UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) [ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 of the Securities Exchange Act of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003 FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-9210
OCCIDENTAL PETROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
State or other jurisdiction of incorporation or organization DELAWARE
I.R.S. Employer Identification No. 95-4035997
Address of principal executive offices 10889 WILSHIRE BLVD., LOS ANGELES, CA
Zip Code 90024
Registrant's telephone number, including area code (310) 208-8800
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
10 1/8% Senior Debentures due 2009 New York Stock Exchange
9 1/4% Senior Debentures due 2019 New York Stock Exchange
Oxy Capital Trust I 8.16% Trust Originated Preferred Securities New York Stock Exchange
Common Stock New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] YES [ ] NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). [X] YES [ ] NO
The aggregate market value of the voting stock held by nonaffiliates of the
registrant was approximately $13.0 billion, computed by reference to the closing
price on the New York Stock Exchange composite tape of $33.55 per share of
Common Stock on June 30, 2003. Shares of Common Stock held by each executive
officer and director have been excluded from this computation in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not a conclusive determination for other purposes.
At January 31, 2004, there were approximately 388,147,906 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement, filed in connection
with its April 30, 2004, Annual Meeting of Stockholders, are incorporated by
reference into Part III.
TABLE OF CONTENTS
PAGE
PART I
ITEMS 1 AND 2 Business and Properties........................................................................ 3
General........................................................................................ 3
Oil and Gas Operations......................................................................... 3
Chemical Operations............................................................................ 4
Capital Expenditures........................................................................... 5
Employees...................................................................................... 5
Environmental Regulation....................................................................... 5
Available Information.......................................................................... 5
ITEM 3 Legal Proceedings.............................................................................. 5
ITEM 4 Submission of Matters to a Vote of Security Holders............................................ 6
Executive Officers of the Registrant........................................................... 6
PART II
ITEM 5 Market for Registrant's Common Equity and Related Stockholder Matters.......................... 7
ITEM 6 Selected Financial Data........................................................................ 8
ITEM 7 Management's Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) (Incorporating Item 7A)...................................................... 8
2003 Business Environment................................................................. 8
Strategy and Overall Performance.......................................................... 9
Business Review........................................................................... 10
2004 Outlook.............................................................................. 13
Segment Operations........................................................................ 14
Significant Items Affecting Earnings...................................................... 16
Consolidated Operations................................................................... 16
Taxes..................................................................................... 17
Liquidity and Capital Resources........................................................... 17
Analysis of Financial Position............................................................ 18
Off-Balance-Sheet Arrangements............................................................ 19
Lawsuits, Claims, Commitments, Contingencies and Related Matters.......................... 20
Environmental Liabilities and Expenditures................................................ 21
Foreign Investments....................................................................... 23
Critical Accounting Policies and Estimates................................................ 23
Significant Accounting Changes............................................................ 25
Derivative Activities and Market Risk..................................................... 28
Selected Cash-Flow Information............................................................ 30
Safe Harbor Statement Regarding Outlook and Other Forward-Looking Data.................... 31
Report of Management...................................................................... 31
ITEM 8 Financial Statements and Supplementary Data.................................................... 32
Report of Independent Auditors............................................................ 32
Consolidated Statements of Operations..................................................... 33
Consolidated Balance Sheets............................................................... 34
Consolidated Statements of Stockholders' Equity........................................... 36
Consolidated Statements of Comprehensive Income........................................... 36
Consolidated Statements of Cash Flows..................................................... 37
Notes to Consolidated Financial Statements................................................ 38
Quarterly Financial Data (Unaudited)...................................................... 69
Supplemental Oil and Gas Information (Unaudited).......................................... 71
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts........................................... 78
ITEM 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........... 79
ITEM 9A Controls and Procedures........................................................................ 79
PART III
ITEM 10 Directors and Executive Officers of the Registrant............................................. 79
ITEM 11 Executive Compensation......................................................................... 79
ITEM 12 Security Ownership of Certain Beneficial Owners and Management................................. 79
ITEM 13 Certain Relationships and Related Transactions................................................. 79
ITEM 14 Principal Accountant Fees and Services......................................................... 79
PART IV
ITEM 15 Exhibits, Financial Statement Schedules and Reports on Form 8-K................................ 79
PART I
ITEMS 1 AND 2 BUSINESS AND PROPERTIES
In this report, "Occidental" refers to Occidental Petroleum Corporation, a
Delaware corporation, and/or one or more entities in which it owns a majority
voting interest (subsidiaries). Occidental's executive offices are located at
10889 Wilshire Boulevard, Los Angeles, California 90024; telephone (310)
208-8800.
GENERAL
Occidental's principal businesses consist of two industry segments. The oil
and gas segment explores for, develops, produces and markets crude oil and
natural gas. The chemicals segment manufactures and markets basic chemicals,
vinyls and performance chemicals. For financial information about these
segments, see Note 15 to the Consolidated Financial Statements of Occidental
(Consolidated Financial Statements).
For information regarding Occidental's current developments, see the
information in the "Management's Discussion and Analysis of Financial Condition
and Results of Operations" (MD&A) section of this report.
OIL AND GAS OPERATIONS
GENERAL
Occidental's domestic oil and gas operations are Elk Hills and other
smaller locations in California, the Hugoton field in Kansas and Oklahoma, the
Permian field in West Texas and New Mexico, and the Gulf of Mexico.
International operations are located in Colombia, Ecuador, Oman, Pakistan,
Qatar, Russia, United Arab Emirates and Yemen. Occidental also has exploration
interests in several other countries. For additional information regarding
Occidental's oil and gas segment, see the information under the captions
"Business Review - Oil and Gas" and "2004 Outlook - Oil and Gas" in the MD&A
section of this report.
RESERVES, PRODUCTION AND PROPERTIES
The table below shows Occidental's total oil and natural gas reserves and
production in 2003, 2002 and 2001. In 2003, including the effect of
acquisitions, Occidental replaced 184 percent of its 2003 worldwide combined oil
and natural gas production of 200 million barrels of oil equivalent (BOE). See
the MD&A section of this report, Note 16 to the Consolidated Financial
Statements and the information under the caption "Supplemental Oil and Gas
Information" in Item 8 of this report for certain details regarding Occidental's
oil and gas reserves, the estimation process and production by country. On May
1, 2003, Occidental reported to the U.S. Department of Energy on Form EIA-28
proved oil and gas reserves at December 31, 2002. The amounts reported were the
same as the amounts reported in Occidental's 2002 Annual Report.
COMPARATIVE OIL AND GAS RESERVES AND PRODUCTION
Oil in millions of barrels; natural gas in billions of cubic feet; total in
millions of barrels of oil equivalent
2003 2002 2001
======================== ============================== =============================== ===============================
OIL (a) GAS TOTAL (b) Oil (a) Gas Total (b) Oil (a) Gas Total (b)
------- ------- ------- ------- ------- ------- ------- ------- -------
U.S. Reserves 1,500 1,826 1,805 1,452 1,821 1,755 1,371 1,962 1,698
International Reserves 538 768 666 518 228 556 526 106 543
------- ------- ------- ------- ------- ------- ------- ------- -------
2,038 2,594 2,471(c) 1,970 2,049 2,311(c) 1,897 2,068 2,241(c)
======= ======= ======= ======= ======= ======= ======= ======= =======
U.S. Production 93 194 125 85 206 119 78 223 115
International Production 70 27 75 65 23 69 55 18 59
------- ------- ------- ------- ------- ------- ------- ------- -------
163 221 200 150 229 188 133 241 174
======================== ======= ======= ======= ======= ======= ======= ======= ======= =======
(a) Includes natural gas liquids and condensate.
(b) Natural gas volumes have been converted to equivalent barrels based on
energy content of 6,000 cubic feet (one thousand cubic feet is referred to
as an "Mcf") of gas to one barrel of oil.
(c) Stated on a net basis and after applicable royalties. Includes reserves
related to production-sharing contracts, other economic arrangements and
Occidental's share of reserves from equity investees. Proved reserves from
production-sharing contracts in the Middle East and from other economic
arrangements in the U.S. were 437 million barrels of oil equivalent (MMBOE)
and 90 MMBOE in 2003, 324 MMBOE and 94 MMBOE in 2002 and 321 MMBOE and 99
MMBOE in 2001, respectively.
3
COMPETITION AND SALES AND MARKETING
As a producer of crude oil and natural gas, Occidental competes with
numerous other domestic and foreign producers. Crude oil and natural gas are
commodities that are sensitive to prevailing global conditions of supply and
demand and are sold at "spot" or contract prices or on futures markets to
refiners and other market participants. Occidental competes by developing and
producing its worldwide oil and gas reserves cost-effectively and acquiring
contracts to explore in areas with known oil and gas deposits. Occidental also
competes by increasing production through enhanced oil recovery projects in
mature and underdeveloped fields and making strategic acquisitions. Occidental
focuses on operations in its core areas of the United States, the Middle East
and Latin America.
CHEMICAL OPERATIONS
GENERAL
Occidental manufactures and markets basic chemicals, vinyls and performance
chemicals directly and through various affiliates (collectively, OxyChem).
OxyChem's operations are affected by cyclical economic factors and by specific
chemical-industry conditions. For additional information regarding Occidental's
chemical segment, see the information under the captions "Business Review -
Chemical" and "2004 Outlook - Chemical" in the MD&A section of this report.
PRODUCTS AND PROPERTIES
OxyChem, which is headquartered in Dallas, Texas, operates chemical
manufacturing plants at 26 sites in the United States. Many of the larger
facilities are located in the Gulf Coast region of Texas and Louisiana. In
addition, OxyChem operates two chemical-manufacturing plants in Canada and one
in Chile. All of OxyChem's manufacturing plants are owned. A number of
additional facilities process, blend and store products. OxyChem owns and leases
an extensive fleet of railcars. OxyChem also has a 50-percent equity investment
in a Brazilian corporation that owns a chlor-alkali plant.
BASIC CHEMICALS
OxyChem's basic chemicals consist of chlorine, caustic soda, potassium
chemicals and their derivatives.
Chlorine is used for chemical manufacturing in the chlorovinyl chain and
for water treatment. OxyChem produces chlorine in Alabama, Delaware, Louisiana,
New York, Texas, Brazil and Chile. Estimated annual capacity, including two
temporarily idled plants, at December 31, 2003, was 3.4 million tons in the
United States (including the 0.9-million-ton total annual capacity of the
OxyVinyls partnership, owned 76 percent by Occidental and 24 percent by PolyOne
Corporation) and 0.3 million gross tons in Brazil and Chile.
Caustic soda is co-produced with chlorine and is used for pulp and paper
production, alumina production and other chemical manufacturing. OxyChem
produces caustic soda in Delaware, Louisiana, New York, Texas, Brazil and Chile.
Estimated annual capacity, including two temporarily idled plants, at December
31, 2003, was 3.5 million tons in the United States (including the 1-million-ton
total annual capacity of the OxyVinyls partnership) and 0.4 million gross tons
in Brazil and Chile.
Potassium chemicals are used in glass, fertilizer, cleaning products and
rubber. OxyChem produces potassium chemicals in Alabama and Delaware. Estimated
annual capacity at December 31, 2003, was 429,000 tons.
Ethylene dichloride (EDC), a chlorine derivative, is a raw material for
vinyl chloride monomer (VCM). OxyChem produces EDC in Louisiana, Texas and
Brazil. Estimated annual capacity, including one temporarily idled plant, at
December 31, 2003, was 3.0 billion pounds in the United States and 0.3 billion
gross pounds in Brazil.
VINYLS
OxyChem's principal producer of vinyls is its 76-percent interest in the
OxyVinyls partnership. OxyChem's vinyls products include polyvinyl chloride
(PVC) and its precursors, VCM and EDC.
OxyChem produces VCM, which is used as a raw material for PVC, in Texas. At
December 31, 2003, estimated annual capacity was 6.2 billion pounds (including
the 2.4-billion-pound total annual capacity of OxyMar, which is 67-percent owned
by Occidental and 3.8-billion-pound total annual gross capacity of the OxyVinyls
partnership).
PVC resins are used in piping, electrical insulation, external construction
materials, flooring, medical and automotive products and packaging. OxyChem
produces PVC resins in Kentucky, New Jersey, Pennsylvania, Texas and Canada. At
December 31, 2003, estimated annual capacity was 4.7 billion pounds (including
the 4.5-billion-pound gross annual capacity of the OxyVinyls partnership).
PERFORMANCE CHEMICALS
OxyChem's performance chemicals include chlorinated isocyanurates
(estimated capacity of 131 million pounds produced in Illinois and Louisiana),
resorcinol (estimated capacity of 52 million pounds produced in Pennsylvania),
antimony oxide (estimated capacity of 33 million pounds produced in Texas),
mercaptans (estimated capacity of 18 million pounds produced in Texas) and
sodium silicates (estimated capacity of 722,000 tons produced in Georgia, Ohio,
Illinois, New Jersey, Texas and Alabama). Information regarding production
capacity reflects estimated annual capacity at December 31, 2003.
4
RAW MATERIALS
Nearly all raw materials used in OxyChem's operations are readily available
from a variety of sources. Power is provided by regional public utilities and/or
by co-generation facilities. Most of OxyChem's key raw-materials purchases are
made through contractual relationships, rather than on the spot market. OxyChem
is generally not dependent on any single nonaffiliated supplier for a material
amount of its raw-material or energy requirements. Operations have not been
curtailed as a result of any supply interruptions.
PATENTS, TRADEMARKS AND PROCESSES
OxyChem's operations use a large number of patents, trademarks and
processes, some of which are proprietary and some of which are licensed. OxyChem
does not regard its business as being materially dependent on any single patent,
trademark or process.
SALES AND MARKETING
OxyChem's products are sold to industrial users or distributors located in
the United States, largely by its own sales force and in certain export markets.
OxyChem sells its products at current market or market-related prices through
short- and long-term sales agreements.
No significant portion of OxyChem's business is dependent on a single
third-party customer. OxyChem generally does not manufacture its products
against a backlog of firm orders.
COMPETITION
Occidental's chemical business competes with numerous producers. Since most
of OxyChem's products are commodity in nature, they compete primarily on the
basis of price. Because OxyChem's products generally do not occupy proprietary
positions, OxyChem endeavors to be an efficient, low-cost producer.
CAPITAL EXPENDITURES
For information on capital expenditures, see the information under the
heading "Capital Expenditures" in the MD&A section of this report.
EMPLOYEES
Occidental employed 7,133 people at December 31, 2003, 5,697 of whom were
located in the United States. Occidental employed 2,995 people in oil and gas
operations and 3,087 people in chemical operations. An additional 1,051 people
were employed in administrative and headquarters functions. Approximately 640
U.S.-based employees are represented by labor unions.
Occidental has a long-standing policy to provide fair and equal employment
opportunities to all people without regard to race, color, religion, ethnicity,
gender, national origin, disability, age, sexual orientation, veteran status or
any other legally impermissible factor. Occidental maintains diversity and
outreach programs.
ENVIRONMENTAL REGULATION
For environmental-regulation information, including associated costs, see
the information under the heading "Environmental Liabilities and Expenditures"
in the MD&A section of this report.
AVAILABLE INFORMATION
Occidental makes the following information available free of charge through
its website at www.oxy.com:
>> Forms 10-K, 10-Q, 8-K and amendments to these forms as soon as reasonably
practicable after they are filed electronically with the SEC;
>> Other SEC filings, including Forms 3, 4 and 5; and
>> Corporate-governance information, including its corporate-governance
guidelines, board-committee charters and Code of Business Conduct.
Board-committee charters and the Code of Business Conduct are available to
stockholders upon request. (See Part III Item 10 of this report for further
information.)
ITEM 3 LEGAL PROCEEDINGS
For information regarding lawsuits, claims, commitments, contingencies and
related matters, see the information in Note 9 to the Consolidated Financial
Statements.
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, Pennsylvania facility. Although the order and
complaint do not propose any amount of penalties, Occidental believes the EPA
seeks 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.
5
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of Occidental's security holders during the
fourth quarter of 2003.
EXECUTIVE OFFICERS OF THE REGISTRANT
Age at
February 29,
Name 2004 Positions with Occidental and Subsidiaries and Five-Year Employment History
- ----------------------- ------------ ---------------------------------------------------------------------------------------
Dr. Ray R. Irani 69 Chairman of the Board of Directors and Chief Executive Officer since 1990; President
from 1984 to 1996; Chief Operating Officer from 1984-1990; Director since 1984; member
of Executive Committee.
Dr. Dale R. Laurance 58 President since 1996; Chairman and Chief Executive Officer of Occidental Oil and Gas
Corporation (OOGC) since 1999; Director since 1990; member of Executive Committee.
Stephen I. Chazen 57 Chief Financial Officer and Executive Vice President -- Corporate Development since
1999; 1994-1999, Executive Vice President -- Corporate Development.
Donald P. de Brier 63 Executive Vice President, General Counsel and Secretary since 1993.
Richard W. Hallock 59 Executive Vice President -- Human Resources since 1994.
John L. Hurst, III 64 Executive Vice President since 2003; President of Occidental Chemical Corporation (OCC)
since 2003; 2001-2003, Executive Vice President -- Chlorovinyls of OCC; 2000-2001,
Executive Vice President -- Basic Chemicals of OCC; 1999-2000, Chief Executive Officer
of OxyVinyls, LP; 1988-1999, Executive Vice President -- Manufacturing of OCC.
John W. Morgan 50 Executive Vice President since 2001; Executive Vice President -- Worldwide Production
of OOGC since 2001; 1998-2001, Executive Vice President -- Operations; 1991-1998, Vice
President -- Operations.
Samuel P. Dominick, Jr. 63 Vice President and Controller since 1991.
James R. Havert 62 Vice President and Treasurer since 1998; 1992-1998, Senior Assistant Treasurer.
The current term of employment of each executive officer will expire at the
April 30, 2004, organizational meeting of the Occidental Board of Directors or
when a successor is selected.
6
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
TRADING PRICE RANGE AND DIVIDENDS
This section incorporates by reference the quarterly financial data
appearing under the caption "Quarterly Financial Data (Unaudited)" in Item 8 and
the information appearing under the caption "Liquidity and Capital Resources" in
the MD&A section of this report. Occidental's common stock was held by
approximately 52,635 stockholders of record at December 31, 2003, with an
estimated 188,043 additional stockholders whose shares were held for them in
street name or nominee accounts. The common stock is listed and traded
principally on the New York Stock Exchange and also is listed on certain foreign
exchanges. The quarterly financial data on pages 68 and 69 of this report set
forth the range of trading prices for the common stock as reported on the
composite tape of the New York Stock Exchange and quarterly dividend
information.
In 2003, the quarterly declared dividend rate for the common stock was
$0.26 per share ($1.04 per year). On February 12, 2004, a quarterly dividend of
$0.275 per share ($1.10 per year) was declared on the common stock, payable on
April 15, 2004 to stockholders of record on March 10, 2004. The declaration of
future cash dividends is a business decision made by the Board of Directors from
time to time, and will depend on Occidental's financial condition and other
factors deemed relevant by the Board.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
All of Occidental's equity compensation plans for its employees and
non-employee directors, pursuant to which options, rights or warrants may be
granted, have been approved by the stockholders. See Note 12 to the Consolidated
Financial Statements for further information on the material terms of these
plans.
The following is a summary of the shares reserved for issuance as of
December 31, 2003, pursuant to outstanding options, rights or warrants granted
under Occidental's equity compensation plans:
(a) Number of (b) Weighted- (c) Number of securities
securities to be average remaining available
issued upon exercise price for future issuance
exercise of out- of outstanding under equity
standing options, options, compensation plans
warrants and warrants and (excluding securities
rights rights in column (a))
- ---------------------- ------------------- --------------------------
23,011,923 $26.53 13,101,112 *
* Includes, with respect to the 1995 Incentive Stock Plan, 1,369,796 shares
at maximum target level (684,898 at target level) reserved for issuance
pursuant to outstanding performance stock awards, including 717,876 shares
at maximum target level (358,938 at target level) eligible for
certification in February 2004, and 1,188,596 deferred performance and
restricted stock awards and, with respect to the 2001 Incentive
Compensation Plan, 1,192,018 shares at maximum target level (596,009 at
target level) reserved for issuance pursuant to outstanding performance
stock awards, 1,737,874 shares reserved for issuance pursuant to restricted
stock awards and 3,971 shares reserved for issuance as dividend equivalents
under the 2001 Incentive Compensation Plan. Of the remaining 7,608,857
shares, 7,574,285 shares are available under the 2001 Incentive
Compensation Plan, all of which may be issued or reserved for issuance for
options, rights and warrants as well as performance stock awards,
restricted stock awards, stock bonuses and dividend equivalents and 34,572
shares are available for issuance under the Restricted Stock Plan for
nonemployee directors.
7
ITEM 6 SELECTED FINANCIAL DATA
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
Dollar amounts in millions, except per-share amounts
For the years ended December 31, 2003 2002 2001 2000 1999
=============================================================== ======== ======== ======== ======== ========
RESULTS OF OPERATIONS (a)
Net sales $ 9,326 $ 7,338 $ 8,102 $ 8,504 $ 5,594
Income from continuing operations $ 1,595 $ 1,163 $ 1,179 $ 1,557 $ 461
Net income $ 1,527 $ 989 $ 1,154 $ 1,570 $ 448
Earnings applicable to common stock $ 1,527 $ 989 $ 1,154 $ 1,571 $ 442
Basic earnings per common share from
continuing operations $ 4.16 $ 3.09 $ 3.16 $ 4.22 $ 1.28
Basic earnings per common share $ 3.98 $ 2.63 $ 3.10 $ 4.26 $ 1.24
Diluted earnings per common share $ 3.93 $ 2.61 $ 3.09 $ 4.26 $ 1.24
Core earnings (b) $ 1,635 $ 999 $ 1,246 $ 1,349 $ 37
FINANCIAL POSITION (a)
Total assets $ 18,168 $ 16,548 $ 17,850 $ 19,414 $ 14,125
Long-term debt, net $ 3,993 $ 3,997 $ 4,065 $ 5,185 $ 4,368
Trust preferred securities (c) $ 453 $ 455 $ 463 $ 473 $ 486
Common stockholders' equity $ 7,929 $ 6,318 $ 5,634 $ 4,774 $ 3,523
CASH FLOW
Cash provided by operating activities $ 3,074 $ 2,100 $ 2,566 $ 2,348 $ 1,004
Capital expenditures $ (1,601) $ (1,236) $ (1,308) $ (892) $ (557)
Cash (used) provided by all other investing activities, net $ (420) $ (460) $ 657 $ (2,152) $ 2,189
DIVIDENDS PER COMMON SHARE $ 1.04 $ 1.00 $ 1.00 $ 1.00 $ 1.00
BASIC SHARES OUTSTANDING (thousands) 383,943 376,190 372,119 368,750 355,073
- --------------------------------------------------------------- -------- -------- -------- -------- --------
(a) See the MD&A and the "Notes to Consolidated Financial Statements" for
information regarding accounting changes, asset acquisitions and
dispositions, discontinued operations, environmental remediation, other
costs and other items affecting comparability.
(b) For an explanation of core earnings, see "Significant Items Affecting
Earnings" in the MD&A.
(c) On January 20, 2004, all of the trust preferred securities were redeemed.
ITEM 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (MD&A) (INCORPORATING ITEM 7A)
In this report, the term "Occidental" refers to Occidental Petroleum
Corporation (OPC) and/or one or more entities in which it owns a majority voting
interest (subsidiaries). Occidental is divided into two segments: oil and gas
and chemical.
2003 BUSINESS ENVIRONMENT
OIL AND GAS
Oil and gas prices are the key variables that drive the industry's
financial performance. Prices can vary significantly, even on a short-term
basis. Oil prices continued to strengthen in 2003 over their levels in the
previous year. The average West Texas Intermediate (WTI) market price for 2003
was $31.03/barrel (bbl) compared with $26.08/bbl in 2002.
NYMEX domestic natural gas prices increased significantly from 2002. For
2003, NYMEX gas prices averaged $5.26/Mcf compared with $3.07/Mcf for 2002.
CHEMICAL
The sectors of the chemical industry in which Occidental participates
showed signs of improvement in 2003 largely due to the improving economy and the
continued strength of the building and construction markets. The industry
experienced higher product prices for all major commodity chemicals; however,
the margin improvement was largely offset by higher costs for key raw materials,
primarily energy and ethylene.
Domestic chlorine demand dropped slightly in 2003, compared to 2002, as the
robust housing sector could not overcome general weakness in other manufacturing
markets. However, chlorine prices increased sharply in 2003 from their depressed
levels in early 2002 in part due to the tightening of supply resulting from
industry capacity reductions and the favorable influence of the strong vinyls
(VCM/PVC) demand, mainly in the housing sector. Caustic soda prices began to
improve in the
8
second quarter of 2003 but softened late in the year due to pressure to move
more caustic soda volume versus chlorine. However, overall caustic soda prices
improved for the year. PVC prices improved significantly although the price
improvement was largely offset by higher raw material costs.
STRATEGY AND OVERALL PERFORMANCE
Occidental's overall corporate strategy aims to generate competitive total
returns to stockholders and consists of three basic elements:
>> Focus on large, long-lived oil and gas assets with growth potential.
>> Maintain financial discipline and a strong balance sheet.
>> Harvest cash from chemicals.
Large, long-lived "legacy" oil and gas assets, like those in California,
the Permian Basin in Texas and Qatar, tend to have moderate decline rates,
enhanced secondary and tertiary recovery opportunities and economies of scale
that lead to cost-effective production. These assets are expected to contribute
substantial earnings and cash flow after capital.
At Occidental, maintaining financial discipline means prudently investing
capital in projects that are expected to generate above-cost-of-capital returns
throughout the business cycle. During periods of high commodity prices,
Occidental will use the bulk of its cash flow after capital expenditures and
dividends to improve future earnings levels by acquiring additional properties
with low-risk characteristics or through debt reduction.
The chemicals business generates free cash flow. In 2003, free cash flow
for the segment was approximately $290 million, which compares favorably with
the 10-year annual average. The segment was able to achieve this result despite
a difficult year for the chemical industry as a whole. (For a calculation of
chemical free cash flow, see "Selected Cash-Flow Information" below.)
In order to ensure that its strategic objectives are reached, Occidental's
management focuses on the following key business goals over the short term:
>> Achieve top quartile performance, compared to peer companies, in return on
equity with a below average level of debt.
>> Segments are to achieve top quartile performance, compared to peer
companies, in return on assets and other measurements unique to that
segment. These include profits per unit produced, costs to produce each
unit, cash flow per unit, costs to find and develop new reserves and other
similar measures.
DEBT STRUCTURE
Occidental's total debt and total debt-to-capitalization ratios are shown
in the table below:
Total Debt-to-
Capitalization
Date ($ amounts in millions) Total Debt(a) Ratio
============================= ========== ==============
12/31/99 $ 5,427 61%
12/31/00 $ 6,354 57%
12/31/01 $ 4,890 46%
12/31/02 $ 4,759 43%
12/31/03 $ 4,570 37%
- ----------------------------- ---------- --------------
(a) Includes trust preferred securities (redeemed January 20, 2004), natural
gas delivery commitment (which was terminated in 2002), subsidiary
preferred stock and capital lease obligations.
Occidental's year-end 2003 total debt-to-capitalization ratio has declined
to approximately 37 percent from the 61-percent level that existed at the end of
1999, as shown in the table above. The decrease in the total
debt-to-capitalization ratio in 2003 compared to 1999 is the result of total
debt reductions of 16 percent combined with an increase in stockholders' equity
of 125 percent over the same period.
RETURN ON EQUITY
Three-Year Average
Annual 2003 (a) 2001 - 2003 (b)
============================= ==========================
21.4% 18.5%
- ----------------------------- --------------------------
(a) The Return on Equity for 2003 was calculated by dividing Occidental's 2003
earnings applicable to common stock by the average equity balance in 2003.
(b) The Return on Equity for the three-year period was calculated as the sum of
the annual earnings applicable to common stock for each of the three years
ended 2003 divided by the sum of the ending equity balances for each year
end in the same period.
Over the past three years, Occidental has focused on improving its return
on equity. In 2003, Occidental's return on equity was 21.4 percent and the
three-year average return on equity was 18.5 percent. During the same three-year
period, Occidental's equity increased by over 41 percent.
OIL AND GAS STRATEGY
The oil and gas business strategy has three parts that, together, are
focused on adding new oil and natural gas reserves at a pace well ahead of
production, while simultaneously keeping finding and development costs among the
lowest in the industry:
>> Continue to add commercial reserves in and around Occidental's core areas,
which are the U.S., Middle East and Latin America, through a combination of
focused exploration and development programs.
>> Pursue commercial opportunities with host governments in core areas to
enhance the development of mature fields with large volumes of remaining
oil in place by applying appropriate technology and innovative
reservoir-management practices.
9
>> Maintain a disciplined approach in buying and selling assets at attractive
prices.
Over the past several years, the asset base within each of the core areas
has been strengthened. Occidental has invested in assets with higher performance
potential and sold properties with low or no current return. The results of
these changes are discussed below in "Business Review - Oil and Gas."
CHEMICAL STRATEGY
OxyChem concentrates on the chlorovinyls chain where it begins with
chlorine, which is co-produced with caustic soda, and then converts chlorine and
ethylene, through a series of intermediate products, into PVC. OxyChem mainly
focuses on being a low-cost producer to maximize its cash flow generation.
BUSINESS REVIEW
OIL AND GAS
Occidental's overall performance during the past several years reflects the
successful implementation of its oil and gas business strategy, beginning with
the acquisition of the Elk Hills oil and gas field in California. The Elk Hills
acquisition was followed in April 2000 by the purchase of Altura Energy in the
Permian Basin in West Texas for $3.6 billion and thereafter by several smaller
acquisitions. During 2003, Occidental enhanced its industry leading position in
the Permian Basin by making several complementary acquisitions.
At the end of 2003, the Elk Hills and Permian Basin assets made up 65
percent of Occidental's worldwide proven oil reserves and 45 percent of its
proven gas reserves. On a BOE basis, they accounted for 62 percent of
Occidental's worldwide reserves. In 2003, the combined production from these
assets averaged approximately 265,000 BOE per day, which represents 48 percent
of Occidental's total worldwide production. These businesses also contributed
approximately 56 percent of oil and gas segment earnings.
ELK HILLS
Occidental operates the Elk Hills oil and gas field in the southern portion
of California's San Joaquin Valley with an approximate 78-percent interest. The
field was acquired in 1998 for $3.5 billion and is the largest producer of gas
in California. Production in 2003 was approximately 94,000 BOE per day. Since
the acquisition date, Elk Hills has generated total net pre-tax cash flow of
approximately $3.5 billion, after subtracting $871 million of capital
expenditures, and has replaced 109 percent of its total Elk Hills oil and gas
production of 207 million BOE. At the end of 2003, the property still had an
estimated 444 million BOE of proved reserves, compared to the 425 million BOE
that were recorded at the time of the acquisition.
Occidental's California natural gas production is declining as it produces
the Elk Hills gas cap, but the decline has been mitigated by increased
development activities.
Total gas production averaged 246 MMcf per day in 2003 compared to 281 MMcf
in 2002.
PERMIAN BASIN
The entire Permian Basin is the largest oil basin in the lower 48 United
States and accounts for approximately 15 percent of total U.S. oil production.
Occidental is the largest producer in the Permian Basin with approximately 15
percent of the total Permian production.
Occidental integrated its acquisition of Altura, which was valued at
approximately $3.6 billion, with its previously existing Permian Basin
properties in Southwest Texas and Southeast New Mexico. Since the acquisition in
2000, the former Altura properties have generated approximately $2.6 billion in
total net pre-tax cash flow, after subtracting capital expenditures of
approximately $565 million.
One element of Occidental's strategy in the Permian Basin is to acquire
producing properties at attractive prices that offer synergies with its existing
operations. In 2003, Occidental made a number of complementary acquisitions in
the Permian Basin for a total purchase price of $317 million. These acquisitions
increased total proven reserves by 103 million BOE for an average cost of $3.08
per BOE.
On January 31, 2004, Occidental acquired a 1,300-mile oil gathering and
pipeline system in the Permian Basin. This system will allow Occidental to
efficiently gather and transport its production to Midland where it has storage
facilities. The remainder of the pipeline's capacity will be filled by third
party producers.
Net Permian oil and gas production averaged 171,000 BOE per day in 2003
compared to 164,000 BOE per day in 2002.
Approximately 50 percent of Occidental's Permian Basin production is
reliant upon the application of carbon dioxide (CO2) flood technology, an
enhanced oil recovery technique. This involves injecting CO2 into oil reservoirs
where it acts as a solvent, causing the oil to flow more freely so it can be
pumped to the surface. The size of these CO2 flood operations makes Occidental a
world leader in the development and application of this technology.
THUMS
Occidental purchased THUMS, the field contractor for an oil production unit
offshore Long Beach, California, in 2000. Occidental's share of production from
THUMS is subject to contractual arrangements similar to a production-sharing
contract, whereby Occidental's share of production varies inversely with oil
prices. For 2003, net production from the THUMS oil property averaged 23,000
barrels per day.
10
GULF OF MEXICO
Occidental has a one-third interest in the deep-water Horn Mountain oil
field, which is Occidental's only asset in the Gulf of Mexico. BP p.l.c. (BP) is
the operator.
The field began production in November 2002 and production was increased
until it reached platform capacity in the third quarter of 2003. In the fourth
quarter of 2003, Occidental's net production at Horn Mountain averaged 28,000
BOE per day.
HUGOTON
Occidental owns a large concentration of gas reserves, production interests
and royalty interests in the Hugoton area of Kansas and Oklahoma. The Hugoton
field is the largest natural gas field discovered to date in North America.
Occidental's Hugoton operations produced 138,000 Mcf of natural gas and 4,000
barrels of oil per day in 2003.
MIDDLE EAST
DOLPHIN PROJECT
In 2002, Occidental purchased a 24.5-percent interest in the Dolphin
Project for $310 million. This investment includes a 24.5-percent interest in
Dolphin Energy Limited (Dolphin Energy), the operator of the Dolphin Project.
The Dolphin Project consists of two parts: (1) a development and production
sharing agreement with Qatar to develop and produce natural gas and condensate
in Qatar's North Field for 25 years, with a provision to request a 5-year
extension; and (2) the rights for Dolphin Energy to build, own and operate a
260-mile-long, 48-inch export pipeline to transport 2 billion cubic feet per day
of dry natural gas from Qatar to markets in the United Arab Emirates (UAE) for
the life of the Dolphin Project and longer. The pipeline will have capacity to
transport up to 3.2 billion cubic feet per day, which will allow for additional
business opportunities.
Several important milestones have been reached since Occidental joined the
Dolphin Project. In 2002, two development wells were drilled and tested,
providing sufficient information to complete the field development plan. In
October 2003, Dolphin Energy signed two 25-year contracts to supply
approximately one BCF of natural gas per day to two entities in the UAE. A third
supply contract with the Emirate of Dubai is currently being negotiated. In
addition, other markets for natural gas and hydrocarbon liquids are being
pursued. In December 2003, the Government of Qatar approved the final field
development plan for the Dolphin Project. Based on the foregoing developments,
Occidental recorded 107 million BOE of proved undeveloped oil and gas reserves
in 2003.
Most recently, in January 2004, Dolphin Energy awarded engineering,
procurement and construction contracts for the gas processing and compression
plant at Ras Laffan in Qatar as well as for two offshore gas production
platforms. The plant will receive wet gas from Dolphin's facilities in Qatar's
North Field and will remove hydrocarbon liquids, including condensate and
natural gas liquids, for further processing and sale. The resulting dry gas will
be compressed and transported to the UAE through Dolphin Energy's pipeline. The
projected start-up date for production is in 2006.
The Dolphin Project is expected to cost approximately $4.0 billion in
total. Occidental expects to invest approximately $1 billion for its
24.5-percent share in the Dolphin Project over the next three years. A portion
of the project costs may be project financed. During 2004, Occidental expects to
invest approximately $250 to $300 million, which is expected to be provided by
Occidental's operating cash flow. This investment is in addition to Occidental's
expected 2004 capital expenditures of $1.4 billion that are discussed under
"Liquidity and Capital Resources."
As the project has not begun operation, no revenue or production costs were
recorded in 2003.
QATAR
By introducing advanced drilling systems and applying new waterflooding and
reservoir characterization techniques in the Idd El Shargi North Dome (ISND)
field, Occidental has increased production and recoverable reserves from the
field.
Occidental is moving forward with a second phase under its existing
agreement in the development of ISND. The new phase is targeting the development
and recovery of additional reserves from ISND.
Occidental is also engaged in full-field development of the Idd El Shargi
South Dome (ISSD) field which, as a satellite to the North Dome, reduces the
overall capital requirement of the two projects.
Combined production from the two fields averaged 45,000 barrels per day,
net to Occidental, in 2003.
Also, see the Dolphin Project discussed above.
YEMEN
In Yemen, Occidental owns direct working interests in the Masila field in
Block 14 (38 percent) and a 40.4-percent interest in the East Shabwa field,
comprising a 28.6-percent direct-working interest and a 11.8-percent equity
interest in an unconsolidated entity. Occidental's net production averaged
37,000 barrels of oil per day in 2003, with 31,000 coming from the Masila field
and the remainder from East Shabwa.
OMAN
Occidental's Oman business is centered in Block 9 where it holds a
65-percent working interest in the production-sharing contract for this block.
Net production to Occidental averaged 12,000 barrels of oil per day in
2003.
Occidental has entered into a gas sales and purchase agreement with the
Government of Oman to sell approximately 120 million gross cubic feet of natural
gas per day from Block 9 operations to the Government. First gas sales are
anticipated in mid-2004. This agreement has opened up a market for previously
stranded gas that is associated with oil production from the Safah field.
Occidental also continues its exploration program in the adjacent Block 27.
In 2003, the Government of Oman approved a farm-out of a 35-percent working
interest in Block 27 to Mitsui E&P Middle East B.V. (Mitsui). As a result,
Occidental and Mitsui now share the same working interest percentages in both
Block 9 and Block 27.
11
LIBYA
Occidental suspended all activities in Libya in 1986 as a result of
economic sanctions imposed by the U.S. government, but continues to hold an
interest in the assets that it formerly operated. Since the imposition of
sanctions, Occidental has derived no economic benefit from its Libyan interests
and has no Libyan assets on its balance sheet. Over the past two years,
Occidental representatives have met with Libyan officials, under specific
authority and guidelines set by the U.S. Treasury Department's Office of Foreign
Assets Control (OFAC), for the purpose of fact-finding and discussing generally
the status of its contractual interests and property rights. Recent developments
that have led to an improvement in U.S.-Libya relations have given rise to
speculation that the sanctions could be eased, or perhaps lifted, in the near
future. Until that happens, Occidental will continue complying with the existing
sanctions and its OFAC licenses. Occidental remains very interested in returning
to Libya, where it had considerable success in finding and developing large
volumes of commercial oil reserves. Management is carefully monitoring the
dynamics of the evolving U.S.-Libya relationship.
OTHER EASTERN HEMISPHERE
PAKISTAN
Occidental holds oil and gas working interests, that vary from 25 to 50
percent, in four Badin Blocks in Pakistan. BP is the operator. In 2002,
Occidental purchased additional interests in two of these blocks from the
Government of Pakistan for approximately $72 million. 2003 gross production was
102,000 BOE per day, while Occidental's net share was approximately 22,000 BOE
per day.
RUSSIA
In Russia, Occidental owns 50 percent of a joint venture company,
Vanyoganneft, that operates in the western Siberian oil basin. Production for
2003 was approximately 30,000 BOE per day, net to Occidental.
LATIN AMERICA
COLOMBIA
Occidental has a 35-percent net share of production and is the operator of
the Cano Limon oil field in Colombia. Cumulative gross production from Cano
Limon reached one billion barrels of oil in 2003. Colombia's national oil
company, Ecopetrol, operates the Cano Limon-Covenas oil pipeline and
marine-export terminal. The pipeline transports oil produced from the Cano Limon
field for export to international markets. In addition, Occidental has working
interests in three exploration blocks: Rio Aipe (50 percent), Chipiron (88
percent) and Cosecha (75 percent).
Production in 2003 approximated 2002 levels as improved security along the
export pipeline reduced the number of attacks by local terrorist groups below
the peak levels of 2001. Occidental's net share of 2003 production averaged
32,000 barrels of oil per day. Occidental's interests in Colombia account for
approximately 1 percent of its worldwide assets, 2 percent of its total
worldwide reserves and about 6 percent of its worldwide oil and gas production
in 2003. Occidental anticipates that it will recover the proved reserves
attributable to its contract.
ECUADOR
Net production in Block 15, which Occidental operates with a 60-percent
working interest, averaged approximately 25,000 barrels of oil per day in 2003.
In the second half of 2003, the increased production from the Eden-Yuturi
oil field in the southeastern corner of Block 15 coincided with the completion
of the Oleoducto de Crudos Pesados (OCP) Ltd. oil export pipeline, in which
Occidental has a 14-percent interest. Full field development of the Eden-Yuturi
oil field is underway with continued development drilling planned in 2004. In
addition, work continues in the producing areas in the western portion of the
block at the Indillana complex and the Yanaquincha and Limoncocha fields. These
projects are expected to increase production by 20,000 barrels per day, for a
total net production of 45,000 barrels per day in 2004.
In addition, Occidental has completed extensive 3-D seismic surveys and
plans to continue expanding its exploration activities in Block 15 in 2004.
Foreign oil companies, including Occidental, have been paying a Value Added
Tax (VAT), generally calculated on the basis of 10 to 12 percent of expenditures
for goods and services used in the production of oil for export. Until 2001, oil
companies, like other companies producing products for export, filed for and
received reimbursement of VAT. In 2001, the Ecuador tax authority announced that
the oil companies' VAT payments did not qualify for reimbursement. In response,
the affected oil companies filed actions in the Ecuador Tax Court to seek a
judicial determination that the expenditures are subject to reimbursement. In
November 2002, Occidental initiated an international arbitration proceeding
against the Ecuadorian Government under the United States-Ecuador bilateral
investment treaty based on Occidental's belief that the Ecuadorian Government is
arbitrarily and discriminatorily refusing to refund the VAT to Occidental.
Arbitration proceedings continue at present. Occidental believes that it has a
valid claim for reimbursement under applicable Ecuador tax law and the treaty.
In the event of an unfavorable outcome, the potential financial statement effect
would not be significant.
PRODUCTION-SHARING CONTRACTS
Occidental conducts its operations in Qatar, Oman and Yemen under
production-sharing contracts and, under such contracts, receives a share of
production to recover its costs and an additional share for profit. Occidental's
share of production from these contracts decreases when oil prices rise and
increases when oil prices decline. Overall, Occidental's net economic benefit
from these contracts is greater at higher oil prices.
12
CHEMICAL
CHLOR-ALKALI
Demand for chlor-alkali products improved throughout the first half of 2003
with combined chlorine and caustic soda prices peaking about mid-year. However,
as supply and demand shifted to a more balanced position, prices softened in the
latter part of the year. OxyChem's chlor-alkali operating rate for 2003 was 90
percent, approximately matching the industry. Domestic caustic soda pricing
improved in the second quarter, but then fell to its lowest level of the year in
the fourth quarter. Export pricing for caustic soda remained weak throughout the
year as the worldwide supply exceeded demand, exerting downward pressure on
pricing.
OxyChem maintained its Deer Park chlor-alkali production facility in
Houston, Texas and its EDC facility in Ingleside, Texas in standby mode. In June
2003, OxyChem idled a circuit which produced chlorine and caustic soda at its
Delaware City plant. These idle facilities will be reactivated upon
strengthening in overall economic conditions that leads to improved demand and
higher margins for caustic soda.
VINYLS
Continuing strength in natural gas and ethylene prices pushed costs higher
in PVC, and led to price increases of two cents per pound per month for four
consecutive months in early 2003, for a total increase of 22-percent. These
increases were in addition to the 43-percent increase in PVC resin prices in
2002, which was also driven by rising feedstock and energy costs.
Total year 2003 demand was lower by 2 percent compared with 2002.
For 2003, ethylene prices rose by over 5.5 cents per pound, and average
natural gas costs were nearly $2 per million British Thermal Units (MMBTU)
higher than 2002.
OxyChem operated its PVC facilities at an average operating rate of 88
percent for 2003, slightly above the North American industry average operating
rate of 86 percent.
In the fourth quarter of 2003, export markets for both PVC and VCM
strengthened notably, helped by VCM outages in the U.S. and overseas.
DISPOSITION OF EQUISTAR INTEREST AND ACQUISITION OF LYONDELL INTEREST
In August 2002, Occidental sold its 29.5-percent share of Equistar to
Lyondell and purchased a 21-percent equity interest in Lyondell. Occidental
entered into these transactions to diversify its petrochemicals interest. These
transactions reduced Occidental's direct exposure to the inherent volatility in
the petrochemicals markets, yet will allow it to participate, through its
Lyondell investment, in the economic recovery of the petrochemicals industry. In
connection with these transactions, Occidental wrote down its investment in the
Equistar partnership to fair value by recording a $412 million pre-tax charge as
of December 2001. When this transaction closed in the third quarter of 2002,
Occidental recorded an after-tax gain of $164 million. As a result of increases
in its investment during 2003, at December 31, 2003, Occidental owned 22 percent
(39.5 million shares) of Lyondell stock with a carrying value of $479 million.
DISPOSITION OF CHROME AND CALENDERING OPERATIONS
In the fourth quarter of 2002, Occidental sold its chrome business at
Castle Hayne, North Carolina for $25 million and its plastic calendering
operations in Rio de Janeiro, Brazil for a $6 million note receivable. In the
third quarter of 2002, Occidental recorded an after-tax impairment charge of $69
million and classified both of these businesses as discontinued operations.
CORPORATE AND OTHER
Corporate and other includes the investments in Lyondell and Premcor, Inc.,
a refining business, and a leased co-generation facility in Taft, Louisiana. In
2004, corporate and other will also include the results of a 1,300-mile oil
pipeline and gathering system located in the Permian Basin, which was acquired
in January 2004 and will be used in corporate-directed oil and gas marketing and
trading operations.
In July 2001, Occidental sold its interests in a subsidiary that owned a
Texas intrastate natural gas pipeline system and also sold its interest in a
liquefied natural gas (LNG) project in Indonesia. After-tax proceeds of
approximately $750 million from these transactions were used to reduce debt.
2004 OUTLOOK
OIL AND GAS
The petroleum industry is highly competitive and subject to significant
volatility due to numerous market forces. Crude oil and natural gas prices are
affected by market fundamentals such as weather, inventory levels, competing
fuel prices, overall demand and the availability of supply.
In the last half of 2003, worldwide oil prices strengthened due to
increasing concerns about the security and availability of ample supplies to
meet growing demand. Continued economic growth, resulting in increased demand
and concerns about supply availability, could result in continued high prices. A
lower growth rate could result in lower crude oil prices.
Sustained high oil prices will significantly affect profitability and
returns for Occidental and other upstream producers. However, the industry has
historically experienced wide fluctuations within price cycles. Although oil
prices cannot be predicted with any certainty, the WTI price has averaged
approximately $22.50/barrel over the past ten years.
While supply-demand fundamentals are a decisive factor affecting domestic
natural gas prices over the long term, day-to-day prices may be more volatile in
the futures markets, such as on the NYMEX and other exchanges, which make it
difficult to forecast prices with any degree of confidence. Over the last ten
years, the NYMEX gas price has averaged $3.00 per Mcf.
13
CHEMICAL
The chemical business has been profitable historically; however, the
average level of earnings has declined over the past several years. The major
factors that have an impact on the performance of this business are general
economic conditions, including demand for chemical products, energy and
feedstock costs, and the effect of changes in available capacity.
Over the last five years, the U.S. chemical industry and its primary
market, the U.S. based manufacturing industry, have faced significant
challenges. Foreign competition continues to make price increases by the U.S.
manufacturing industry difficult to achieve. In the chemical industry,
increasing natural gas prices, which affect U.S. electricity prices, have
sharply reduced, and in many cases eliminated, the domestic chemical industry's
natural advantage of proximity to its markets. This has affected basic commodity
chemicals such as caustic soda, chlorine and PVC, but is particularly
significant for niche specialty products such as resorcinol, mercaptans and
antimony-based products. As a result, the U.S. based chemical industry is facing
increasing pressure from competitors in both domestic and export markets. Export
sales accounted for approximately 17 percent of Occidental's 2003 chemical
sales.
The end of the most recent recession and resultant world economic recovery
is expected to improve the overall outlook.
Construction of LNG terminals on the U.S. Gulf Coast could stabilize
natural gas prices at a lower-than-current level and thereby help improve the
competitive position of efficient Gulf Coast chemical facilities. However, this
may not occur in the immediate future. Although Occidental's chemical business
is profitable, if U.S. manufacturing becomes non-competitive on a worldwide
basis, this could shorten the estimated productive lives of some of Occidental's
plants, resulting in higher annual depreciation. Significantly shorter
productive lives could also result in asset impairments, including plant
closures. It is unlikely that any changes in estimated productive lives would be
uniform. While potential impairment charges could have a material impact on the
earnings in a discrete period, such changes are unlikely to have a material
effect on Occidental's overall financial situation.
For additional discussion of the possible financial effect, please see the
"Critical Accounting Policies and Estimates" section below in the MD&A.
CHLOR-ALKALI
Further improvement in chlor-alkali operating rates is expected in 2004 and
beyond as domestic demand for chlorine and caustic soda is forecasted to
increase 2 percent in 2004. PVC and other downstream derivatives are leading the
growth in demand for chlorine. Demand growth for caustic soda is expected to
track closely with overall manufacturing activity.
With increasing demand and improved capacity utilization, pricing for
chlorine is expected to continue to rise compared to 2003. Caustic soda prices
should also improve as overall manufacturing demand strengthens.
VINYLS
Gross domestic product (GDP) growth in the latter part of 2003 and
consensus forecasts of 2004 GDP growth exceeding 4 percent for North America are
encouraging and suggest a strengthening in the economy that will favorably
impact chlorovinyls. Overall, Occidental expects 2-percent growth in vinyls
demand in North America in 2004. PVC and VCM operating rates are expected to
move upward during the year, also averaging 2 percent higher than 2003 rates.
Chlorovinyls supply constraints, together with high energy costs, have
created conditions for vinyls price increases early in 2004. Resin producer
price increases of 2 cents per pound have taken effect for January, and a second
2 cents per pound increase has been announced for February. In addition, VCM
intermediates are expected to be in shorter supply than PVC because of industry
capacity reductions and maintenance requirements. Average operating rates for
North American VCM producers are expected to exceed 90 percent.
The increased demand for chlorine and tighter VCM supplies, due to capacity
reductions, is expected to result in supply restrictions for vinyl producers.
SEGMENT OPERATIONS
The following discussion of Occidental's two operating segments and
corporate items should be read in conjunction with Note 15 to the Consolidated
Financial Statements.
Segment earnings exclude interest income, interest expense, unallocated
corporate expenses, discontinued operations and the cumulative effect of changes
in accounting principles, but include gains and losses from dispositions of
segment assets and results from the segments' equity investments.
Foreign income and other taxes and certain state taxes are included in
segment earnings based on their operating results. U.S. federal income taxes are
not allocated to segments except for amounts in lieu thereof that represent the
tax effect of operating charges resulting from purchase accounting adjustments,
and the tax effects resulting from major, infrequently occurring transactions,
such as asset dispositions that relate to segment results.
14
The following table sets forth the sales and earnings of each operating
segment and corporate items:
SEGMENT OPERATIONS
In millions, except per share amounts
For the years ended December 31, 2003 2002 2001
================================= ======== ======== ========
SALES
Oil and Gas $ 6,003 $ 4,634 $ 5,134
Chemical 3,178 2,704 2,968
Other (a) 145 -- --
-------- -------- --------
$ 9,326 $ 7,338 $ 8,102
================================= ======== ======== ========
EARNINGS(LOSS)
Oil and Gas (b) $ 2,664 $ 1,707 $ 2,845
Chemical (b) 210 275 (399)
-------- -------- --------
2,874 1,982 2,446
Unallocated corporate items
Interest expense, net (c)
Debt, net (289) (253) (272)
Trust preferred distributions
and other (44) (47) (56)
Income taxes (d) (662) (364) (359)
Other (d, e) (284) (155) (580)
-------- -------- --------
Income from continuing
operations 1,595 1,163 1,179
Discontinued operations, net -- (79) (1)
Cumulative effect of changes in
accounting principles, net (68) (95) (24)
-------- -------- --------
Net Income $ 1,527 $ 989 $ 1,154
================================= ======== ======== ========
Basic Earnings per
Common Share $ 3.98 $ 2.63 $ 3.10
================================= ======== ======== ========
(a) The 2003 amount represents revenue from a co-generation plant in Taft,
Louisiana.
(b) Includes U.S. federal tax charge of $6 million related to oil and gas in
2003. Segment earnings in 2002 were affected by $402 million of net credits
allocated, comprising $1 million of charges and $403 million of credits in
oil and gas and chemical, respectively. The chemical amount includes a $392
million credit for the sale of the Equistar investment, which resulted in a
net gain of $164 million. Segment earnings in 2001 were affected by $14
million of net charges allocated, comprising $56 million of charges and $42
million of credits in oil and gas and chemical, respectively. The oil and
gas amount includes a charge for the sale of the Indonesian Tangguh LNG
project. The chemical amount includes credits for the sale of certain
chemical operations.
(c) The 2003 amount includes a $61 million interest charge to repay a $450
million senior note that had 10 years of remaining life, but subject to
remarketing on April 1, 2003. The 2002 and 2001 amounts are net of $21
million and $102 million, respectively, of interest income on notes
receivable from Altura partners.
(d) The 2001 tax amount excludes the income tax benefit of $188 million
attributed to the sale of the entity that owns a Texas intrastate pipeline
system. The tax benefit is included in Other.
(e) The 2003 amount includes $58 million of corporate equity-method investment
losses and $63 million of environmental remediation expense. The 2002
amount includes $22 million of preferred distributions to the Altura
partners, $23 million of environmental remediation expenses and $25 million
of corporate equity-method investment losses. The 2001 amount includes the
after-tax loss of $272 million related to the sale of the entity that owns
a Texas intrastate pipeline system, a $109 million charge for environmental
remediation expenses and $104 million of preferred distributions to the
Altura partners.
OIL AND GAS
In millions, except as indicated 2003 2002 2001
======================================== ======== ======== ========
SEGMENT SALES $ 6,003 $ 4,634 $ 5,134
SEGMENT EARNINGS $ 2,664 $ 1,707 $ 2,845
CORE EARNINGS (a) $ 2,664 $ 1,707 $ 2,446
NET PRODUCTION PER DAY
UNITED STATES
Crude oil and liquids (MBBL)
California 81 86 76
Permian 150 142 137
Horn Mountain 21 1 --
Hugoton 4 3 --
-------- -------- --------
Total 256 232 213
Natural Gas (MMCF)
California 252 286 303
Hugoton 138 148 159
Permian 129 130 148
Horn Mountain 13 -- --
-------- -------- --------
Total 532 564 610
LATIN AMERICA
Crude oil & condensate (MBBL)
Colombia 37 40 21
Ecuador 25 13 13
-------- -------- --------
Total 62 53 34
MIDDLE EAST
Crude oil & condensate (MBBL)
Oman 12 13 12
Qatar 45 42 43
Yemen 35 37 33
-------- -------- --------
Total 92 92 88
OTHER EASTERN HEMISPHERE
Crude oil & condensate (MBBL)
Pakistan 9 10 7
Natural Gas (MMCF)
Pakistan 74 63 50
BARRELS OF OIL EQUIVALENT (MBOE)
SUBTOTAL CONSOLIDATED SUBSIDIARIES 520 492 452
Colombia-minority interest (5) (5) (3)
Russia-Occidental net interest 30 27 27
Yemen-Occidental net interest 2 1 --
-------- -------- --------
TOTAL WORLDWIDE PRODUCTION 547 515 476
======== ======== ========
AVERAGE SALES PRICES
CRUDE OIL PRICES ($ per barrel)
U.S. $ 28.74 $ 23.47 $ 21.74
Latin America $ 27.21 $ 23.14 $ 20.10
Middle East (b) $ 27.81 $ 24.13 $ 23.00
Other Eastern Hemisphere $ 26.61 $ 23.02 $ 22.64
Total consolidated subsidiaries $ 28.18 $ 23.56 $ 21.91
Other interests $ 15.95 $ 14.80 $ 15.57
Total worldwide $ 27.25 $ 22.91 $ 21.41
GAS PRICES ($ per thousand cubic feet)
U.S. $ 4.81 $ 2.89 $ 6.40
Other Eastern Hemisphere $ 2.04 $ 2.08 $ 2.29
Total worldwide $ 4.45 $ 2.81 $ 6.09
EXPENSED EXPLORATION (c) $ 139 $ 176 $ 184
CAPITAL EXPENDITURES
Development $ 1,097 $ 897 $ 918
Exploration $ 43 $ 55 $ 86
Acquisitions and other (d, e) $ 97 $ 86 $ 134
- ---------------------------------------- -------- -------- --------
(a) For an explanation of core earnings, see "Significant Items Affecting
Earnings."
(b) These amounts exclude implied taxes.
(c) Includes dry hole write-offs and lease impairments of $80 million in 2003,
$96 million in 2002 and $99 million in 2001.
(d) Includes capitalized portion of injected CO2 of $48 million, $42 million
and $48 million in 2003, 2002 and 2001, respectively.
(e) Includes mineral acquisitions but excludes significant acquisitions
individually discussed in this report.
15
Core earnings in 2003 were $2.7 billion compared with $1.7 billion in 2002.
The increase in core earnings primarily reflects the impact of higher crude oil
and natural gas prices and higher crude oil production volumes, partially offset
by lower natural gas production volumes, higher depreciation, depletion and
amortization (DD&A) rates and increased costs.
CHEMICAL
In millions, except as indicated 2003 2002 2001
========================================= ======== ======== ========
SEGMENT SALES $ 3,178 $ 2,704 $ 2,968
SEGMENT EARNINGS (LOSS) $ 210 $ 275 $ (399)
CORE EARNINGS (a) $ 210 $ 111 $ 13
KEY PRODUCT PRICE INDEXES (1987
through 1990 average price = 1.0)
Chlorine 1.72 1.01 0.74
Caustic soda 0.84 0.71 1.33
Ethylene dichloride 1.16 1.01 0.61
PVC commodity resins (b) 0.89 0.73 0.68
KEY PRODUCT VOLUMES
Chlorine (thousands of tons) (c) 2,733 2,807 2,847
Caustic soda (thousands of tons) 2,764 2,717 2,857
Ethylene dichloride (thousands of tons) 546 573 735
PVC commodity resins
(millions of pounds) 3,954 4,132 3,950
CAPITAL EXPENDITURES (d) $ 345 $ 109 $ 112
- ----------------------------------------- -------- -------- --------
(a) For an explanation of core earnings, see "Significant Items Affecting
Earnings."
(b) Product volumes produced at former PolyOne facilities, now part of
OxyVinyls, are excluded from the product price indexes.
(c) Product volumes include those manufactured and consumed internally.
(d) The 2003 amount includes $180 million for the purchase of a previously
leased facility in LaPorte, Texas and $44 million related to the exercise
of purchase options for certain leased railcars.
Core earnings were $210 million in 2003, compared with $111 million in
2002. The increase in core earnings reflects the impact of higher sales prices
for all major products (PVC, EDC, chlorine and caustic), partially offset by
higher energy and ethylene costs.
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.
SIGNIFICANT ITEMS AFFECTING EARNINGS
Benefit (Charge) (in millions) 2003 2002 2001
========================================= ======== ======== ========
TOTAL REPORTED EARNINGS $ 1,527 $ 989 $ 1,154
========================================= ======== ======== ========
OIL AND GAS
Segment Earnings $ 2,664 $ 1,707 $ 2,845
Less:
Gain on sale of interest in the
Indonesian Tangguh LNG Project (a) -- -- 399
-------- -------- --------
Segment Core Earnings $ 2,664 $ 1,707 $ 2,446
- ----------------------------------------- -------- -------- --------
CHEMICAL
Segment Results $ 210 $ 275 $ (399)
Less:
Gain on sale of Equistar investment (a) -- 164 --
Equistar writedown -- -- (412)
-------- -------- --------
Segment Core Earnings $ 210 $ 111 $ 13
- ----------------------------------------- -------- -------- --------
CORPORATE
Results $ (1,347) $ (993) $ (1,292)
Less:
Loss on sale of pipeline-owning
entity (a) -- -- (272)
Settlement of state tax issue -- -- 70
Debt repayment fee (61) -- --
Changes in accounting principles,
net (a) (68) (95) (24)
Discontinued operations, net (a) -- (79) (1)
Tax effect of pre-tax adjustments 21 -- 148
- ----------------------------------------- -------- -------- --------
TOTAL CORE EARNINGS $ 1,635 $ 999 $ 1,246
========================================= ======== ======== ========
(a) These amounts are shown after-tax.
CONSOLIDATED OPERATIONS
SELECTED REVENUE ITEMS
In millions 2003 2002 2001
==================================== ======== ======== ========
Net sales $ 9,326 $ 7,338 $ 8,102
Interest, dividends and other income $ 89 $ 143 $ 223
Gains on disposition of assets, net $ 32 $ 10 $ 10
- ------------------------------------ -------- -------- --------
The increase in sales in 2003, compared to 2002, primarily reflects higher
crude oil, natural gas and chemical prices and higher crude oil production
volumes, partially offset by lower natural gas production volumes.
The decrease in sales in 2002, compared to 2001, primarily reflects lower
natural gas and chemical prices and lower natural gas and chemical volumes,
partially offset by higher crude oil prices and production.
Interest, dividends and other income in 2002 and 2001 includes interest
income on the notes receivable from the Altura partners of $21 million and $102
million, respectively. Occidental exercised an option in May 2002 to redeem the
sellers' remaining partnership interests in exchange for the notes receivable.
Gains on disposition of assets in 2003 include the final gain of $22
million on the sale of the remaining Continental Shelf Gulf of Mexico (GOM)
assets to Apache Corporation. Gains on disposition of assets in 2001 include the
gain of $454 million on the sale of the interest in the Tangguh LNG project and
the loss of $459 million on the sale of its interests in a subsidiary that owned
a Texas natural gas intrastate pipeline system.
16
SELECTED EXPENSE ITEMS
In millions 2003 2002 2001
=================================== ======== ======== ========
Cost of sales $ 3,988 $ 3,385 $ 3,626
Selling, general and administrative
and other operating expenses $ 855 $ 677 $ 668
Depreciation, depletion and
amortization $ 1,177 $ 1,012 $ 965
Exploration expense $ 139 $ 176 $ 184
Interest and debt expense, net $ 332 $ 295 $ 401
- ----------------------------------- -------- -------- --------
Cost of sales increased in 2003, compared to 2002, due mainly to oil and
gas volume increases and higher energy and feedstock costs in the chemical
segment. The 2003 amount also includes $156 million for the costs of operating a
co-generation facility.
Cost of sales decreased in 2002, compared to 2001, due mainly to lower
chemical raw material costs, partially offset by volume increases in oil and
gas.
Selling, general and administrative and other operating expenses increased
in 2003 compared with 2002. The increases were in several areas. General and
administrative costs increased in both oil and gas and corporate infrastructure
and general support areas. In addition, non-operating costs were generally
higher in international operations, mainly Latin America. Higher oil and gas
production taxes reflected the overall increase in worldwide production. Also,
additional expense resulted from adoption of the new asset retirement obligation
accounting standard.
Selling, general and administrative and other operating expenses increased
in 2002, compared to 2001, due mainly to $42 million of chemical asset
writedowns in 2002, partially offset by other charges in 2001.
The increase in DD&A in 2003, compared to 2002, and 2002, compared to 2001,
was primarily due to the increase in oil and gas production from the prior year
and a higher DD&A rate in 2003.
The decrease in exploration expense in 2003, compared to 2002, was
primarily due to lower dry hole write-offs and impairment costs and lower
seismic, geological and geophysical costs in 2003.
The increase in interest and debt expense in 2003, compared to 2002,
reflected a pre-tax debt repayment charge of $61 million in 2003, partially
offset by lower interest rates and lower average debt levels. In addition, since
Occidental adopted Statement of Financial Accounting Standards (SFAS) No. 150 in
July 2003, the 2003 interest expense amount includes six months of interest that
had been classified as distributions on trust preferred securities prior to the
adoption (see below).
The decrease in interest and debt expense in 2002, compared to 2001,
reflects lower average debt levels and lower interest rates.
OTHER ITEMS
In millions 2003 2002 2001
============================= ======== ======== ========
Provision for income taxes $ 1,227 $ 422 $ 556
Minority interest $ 62 $ 77 $ 143
Loss from equity investments $ 9 $ 261 $ 504
- ----------------------------- -------- -------- --------
The increase in the provision for income taxes in 2003, compared to 2002,
reflected an increase in income before taxes. In addition, the 2002 provision
for income taxes includes an income tax benefit of $406 million for the sale of
the Equistar investment.
The 2001 provision includes income tax benefits of $172 million resulting
from the write-down of the Equistar investment, $188 million from the sale of
the entity that owns a Texas intrastate natural gas pipeline system, and a $45
million after-tax settlement of a state-tax issue.
The decrease in minority interest in 2003, compared to 2002, resulted from
the July 1, 2003 adoption of SFAS No. 150, which required distributions on trust
preferred securities to be classified as interest expense. These distributions
were previously recorded in minority interest. The decrease in minority interest
in 2002, compared to 2001, was due to an $84 million decrease in preferred
distributions to the Altura partners. The remaining Altura partnership interests
were redeemed in May 2002.
The 2002 loss from equity investments includes a pre-tax loss of $242
million from the sale of the Equistar investment in August 2002. The loss from
equity investments in 2001 includes a $412 million pre-tax write-down of
Equistar and a loss of $89 million from the Equistar equity investment.
TAXES
Deferred tax liabilities were $926 million at December 31, 2003, net of
deferred tax assets of $839 million. The current portion of the deferred tax
assets of $75 million is included in prepaid expenses and other. The net
deferred tax assets are expected to be realized through future operating income
and reversal of taxable temporary differences.
LIQUIDITY AND CAPITAL RESOURCES
FINANCING ACTIVITY
During 2003, Occidental strengthened its liquidity position, generating
approximately $3 billion in cash from operations. Although future volatility in
commodity prices may result in varying operating cash flows, Occidental believes
that cash on hand, cash generated from operating activities, unused committed
bank credit lines and other sources of funds, such as debt issued in the capital
markets and the receivables sale program, will be adequate to satisfy its future
financial obligations and liquidity needs.
As of December 31, 2003, available borrowing capacity under Occidental's
unused committed bank credit lines was $1.5 billion. Occidental had
approximately $683 million in cash on hand at December 31, 2003, an increase of
$537 million from 2002. A portion of the year-end 2003 cash balance was used to
redeem all of the outstanding 8.16 percent Trust Preferred Redeemable Securities
(trust preferred securities) on January 20, 2004. The trust preferred securities
were redeemed at par plus accrued interest, resulting in a decrease in current
liabilities of approximately $453 million.
17
In 2003, Occidental recorded a pre-tax interest charge of $61 million to
repay a $450 million 6.4-percent senior notes issue that had ten years of
remaining life, but was subject to remarketing on April 1, 2003. Occidental
refinanced $300 million of this amount and paid the remaining $150 million out
of existing cash.
In 2002, Occidental filed a shelf registration statement for up to $1
billion of various securities, including senior debt securities. In November
2002, Occidental issued $175 million of 4-percent Medium-Term Senior Notes,
Series C, and $75 million of 4.101-percent Medium-Term Senior Notes, Series C,
due 2007 for general corporate purposes. In March 2003, Occidental issued $300
million of 4.25-percent Medium-Term Senior Notes and used the proceeds to
refinance a portion of the $450 million senior notes discussed above. Occidental
has $450 million of securities remaining under the shelf registration.
In 2002, Occidental repaid and or redeemed approximately $198 million of
senior notes and medium-term notes and a subsidiary of Occidental issued $75
million of preferred stock. Occidental retains all common shares of the
subsidiary and elects the majority of the directors. The subsidiary is the
holding company for a number of international subsidiaries of Occidental. In the
event that the subsidiary fails to pay preferred dividends for two consecutive
quarters or upon the occurrence of certain other events, the holder of the
preferred stock could gain control of the subsidiary's board of directors.
CASH FLOW ANALYSIS
In millions 2003 2002 2001
===================================== ======== ======== ========
Net cash provided by operating
activities $ 3,074 $ 2,100 $ 2,566
- ------------------------------------- -------- -------- --------
The increase in operating cash flow in 2003 compared to 2002 resulted from
higher net income.
The lower operating cash flow in 2002, compared with 2001, results from
lower core earnings and higher working capital usage.
Non-cash charges in 2003 include deferred compensation, stock incentive
plan amortization and environmental remediation accruals. Non-cash charges in
2002 include environmental remediation accruals and the asset writedown for two
chemical facilities. Non-cash charges in 2001 include environmental remediation
accruals. 2002 and 2001 also include charges for employee benefit plans and
other items.
In millions 2003 2002 2001
===================================== ======== ======== ========
Net cash used by investing activities $ (2,021) $ (1,696) $ (651)
- ------------------------------------- -------- -------- --------
The 2003 amount includes several Permian Basin acquisitions totaling $317
million.
The 2002 amount includes approximately $349 million for a 24.5-percent
interest in the Dolphin Project and Dolphin Energy, including $39 million for
historical costs.
The 2001 amount includes the gross proceeds of $863 million from the sale
of the entity that owns a Texas intrastate pipeline system and the sale of
Occidental's interest in the Tangguh LNG project in Indonesia.
Also, see the "Capital Expenditures" section below.
In millions 2003 2002 2001
===================================== ======== ======== ========
Net cash used by financing activities $ (516) $ (456) $ (1,814)
- ------------------------------------- -------- -------- --------
The 2003 amount includes net debt repayments of $334 million.
The 2002 amount reflects the net $179 million buyout of the natural gas
delivery commitment and $72 million of net proceeds from the issuance of a
subsidiary's preferred stock.
The 2001 amount reflects the repayment of $2.3 billion of long-term and
non-recourse debt, partially offset by proceeds of $861 million from new
long-term debt.
Occidental paid common stock dividends of $392 million in 2003, $375
million in 2002 and $372 million in 2001.
CAPITAL EXPENDITURES
In millions 2003 2002 2001
============================= ======== ======== ========
Oil and Gas $ 1,237 $ 1,038 $ 1,138
Chemical 345 109 112
Corporate and other 19 89 58
-------- -------- --------
TOTAL $ 1,601 $ 1,236 $ 1,308
============================= ======== ======== ========
The 2003 chemical amount includes $180 million for the purchase of a
previously leased facility in LaPorte, Texas and $44 million related to the
exercise of purchase options for certain leased railcars.
Occidental's capital spending estimate for 2004 is approximately $1.4
billion. In addition, Occidental expects to spend $250 million to $300 million
on the Dolphin Project. A majority of the capital spending will be allocated to
oil and gas, with the main focus on Qatar, Elk Hills and the Permian Basin.
Commitments at December 31, 2003, for major capital expenditures during
2004 and thereafter were approximately $201 million. Occidental will fund these
commitments and capital expenditures with cash from operations and, as needed,
with proceeds from existing credit facilities.
ANALYSIS OF FINANCIAL POSITION
The changes in the following components of Occidental's balance sheet are
discussed below:
SELECTED BALANCE SHEET COMPONENTS
In millions 2003 2002
================================================ ======== ========
Cash and cash equivalents $ 683 $ 146
Trade receivables, net $ 804 $ 608
Income tax receivable $ 20 $ 150
Investments in unconsolidated subsidiaries $ 1,155 $ 1,056
Property, plant and equipment, net $ 14,005 $ 13,036
Current maturities of long-term debt and capital
lease liabilities $ 23 $ 206
Accounts payable $ 909 $ 785
Accrued liabilities $ 877 $ 914
Dividends payable $ 101 $ 193
Trust preferred securities - current $ 453 $ --
Trust preferred securities - non-current $ -- $ 455
Other deferred credits and liabilities $ 2,407 $ 2,228
Stockholders' equity $ 7,929 $ 6,318
- ------------------------------------------------ -------- --------
18
The higher balance in cash and cash equivalents at December 31, 2003,
compared to December 31, 2002, reflects the build-up of cash, part of which was
used to redeem $453 million of trust preferred securities in January 2004. The
higher balance in trade receivables at December 31, 2003, compared with December
31, 2002, reflects higher product prices and sales volumes during the fourth
quarter of 2003 versus 2002 in the oil and gas segment. The decrease in income
tax receivable was due to a 2002 tax receivable from the Equistar sale that was
received in 2003. The higher balance in investments in unconsolidated entities
primarily reflects a capital contribution to the Ecuador OCP pipeline
investment, additional purchases of Lyondell and Premcor stock and
mark-to-market increases in the available-for-sale Premcor investment. The
increase in the net balance in property, plant and equipment reflects capital
spending, the addition of the acquired Permian Basin assets and the
consolidation of the OxyMar property, plant and equipment as a result of the
adoption of Financial Accounting Standards Board (FASB) Interpretation No. (FIN)
46, partially offset by depreciation, depletion and amortization.
The decrease in current maturities of long-term debt is due to the fact
that a lower level of debt will mature in 2004. The increase in accounts payable
is due to higher payable balances in the oil and gas marketing and trading
operations. The decrease in accrued liabilities is due to lower mark-to-market
adjustments on derivative financial instruments. The decrease in dividends
payable is due to the fact that at the end of 2002, there were two quarters of
dividend accruals due to an early declaration in 2002 of a dividend paid in
2003. At June 30, 2003, pursuant to the adoption of SFAS No. 150, the trust
preferred securities were reclassified to long-term liabilities. At year-end
2003, they were further reclassified to current liabilities as Occidental
announced its intention to redeem all of the trust preferred securities. On
January 20, 2004, all of the trust preferred securities were redeemed. Other
deferred credits and liabilities include deferred compensation, other
post-retirement benefits, environmental remediation reserves, asset retirement
obligations and other deferred items. The increase in other deferred credits and
liabilities in 2003, compared to 2002, was primarily due to the asset retirement
obligation that was recorded in connection with the adoption of SFAS No. 143.
The increase in stockholders' equity primarily reflects net income and issuance
of new stock related to options exercised, partially offset by dividends on
common stock.
OFF-BALANCE-SHEET ARRANGEMENTS
In the course of its business activities, Occidental pursues a number of
projects and transactions to meet its core business objectives. The accounting
and financial statement treatment of these transactions is a result of the
varying methods of funding employed. Occidental also makes commitments on behalf
of unconsolidated entities. These transactions, or groups of transactions, are
recorded in compliance with generally accepted accounting principles and, unless
otherwise noted, are not reflected on Occidental's balance sheets. The following
is a description of the business purpose and nature of these transactions.
DOLPHIN PROJECT
See discussion of the Dolphin Project in the "Business Review - Oil and
Gas, Middle East" section of the MD&A above.
ECUADOR
In Ecuador, Occidental has a 14-percent interest in the OCP oil export
pipeline. In the second half of 2003, the increased production from the
Eden-Yuturi oil field in the southeastern corner of Block 15 coincided with the
completion of the pipeline. Occidental made capital contributions of $64 million
in 2003 and as of December 31, 2003, has contributed a total of $73 million to
the project. Occidental reports this investment in its consolidated statements
using the equity method of accounting.
The project was funded in part by senior project debt. The senior project
debt is to be repaid with the proceeds of ship-or-pay tariffs of certain
upstream producers in Ecuador, including Occidental. Under their ship-or-pay
commitments, Occidental and the other upstream producers have each assumed their
respective share of project-specific risks, including operating risk and
force-majeure risk. Occidental would be required to make an advance tariff
payment in the event of prolonged force majeure, upstream expropriation events,
bankruptcy of the pipeline company or its parent company, abandonment of the
project, termination of an investment guarantee agreement with Ecuador, or
certain defaults by Occidental. This advance tariff would be used by the
pipeline company to service or prepay project debt. Occidental's obligation
relating to the pipeline company's senior project debt totaled $108 million, and
Occidental's obligations relating to performance bonds totaled $14 million at
December 31, 2003. As Occidental ships product using the pipeline, its overall
obligations will decrease with the reduction of the pipeline company's senior
project debt.
ELK HILLS POWER
Occidental 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 variable-interest entity (VIE) under the provisions of FIN
46. Occidental has concluded it is not the primary beneficiary of EHP and,
therefore, accounts for this investment using the equity method. In January
2002, EHP entered into a $400 million construction loan facility, which was
amended in May 2003 to increase the facility to $425 million. Upon construction
completion on July 17, 2003, the facility converted to a $415 million term loan,
50 percent of which is guaranteed by Occidental.
19
RECEIVABLES SALE PROGRAM
Occidental has an agreement in place to sell, under a revolving sale
program, an undivided interest in a designated pool of trade receivables. This
program is used by Occidental as a low-cost source of working capital funding.
The balance of receivables sold at December 31, 2003 and 2002 was $360 million.
This amount is not included in the debt and related trade receivables accounts,
respectively, on Occidental's consolidated balance sheets. Receivables must meet
certain criteria to qualify for the program.
Under this program, Occidental serves as the collection agent with respect
to the receivables sold. An interest in new receivables is sold as collections
are made from customers. Fees and expenses under this program are included in
selling, general and administrative and other operating expenses. The fair value
of any retained interests in the receivables sold is not material. The buyers of
the receivables are protected against significant risk of loss on their purchase
of receivables. Occidental provides for allowances for any doubtful receivables
based on its periodic evaluation of such receivables. The provisions for such
receivables were not material in the years ended December 31, 2003, 2002 and
2001.
The program can terminate upon the occurrence of certain events, which
generally are under Occidental's control or relate to bankruptcy. In such an
event, alternative funding would have to be arranged, which could result in an
increase in debt recorded on the consolidated balance sheet, with a
corresponding increase in the accounts receivable balance. The consolidated
income statement effect of such an event would not be significant.
LEASES
Occidental has entered into various operating-lease agreements, mainly for
railcars, power plants, manufacturing facilities and office space. The leased
assets are used in Occidental's operations where leasing offers advantages of
greater operating flexibility and generally costs less than alternative methods
of funding that were available at the time financing decisions were made. Lease
payments are expensed mainly as cost of sales. See contractual obligation table
below.
CONTRACTUAL OBLIGATIONS
The table below summarizes and cross-references certain contractual
obligations that are reflected in the Consolidated Balance Sheets and/or
disclosed in the accompanying Notes.
Payments Due by Year
-------------------------------------------------
2005 2007 2009
Contractual to to and
Obligations (in millions) Total 2004 2006 2008 thereafter
========================= ========== ========== ========== ========== ==========
CONSOLIDATED
BALANCE SHEET
Long-term debt
(Note 6) (a) $ 4,389 $ 476 $ 653 $ 955 $ 2,305
Capital leases
(Note 7) 33 1 2 2 28
Other long-term
liabilities (b) 658 75 146 102 335
OTHER OBLIGATIONS
Operating leases
(Note 7) (c) 1,332 106 179 137 910
Purchase
obligations (d) 2,728 1,657 292 151 628
---------- ---------- ---------- ---------- ----------
TOTAL $ 9,140 $ 2,315 $ 1,272 $ 1,347 $ 4,206
========================= ========== ========== ========== ========== ==========
(a) Includes trust preferred securities reported as current liabilities at
December 31, 2003, and excludes fair-value hedge mark-to-market adjustments
and unamortized debt discounts.
(b) Primarily includes obligations under postretirement benefit and deferred
compensation plans.
(c) Amounts are presented gross of sublease rental income.
(d) Primarily includes long-term purchase contracts and purchase orders and
contracts for goods and services used in manufacturing and producing
operations in the normal course of business. Some of these arrangements
involve take-or-pay commitments but they do not represent debt obligations.
Due to their long-term nature, purchase contracts with terms greater than 5
years are discounted using a 6-percent discount rate.
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 the Comprehensive Environmental Response, Compensation and
Liability Act (CERCLA) and similar federal, state and local environmental laws.
These environmental proceedings seek funding or performance of remediation and,
in some cases, compensation for alleged property damage, punitive damages and
civil penalties; however, Occidental is usually one of many companies in these
proceedings and has to date been successful in sharing response costs with other
financially sound companies. With respect to all such lawsuits, claims and
proceedings, including environmental proceedings, Occidental accrues reserves
when it is probable a liability has been incurred and the amount of loss can be
reasonably estimated.
20
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 2002 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.
Occidental has entered into agreements providing for future payments to
secure terminal and pipeline capacity, drilling services, electrical power,
steam and certain chemical raw materials. At December 31, 2003, the net present
value of the fixed and determinable portion of the obligations under these
agreements, which were used to collateralize financings of the respective
suppliers, aggregated $45 million, which was payable as follows (in millions):
2004--$12, 2005--$11, 2006--$10, 2007--$9 and 2008--$3. Fixed payments under
these agreements were $16 million in 2003, $27 million in 2002 and $20 million
in 2001.
Occidental has certain other commitments under contracts, guarantees and
joint ventures, and certain other contingent liabilities. Many of these
commitments, although not fixed or determinable, involve capital expenditures
and are part of the $1.4 billion capital expenditures estimated for 2004, and
the $250 to $300 million estimated to be spent on the Dolphin Project in 2004.
As discussed under "Significant Accounting Changes" below, FIN 45 requires
the disclosure in Occidental's financial statements of information relating to
guarantees issued by Occidental and outstanding at December 31, 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 (guarantees).
At December 31, 2003, the notional amount of the guarantees was
approximately $500 million. Of this amount, approximately $400 million relates
to Occidental's guarantee of equity investees' debt and other commitments. The
debt guarantees relating to Elk Hills Power and the guarantees on debt and other
commitments relating to the Ecuador pipeline have been discussed above in the
"Off-Balance-Sheet Arrangements" section. The remaining $100 million relates to
various indemnities and guarantees provided to third parties.
Occidental has indemnified various parties against specified liabilities
that those parties might incur in the future in connection with purchases and
other transactions that they have entered into with Occidental. These
indemnities usually are contingent upon the other party incurring liabilities
that reach specified thresholds. As of December 31, 2003, Occidental is not
aware of circumstances that would lead to future indemnity claims against it for
material amounts in connection with these transactions.
It is impossible at this time to determine the ultimate liabilities that
OPC and its subsidiaries may incur resulting from any lawsuits, claims and
proceedings, audits, commitments, contingencies and related matters. If these
matters were to be ultimately resolved unfavorably at amounts substantially
exceeding Occidental's reserves, an outcome not currently anticipated, it is
possible that such outcome could have a material adverse effect upon
Occidental's consolidated financial position or results of operations. However,
after taking into account reserves, management does not expect the ultimate
resolution of any of these matters to have a material adverse effect upon
Occidental's consolidated financial position or results of operations.
ENVIRONMENTAL LIABILITIES AND EXPENDITURES
Occidental's operations in the United States are subject to stringent
federal, state and local laws and regulations relating to improving or
maintaining environmental quality. Foreign operations also are subject to
environmental-protection laws. Costs associated with environmental compliance
have increased over time and are generally expected to rise in the future.
Environmental expenditures related to current operations are factored into the
overall business planning process. These expenditures are mainly considered an
integral part of production in manufacturing quality products responsive to
market demand.
ENVIRONMENTAL REMEDIATION
The laws 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. OPC or certain of its subsidiaries are currently
participating in environmental assessments and cleanups under these laws at
federal Superfund sites, comparable state sites and other remediation sites,
including Occidental facilities and previously owned sites. Also, OPC and
certain of its subsidiaries have been involved in a substantial number of
governmental and private proceedings involving historical practices at various
sites including, in some instances, having been named in proceedings under
CERCLA and similar federal, state and local environmental laws. These
proceedings seek funding or performance of remediation and, in some cases,
compensation for alleged property damage, punitive damages and civil penalties.
Occidental manages its environmental remediation efforts through a wholly
owned subsidiary, Glenn Springs Holdings, Inc. (GSH), which reports its results
directly to Occidental's corporate management.
21
The following table presents Occidental's environmental remediation
reserves at December 31, 2003, 2002 and 2001 grouped by three categories of
environmental remediation sites:
$ amounts in millions 2003 2002 2001
===================== =============== =============== ===============
# OF RESERVE # of Reserve # of Reserve
SITES BALANCE Sites Balance Sites Balance
----- ------- ----- ------- ----- -------
CERCLA &
equivalent sites 131 $ 240 124 $ 284 126 $ 320
Active facilities 13 79 14 46 14 59
Closed or sold
facilities 39 53 44 63 47 75
----- ------- ----- ------- ----- -------
TOTAL 183 $ 372 182 $ 393 187 $ 454
===================== ===== ======= ===== ======= ===== =======
The increase in the number of CERCLA and equivalent sites between 2002 and
2003 was primarily in the "minimal/no exposure" category as discussed below.
The following table shows environmental reserve activity for the past three
reporting periods:
In millions 2003 2002 2001
============================ ======== ======== ========
Balance - Beginning of Year $ 393 $ 454 $ 402
Increases to provision
including interest
accretion 64 25 111
Changes from
acquisitions/dispositions -- -- 5
Payments (83) (84) (75)
Other (2) (2) 11
-------- -------- --------
Balance - End of Year $ 372 $ 393 $ 454
============================ ======== ======== ========
Occidental expects to expend funds equivalent to about half of the current
environmental reserve over the next three years and the balance over the next
ten or more years. Occidental expects that it may 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 $400 million beyond the amount accrued.
For management's opinion, refer to the "Lawsuits, Claims, Commitments,
Contingencies and Related Matters" section above.
CERCLA AND EQUIVALENT SITES
At December 31, 2003, OPC or certain of its subsidiaries have been named in
131 CERCLA or state equivalent proceedings, as shown below.
Reserve
Description ($ amounts in millions) # of Sites Balance
=================================== ============ ===========
Minimal/No exposure (a) 109 $ 5
Reserves between $1-10 MM 15 59
Reserves over $10 MM 7 176
------------ -----------
TOTAL 131 $ 240
=================================== ============ ===========
(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, 57 sites where Occidental's reserves are less
than $50,000 each, and 12 sites where reserves are between $50,000 and $1
million each.
The seven sites with individual reserves over $10 million in 2003 are a
former copper mining and smelting operation in Tennessee, two closed landfills
in Western New York, groundwater treatment facilities at three former chemical
plants (Western New York, Montague, Michigan and Tacoma, Washington) and a
municipal drinking water treatment plant in Western New York.
ACTIVE FACILITIES
Certain subsidiaries of OPC are currently addressing releases of substances
from past operations at 13 active facilities. Four facilities -- certain oil and
gas properties in the southwestern United States, a chemical plant in Louisiana,
a chemical plant in Texas, and a phosphorous recovery operation in Tennessee --
account for 89 percent of the reserves associated with these facilities.
CLOSED OR SOLD FACILITIES
There are 39 sites formerly owned or operated by certain subsidiaries of
OPC that have ongoing environmental remediation requirements. Three sites
account for 72 percent of the reserves associated with this group. The three
sites are: an active refinery in Louisiana where Occidental indemnifies the
current owner and operator for certain remedial actions, a water treatment
facility at a former coal mine in Pennsylvania, and a former chemical plant in
West Virginia.
ENVIRONMENTAL COSTS
Occidental's costs, some of which may include estimates, relating to
compliance with environmental laws and regulations, are shown below for each
segment:
In millions 2003 2002 2001
============================= ======== ======== ========
OPERATING EXPENSES
Oil and Gas $ 40 $ 32 $ 22
Chemical 49 46 47
-------- -------- --------
$ 89 $ 78 $ 69
======== ======== ========
CAPITAL EXPENDITURES
Oil and Gas $ 98 $ 70 $ 60
Chemical 15 16 20
-------- -------- --------
$ 113 $ 86 $ 80
======== ======== ========
REMEDIATION EXPENSES
Corporate $ 63 $ 23 $ 109
============================= ======== ======== ========
Operating expenses are incurred on a continual basis. Capital expenditures
relate to longer-lived improvements in currently operating facilities.
Remediation expenses relate to existing conditions caused by past operations and
do not contribute to current or future revenue generation. Although total costs
may vary in any one year, over the long term, segment operating and capital
expenditures for environmental compliance generally are expected to increase.
22
In October 2001, the federal Environmental Protection Agency (EPA) approved
a State Implementation Plan (SIP) for eight counties in the Houston-Galveston
area of Texas to implement certain requirements of the federal Clean Air Act.
The SIP contains provisions requiring the reduction of 80 percent of nitrogen
oxide emissions and 60 percent of certain volatile organic compound emissions by
November 2007. Occidental operates six facilities that are subject to the SIP's
emissions reduction requirements and estimates that its future capital
expenditures will total approximately $25 to $30 million for environmental
control and monitoring equipment necessary to comply with the SIP. Occidental
expects expenditures to end in 2007, although the timing of the expenditures
will vary by facility.
Occidental presently estimates that capital expenditures for environmental
compliance (including the SIP discussed above) will be approximately $82 million
for 2004 and $97 million for 2005.
FOREIGN INVESTMENTS
Portions of Occidental's assets outside North America are exposed to
political and economic risks. Occidental conducts its financial affairs so as to
mitigate its exposure against those risks. At December 31, 2003, the carrying
value of Occidental's assets in countries outside North America aggregated
approximately $3.3 billion, or approximately 18 percent of Occidental's total
assets at that date. Of such assets, approximately $2.3 billion are located in
the Middle East, approximately $759 million are located in Latin America, and
substantially all of the remainder are located in Pakistan.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The process of preparing financial statements in accordance with GAAP
requires the management of Occidental to make estimates and judgments regarding
certain items and transactions. It is possible that materially different amounts
could be recorded if these estimates and judgments change or if the actual
results differ from these estimates and judgments. Occidental considers the
following to be its most critical accounting policies and estimates that involve
the judgment of Occidental's management. There has been no material change to
these policies over the past three years. The selection and development of these
critical accounting policies and estimates have been discussed with the Audit
Committee of the Board of Directors.
OIL AND GAS PROPERTIES
Occidental uses the successful efforts method to account for its oil and
gas properties. Under this method, costs of acquiring properties, costs of
drilling successful exploration wells and development costs are capitalized.
Annual lease rentals, exploration costs, geological, geophysical and seismic
costs and exploratory dry-hole costs are expensed as incurred.
Proved oil and gas reserves are the estimated quantities of crude oil,
natural gas, and natural gas liquids (NGLs) that geological and engineering data
demonstrate with reasonable certainty can be recovered in future years from
known reservoirs under existing economic and operating conditions considering
future production and development costs. There are several factors that could
change Occidental's recorded oil and gas reserves. Occidental receives a share
of production from production-sharing contracts to recover its costs and an
additional share for profit. Occidental's share of production from these
contracts decreases when oil prices improve and increases when oil prices
decline. Overall, Occidental's net economic benefit from these contracts is
greater at higher oil prices. In other contractual arrangements, sustained lower
product prices may lead to a situation where production of proved reserves
becomes uneconomical. Estimation of future production and development costs is
also subject to change partially due to factors beyond Occidental's control,
such as energy costs and inflation or deflation of oil field service costs.
These factors, in turn, could lead to a reduction in the quantity of recorded
proved reserves. An additional factor that could result in a change of proved
reserves is the reservoir decline rates being different from those assumed when
the reserves were initially recorded. Overall, Occidental's revisions to proved
reserves were positive for 2003, 2002 and 2001 and amounted to less than 1
percent of the total reserves for each year. Additionally, Occidental is
required to perform impairment tests pursuant to SFAS No. 144 generally when
prices decline and/or reserve estimates change significantly. There have been no
impairments of reserves over the past three years.
Depreciation and depletion of oil and gas producing properties is
determined by the unit-of-production method and could change with revisions to
estimated proved recoverable reserves. The change in the depreciation and
depletion rate over the past three years due to revisions of previous reserve
estimates has been immaterial.
If Occidental's oil and gas reserves were to change based on the factors
mentioned above, the most significant impact would be on the depreciation and
depletion rate. For example, a 5-percent increase in the amount of oil and gas
reserves would change the rate from $4.82/barrel to $4.58/barrel, which would
increase pre-tax income by $48 million annually. A 5-percent decrease in the oil
and gas reserves would change the rate from $4.82/barrel to $5.06/barrel and
would result in a decrease in pre-tax income of $48 million annually.
A portion of the carrying value of Occidental's oil and gas properties is
attributable to unproved properties. At December 31, 2003, the costs
attributable to unproved properties were approximately $900 million. These costs
are not currently being depreciated or depleted. As exploration and development
work progresses and the reserves on these properties are proven, capitalized
23
costs attributable to the properties will be subject to depreciation and
depletion. If the exploration and development work were to be unsuccessful, the
capitalized costs of the properties related to this unsuccessful work would be
expensed in the year in which the determination was made. The timing of any
writedowns of these unproven properties, if warranted, depends upon the nature,
timing and extent of future exploration and development activities and their
results. Occidental believes its exploration and development efforts will allow
it to realize the unproved property balance.
CHEMICAL ASSETS
The most critical accounting policy affecting Occidental's chemical assets
is the determination of the estimated useful lives of its property, plant and
equipment. Occidental's chemical plants are depreciated using either the
unit-of-production or straight-line method based upon the estimated useful life
of the facilities. The estimated useful lives of Occidental's chemical assets,
which range from 3 years to 50 years, are used to compute depreciation expense
and are also used for impairment tests. The estimated useful lives used for the
chemical facilities are based on the assumption that Occidental will provide an
appropriate level of annual expenditures to maintain the facilities in good
operating condition. Without these continued expenditures, the useful lives of
these plants could significantly decrease. Other factors that could change the
estimated useful lives of Occidental's chemical plants include higher or lower
product prices, which are particularly affected by both domestic and foreign
competition, feedstock costs, energy prices, environmental regulations,
competition and technological changes.
Occidental is required to perform impairment tests on its assets whenever
events or changes in circumstances lead to a reduction in the estimated useful
lives or estimated future cash flows that would indicate that the carrying
amount may not be recoverable, or when management's plans change with respect to
those assets. Under the provisions of SFAS No. 144, Occidental must compare the
undiscounted future cash flows of an asset to its carrying value. The key
factors that could significantly affect future cash flows are future product
prices, which are particularly affected by both domestic and foreign
competition, feedstock costs, energy costs, significantly increased regulation
and remaining estimated useful life.
Due to a temporary decrease in demand for some of its products, Occidental
temporarily idled an EDC plant in June 2001, a chlor-alkali plant in December
2001 and a portion of a chlor-alkali plant in June 2003. These facilities will
remain idle until market conditions improve. Management expects that these
plants will become operational in the future. The net book value of these plants
was $156 million at December 31, 2003. Based on year-end value, the chlor-alkali
plant that closed on December 1, 2001 has a 24-percent minority interest of $28
million. These facilities are periodically tested for impairment and, based on
the results, no impairment is deemed necessary at this time. Occidental
continues to depreciate these facilities based on their remaining estimated
useful lives.
Over the prior three years, the change in the depreciation rate due to
changes in estimated useful lives has been immaterial.
Occidental's net property, plant and equipment for chemicals is
approximately $2.6 billion and its annual depreciation expense is expected to be
approximately $225 million. If the estimated useful lives of Occidental's
chemical plants were to decrease based on the factors mentioned above, the most
significant impact would be on depreciation expense. For example, a reduction in
the remaining useful lives of 20 percent would increase depreciation and reduce
pre-tax earnings by approximately $50 million per year.
ENVIRONMENTAL LIABILITIES AND EXPENDITURES
Environmental expenditures that relate to current operations are expensed
or capitalized as appropriate. Reserves for estimated costs that relate to
existing conditions caused by past operations and that do not contribute to
current or future revenue generation are recorded when environmental remedial
efforts are probable and the costs can be reasonably estimated. In determining
the reserves and the reasonably possible range of loss, Occidental refers to
currently available information, including relevant past experience, available
technology, regulations in effect, the timing of remediation and cost-sharing
arrangements. The environmental reserves are based on management's estimate of
the most likely cost to be incurred and are reviewed periodically and adjusted
as additional or new information becomes available. For the years ended December
31, 2003 and 2002, Occidental has not accrued any reimbursements or
indemnification recoveries for environmental remediation matters as assets.
Recoveries and reimbursements are recorded in income when receipt is probable.
Environmental reserves are recorded on a discounted basis only when a reserve is
initially established and the aggregate amount of the estimated costs for a
specific site and the timing of cash payments are reliably determinable. The
reserve methodology for a specific site is not modified once it has been
established.
Many factors could result in changes to Occidental's environmental reserves
and reasonably possible range of loss. The most significant are:
>> The original cost estimate may have been inaccurate.
>> Modified remedial measures might be necessary to achieve the required
remediation results. Occidental generally assumes that the remedial
objective can be achieved using the most cost-effective technology
reasonably expected to achieve that objective. Such technologies may
include air sparging or phyto-remediation of shallow groundwater, or
limited surface soil removal or in-situ treatment producing acceptable risk
assessment results. Should such remedies fail to achieve remedial
objectives, more intensive or costly measures may be required.
24
>> The remedial measure might take more or less time than originally
anticipated to achieve the required contaminant reduction. Site-specific
time estimates can be affected by factors such as groundwater capture
rates, anomalies in subsurface geology, interactions between or among
water-bearing zones and non-water-bearing zones, or the ability to identify
and control contaminant sources.
>> The regulatory agency might ultimately reject or modify Occidental's
proposed remedial plan and insist upon a different course of action.
Additionally, other events might occur that could affect Occidental's
future remediation costs, such as:
>> The discovery of more extensive contamination than had been originally
anticipated. For some sites with impacted groundwater, accurate definition
of contaminant plumes requires years of monitoring data and computer
modeling. Migration of contaminants may follow unexpected pathways along
geologic anomalies that could initially go undetected. Additionally, the
size of the area requiring remediation may change based upon risk
assessment results following site characterization or interim remedial
measures.
>> Improved remediation technology might decrease the cost of remediation. In
particular, for groundwater remediation sites with projected long-term
operation and maintenance, the development of more effective treatment
technology, or acceptance of alternative and more cost-effective treatment
methodologies such as bio-remediation, could significantly affect
remediation costs.
>> Laws and regulations might change to impose more or less stringent
remediation requirements.
At sites involving multiple parties, Occidental provides environmental
reserves based upon its expected share of liability. When other parties are
jointly liable, the financial viability of the parties, the degree of their
commitment to participate and the consequences to Occidental of their failure to
participate are evaluated when estimating Occidental's ultimate share of
liability. Based on these factors, Occidental believes that it will not be
required to assume a share of liability of other potentially responsible
parties, with whom it is alleged to be jointly liable, in an amount that would
have a material effect on Occidental's consolidated financial position,
liquidity or results of operations.
Most cost sharing arrangements with other parties fall into one of the
following three categories:
Category 1: CERCLA or state-equivalent sites wherein Occidental and other
alleged potentially responsible parties share the cost of remediation in
accordance with negotiated or prescribed allocations;
Category 2: Oil and gas joint ventures wherein each joint venture partner
pays its proportionate share of remedial cost; and
Category 3: Contractual arrangements typically relating to purchases and
sales of property wherein the parties to the transaction agree to methods of
allocating the costs of environmental remediation.
In all three of these categories, Occidental records as a reserve its
expected net cost of remedial activities, as adjusted by recognition for any
non-performing parties.
In addition to the costs of investigating and implementing remedial
measures, which often take in excess of ten years at CERCLA sites, Occidental's
reserves include management's estimates of the cost of operation and maintenance
of remedial systems. To the extent that the remedial systems are modified over
time in response to significant changes in site-specific data, laws,
regulations, technologies or engineering estimates, Occidental reviews and
changes the reserves accordingly on a site-specific basis.
If the environmental reserve balance were to either increase or decrease
based on the factors mentioned above, the amount of the increase or decrease
would be immediately recognized in earnings. For example, if the reserve balance
were to decrease by 10 percent, Occidental would record a pre-tax gain of $37
million. If the reserve balance were to increase by 10 percent, Occidental would
record an additional remediation expense of $37 million.
OTHER LOSS CONTINGENCIES
Occidental is involved with numerous lawsuits, claims, proceedings and
audits in the normal course of its operations. Occidental records a loss
contingency for these matters when it is probable that an asset has been
impaired or a liability has been incurred and the amount of the loss can be
reasonably estimated. In addition, Occidental discloses, in aggregate, its
exposure to loss in excess of the amount recorded on the balance sheet for these
matters if it is reasonably possible that an additional material loss may be
incurred. Occidental reviews its loss contingencies on an on-going basis so that
they are adequately reserved on the balance sheet.
These reserves are based on judgments made by management with respect to
the likely outcome of these matters and are adjusted as appropriate.
Management's judgments could change based on new information, changes in laws or
regulations, changes in management's plans or intentions, the outcome of legal
proceedings, settlements or other factors.
SIGNIFICANT ACCOUNTING CHANGES
Listed below are significant changes in Occidental's accounting principles.
SFAS NO. 132 REVISED
In December 2003, the FASB issued a revision to SFAS No. 132, "Employers
Disclosures about Pensions and Other Postretirement Benefits" to improve
financial statement disclosures for defined benefit plans. The standard requires
that companies provide more details about their plan assets, benefit
obligations, cash flows and other relevant information, such as plan assets by
category. A description of investment policies and strategies for these asset
categories and target allocation percentages or target ranges are also required
25
in financial statements. This statement is effective for financial statements
with fiscal years ending after December 15, 2003. Occidental adopted this
statement in the fourth quarter of 2003 and provided the required disclosure in
this report.
SFAS NO. 150
In May 2003, the FASB issued 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. On January 20, 2004,
all of the trust preferred securities were redeemed.
SFAS NO. 149
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.
FIN 46 AND FIN 46-R (REVISED)
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities." FIN 46 requires a company to consolidate a 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 imposes 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 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 position or results of operations.
See "Off-Balance-Sheet Arrangements - Elk Hills Power" for information on
VIEs where Occidental is not the primary beneficiary.
In December 2003, the FASB revised FIN 46 to exempt certain entities from
its requirements and to clarify certain issues arising during the initial
implementation of FIN 46. Occidental will adopt the revised interpretation in
the first quarter of 2004 and it is not expected to have an impact on the
financial statements when adopted.
FIN 45
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 Note 9. 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.
EITF ISSUE NO. 02-3
In the third quarter of 2002, Occidental adopted certain provisions of
Emerging Issues Task Force (EITF) Issue No. 02-3, "Issues involved in Accounting
for Derivative Contracts Held for Trading Purposes and Contracts Involved in
Energy Trading and Risk Management Activities." These provisions prescribed
significant changes in how revenue from energy trading is recorded.
Historically, Occidental had two major types of oil and gas revenues: (1)
revenues from its equity production; and (2) revenues from the sale of oil and
gas produced by other companies, but purchased and resold by Occidental,
referred to as revenue from trading activities. Both types of sales involve
physical deliveries and had been historically recorded on a gross basis in
accordance with generally accepted accounting principles. With the adoption of
EITF Issue No. 02-3, Occidental now reflects the revenue from trading activities
on a net basis. There were no changes in gross margins, net income, cash flow or
earnings per share for any period as a result of adopting this requirement.
However, net sales and cost of sales were reduced by equal and offsetting
amounts to reflect the adoption of this requirement. For the years ended
December 31, 2002 and 2001, net sales and cost of sales were reduced from
amounts previously reported by approximately $2.2 billion (representing amounts
for the first two quarters of 2002) and $5.8 billion, respectively, to conform
to the current presentation.
Since 1999, Occidental has accounted for certain energy-trading contracts
in accordance with EITF Issue No. 98-10, "Accounting for Contracts Involved in
Energy Trading and Risk Management Activities." EITF Issue No. 98-10 required
that all energy-trading contracts must be marked to fair value with gains and
losses included in earnings, whether the contracts were derivatives or not.
26
In October 2002, the EITF rescinded EITF Issue No. 98-10 thus precluding
mark-to-market accounting for all energy-trading contracts that are not
derivatives and fair value accounting for inventories purchased from third
parties. Also, the rescission requires derivative gains and losses to be
presented net on the income statement, whether or not they are physically
settled, if the derivative instruments are held for trading purposes. Occidental
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.
SFAS NO. 146
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires that a
liability be recognized for exit and disposal costs only when the liability has
been incurred and when it can be measured at fair value. The statement is
effective for exit and disposal activities that are initiated after December 31,
2002. Occidental adopted SFAS No. 146 in the first quarter of 2003 and it did
not have a material effect on its financial statements.
SFAS NO. 145
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." In addition to amending or rescinding other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions, SFAS No. 145 precludes
companies from recording gains and losses from the extinguishment of debt as an
extraordinary item. Occidental implemented SFAS No. 145 in the fourth quarter of
2002 and all comparative financial statements have been reclassified to conform
to the 2002 presentation. Since Occidental had no 2002 extraordinary items,
there was no effect on the 2002 presentation. The effects of the statement on
prior years include the reclassification of an extraordinary loss to net income
from continuing operations of $8 million ($0.02 per share) in 2001. There was no
effect on net income or basic earnings per common share upon adoption.
SFAS NO. 143
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. Under SFAS No. 143, companies
are required to recognize the fair value of a liability for an asset retirement
obligation in the period in which the liability is incurred if there is a legal
obligation to dismantle the asset and reclaim or remediate the property at the
end of the useful life. Occidental 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.
SFAS NO. 142
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 changes the accounting and reporting requirements for
acquired goodwill and intangible assets. The provisions of this statement are
applied to companies starting with fiscal years beginning after December 15,
2001. At December 31, 2001, the balance sheet included approximately $108
million of goodwill and intangible assets with annual amortization expense of
approximately $6 million recorded in each of the years' income statements for
the three-year period ended December 31, 2001. As a result, elimination of
goodwill amortization would not have had a material impact on net income or
earnings per share of any of the years presented and, as a result, the
transitional disclosures of adjusted net income excluding goodwill amortization
described by SFAS No. 142 have not been presented. Upon implementation of SFAS
No. 142 in the first quarter of 2002, three separate specialty chemical
businesses were identified as separate reporting units and tested for goodwill
impairment. All three of these businesses are components of the chemical
segment. The fair value of each of the three reporting units was determined
through third party appraisals. The appraisals determined fair value to be the
price that the assets could be sold for in a current transaction between willing
parties. As a result of the impairment testing, Occidental recorded a cumulative
effect of changes in accounting principles after-tax reduction in net income of
approximately $95 million due to the impairment of all the goodwill attributed
to these reporting units.
SFAS NO. 133
On January 1, 2001, Occidental adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended. This statement
established accounting and reporting standards for derivative instruments and
hedging activities and required an entity to recognize derivatives on the
balance sheet and measure those instruments at fair value. Changes in the
derivative instrument's fair value must be recognized in earnings unless
specific hedge accounting criteria are met. Adoption of this new accounting
standard resulted in cumulative after-tax reductions in net income of
approximately $24 million and Other Comprehensive Income (OCI) of approximately
$27 million in the first quarter of 2001. The adoption also increased total
assets by $588 million and total liabilities by $639 million as of January 1,
2001.
27
INTANGIBLE ASSETS
The EITF currently is deliberating on EITF No. 03-O, "Whether Mineral
Rights Are Tangible or Intangible Assets" and EITF No. 03-S "Application of FASB
Statement No. 142, Goodwill and Other Intangible Assets, to Oil and Gas
Companies." These proposed statements will determine whether contract-based oil
and gas mineral rights are classified as tangible or intangible assets based on
the EITF's interpretation of SFAS No. 141 and SFAS No. 142. Historically,
Occidental has classified all of its contract-based mineral rights within
property, plant and equipment and has generally not identified these amounts
separately. If the EITF determines that these mineral rights should be presented
as intangible assets, Occidental would have to reclassify its contract-based oil
and gas mineral rights acquired after June 30, 2001 to intangible assets and
make additional disclosures in accordance with SFAS No. 142. If Occidental
adopted this change, approximately $492 million and $226 million of the
property, plant and equipment balance would be reclassified to intangible assets
at December 31, 2003 and 2002, respectively. These amounts, which are net of
accumulated depreciation, depletion and amortization, include approximately $475
million and $210 million of mineral rights related to proved properties at
December 31, 2003 and 2002, respectively. Occidental has been amortizing these
amounts under the unit-of-production method and would continue to amortize the
mineral rights under this method. Based on its understanding of the scope of the
EITF deliberations, Occidental believes the adoption of this potential decision
would have no material effect on its results of operations.
DERIVATIVE ACTIVITIES AND MARKET RISK
GENERAL
Occidental's market risk exposures relate primarily to commodity prices
and, to a lesser extent, interest rates and foreign currency exchange rates.
Occidental periodically enters into derivative instrument transactions to reduce
these price and rate fluctuations. A derivative is a financial instrument which
derives its value from another instrument or variable.
In general, the fair value recorded for derivative instruments is based on
quoted market prices, dealer quotes and the Black-Scholes or similar valuation
models.
ACCOUNTING FOR DERIVATIVES AND DEFINITIONS
Occidental applies either fair value or cash flow hedge accounting when
transactions meet specified criteria to obtain hedge accounting treatment. If
the derivative does not qualify as a hedge or is not designated as a hedge, the
gain or loss is immediately recognized in earnings. If the derivative qualifies
for hedge accounting, the gain or loss on the derivative is either recognized in
income with an offsetting adjustment to the basis of the item being hedged for
fair value hedges, or deferred in OCI to the extent the hedge is effective for
cash flow hedges.
A hedge is regarded as highly effective and qualifies for hedge accounting
if, at inception and throughout its life, it is expected that changes in the
fair value or cash flows of the hedged item are almost fully offset by the
changes in the fair value or changes in cash flows of the hedging instrument and
actual effectiveness is within a range of 80 percent to 125 percent. In the case
of hedging a forecasted transaction, the transaction must be highly probable and
must present an exposure to variations in cash flows that could ultimately
affect reported net profit or loss. Occidental discontinues hedge accounting
when it is determined that a derivative has ceased to be highly effective as a
hedge; when the derivative expires, or is sold, terminated, or exercised; when
the hedged item matures or is sold or repaid; or when a forecasted transaction
is no longer deemed highly probable.
COMMODITY PRICE RISK
GENERAL
Occidental's results are sensitive to fluctuations in crude oil and natural
gas prices. Based on current levels of production, if oil prices vary overall by
$1 per barrel, it would have approximately a $125 million annual effect on
income before U.S. income tax. If natural gas prices vary by $0.25 per MCF, it
would have approximately a $48 million annual effect on income before U.S.
income tax. If production levels change in the future, the sensitivity of
Occidental's results to oil and gas prices also would change.
Occidental's results are also sensitive to fluctuations in chemical prices.
If chlorine and caustic soda prices vary by $10/ton, it would have approximately
a $12 million and $25 million, respectively, annual effect on income before U.S.
income taxes. If PVC prices vary by $.01/lb, it would have approximately a $27
million annual effect on income before U.S. income taxes. If EDC prices vary by
$10/ton, it would have approximately a $3 million annual effect on income before
U.S. income taxes. Historically, price changes either precede or follow raw
material and feedstock price changes; therefore, the margin improvement of price
changes can be mitigated. According to Chemical Market Associates, Inc.,
December 2003 average contract prices were: chlorine--$203/ton, caustic
soda--$133/ton, PVC--$0.44/lb and EDC--$228/ton.
MARKETING AND TRADING OPERATIONS
Occidental periodically uses different types of derivative instruments to
achieve the best prices for oil and gas. Derivatives are also used by Occidental
to reduce its exposure to price volatility and mitigate fluctuations in
commodity-related cash flows. Occidental enters into low-risk marketing and
trading activities through its separate marketing organization, which operates
under established policy controls and procedures. With respect to derivatives
used in its oil and gas marketing operations, Occidental utilizes a combination
of futures, forwards, options and swaps to offset various physical transactions.
Overall, Occidental has a low level of involvement in the hedging of long-term
oil and gas prices and its use of derivatives in hedging activity remains at a
correspondingly low level.
28
In September 2002, Occidental unwound its natural gas delivery commitment
and corresponding natural gas price swap which were entered into in November
1998. Occidental recognized a pre-tax loss of $3 million related to these
transactions.
RISK MANAGEMENT
Occidental conducts its risk management activities for energy commodities
(which include buying, selling, marketing, trading, and hedging activities)
under the controls and governance of its Risk Management Policy. The Chief
Financial Officer and Risk Management Committee, comprising members of
Occidental's management, oversee these controls, which are implemented and
enforced by the Trading Control Officer. The Trading Control Officer provides an
independent and separate check on results of marketing and trading activities.
Controls for energy commodities include limits on credit, limits on trading,
segregation of duties, delegation of authority and a number of other policy and
procedural controls.
FAIR VALUE OF CONTRACTS
The following tables reconcile the changes in the fair value of
Occidental's marketing and trading contracts during 2003 and 2002 and segregate
the open contracts at December 31, 2003 by maturity periods.
In millions 2003 2002 (a)
========================================================== ======== ========
Fair value of contracts outstanding at beginning of year $ (2) $ 43
Losses(gains) on changes on contracts realized or
otherwise settled during the year 50 (17)
Changes in fair value attributable to changes in valuation
techniques and assumptions -- --
(Gains)losses on other changes in fair values (16) (28)
-------- --------
Fair value of contracts outstanding at end of year $ 32 $ (2)
========================================================== ======== ========
(a) Amounts have been reclassified to conform to current presentation.
Maturity Periods
-------------------------------------------------
2005 2007 2009 Total
Source of to to and Fair
Fair Value 2004 2006 2008 thereafter Value
================ ========== ========== ========== ========== ==========
Prices actively
quoted $ 13 $ 6 $ -- $ -- $ 19
Prices provided
by other
external
sources 7 2 4 3 16
Prices based on
models and
other valuation
methods (3) -- -- -- (3)
---------- ---------- ---------- ---------- ----------
TOTAL $ 17 $ 8 $ 4 $ 3 $ 32
================ ========== ========== ========== ========== ==========
The tables above include the fair value of physical positions and the fair
value of the related financial instruments for trading and marketing operations.
At December 31, 2003 and 2002, the physical positions were a net gain of $10
million and $6 million, respectively. The value of the derivative financial
instruments that offset these physical positions are a net gain of $22 million
and a net loss of $8 million at December 31, 2003 and 2002, respectively. Gains
and losses are netted in the statement of operations. On the balance sheets,
except where a right of set-off exists, gains are recognized as assets and
losses are recognized as liabilities.
COMMODITY HEDGES
On a limited basis, Occidental uses cash-flow hedges for the sale of crude
oil and natural gas production. Crude oil cash-flow hedges were executed for
approximately 20 percent of total U.S. oil production in 2002. Natural gas
cash-flow hedges were executed for approximately 7 percent of total U.S. 2002
gas production. Occidental's commodity cash-flow-hedging instruments in 2002
were highly effective. At December 31, 2002, all of these cash-flow hedges had
been settled. No fair value hedges were used for oil and gas production during
2003 or 2002 and no cash flow hedges were used for the sale of production in
2003.
QUANTITATIVE INFORMATION
Occidental uses value at risk to estimate the potential effects of changes
in fair values of commodity-based derivatives and commodity contracts used in
trading activities. This method determines the maximum potential negative
short-term change in fair value with a 95-percent level of confidence. For
non-trading activities, there were no material amounts outstanding at December
31, 2003.
The value at risk for both oil and natural gas is summarized below:
MARKETING AND TRADING VALUE AT RISK
For the years ended December 31, (in millions) 2003 2002
============================================== ======== ========
Value at Risk - Oil
High during the year $ -- $ 1
Low during the year -- --
Average for the year -- 1
Value at Risk - Natural Gas
High during the year $ 3 $ 1
Low during the year -- --
Average for the year 1 1
- ---------------------------------------------- -------- --------
INTEREST RATE RISK
GENERAL
Occidental is exposed to risk resulting from changes in interest rates and
it enters into various derivative financial instruments to manage interest-rate
exposure. Interest-rate swaps, forward locks and futures contracts are entered
into periodically as part of Occidental's overall strategy.
HEDGING ACTIVITIES
Occidental has entered into several interest-rate swaps that qualified for
fair-value hedge accounting. These derivatives effectively convert approximately
$1.8 billion of fixed-rate debt to variable-rate debt with maturities ranging
from 2005 to 2009.
29
Occidental was a party to a series of forward interest-rate locks, which
qualified as cash-flow hedges. The hedges were related to the construction of a
cogeneration plant leased by Occidental that was completed in December 2002. The
remaining loss on the hedges through December 2003 was approximately $21 million
after-tax, which is recorded in accumulated OCI and is being recognized in
earnings over the lease term of 26 years on a straight-line basis.
Certain of Occidental's equity investees have entered into additional
derivative instruments that qualified as cash-flow hedges. Occidental reflects
its proportionate share of these cash-flow hedges in OCI.
TABULAR PRESENTATION OF INTEREST RATE RISK
In millions of U.S. dollars, except rates
U.S. Dollar U.S. Dollar
Year of Maturity Fixed Rate Variable Rate(a) Grand Total (a)
====================== ============= ============= =============
2005 $ -- $ 157 $ 157
2006 46 450 496
2007 -- 550 550
2008 10 395 405
2009 -- 276 276
Thereafter 1,914 115 2,029
------------- ------------- -------------
TOTAL $ 1,970 $ 1,943 $ 3,913
============= ============= =============
Average interest rate 7.17% 3.21% 5.20%
============= ============= =============
Fair Value $ 2,330 $ 2,160 $ 4,490
====================== ============= ============= =============
(a) Includes fixed-rate debt with fair-value hedges but excludes $87 million of
mark-to-market adjustments related to such hedges and $7 million of
unamortized debt discounts.
CREDIT RISK
Occidental's energy contracts are spread among numerous counterparties.
Creditworthiness is reviewed before doing business with a new counterparty and
on an ongoing basis. Occidental monitors aggregated counterparty exposure
relative to credit limits, and manages credit-enhancement issues. Credit
exposure for each customer is monitored for outstanding balances, current month
activity, and forward mark-to-market exposure.
FOREIGN CURRENCY RISK
Several of Occidental's foreign operations are located in countries whose
currencies generally depreciate against the U.S. dollar. Typically, effective
currency forward markets do not exist for these countries. Therefore, Occidental
attempts to manage its exposure primarily by balancing monetary assets and
liabilities and maintaining cash positions only at levels necessary for
operating purposes. Generally, international crude oil sales are denominated in
U.S. dollars. Additionally, all of Occidental's oil and gas foreign entities
have the U.S. dollar as the functional currency. However, in one foreign
chemical subsidiary where the local currency is the functional currency,
Occidental has exposure on U.S. dollar-denominated debt that is not material. At
December 31, 2003 and 2002, Occidental had not entered into any foreign currency
derivative instruments. The effect of exchange-rate transactions in foreign
currencies is included in periodic income.
DERIVATIVE AND FAIR VALUE DISCLOSURES
The following table shows derivative financial instruments included in the
consolidated balance sheets:
Balance at December 31, (in millions) 2003 2002
=============================================== ======== ========
Derivative financial instrument assets (a)
Current $ 138 $ 164
Non-current 118 157
-------- --------
$ 256 $ 321
======== ========
Derivative financial instrument liabilities (a)
Current $ 85 $ 115
Non-current 23 23
-------- --------
$ 108 $ 138
=============================================== ======== ========
(a) Amounts include energy-trading contracts.
As a result of fair-value hedges, the amount of interest expense recorded
in the income statement was lower by approximately $58 million and $45 million
for the years ended December 31, 2003 and 2002, respectively.
The following table summarizes after-tax derivative activity recorded in
OCI:
For the years ended December 31, (in millions) 2003 2002
================================================= ======== ========
Beginning Balance $ (26) $ (20)
Losses from changes in current cash flow hedges (17) (14)
Amount reclassified to income 19 8
-------- --------
Ending Balance $ (24) $ (26)
================================================= ======== ========
During the next twelve months, Occidental expects that approximately $3
million of net derivative after-tax losses included in OCI, based on their
valuation at December 31, 2003, will be reclassified into earnings when the
hedged transactions close. Hedge ineffectiveness did not have a significant
impact on earnings for the years ended December 31, 2003 and 2002.
SELECTED CASH-FLOW INFORMATION
Occidental calculates chemical segment free cash flow as segment income,
adding back depreciation, depletion and amortization, and subtracting from that
amount total capital expenditures, excluding acquisitions. Occidental believes
that free cash flow is useful to investors as an indicator of Occidental's
ability to generate positive cash results to service and/or repay debt and
generate cash for acquisitions and other investments. Free cash flow does not
represent residual cash flow available for discretionary expenditures. Changes
in working capital are not reflected in free cash flow, and Occidental has
certain non-discretionary obligations, such as debt service, that are not
deducted from this measure. In addition, this measure should not be considered
in isolation or as a substitute for measures prepared in accordance with GAAP or
as a measure of profitability or liquidity. Free cash flow as presented herein
may not be comparable to similarly titled measures reported by other companies.
There is no comparable segment cash-flow measure available under GAAP.
30
In addition, Occidental discloses cumulative net pre-tax cash flows
generated by particular properties, which it believes is an important indicator
of cumulative life-to-date performance. There is no comparable property level
cash flow measure available under GAAP.
Chemical segment free cash flow is calculated as follows:
In millions 2003
============================================= ========
Segment earnings $ 210
Depreciation, depletion and amortization 205
Capital spending (a) (121)
--------
Free Cash Flow (b) $ 294
============================================= ========
(a) Excludes $180 million for the purchase of a previously leased facility in
LaPorte, Texas and $44 million related to the exercise of purchase options
for certain leased railcars.
(b) Excludes working capital changes.
SAFE HARBOR STATEMENT REGARDING OUTLOOK AND OTHER FORWARD-LOOKING DATA
Portions of this report, including Items 1 and 2 and the information
appearing under the caption "Management's Discussion and Analysis of Financial
Condition and Results of Operations," including the information under the
sub-caption "2004 Outlook," contain forward-looking statements and involve risks
and uncertainties that could significantly affect expected results of
operations, liquidity, cash flows and business prospects. Factors that could
cause results to differ materially include, but are not limited to: global
commodity pricing fluctuations; competitive pricing pressures; higher than
expected costs including feedstocks; crude oil and natural gas prices; chemical
prices; potential liability for remedial actions under existing or future
environmental regulations and litigation; potential liability resulting from
pending or future litigation; general domestic and international political
conditions; potential disruption or interruption of Occidental's production or
manufacturing facilities due to accidents, political events or insurgent
activity; potential failure to achieve expected production from existing and
future oil and gas development projects; the supply/demand considerations for
Occidental's products; any general economic recession or slowdown domestically
or internationally; regulatory uncertainties; and not successfully completing,
or any material delay of, any development of new fields, expansion, capital
expenditure, efficiency improvement project, acquisition or disposition.
Forward-looking statements are generally accompanied by words such as
"estimate", "project", "predict", "will", "anticipate", "plan", "intend",
"believe", "expect" or similar expressions that convey the uncertainty of future
events or outcomes. Occidental expressly disclaims any obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information or otherwise. In light of these risks, uncertainties and
assumptions, the forward-looking events discussed might not occur.
REPORT OF MANAGEMENT
The management of Occidental Petroleum Corporation is responsible for the
integrity of the financial data reported by Occidental and its subsidiaries.
Fulfilling this responsibility requires the preparation and presentation of
consolidated financial statements in accordance with generally accepted
accounting principles. Management uses internal accounting controls,
corporate-wide policies and procedures and judgment so that such statements
reflect fairly Occidental's consolidated financial position, results of
operations and cash flows.
31
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders, Occidental Petroleum
Corporation:
We have audited the consolidated balance sheets of Occidental Petroleum
Corporation and its subsidiaries (the Company) as of December 31, 2003 and 2002,
and the related consolidated statements of operations, stockholders' equity,
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 2003. In connection with our audits of the
consolidated financial statements, we also have audited the accompanying
financial statement schedule. These consolidated financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Occidental
Petroleum Corporation and its subsidiaries as of December 31, 2003 and 2002, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America. Also in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
As explained in Note 4 to the financial statements, effective January 1,
2003, the Company changed its method of accounting for inventories purchased
from third parties and its method of accounting for asset retirement
obligations. Effective April 1, 2003, the Company changed its method of
accounting for the consolidation of variable interest entities. Effective July
1, 2003, the Company changed its method of accounting for certain financial
instruments with characteristics of both liabilities and equity. Effective
January 1, 2002, the Company changed its method of accounting for the impairment
of goodwill and other intangibles. Effective January 1, 2001, the Company
changed its method of accounting for derivative instruments and hedging
activities.
/s/ KPMG LLP
Los Angeles, California
February 13, 2004
32
CONSOLIDATED STATEMENTS OF OPERATIONS Occidental Petroleum Corporation
In millions, except per-share amounts and Subsidiaries
For the years ended December 31, 2003 2002 2001
====================================================================== ========== ========== ==========
REVENUES
Net sales $ 9,326 $ 7,338 $ 8,102
Interest, dividends and other income 89 143 223
Gains on disposition of assets, net 32 10 10
---------- ---------- ----------
9,447 7,491 8,335
---------- ---------- ----------
COSTS AND OTHER DEDUCTIONS
Cost of sales 3,988 3,385 3,626
Selling, general and administrative and other operating expenses 855 677 668
Depreciation, depletion and amortization 1,177 1,012 965
Environmental remediation 63 23 109
Exploration expense 139 176 184
Interest and debt expense, net 332 295 401
---------- ---------- ----------
6,554 5,568 5,953
---------- ---------- ----------
INCOME BEFORE TAXES AND OTHER ITEMS 2,893 1,923 2,382
Provision for domestic and foreign income and other taxes 1,227 422 556
Minority interest 62 77 143
Loss from equity investments 9 261 504
---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS 1,595 1,163 1,179
Discontinued operations, net -- (79) (1)
Cumulative effect of changes in accounting principles, net (68) (95) (24)
---------- ---------- ----------
NET INCOME $ 1,527 $ 989 $ 1,154
========== ========== ==========
BASIC EARNINGS PER COMMON SHARE
Income from continuing operations $ 4.16 $ 3.09 $ 3.16
Discontinued operations, net -- (0.21) --
Cumulative effect of changes in accounting principles, net (0.18) (0.25) (0.06)
---------- ---------- ----------
BASIC EARNINGS PER COMMON SHARE $ 3.98 $ 2.63 $ 3.10
========== ========== ==========
DILUTED EARNINGS PER COMMON SHARE
Income from continuing operations $ 4.11 $ 3.07 $ 3.15
Discontinued operations, net -- (0.21) --
Cumulative effect of changes in accounting principles, net (0.18) (0.25) (0.06)
---------- ---------- ----------
DILUTED EARNINGS PER COMMON SHARE $ 3.93 $ 2.61 $ 3.09
========== ========== ==========
DIVIDENDS PER COMMON SHARE $ 1.04 $ 1.00 $ 1.00
====================================================================== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
33
CONSOLIDATED BALANCE SHEETS Occidental Petroleum Corporation
In millions, except share amounts and Subsidiaries
Assets at December 31, 2003 2002
===================================================================================== ========== ==========
CURRENT ASSETS
Cash and cash equivalents $ 683 $ 146
Trade receivables, net of reserves of $24 in 2003 and $28 in 2002 804 608
Receivables from joint ventures, partnerships and other 330 321
Inventories 510 491
Income tax receivable 20 150
Prepaid expenses and other 127 157
---------- ----------
TOTAL CURRENT ASSETS 2,474 1,873
---------- ----------
LONG-TERM RECEIVABLES, NET 264 275
---------- ----------
INVESTMENTS IN UNCONSOLIDATED ENTITIES 1,155 1,056
---------- ----------
PROPERTY, PLANT AND EQUIPMENT
Oil and gas segment, successful efforts method 16,698 15,440
Chemical segment 4,499 3,689
Corporate and other 275 302
---------- ----------
21,472 19,431
Accumulated depreciation, depletion and amortization (7,467) (6,395)
---------- ----------
14,005 13,036
OTHER ASSETS 270 308
---------- ----------
$ 18,168 $ 16,548
===================================================================================== ========== ==========
The accompanying notes are an integral part of these financial statements.
34
CONSOLIDATED BALANCE SHEETS Occidental Petroleum Corporation
In millions, except share amounts and Subsidiaries
Liabilities and Equity at December 31, 2003 2002
===================================================================================== ========== ==========
CURRENT LIABILITIES
Current maturities of long-term debt and capital lease liabilities $ 23 $ 206
Accounts payable 909 785
Accrued liabilities 877 914
Dividends payable 101 193
Domestic and foreign income taxes 163 137
Trust preferred securities 453 --
---------- ----------
TOTAL CURRENT LIABILITIES 2,526 2,235
---------- ----------
LONG-TERM DEBT, NET OF CURRENT MATURITIES AND UNAMORTIZED DISCOUNT 3,993 3,997
---------- ----------
TRUST PREFERRED SECURITIES -- 455
---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred and other domestic and foreign income taxes 1,001 982
Other 2,407 2,228
---------- ----------
3,408 3,210
---------- ----------
CONTINGENT LIABILITIES AND COMMITMENTS
MINORITY INTEREST 312 333
---------- ----------
STOCKHOLDERS' EQUITY
Nonredeemable preferred stock; $1.00 par value, authorized 50 million shares;
outstanding shares: 2003 -- none and 2002 -- none -- --
Common stock, $.20 par value; authorized 500 million shares;
outstanding shares: 2003 -- 387,047,948 and 2002 -- 377,860,191 77 75
Additional paid-in capital 4,272 3,967
Retained earnings 3,530 2,303
Accumulated other comprehensive income(loss) 50 (27)
---------- ----------
7,929 6,318
---------- ----------
$ 18,168 $ 16,548
===================================================================================== ========== ==========
The accompanying notes are an integral part of these financial statements.
35
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Occidental Petroleum Corporation
In millions and Subsidiaries
Accumulated
Additional Other
Common Paid-in Retained Comprehensive
Stock Capital Earnings Income(Loss)
======================================================= ============= ============= ============= =============
BALANCE, DECEMBER 31, 2000 $ 74 $ 3,743 $ 1,007 $ (50)
Net income -- -- 1,154 --
Other comprehensive loss, net of tax -- -- -- (36)
Dividends on common stock -- -- (373) --
Issuance of common stock -- 19 -- --
Exercises of options and other, net 1 95 -- --
- ------------------------------------------------------- ------------- ------------- ------------- -------------
BALANCE, DECEMBER 31, 2001 $ 75 $ 3,857 $ 1,788 $ (86)
Net income -- -- 989 --
Other comprehensive income, net of tax -- -- -- 59
Dividends on common stock -- -- (474) --
Issuance of common stock -- 22 -- --
Exercises of options and other, net -- 88 -- --
- ------------------------------------------------------- ------------- ------------- ------------- -------------
BALANCE, DECEMBER 31, 2002 $ 75 $ 3,967 $ 2,303 $ (27)
Net income -- -- 1,527 --
Other comprehensive income, net of tax -- -- -- 77
Dividends on common stock -- -- (300) --
Issuance of common stock -- 11 -- --
Exercises of options and other, net 2 294 -- --
- ------------------------------------------------------- ------------- ------------- ------------- -------------
BALANCE, DECEMBER 31, 2003 $ 77 $ 4,272 $ 3,530 $ 50
======================================================= ============= ============= ============= =============
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
In millions
For the years ended December 31, 2003 2002 2001
========================================================================== ========== ========== ==========
Net income $ 1,527 $ 989 $ 1,154
Other comprehensive income(loss) items:
Foreign currency translation adjustments (a) 38 5 (12)
Derivative mark-to-market adjustments (b) 2 (6) (20)
Minimum pension liability adjustments (c) 13 (5) (6)
Unrealized gains on securities (d) 24 65 2
---------- ---------- ----------
Other comprehensive income(loss), net of tax 77 59 (36)
---------- ---------- ----------
Comprehensive income $ 1,604 $ 1,048 $ 1,118
========================================================================== ========== ========== ==========
(a) Net of tax of $15 million, $0 million and $0 million in 2003, 2002 and
2001, respectively.
(b) Net of tax of $1 million, $(5) million and $(11) million in 2003, 2002 and
2001, respectively.
(c) Net of tax of $7 million, $(3) million and $(3) million in 2003, 2002 and
2001, respectively.
(d) Net of tax of $13 million, $35 million and $0 million in 2003, 2002 and
2001, respectively.
The accompanying notes are an integral part of these financial statements.
36
CONSOLIDATED STATEMENTS OF CASH FLOWS Occidental Petroleum Corporation
In millions and Subsidiaries
For the years ended December 31, 2003 2002 2001
================================================================================ ========== ========== ==========
CASH FLOW FROM OPERATING ACTIVITIES
Income from continuing operations $ 1,595 $ 1,163 $ 1,179
Adjustments to reconcile income to net cash provided by operating activities:
Depreciation, depletion and amortization of assets 1,177 1,012 965
Amortization of debt discount and deferred financing costs 6 7 5
Deferred income tax provision(benefit) 61 (141) (183)
Other noncash charges to income 313 62 106
Gains on disposition of assets, net (32) (10) (10)
Loss from equity investments 9 261 504
Dry hole and impairment expense 80 96 99
Changes in operating assets and liabilities:
(Increase) decrease in accounts and notes receivable (225) (342) 1,085
(Increase) decrease in inventories (3) (73) 37
(Increase) decrease in prepaid expenses and other assets (49) (39) 72
Increase (decrease) in accounts payable and accrued liabilities 84 172 (1,150)
Increase in current domestic and foreign income taxes 231 115 4
Other operating, net (173) (174) (152)
---------- ---------- ----------
Operating cash flow from continuing operations 3,074 2,109 2,561
Operating cash flow from discontinued operations -- (9) 5
---------- ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,074 2,100 2,566
---------- ---------- ----------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures (1,601) (1,236) (1,308)
Sale of businesses and disposal of property, plant and equipment, net 70 41 852
Purchase of businesses, net (351) (492) (46)
Equity investments and other, net (139) (5) (141)
---------- ---------- ----------
Investing cash flow from continuing operations (2,021) (1,692) (643)
Investing cash flow from discontinued operations -- (4) (8)
---------- ---------- ----------
NET CASH USED BY INVESTING ACTIVITIES (2,021) (1,696) (651)
---------- ---------- ----------
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from long-term debt 297 248 861
Payments of long-term debt, non-recourse debt and capital lease liabilities (631) (199) (2,258)
Proceeds from issuance of common stock 10 22 18
Repurchase of trust preferred securities (2) (9) (11)
Purchases for natural gas delivery commitment -- (95) (121)
Buyout of natural gas commitment, net -- (179) --
Payments of notes payable, net -- -- (2)
Proceeds from subsidiary preferred stock issuance -- 72 --
Cash dividends paid (392) (375) (372)
Stock options exercised 200 60 72
Other financing, net 2 (1) (1)
---------- ---------- ----------
Financing cash flow from continuing operations (516) (456) (1,814)
Financing cash flow from discontinued operations -- -- --
---------- ---------- ----------
NET CASH USED BY FINANCING ACTIVITIES (516) (456) (1,814)
---------- ---------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 537 (52) 101
CASH AND CASH EQUIVALENTS--BEGINNING OF YEAR 146 198 97
---------- ---------- ----------
CASH AND CASH EQUIVALENTS--END OF YEAR $ 683 $ 146 $ 198
================================================================================ ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Occidental Petroleum Corporation
and Subsidiaries
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Occidental
Petroleum Corporation, entities where it owns a majority voting interest,
variable-interest entities (VIE) where it is the primary beneficiary and its
undivided interests in oil and gas exploration and production ventures. In these
Notes, the term "Occidental" or "the company" refers to Occidental Petroleum
Corporation and/or one or more entities where it owns a majority voting
interest. The company's proportionate share of oil and gas exploration and
production ventures, where it has a direct working interest, is accounted for by
reporting its proportionate share of assets, liabilities, revenues and costs
within the relevant lines on the balance sheets, income statements and cash flow
statements.
In addition, certain financial statements, notes and supplementary data for
prior years have been changed to conform to the 2003 presentation.
INVESTMENTS IN UNCONSOLIDATED ENTITIES
Investments in unconsolidated entities include both equity method
investments and available-for-sale investments. Amounts representing
Occidental's percentage interest in the underlying net assets of affiliates
(excluding undivided interests in oil and gas exploration and production
ventures) in which it does not have a majority voting interest but as to which
it exercises significant influence, are accounted for under the equity method.
The company reviews equity method investments for impairment whenever events or
changes in circumstances indicate that an other-than-temporary decline in value
has occurred. The amount of impairment, if any, is based on quoted market
prices, where available, or other valuation techniques, including discounted
cash flows.
Investments in which Occidental does not exercise significant influence are
accounted for as available-for-sale investments in accordance with Statements of
Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Under SFAS No. 115,
available-for-sale investments are carried at fair value, based on quoted market
prices, with unrealized gains and losses reported in Other Comprehensive Income
(OCI), net of taxes, until such investment is sold or collected. In disposal,
the accumulated unrealized gain or loss included in OCI is transferred to
income.
REVENUE RECOGNITION
For oil and gas, title passes to the customer when product is shipped.
Revenue is recognized when title has passed to the customer. Prices are either
fixed or based on a market index. For marketing and trading activities, revenue
is recognized on settled transactions upon completion of contract terms, and for
physical deliveries, upon title transfer. For unsettled transactions, contracts
that meet specified accounting criteria are marked to market (see "Accounting
Changes" in Note 4).
Revenue from chemical product sales is recognized when the product is
shipped and title has passed to the customer. Prices are fixed at the time of
shipment. Customer incentive programs provide for payments or credits to be made
to customers based on the volume of product purchased over a defined period.
Total customer incentive payments over a given period are estimated and recorded
as a reduction to revenue ratably over the contract period. Such estimates are
evaluated and revised as warranted.
NATURE OF OPERATIONS
Occidental is a multinational organization whose principal business
segments are oil and gas and chemical. The oil and gas segment explores for,
develops, produces and markets crude oil and natural gas. The chemical segment
manufactures and markets basic chemicals, vinyls and performance chemicals.
RISKS AND UNCERTAINTIES
The process of preparing consolidated financial statements in conformity
with generally accepted accounting principles requires the use of estimates and
assumptions regarding certain types of assets, liabilities, revenues and
expenses. Such estimates primarily relate to unsettled transactions and events
as of the date of the consolidated financial statements. Accordingly, upon
settlement, actual results may differ from estimated amounts, generally not by
material amounts. Management believes that these estimates and assumptions
provide a reasonable basis for the fair presentation of Occidental's financial
position and results of operations.
38
Included in the accompanying consolidated balance sheet are deferred tax
assets of $839 million as of December 31, 2003, the noncurrent portion of which
is netted against deferred income tax liabilities. Realization of these assets
is dependent upon Occidental generating sufficient future taxable income.
Occidental expects to realize the recorded deferred tax assets through future
operating income and reversal of taxable temporary differences.
The accompanying consolidated balance sheet includes assets of
approximately $3.3 billion as of December 31, 2003, relating to Occidental's
operations in countries outside North America. Some of these countries may be
considered politically and economically unstable. These assets and the related
operations are subject to the risk of actions by governmental authorities and
insurgent groups. Occidental attempts to conduct its financial affairs so as to
mitigate its exposure against such risks and would expect to receive
compensation in the event of nationalization.
Since Occidental's major products are commodities, significant changes in
the prices of oil and gas and chemical products may have a significant impact on
Occidental's results of operations for any particular year.
Also, see "Property, Plant and Equipment" below.
FOREIGN CURRENCY TRANSACTIONS
The functional currency applicable to all of Occidental's foreign oil and
gas operations is the U.S. dollar since cash flows are denominated principally
in U.S. dollars. Occidental's chemical operations in Brazil use the Real as the
functional currency. The effect of exchange-rate changes on transactions
denominated in nonfunctional currencies generated a gain(loss) of $0 in 2003,
$(26) million in 2002 and $1 million in 2001. The 2002 amount related to the
writedown and sale of Occidental's calendering operations in Rio de Janeiro,
Brazil.
CASH AND CASH EQUIVALENTS
Cash equivalents are short-term, highly liquid investments that are readily
convertible to cash. Cash equivalents totaled approximately $661 million and
$116 million at December 31, 2003 and 2002, respectively.
TRADE RECEIVABLES
Occidental has an agreement in place to sell, under a revolving sale
program, an undivided interest in a designated pool of non-interest bearing
trade receivables. This program is used by Occidental as a low-cost source of
working capital funding. The balance of receivables sold at December 31, 2003
and 2002 was $360 million. This amount is not included in the debt and related
trade receivables accounts, respectively, on Occidental's consolidated balance
sheets. Receivables must meet certain criteria to qualify for the program.
Under this program, Occidental serves as the collection agent with respect
to the receivables sold. An interest in new receivables is sold as collections
are made from customers. Fees and expenses under this program are included in
selling, general and administrative and other operating expenses. During the
years ended December 31, 2003, 2002 and 2001, the cost of this program amounted
to approximately 1.5 percent, 2.1 percent and 4.5 percent, respectively, of the
weighted average amount of the receivables sold in each year. The fair value of
any retained interests in the receivables sold is not material. The buyers of
the receivables are protected against significant risk of loss on their purchase
of receivables. Occidental provides for allowances for any doubtful receivables
based on its periodic evaluation of such receivables. The provisions for such
receivables were not material in the years ended December 31, 2003, 2002 and
2001.
The program can terminate upon the occurrence of certain events, which
generally are under Occidental's control or relate to bankruptcy. In such an
event, alternative funding would have to be arranged, which could result in an
increase in debt recorded on the consolidated balance sheet, with a
corresponding increase in the accounts receivable balance. The consolidated
income statement effect of such an event would not be significant.
INVENTORIES
For the oil and gas segment, materials and supplies are valued at the lower
of average cost or market. Inventories are reviewed periodically (at least
annually) for obsolescence. Oil and natural gas liquids (NGLs) inventories,
which typically represent the last few days of production at the end of each
period, and natural gas trading inventory are valued at the lower of cost or
market. Natural gas trading inventory was valued at market prior to January 1,
2003 (see "Accounting Changes" in Note 4).
For the chemical segment, in countries where allowable, Occidental
generally values its inventories using the last-in, first-out (LIFO) method as
it better matches current costs and current revenue. Accordingly, Occidental
accounts for most of its domestic inventories in its chemical business, other
than materials and supplies, on the LIFO method. For other countries, Occidental
uses the first-in, first-out (FIFO) method (if the costs of goods are
specifically identifiable) or the average-cost method (if the costs of goods are
not specifically identifiable). Materials and supplies are accounted for using a
weighted average cost method.
39
PROPERTY, PLANT AND EQUIPMENT
OIL AND GAS
Property additions and major renewals and improvements are capitalized at
cost. Interest costs incurred in connection with major capital expenditures are
capitalized and amortized over the lives of the related assets (see Note 16).
Occidental uses the successful efforts method to account for its oil and
gas properties. Under this method, costs of acquiring properties, costs of
drilling successful exploration wells and development costs are capitalized.
Annual lease rentals, exploration costs, geological, geophysical and seismic
costs and exploratory dry-hole costs are expensed as incurred.
Proved oil and gas reserves are the estimated quantities of crude oil,
natural gas, and NGLs that geological and engineering data demonstrate with
reasonable certainty can be recovered in future years from known reservoirs
under existing economic and operating conditions considering future production
and development costs. Depreciation and depletion of oil and gas producing
properties is determined by the unit-of-production method.
The carrying value of Occidental's property, plant and equipment (PP&E) is
based on the cost incurred to acquire the PP&E, net of accumulated depreciation
and net of any impairment charges. Occidental is required to perform impairment
tests on its assets whenever events or changes in circumstances lead to a
reduction in the estimated useful lives or estimated future cash flows that
would indicate that the carrying amount may not be recoverable, or when
management's plans change with respect to those assets. Under the provisions of
SFAS No. 144, Occidental must compare the undiscounted future cash flows of an
asset to its carrying value.
A portion of the carrying value of Occidental's oil and gas properties are
attributable to unproved properties. At December 31, 2003, the costs
attributable to unproved properties were approximately $900 million. These costs
are not currently being depreciated or depleted. As exploration and development
work progresses and the reserves on these properties are proven, capitalized
costs attributable to the properties will be subject to depreciation and
depletion. If the exploration and development work were to be unsuccessful, the
capitalized costs of the properties related to this unsuccessful work would be
expensed in the year in which the determination was made. The timing of any
writedowns of these unproven properties, if warranted, depends upon the nature,
timing and extent of future exploration and development activities and their
results. Occidental believes its exploration and development efforts will allow
it to realize the unproved property balance.
CHEMICAL
Occidental's chemical plants are depreciated using either the
unit-of-production or straight-line method based upon the estimated useful life
of the facilities.
The estimated useful lives of Occidental's chemical assets, which range
from 3 years to 50 years, are used to compute depreciation expense and are also
used for impairment tests. The estimated useful lives used for the chemical
facilities are based on the assumption that Occidental will provide an
appropriate level of annual expenditures to maintain the facilities in good
operating condition. Without these continued expenditures, the useful lives of
these plants could significantly decrease. Other factors which could change the
estimated useful lives of Occidental's chemical plants include higher or lower
product prices, which are particularly affected by both domestic and foreign
competition, feedstock costs, energy prices, environmental regulations,
competition and technological changes.
Occidental is required to perform impairment tests on its chemical assets
whenever events or changes in circumstances lead to a reduction in the estimated
useful lives or estimated future cash flows that would indicate that the
carrying amount may not be recoverable, or when management's plans change with
respect to those assets. Under the provisions of SFAS No. 144, Occidental must
compare the undiscounted future cash flows of an asset to its carrying value.
The key factors which could significantly affect future cash flows are future
product prices, which are particularly affected by both domestic and foreign
competition, feedstock costs, energy costs, significantly increased regulation
and remaining estimated useful life.
Due to a temporary decrease in demand for some of its products, Occidental
temporarily idled an ethylene dichloride (EDC) plant in June 2001, a
chlor-alkali plant in December 2001 and a portion of a chlor-alkali plant in
June 2003. These facilities will remain idle until market conditions improve.
Management expects that these plants will become operational in the future. The
net book value of these plants was $156 million at December 31, 2003. Based on
year-end value, the chlor-alkali plant that closed in December 2001 has a
24-percent minority interest of $28 million. These facilities are periodically
tested for impairment and, based on the results, no impairment is deemed
necessary at this time. Occidental continues to depreciate these facilities
based on their remaining estimated useful lives.
ACCRUED LIABILITIES--CURRENT
Accrued liabilities include accrued payroll, commissions and related
expenses of $200 million and $159 million at December 31, 2003 and 2002,
respectively.
40
ENVIRONMENTAL LIABILITIES AND EXPENDITURES
Environmental expenditures that relate to current operations are expensed
or capitalized as appropriate. Reserves for estimated costs that relate to
existing conditions caused by past operations and that do not contribute to
current or future revenue generation are recorded when environmental remedial
efforts are probable and the costs can be reasonably estimated. In determining
the reserves and the reasonably possible range of loss, Occidental refers to
currently available information, including relevant past experience, available
technology, regulations in effect, the timing of remediation and cost-sharing
arrangements. The environmental reserves are based on management's estimate of
the most likely cost to be incurred and are reviewed periodically and adjusted
as additional or new information becomes available. For the years ended December
31, 2003 and 2002, Occidental has not accrued any reimbursements or
indemnification recoveries for environmental remediation matters as assets.
Recoveries and reimbursements are recorded in income when receipt is probable.
Environmental reserves are recorded on a discounted basis only when a reserve is
initially established and the aggregate amount of the estimated costs for a
specific site and the timing of cash payments are reliably determinable. The
reserve methodology for a specific site is not modified once it has been
established.
Many factors could result in changes to Occidental's environmental reserves
and reasonably possible range of loss. The most significant are:
>> The original cost estimate may have been inaccurate.
>> Modified remedial measures might be necessary to achieve the required
remediation results. Occidental generally assumes that the remedial
objective can be achieved using the most cost-effective technology
reasonably expected to achieve that objective. Such technologies may
include air sparging or phyto-remediation of shallow groundwater, or
limited surface soil removal or in-situ treatment producing acceptable risk
assessment results. Should such remedies fail to achieve remedial
objectives, more intensive or costly measures may be required.
>> The remedial measure might take more or less time than originally
anticipated to achieve the required contaminant reduction. Site-specific
time estimates can be affected by factors such as groundwater capture
rates, anomalies in subsurface geology, interactions between or among
water-bearing zones and non-water-bearing zones, or the ability to identify
and control contaminant sources.
>> The regulatory agency might ultimately reject or modify Occidental's
proposed remedial plan and insist upon a different course of action.
Additionally, other events might occur that could affect Occidental's
future remediation costs, such as:
>> The discovery of more extensive contamination than had been originally
anticipated. For some sites with impacted groundwater, accurate definition
of contaminant plumes requires years of monitoring data and computer
modeling. Migration of contaminants may follow unexpected pathways along
geologic anomalies that could initially go undetected. Additionally, the
size of the area requiring remediation may change based upon risk
assessment results following site characterization or interim remedial
measures.
>> Improved remediation technology might decrease the cost of remediation. In
particular, for groundwater remediation sites with projected long-term
operation and maintenance, the development of more effective treatment
technology, or acceptance of alternative and more cost-effective treatment
methodologies such as bio-remediation, could significantly affect
remediation costs.
>> Laws and regulations might change to impose more or less stringent
remediation requirements.
At sites involving multiple parties, Occidental provides environmental
reserves based upon its expected share of liability. When other parties are
jointly liable, the financial viability of the parties, the degree of their
commitment to participate and the consequences to Occidental of their failure to
participate are evaluated when estimating Occidental's ultimate share of
liability. Based on these factors, Occidental believes that it will not be
required to assume a share of liability of other potentially responsible
parties, with whom it is alleged to be jointly liable, in an amount that would
have a material effect on Occidental's consolidated financial position,
liquidity or results of operations.
Most cost sharing arrangements with other parties fall into one of the
following three categories:
Category 1: Comprehensive Environmental Response, Compensation and
Liability Act (CERCLA) or state-equivalent sites wherein Occidental and other
alleged potentially responsible parties share the cost of remediation in
accordance with negotiated or prescribed allocations;
Category 2: Oil and gas joint ventures wherein each joint venture partner
pays its proportionate share of remedial cost; and
Category 3: Contractual arrangements typically relating to purchases and
sales of property wherein the parties to the transaction agree to methods of
allocating the costs of environmental remediation.
In all three of these categories, Occidental records as a reserve its
expected net cost of remedial activities, as adjusted by recognition for any
non-performing parties.
41
In addition to the costs of investigating and implementing remedial
measures, which often take in excess of ten years at CERCLA sites, Occidental's
reserves include management's estimates of the cost of operation and maintenance
of remedial systems. To the extent that the remedial systems are modified over
time in response to significant changes in site-specific data, laws,
regulations, technologies or engineering estimates, Occidental reviews and
changes the reserves accordingly on a site-specific basis.
ASSET RETIREMENT OBLIGATIONS
Occidental adopted SFAS No. 143, "Accounting for Asset Retirement
Obligations", on January 1, 2003 (see "Accounting Changes" in Note 4). The
following table summarizes the activity of the asset retirement obligations:
For the year ended December 31, (in millions) 2003
================================================================================ ==========
Beginning balance $ --
Cumulative effect of change in accounting principles 151
Liabilities incurred 6
Liabilities settled (7)
Accretion expense 11
Acquisitions and other 1
Revisions to estimated cash flows 5
----------
ENDING BALANCE $ 167
================================================================================ ==========
Before 2003, the estimated future abandonment costs of offshore oil and gas
properties and removal costs for platforms, net of salvage value, were accrued
over their operating lives. Such costs were calculated at unit-of-production
rates based upon estimated proved recoverable reserves and were taken into
account in determining depreciation, depletion and amortization. Occidental
assumed that the salvage value of the oil and gas property would equal the
dismantlement, restoration and reclamation costs for onshore production, so no
accrual was deemed necessary. For the chemical segment, appropriate reserves
were provided when a decision was made to dispose of a property, since
Occidental makes capital renewal expenditures on a continual basis while an
asset is in operation.
DERIVATIVE INSTRUMENTS
On January 1, 2001, Occidental adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended. This statement
required an entity to recognize derivatives on the balance sheet and measure
those instruments at fair value. Adoption of this new accounting standard
resulted in cumulative after-tax reductions in net income of approximately $24
million and OCI of approximately $27 million in the first quarter of 2001. The
adoption also increased total assets by $588 million and total liabilities by
$639 million as of January 1, 2001.
Occidental applies either fair value or cash flow hedge accounting when
transactions meet specified criteria to obtain hedge accounting treatment. If
the derivative does not qualify as a hedge or is not designated as a hedge, the
gain or loss is immediately recognized in earnings. If the derivative qualifies
for hedge accounting, the gain or loss on the derivative is either recognized in
income with an offsetting adjustment to the basis of the item being hedged for
fair value hedges, or deferred in OCI to the extent the hedge is effective for
cash flow hedges.
A hedge is regarded as highly effective and qualifies for hedge accounting
if, at inception and throughout its life, it is expected that changes in the
fair value or cash flows of the hedged item are almost fully offset by the
changes in the fair value of changes in cash flows of the hedging instrument and
actual effectiveness is within a range of 80 percent to 125 percent. In the case
of hedging a forecasted transaction, the transaction must be highly probable and
must present an exposure to variations in cash flows that could ultimately
affect reported net profit or loss. Occidental discontinues hedge accounting
when it is determined that a derivative has ceased to be highly effective as a
hedge; when the derivative expires, or is sold, terminated, or exercised; when
the hedged item matures or is sold or repaid; or when a forecasted transaction
is no longer deemed highly probable.
Derivative assets are classified in receivables from joint ventures,
partnerships and other, and long-term receivables; derivative liabilities are
reported in accrued liabilities and deferred credits and other liabilities -
other.
FINANCIAL INSTRUMENTS FAIR VALUE
Occidental values financial instruments as required by SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments." The carrying amounts of
cash and cash equivalents approximate fair value because of the short maturity
of those instruments. The carrying value of other on-balance-sheet financial
instruments, other than debt, approximates fair value, and the cost, if any, to
terminate off-balance-sheet financial instruments is not significant.
42
STOCK INCENTIVE PLANS
Occidental has stock incentive plans (Plans) that are more fully described
in Note 12. Occidental accounts for those Plans under APB No. 25, "Accounting
for Stock Issued to Employees", and related interpretations. Occidental's policy
is to recognize compensation expense for the Plans over the vesting period of
the award. Had compensation expense for those Plans been determined in
accordance with SFAS No. 123, "Accounting for Stock Based Compensation",
Occidental's pro-forma net income and earnings per share would have been as
follows:
Year ended December 31, (in millions) 2003 2002 2001
========================================================================================= ========== ========== ==========
Net income, as reported $ 1,527 $ 989 $ 1,154
Add: Stock-based employee compensation expense included in reported net income
determined under APB No. 25, net of related tax effects 38 18 16
Deduct: Total stock-based employee compensation expense determined under the SFAS No. 123
fair-value-based method for all awards, net of related tax effects (56) (37) (33)
---------- ---------- ----------
Pro-forma net income $ 1,509 $ 970 $ 1,137
========================================================================================= ========== ========== ==========
Earnings Per Share:
Basic - as reported $ 3.98 $ 2.63 $ 3.10
Basic - pro forma $ 3.93 $ 2.58 $ 3.06
Diluted Earnings per Share
Diluted - as reported $ 3.93 $ 2.61 $ 3.09
Diluted - pro forma $ 3.88 $ 2.55 $ 3.04
- ----------------------------------------------------------------------------------------- ---------- ---------- ----------
The fair value of each option grant, for pro-forma calculation purposes, is
estimated using the Black-Scholes option-pricing model. The weighted average
grant-date fair value of options granted was $3.20, $5.36 and $5.90 in 2003,
2002 and 2001, respectively. The fair value of each option grant is estimated
with the following weighted average assumptions:
Year ended December 31, 2003 2002 2001
================================================================================ ========== ========== ==========
Assumptions used:
Risk-free interest rate 1.63% 3.89% 4.84%
Dividend yield 3.37% 3.93% 3.74%
Volatility factor 21% 32% 29%
Expected life (years) 2.4 3.5 5.0
- -------------------------------------------------------------------------------- ---------- ---------- ----------
These grants have limitations on transferability. In the case of executive
management, such options may not be exercised for approximately two months of
each calendar quarter. The use of short-term volatility measures as a proxy for
long-term volatility provides significant uncertainty as to the fair value of
the options. These factors could result in the market value of the options being
less than the Black-Scholes values.
SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments, net of refunds, during the years 2003, 2002 and 2001
included federal, foreign and state income taxes of approximately $538 million,
$111 million and $408 million, respectively. Interest paid (net of interest
capitalized) totaled approximately $310 million, $250 million and $389 million
for the years 2003, 2002 and 2001, respectively. (See Note 3 for detail of
noncash investing and financing activities regarding certain acquisitions.)
NOTE 2 DERIVATIVE ACTIVITIES INCLUDING FAIR VALUE OF FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
Occidental's market risk exposures relate primarily to commodity prices
and, to a lesser extent, interest rates and foreign currency exchange rates.
Occidental periodically enters into derivative instrument transactions to reduce
these price and rate fluctuations. A derivative is a financial instrument that
derives its value from another instrument or variable.
In general, the fair value recorded for derivative instruments is based on
quoted market prices, dealer quotes and the Black-Scholes or similar valuation
models.
43
COMMODITY PRICE RISK
GENERAL
Occidental's results are sensitive to fluctuations in crude oil and natural
gas prices.
MARKETING AND TRADING OPERATIONS
Occidental periodically uses different types of derivative instruments to
achieve the best prices for oil and gas. Derivatives are also used by Occidental
to reduce its exposure to price volatility and mitigate fluctuations in
commodity-related cash flows. Occidental enters into low-risk marketing and
trading activities through its separate marketing organization, which operates
under established policy controls and procedures. With respect to derivatives
used in its oil and gas marketing operations, Occidental utilizes a combination
of futures, forwards, options and swaps to offset various physical transactions.
Overall, Occidental has a low level of involvement in the hedging of long-term
oil and gas prices and its use of derivatives in hedging activity remains at a
correspondingly low level.
In September 2002, Occidental unwound its natural gas delivery commitment
and corresponding natural gas price swap, which were entered into in November
1998. Occidental recognized a pre-tax loss of $3 million related to these
transactions.
COMMODITY HEDGES
On a limited basis, Occidental uses cash-flow hedges for the sale of crude
oil and natural gas production. Occidental's commodity cash-flow-hedging
instruments were used in 2002 for the sale of production and were highly
effective. At December 31, 2002, all of these cash-flow hedges had been settled.
No fair value hedges were used for oil and gas production during 2003 or 2002
and no cash flow hedges were used for the sale of production in 2003.
INTEREST RATE RISK
GENERAL
Occidental is exposed to risk resulting from changes in interest rates and
it enters into various derivative financial instruments to manage interest-rate
exposure. Interest-rate swaps, forward locks and futures contracts are entered
into periodically as part of Occidental's overall strategy.
HEDGING ACTIVITIES
Occidental has entered into several interest-rate swaps that qualified for
fair-value hedge accounting. These derivatives effectively convert approximately
$1.8 billion of fixed-rate debt to variable-rate debt with maturities ranging
from 2005 to 2009.
Occidental was a party to a series of forward interest-rate locks, which
qualified as cash-flow hedges. The hedges were related to the construction of a
cogeneration plant leased by Occidental that was completed in December 2002. The
remaining loss on the hedges through December 2003 was approximately $21 million
after-tax, which is recorded in accumulated OCI and is being recognized in
earnings over the lease term of 26 years on a straight-line basis.
Certain of Occidental's equity investees have entered into additional
derivative instruments that qualify as cash-flow hedges. Occidental reflects its
proportionate share of these cash-flow hedges in OCI.
CREDIT RISK
Occidental's energy contracts are spread among numerous counterparties.
Creditworthiness is reviewed before doing business with a new counterparty and
on an ongoing basis. Occidental monitors aggregated counterparty exposure
relative to credit limits, and manages credit-enhancement issues. Credit
exposure for each customer is monitored for outstanding balances, current month
activity, and forward mark-to-market exposure.
FOREIGN CURRENCY RISK
Several of Occidental's foreign operations are located in countries whose
currencies generally depreciate against the U.S. dollar. Typically, effective
currency forward markets do not exist for these countries. Therefore, Occidental
attempts to manage its exposure primarily by balancing monetary assets and
liabilities and maintaining cash positions only at levels necessary for
operating purposes. Generally, international crude oil sales are denominated in
U.S. dollars. Additionally, all of Occidental's oil and gas foreign entities
have the U.S. dollar as the functional currency. However, in one foreign
chemical subsidiary where the local currency is the functional currency,
Occidental has exposure on U.S. dollar-denominated debt that is not material. At
December 31, 2003 and 2002, Occidental had not entered into any foreign currency
derivative instruments. The effect of exchange-rate transactions in foreign
currencies is included in periodic income.
44
DERIVATIVE AND FAIR VALUE DISCLOSURES
The following table shows derivative financial instruments included in the
consolidated balance sheets:
Balance at December 31, (in millions) 2003 2002
================================================================================ ========== ==========
Derivative financial instrument assets (a)
Current $ 138 $ 164
Non-current 118 157
---------- ----------
$ 256 $ 321
========== ==========
Derivative financial instrument liabilities (a)
Current $ 85 $ 115
Non-current 23 23
---------- ----------
$ 108 $ 138
================================================================================ ========== ==========
(a) Amounts include energy-trading contracts
As a result of fair-value hedges, the amount of interest expense recorded
in the income statement was lower by approximately $58 million and $45 million
for the years ended December 31, 2003 and 2002, respectively.
The following table summarizes after-tax derivative activity recorded in
OCI:
Balance at December 31, (in millions) 2003 2002
================================================================================ ========== ==========
Beginning Balance $ (26) $ (20)
Losses from changes in current cash flow hedges (17) (14)
Amount reclassified to income 19 8
---------- ----------
Ending Balance $ (24) $ (26)
================================================================================ ========== ==========
During the next twelve months, Occidental expects that approximately $3
million of net derivative after-tax losses included in OCI, based on their
valuation at December 31, 2003, will be reclassified into earnings when the
hedged transactions close. Hedge ineffectiveness did not have a significant
impact on earnings for the years ended December 31, 2003 and 2002.
NOTE 3 BUSINESS COMBINATIONS AND ASSET ACQUISITIONS AND DISPOSITIONS
- --------------------------------------------------------------------------------
2003
In 2003, Occidental made several oil and gas acquisitions in the Permian
Basin for approximately $317 million in cash and sold approximately $34 million
of these assets shortly thereafter. No gain or loss was recorded on these sales.
2002
In 2002, Occidental purchased a 24.5-percent interest in the Dolphin
Project for $310 million. This investment includes a 24.5-percent interest in
Dolphin Energy Limited (Dolphin Energy), the operator of the Dolphin Project.
The Dolphin Project consists of two parts: (1) a development and production
sharing agreement with Qatar to develop and produce natural gas and condensate
in Qatar's North Field for 25 years, with a provision to request a 5-year
extension, which will be proportionately consolidated by Occidental; and (2) the
rights for Dolphin Energy to build, own and operate a 260-mile-long, 48-inch
export pipeline to transport 2 billion cubic feet per day of dry natural gas
from Qatar to markets in the United Arab Emirates (UAE) for the life of the
Dolphin Project and longer, which will be accounted for as an equity investment.
The pipeline will have capacity to transport up to 3.2 billion cubic feet per
day, which will allow for additional business opportunities. Approximately $250
million of the purchase price was allocated to the equity investment, while the
remaining amount was recorded in PP&E.
Several important milestones have been reached since Occidental joined the
Dolphin Project. In 2002, two development wells were tested, providing
sufficient information to complete the field development plan. In October 2003,
Dolphin Energy signed two 25-year contracts to supply approximately one BCF of
natural gas per day to two entities in the UAE. In December 2003, the Government
of Qatar approved the final field development plan for the Dolphin Project.
Based on the foregoing developments, Occidental recorded 107 million barrels of
oil equivalent (BOE) (unaudited) of proved undeveloped oil and gas reserves in
2003. As the project has not begun operation, no revenue or production costs
were recorded in 2003.
45
Most recently, in January 2004, Dolphin Energy awarded engineering,
procurement and construction contracts for the gas processing and compression
plant at Ras Laffan in Qatar as well as for two offshore gas production
platforms. The projected start-up date for production is in 2006.
In August 2002, Occidental and Lyondell Chemical Company completed an
agreement for Occidental to sell its 29.5-percent share of Equistar to Lyondell
and to purchase a 21-percent equity interest in Lyondell. Occidental entered
into these transactions to diversify its petrochemicals interests. These
transactions reduced Occidental's direct exposure to petrochemicals volatility,
yet will allow it to preserve, through its Lyondell investment, an economic
upside of a recovery in the petrochemicals industry. In connection with these
transactions, Occidental wrote down its investment in the Equistar partnership
to fair value by recording a $412 million pre-tax charge as of December 2001.
After the write-down, the net book value of Occidental's investment in Equistar
at December 31, 2001, after considering tax effects, approximated the fair value
of the Lyondell shares Occidental expected to receive, less transaction costs.
Occidental recorded an after-tax gain of $164 million in the third quarter of
2002, as a result of closing these transactions on August 22, 2002. Occidental's
initial carrying value of the Lyondell investment was $489 million, which
represented the fair value of Lyondell's shares at closing.
In 2002, Occidental increased its ownership in Badin Block 1 and 2R by
purchasing additional interests in these two blocks from the Government of
Pakistan for approximately $72 million.
In the fourth quarter of 2002, Occidental sold its chrome business at
Castle Hayne, North Carolina for $25 million and its plastic calendering
operations in Brazil for a $6 million note receivable. In the third quarter of
2002, Occidental recorded an after-tax impairment charge of $69 million and
classified both of these businesses as discontinued operations. The fair value
of these businesses was determined by the expected sales proceeds from third
party buyers. When these transactions closed, no significant gain or loss was
recorded. For the years ended December 31, 2002 and 2001, the discontinued
operations had revenues of $91 million and $124 million, respectively, and
pre-tax income (loss) of $(98) million and $2 million, respectively.
2001
On August 31, 2001, Occidental sold its interest in a subsidiary that owned
a Texas intrastate pipeline system. The entity was sold to Kinder Morgan Energy
Partners, L.P. for $360 million. Occidental recorded an after-tax loss of
approximately $272 million in connection with this transaction.
On July 10, 2001, Occidental completed the sale of its interest in the
Tangguh liquefied natural gas (LNG) project in Indonesia to Mitsubishi
Corporation of Japan for proceeds of $503 million. Occidental recorded an
after-tax gain of approximately $399 million for this transaction.
NOTE 4 ACCOUNTING CHANGES
- --------------------------------------------------------------------------------
SFAS NO. 132 REVISED
In December 2003, the Financial Accounting Standards Board (FASB) issued a
revision to SFAS No. 132, "Employers Disclosures about Pensions and Other
Postretirement Benefits" to improve financial statement disclosures for defined
benefit plans. The standard requires that companies provide more details about
their plan assets, benefit obligations, cash flows and other relevant
information, such as plan assets by category. A description of investment
policies and strategies for these asset categories and target allocation
percentages or target ranges are also required in financial statements. This
statement is effective for financial statements with fiscal years ending after
December 15, 2003. Occidental adopted this statement in the fourth quarter of
2003 and provided the required disclosures in Note 13.
SFAS NO. 150
In May 2003, the FASB issued 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. On January 20, 2004,
all of the trust preferred securities were redeemed.
SFAS NO. 149
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.
46
FIN 46 AND FIN 46-R (REVISED)
In January 2003, the FASB issued FASB Interpretation No. (FIN) 46,
"Consolidation of Variable Interest Entities." FIN 46 requires a company to
consolidate a 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
imposes 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 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 position or
results of operations.
See Note 14 for more information on VIEs where Occidental is not the
primary beneficiary.
In December 2003, the FASB revised FIN 46 to exempt certain entities from
its requirements and to clarify certain issues arising during the initial
implementation of FIN 46. Occidental will adopt the revised interpretation in
the first quarter of 2004 and it is not expected to have a material impact on
the financial statements when adopted.
FIN 45
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 Note 9. 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.
EITF ISSUE NO. 02-3
In the third quarter of 2002, Occidental adopted certain provisions of
Emerging Issues Task Force (EITF) Issue No. 02-3, "Issues involved in Accounting
for Derivative Contracts Held for Trading Purposes and Contracts Involved in
Energy Trading and Risk Management Activities." These provisions prescribed
significant changes in how revenue from energy trading is recorded.
Historically, Occidental had two major types of oil and gas revenues: (1)
revenues from its equity production; and (2) revenues from the sale of oil and
gas produced by other companies, but purchased and resold by Occidental,
referred to as revenue from trading activities. Both types of sales involve
physical deliveries and had been historically recorded on a gross basis in
accordance with generally accepted accounting principles. With the adoption of
EITF Issue No. 02-3, Occidental now reflects the revenue from trading activities
on a net basis. There were no changes in gross margins, net income, cash flow or
earnings per share for any period as a result of adopting this requirement.
However, net sales and cost of sales were reduced by equal and offsetting
amounts to reflect the adoption of this requirement. For the years ended
December 31, 2002 and 2001, net sales and cost of sales were reduced from
amounts previously reported by approximately $2.2 billion (representing amounts
for the first two quarters of 2002) and $5.8 billion, respectively, to conform
to the current presentation.
Since 1999, Occidental has accounted for certain energy-trading contracts
in accordance with EITF Issue No. 98-10, "Accounting for Contracts Involved in
Energy Trading and Risk Management Activities." EITF Issue No. 98-10 required
that all energy-trading contracts must be marked to fair value with gains and
losses included in earnings, whether the contracts were derivatives or not. In
October 2002, the EITF rescinded EITF Issue No. 98-10 thus precluding
mark-to-market accounting for all energy-trading contracts that are not
derivatives and fair value accounting for inventories purchased from third
parties. Also, the rescission requires derivative gains and losses to be
presented net on the income statement, whether or not they are physically
settled, if the derivative instruments are held for trading purposes. Occidental
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.
SFAS NO. 146
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires that a
liability be recognized for exit and disposal costs only when the liability has
been incurred and when it can be measured at fair value. The statement is
effective for exit and disposal activities that are initiated after December 31,
2002. Occidental adopted SFAS No. 146 in the first quarter of 2003 and it did
not have a material effect on its financial statements.
47
SFAS NO. 145
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." In addition to amending or rescinding other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions, SFAS No. 145 precludes
companies from recording gains and losses from the extinguishment of debt as an
extraordinary item. Occidental implemented SFAS No. 145 in the fourth quarter of
2002 and all comparative financial statements have been reclassified to conform
to the 2002 presentation. Since Occidental had no 2002 extraordinary items,
there was no effect on the 2002 presentation. The effects of the statement on
prior years include the reclassification of an extraordinary loss to net income
from continuing operations of $8 million ($0.02 per share) in 2001. There was no
effect on net income or basic earnings per common share upon adoption.
SFAS NO. 143
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. Under SFAS No. 143, companies
are required to recognize the fair value of a liability for an asset retirement
obligation in the period in which the liability is incurred if there is a legal
obligation to dismantle the asset and reclaim or remediate the property at the
end of the useful life. Occidental 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.
SFAS NO. 142
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 changes the accounting and reporting requirements for
acquired goodwill and intangible assets. The provisions of this statement are
applied to companies starting with fiscal years beginning after December 15,
2001. At December 31, 2001, the balance sheet included approximately $108
million of goodwill and intangible assets with annual amortization expense of
approximately $6 million recorded in each of the years' income statements for
the three-year period ended December 31, 2001. As a result, elimination of
goodwill amortization would not have had a material impact on net income or
earnings per share of any of the years presented and, as a result, the
transitional disclosures of adjusted net income excluding goodwill amortization
described by SFAS No. 142 have not been presented. Upon implementation of SFAS
No. 142 in the first quarter of 2002, three separate specialty chemical
businesses were identified as separate reporting units and tested for goodwill
impairment. All three of these businesses are components of the chemical
segment. The fair value of each of the three reporting units was determined
through third party appraisals. The appraisals determined fair value to be the
price that the assets could be sold for in a current transaction between willing
parties. As a result of the impairment testing, Occidental recorded a cumulative
effect of changes in accounting principles after-tax reduction in net income of
approximately $95 million due to the impairment of all the goodwill attributed
to these reporting units.
INTANGIBLE ASSETS
The EITF currently is deliberating on EITF No. 03-O, "Whether Mineral
Rights Are Tangible or Intangible Assets" and EITF No. 03-S "Application of FASB
Statement No. 142, Goodwill and Other Intangible Assets, to Oil and Gas
Companies." These proposed statements will determine whether contract-based oil
and gas mineral rights are classified as tangible or intangible assets based on
the EITF's interpretation of SFAS No. 141 and SFAS No. 142. Historically,
Occidental has classified all of its contract-based mineral rights within
property, plant and equipment and has generally not identified these amounts
separately. If the EITF determines that these mineral rights should be presented
as intangible assets, Occidental would have to reclassify its contract-based oil
and gas mineral rights acquired after June 30, 2001 to intangible assets and
make additional disclosures in accordance with SFAS No. 142. If Occidental
adopted this change, approximately $492 million and $226 million of the
property, plant and equipment balance would be reclassified to intangible assets
at December 31, 2003 and 2002, respectively. These amounts, which are net of
accumulated depreciation, depletion and amortization, include approximately $475
million and $210 million of mineral rights related to proved properties at
December 31, 2003 and 2002, respectively. Occidental has been amortizing these
amounts under the unit-of-production method and would continue to amortize the
mineral rights under this method. Based on its understanding of the scope of the
EITF deliberations, Occidental believes the adoption of this potential decision
would have no material effect on its results of operations.
48
NOTE 5 INVENTORIES
- --------------------------------------------------------------------------------
Inventories of approximately $171 million and $190 million were valued
under the LIFO method at December 31, 2003 and 2002, respectively. Inventories
consisted of the following:
Balance at December 31, (in millions) 2003 2002
================================================================================ ========== ==========
Raw materials $ 46 $ 54
Materials and supplies 143 125
Finished goods 342 319
---------- ----------
531 498
LIFO reserve (21) (7)
---------- ----------
TOTAL $ 510 $ 491
================================================================================ ========== ==========
NOTE 6 LONG-TERM DEBT AND TRUST PREFERRED SECURITIES
- --------------------------------------------------------------------------------
Long-term debt and trust preferred securities consisted of the following:
Balance at December 31, (in millions) 2003 2002
================================================================================ ========== ==========
OCCIDENTAL PETROLEUM CORPORATION
6.75% senior notes due 2012 $ 500 $ 500
7.65% senior notes due 2006 (a) 476 485
6.4% senior notes due 2013, redeemed March 31, 2003 -- 450
7.375% senior notes due 2008 (a) 426 436
8.45% senior notes due 2029 350 350
5.875% senior notes due 2007 (a) 318 323
9.25% senior debentures due 2019, putable August 1, 2004 at par (b) 300 300
4.25% medium-term notes due 2010 300 --
10.125% senior debentures due 2009 (a) 280 276
7.2% senior debentures due 2028 200 200
4% medium-term notes due 2007 (a) 178 175
6.5% senior notes due 2005 (a) 161 164
8.75% medium-term notes due 2023 100 100
4.101% medium-term notes due 2007 (a) 76 75
Medium-term notes due 2004 through 2008 (8.10% to 8.25% at December 31, 2003) 33 85
11.125% senior notes due 2010 12 12
---------- ----------
3,710 3,931
---------- ----------
SUBSIDIARY DEBT
1.08% to 7.5% unsecured notes due 2006 through 2030 313 280
---------- ----------
4,023 4,211
Less:
Unamortized discount, net (7) (8)
Current maturities (23) (206)
---------- ----------
TOTAL LONG-TERM DEBT 3,993 3,997
TRUST PREFERRED SECURITIES 453 455
---------- ----------
TOTAL $ 4,446 $ 4,452
================================================================================ ========== ==========
(a) Amounts include mark-to-market adjustments due to fair-value hedges.
(b) Amount is classified as non-current since Occidental does not expect debt
holders to put the debt on August 1, 2004. If the debt were put to
Occidental, it would refinance this amount on a long-term basis using
available lines of long-term bank credit.
In January 1999, Occidental issued 21,000,000 shares of 8.16-percent Trust
Originated Preferred Securities (trust preferred securities) to the public.
Holders of the trust preferred securities are entitled to cumulative cash
distributions at an annual rate of 8.16 percent of the liquidation amount of $25
per security. The trust preferred securities must be redeemed by January 20,
2039, but can be redeemed in whole, or in part, beginning January 20, 2004.
Starting July 1,
49
2003, upon adoption of SFAS No. 150, the trust preferred securities are
classified as a liability, and distributions on the trust preferred securities,
which were previously recorded as minority interest on the statement of
operations, are recorded as interest expense. On January 20, 2004, Occidental
redeemed all of the trust preferred securities for par of $453 million plus
accrued interest.
At March 31, 2003, Occidental redeemed its 6.4-percent senior notes due
2013 and recorded a pre-tax interest charge of $61 million. At December 31,
2003, Occidental had available lines of committed bank credit of approximately
$1.5 billion. Bank fees on these committed lines of credit ranged from 0.100
percent to 0.225 percent.
At December 31, 2003, minimum principal payments on long-term debt
subsequent to December 31, 2004 aggregated $3,913 million, of which $157 million
is due in 2005, $496 million in 2006, $550 million in 2007, $405 million in
2008, $276 million in 2009 and $2,029 million thereafter. These amounts do not
include the unamortized discount of $7 million and fair-value hedge
mark-to-market gains of $87 million. Unamortized discount is generally being
amortized to interest expense on the effective interest method over the lives of
the related issuances.
At December 31, 2003, under the most restrictive covenants of certain
financing agreements, the capacity for the payment of cash dividends and other
distributions on, and for acquisitions of, Occidental's capital stock was
approximately $5.2 billion, assuming that such dividends, distributions and
acquisitions were made without incurring additional borrowings.
Occidental estimates the fair value of its long-term debt based on the
quoted market prices for the same or similar issues or on the yields offered to
Occidental for debt of similar rating and similar remaining maturities. The
estimated fair value of Occidental's total debt, including trust preferred
securities, at December 31, 2003 and 2002, was approximately $5.0 billion and
$5.2 billion, respectively, compared with a carrying value of approximately $4.5
billion, and approximately $4.7 billion, respectively.
NOTE 7 LEASE COMMITMENTS
- --------------------------------------------------------------------------------
The present value of minimum capital lease payments, net of the current
portion, totaled $26 million at both December 31, 2003 and 2002. These amounts
are included in other liabilities.
Operating and capital lease agreements, which include leases for
manufacturing facilities, office space, railcars and tanks, frequently include
renewal and/or purchase options and require Occidental to pay for utilities,
taxes, insurance and maintenance expense.
At December 31, 2003, future net minimum lease payments for capital and
operating leases (excluding oil and gas and other mineral leases) were the
following:
In millions Capital Operating
================================================================================ =========== ===========
2004 $ 1 $ 98
2005 1 86
2006 1 75
2007 1 62
2008 1 59
Thereafter 28 865
----------- -----------
TOTAL MINIMUM LEASE PAYMENTS 33 $ 1,245
===========
Less:
Imputed interest (6)
Current portion (1)
-----------
PRESENT VALUE OF MINIMUM CAPITAL LEASE PAYMENTS, NET OF CURRENT PORTION $ 26
================================================================================ ===========
Rental expense for operating leases, net of sublease rental income, was
$118 million in 2003, $81 million in 2002 and $84 million in 2001. Rental
expense was net of sublease income of $8 million in 2003, $7 million in 2002 and
$8 million in 2001. At December 31, 2003, sublease rental amounts included in
the future operating lease payments totaled $87 million, as follows (in
millions): 2004--$8, 2005--$9, 2006--$9, 2007--$8, 2008--$8 and thereafter--$45.
Included in both the 2003 and 2002 property, plant and equipment accounts
were $10 million of property leased under capital leases and $8 million and $7
million, respectively, of related accumulated amortization.
50
NOTE 8 ENVIRONMENTAL LIABILITIES AND EXPENDITURES
- --------------------------------------------------------------------------------
Occidental's operations in the United States are subject to stringent
federal, state and local laws and regulations relating to improving or
maintaining environmental quality. Foreign operations also are subject to
environmental-protection laws. Costs associated with environmental compliance
have increased over time and are generally expected to rise in the future.
Environmental expenditures related to current operations are factored into the
overall business planning process. These expenditures are mainly considered an
integral part of production in manufacturing quality products responsive to
market demand.
The laws 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, comparable state sites and
other remediation sites, including Occidental facilities and previously owned
sites. Also, OPC and certain of its subsidiaries have been involved in a
substantial number of governmental and private proceedings involving historical
practices at various sites including, in some instances, having been named in
proceedings under CERCLA and similar federal, state and local environmental
laws. These proceedings seek funding or performance of remediation and, in some
cases, compensation for alleged property damage, punitive damages and civil
penalties.
Occidental manages its environmental remediation efforts through a wholly
owned subsidiary, Glenn Springs Holdings, Inc. (GSH), which reports its results
directly to Occidental's corporate management. The following table presents
Occidental's environmental remediation reserves at December 31, 2003, 2002 and
2001 grouped by three categories of environmental remediation sites:
$ amounts in millions 2003 2002 2001
=============================== ========================== ========================== ===========================
RESERVE Reserve Reserve
NUMBER OF SITES BALANCE Number of Sites Balance Number of Sites Balance
--------------- ------- --------------- ------- --------------- -------
CERCLA & equivalent sites 131 $ 240 124 $ 284 126 $ 320
Active facilities 13 79 14 46 14 59
Closed or sold facilities 39 53 44 63 47 75
--------------- ------- --------------- ------- --------------- -------
TOTAL 183 $ 372 182 $ 393 187 $ 454
=============================== =============== ======= =============== ======= =============== =======
The increase in the number of CERCLA and equivalent sites between 2002 and
2003 was primarily in the "minimal/no exposure" category as discussed below.
The following table shows environmental reserve activity for the past three
reporting periods:
12 MONTHS 12 Months 12 Months
ENDED Ended Ended
In millions 12/31/03 12/31/02 12/31/01
=========================================================================== ========== ========== ==========
Balance -- Beginning of Year $ 393 $ 454 $ 402
Increases to provision including interest accretion 64 25 111
Changes from acquisitions/dispositions -- -- 5
Payments (83) (84) (75)
Other (2) (2) 11
---------- ---------- ----------
Balance -- End of Year $ 372 $ 393 $ 454
=========================================================================== ========== ========== ==========
Occidental expects to expend funds equivalent to about half of the current
environmental reserve over the next three years and the balance over the next
ten or more years. Occidental expects that it may 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 $400 million beyond the amount accrued. For
management's opinion, refer to Note 9.
51
At December 31, 2003, OPC or certain of its subsidiaries have been named in
131 CERCLA or state equivalent proceedings, as shown below.
Description ($ amounts in millions) Number of Sites Reserve Balance
====================================================================== =============== ===============
Minimal/No exposure (a) 109 $ 5
Reserves between $1-10 MM 15 59
Reserves over $10 MM 7 176
--------------- ---------------
TOTAL 131 $ 240
====================================================================== =============== ===============
(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, 57 sites where Occidental's reserves are less
than $50,000 each, and 12 sites where reserves are between $50,000 and $1
million each.
The seven sites with individual reserves over $10 million in 2003 are a
former copper mining and smelting operation in Tennessee, two closed landfills
in Western New York, groundwater treatment facilities at three former chemical
plants (Western New York, Montague, Michigan and Tacoma, Washington) and a
municipal drinking water treatment plant in Western New York.
Certain subsidiaries of OPC are currently addressing releases of substances
from past operations at 13 active facilities. Four facilities -- certain oil and
gas properties in the southwestern United States, a chemical plant in Louisiana,
a chemical plant in Texas and a phosphorous recovery operation in Tennessee --
account for 89 percent of the reserves associated with these facilities.
There are 39 sites formerly owned or operated by certain subsidiaries of
OPC that have ongoing environmental remediation requirements. Three sites
account for 72 percent of the reserves associated with this group. The three
sites are: an active refinery in Louisiana where Occidental indemnifies the
current owner and operator for certain remedial actions, a water treatment
facility at a former coal mine in Pennsylvania, and a former chemical plant in
West Virginia.
Occidental's costs, some of which may include estimates, relating to
compliance with environmental laws and regulations are shown below for each
segment:
In millions 2003 2002 2001
================================================================================ ======== ======== ========
OPERATING EXPENSES
Oil and Gas $ 40 $ 32 $ 22
Chemical 49 46 47
-------- -------- --------
$ 89 $ 78 $ 69
======== ======== ========
CAPITAL EXPENDITURES
Oil and Gas $ 98 $ 70 $ 60
Chemical 15 16 20
-------- -------- --------
$ 113 $ 86 $ 80
======== ======== ========
REMEDIATION EXPENSES
Corporate $ 63 $ 23 $ 109
================================================================================ ======== ======== ========
Operating expenses are incurred on a continual basis. Capital expenditures
relate to longer-lived improvements in currently operating facilities.
Remediation expenses relate to existing conditions caused by past operations and
do not contribute to current or future revenue generation. Although total costs
may vary in any one year, over the long term, segment operating and capital
expenditures for environmental compliance generally are expected to increase.
In October 2001, the federal Environmental Protection Agency (EPA) approved
a State Implementation Plan (SIP) for eight counties in the Houston-Galveston
area of Texas to implement certain requirements of the federal Clean Air Act.
The SIP contains provisions requiring the reduction of 80 percent of nitrogen
oxide emissions and 60 percent of certain volatile organic compound emissions by
November 2007. Occidental operates six facilities that are subject to the SIP's
emissions reduction requirements and estimates that its future capital
expenditures will total approximately $25 to $30 million for environmental
control and monitoring equipment necessary to comply with the SIP. Occidental
expects expenditures to end in 2007, although the timing of the expenditures
will vary by facility.
52
NOTE 9 LAWSUITS, CLAIMS, COMMITMENTS, CONTINGENCIES AND RELATED MATTERS
- --------------------------------------------------------------------------------
OPC and certain of its subsidiaries have been named in a substantial number
of lawsuits, claims and other legal proceedings. These actions seek, among other
things, compensation for alleged personal injury, breach of contract, property
damage, punitive damages, civil penalties or other losses; or injunctive or
declaratory relief. OPC and certain of its subsidiaries also have been named in
proceedings under CERCLA and similar federal, state and local environmental
laws. These environmental proceedings seek funding or performance of remediation
and, in some cases, compensation for alleged property damage, punitive damages
and civil penalties; however, Occidental is usually one of many companies in
these proceedings and has to date been successful in sharing response costs with
other financially sound companies. With respect to all such lawsuits, claims and
proceedings, including environmental proceedings, Occidental accrues reserves
when it is probable a liability has been incurred and the amount of loss can be
reasonably estimated.
During the course of its operations, Occidental is subject to audit by tax
authorities for varying periods in various federal, state, local and foreign tax
jurisdictions. Taxable years prior to 1997 are closed for U.S. federal income
tax purposes. Taxable years 1997 through 2002 are in various stages of audit by
the Internal Revenue Service. Disputes arise during the course of such audits as
to facts and matters of law.
At December 31, 2003, commitments for major capital expenditures during
2004 and thereafter were approximately $201 million.
Occidental has entered into agreements providing for future payments to
secure terminal and pipeline capacity, drilling services, electrical power,
steam and certain chemical raw materials. At December 31, 2003, the net present
value of the fixed and determinable portion of the obligations under these
agreements, which were used to collateralize financings of the respective
suppliers, aggregated $45 million, which was payable as follows (in millions):
2004--$12, 2005--$11, 2006--$10, 2007--$9 and 2008--$3. Fixed payments under
these agreements were $16 million in 2003, $27 million in 2002 and $20 million
in 2001.
Occidental has certain other commitments under contracts, guarantees and
joint ventures, and certain other contingent liabilities. Many of these
commitments, although not fixed or determinable, involve capital expenditures
and are part of the $1.4 billion capital expenditures estimated for 2004, and
the $250 to $300 million estimated to be spent on the Dolphin Project in 2004.
As discussed in Note 4, FIN 45 requires the disclosure in Occidental's
financial statements of information relating to guarantees issued by Occidental
and outstanding at December 31, 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 (guarantees).
At December 31, 2003, the notional amount of the guarantees was
approximately $500 million. Of this amount, approximately $400 million relates
to Occidental's guarantee of equity investees' debt and other commitments. The
debt guarantees relating to Elk Hills Power and the guarantees on debt and other
commitments relating to the Ecuador pipeline. The remaining $100 million relates
to various indemnities and guarantees provided to third parties.
Occidental has indemnified various parties against specified liabilities
that those parties might incur in the future in connection with purchases and
other transactions that they have entered into with Occidental. These
indemnities usually are contingent upon the other party incurring liabilities
that reach specified thresholds. As of December 31, 2003, Occidental is not
aware of circumstances that would lead to future indemnity claims against it for
material amounts in connection with these transactions.
It is impossible at this time to determine the ultimate liabilities that
OPC and its subsidiaries may incur resulting from any lawsuits, claims and
proceedings, audits, commitments, contingencies and related matters. If these
matters were to be ultimately resolved unfavorably at amounts substantially
exceeding Occidental's reserves, an outcome not currently anticipated, it is
possible that such outcome could have a material adverse effect upon
Occidental's consolidated financial position or results of operations. However,
after taking into account reserves, management does not expect the ultimate
resolution of any of these matters to have a material adverse effect upon
Occidental's consolidated financial position or results of operations.
53
NOTE 10 DOMESTIC AND FOREIGN INCOME AND OTHER TAXES
- --------------------------------------------------------------------------------
The domestic and foreign components of income from continuing operations
before domestic and foreign income and other taxes were as follows:
For the years ended December 31, (in millions) Domestic Foreign Total
=========================================================================== ========== ========== ==========
2003 $ 1,506 $ 1,316 $ 2,822
========== ========== ==========
2002 $ 438 $ 1,147 $ 1,585
========== ========== ==========
2001 $ 272 $ 1,463 $ 1,735
=========================================================================== ========== ========== ==========
The provisions(credits) for domestic and foreign income and other taxes
from continuing operations consisted of the following:
U.S. State
For the years ended December 31, (in millions) Federal and Local Foreign Total
================================================================= ========== ========== ========== ==========
2003
Current $ 564 $ 29 $ 573 $ 1,166
Deferred 82 (6) (15) 61
---------- ---------- ---------- ----------
$ 646 $ 23 $ 558 $ 1,227
================================================================= ========== ========== ========== ==========
2002
Current $ 79 $ 9 $ 475 $ 563
Deferred (112) (26) (3) (141)
---------- ---------- ---------- ----------
$ (33) $ (17) $ 472 $ 422
================================================================= ========== ========== ========== ==========
2001
Current $ 326 $ 17 $ 396 $ 739
Deferred (40) (141) (2) (183)
---------- ---------- ---------- ----------
$ 286 $ (124) $ 394 $ 556
================================================================= ========== ========== ========== ==========
The credit for deferred federal and state and local income taxes in 2002
results primarily from the sale of the investment in Equistar.
The credit for deferred state and local income taxes in 2001 reflects a
benefit of $70 million related to the settlement of a state tax issue, deferred
tax reversing due to the sale of the entity owning pipelines in Texas that were
leased to a former subsidiary, a write-down of the investment in Equistar and an
adjustment to reflect lower effective state tax rates.
The following is a reconciliation, stated as a percentage of pre-tax
income, of the U.S. statutory federal income tax rate to Occidental's effective
tax rate on income from continuing operations:
For the years ended December 31, 2003 2002 2001
=========================================================================== ======== ======== ========
U.S. federal statutory tax rate 35 % 35 % 35 %
Operations outside the United States (a) 8 12 2
Benefit from sale of subsidiary stock -- (21) --
State taxes, net of federal benefit 1 -- (5)
Other (1) 1 --
-------- -------- --------
Tax rate provided by Occidental 43 % 27 % 32 %
=========================================================================== ======== ======== ========
(a) Included in these figures is the impact of not providing U.S. taxes on the
unremitted earnings of certain foreign subsidiaries. The effect of this is
to reduce the U.S. federal tax rate by approximately 5 percent in 2003 and
7 percent in 2002. The effect on 2001 was insignificant due to
distributions from these subsidiaries.
54
The tax effects of temporary differences resulting in deferred income taxes
at December 31, 2003 and 2002 were as follows:
2003 2002
------------------------- -------------------------
DEFERRED DEFERRED Deferred Deferred
TAX TAX Tax Tax
Items resulting in temporary differences (in millions) ASSETS LIABILITIES Assets Liabilities
====================================================================== =========== =========== =========== ===========
Property, plant and equipment differences $ 79 $ 1,317 $ 87 $ 1,166
Equity investments including partnerships -- 365 -- 375
Environmental reserves 163 -- 155 --
Postretirement benefit accruals 127 -- 129 --
Deferred compensation and fringe benefits 144 -- 135 --
Asset retirement obligation 58 -- -- --
State income taxes 44 -- 41 --
All other 224 83 186 60
----------- ----------- ----------- -----------
Total deferred taxes $ 839 $ 1,765 $ 733 $ 1,601
====================================================================== =========== =========== =========== ===========
Included in total deferred tax assets was a current portion aggregating $75
million and $114 million as of December 31, 2003 and 2002, respectively, that
was reported in prepaid expenses and other.
A deferred tax liability of approximately $210 million at December 31, 2003
has not been recognized for temporary differences related to Occidental's
investment in certain foreign subsidiaries primarily as a result of unremitted
earnings of consolidated subsidiaries, as it is Occidental's intention,
generally, to reinvest such earnings permanently.
The discontinued operations include an income tax benefit of $18 million in
2002 and an income tax expense of $3 million in 2001.
The cumulative effect of changes in accounting principles was reduced by an
income tax benefit of $38 million in 2003 and $6 million in 2002.
Additional paid-in capital was credited $30 million in 2003 and $7 million
in 2002 for a tax benefit resulting from the exercise of certain stock options.
NOTE 11 STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
The following is an analysis of common stock:
(shares in thousands) Common Stock
================================================================================ ==============
Balance, December 31, 2000 369,984
Issued 1,064
Options exercised and other, net 3,078
- -------------------------------------------------------------------------------- --------------
Balance, December 31, 2001 374,126
Issued 1,027
Options exercised and other, net 2,707
- -------------------------------------------------------------------------------- --------------
Balance, December 31, 2002 377,860
Issued 1,156
Options exercised and other, net 8,032
- -------------------------------------------------------------------------------- --------------
BALANCE, DECEMBER 31, 2003 387,048
================================================================================ ==============
55
NONREDEEMABLE PREFERRED STOCK
Occidental has authorized 50,000,000 shares of preferred stock with a par
value of $1.00 per share. At December 31, 2003, 2002 and 2001, Occidental had no
outstanding shares of preferred stock.
EARNINGS PER SHARE AND ANTI-DILUTIVE COMPUTATIONS
Basic earnings per share was computed by dividing net income plus the
effect of repurchase of trust preferred securities by the weighted average
number of common shares outstanding during each year. The computation of diluted
earnings per share further assumes the dilutive effect of stock options.
The following are the share amounts used to compute the basic and diluted
earnings per share for the years ended December 31:
In millions 2003 2002 2001
=========================================================================== ========== ========== ==========
BASIC EARNINGS PER SHARE
Basic Shares Outstanding 383.9 376.2 372.1
========== ========== ==========
DILUTED EARNINGS PER SHARE
Basic shares outstanding 383.9 376.2 372.1
Dilutive effect of exercise of options outstanding 3.9 2.7 1.8
Other .8 .6 .4
---------- ---------- ----------
Dilutive Shares 388.6 379.5 374.3
=========================================================================== ========== ========== ==========
The following items were not included in the computation of diluted
earnings per share because their effect was anti-dilutive for the years ended
December 31:
2003 2002 2001
=================================================================== ================ ================ ================
STOCK OPTIONS
Number of anti-dilutive options (in millions) NONE 0.02 0.02
Price range -- $29.063-$29.438 $29.063-$29.438
Expiration range -- 12/1/07-4/29/08 12/1/07-4/29/08
- ------------------------------------------------------------------- ---------------- ---------------- ----------------
ACCUMULATED OTHER COMPREHENSIVE INCOME (AOCI)
AOCI consisted of the following:
Balance at December 31, (in millions) 2003 2002
================================================================================ ========== ==========
Foreign currency translation adjustments $ (18) $ (56)
Derivative mark-to-market adjustments (24) (26)
Minimum pension liability adjustments 3 (10)
Unrealized gains on securities 89 65
---------- ----------
TOTAL $ 50 $ (27)
================================================================================ ========== ==========
NOTE 12 STOCK INCENTIVE PLANS
- --------------------------------------------------------------------------------
Occidental applies APB No. 25 and related interpretations in accounting for
its stock incentive plans (Plans), which are described below. The pro-forma
effect on net income and earnings per share, had Occidental applied the
fair-value recognition provisions of SFAS No. 123, are shown in Note 1.
The company has established several stock incentive plans offering certain
employees and management stock options, restricted stock, stock appreciation
rights and performance stock awards. These awards are granted under the 1995 and
2001 Incentive Stock Plans. The 1995 Plan was terminated, for the purposes of
further award grants, upon the effective date of the 2001 Plan; however, certain
1995 Plan award grants are outstanding at December 31, 2003. An aggregate of
27,000,000 share-based awards are reserved for issuance under the 2001 Plan and
at December 31, 2003, approximately 7,574,285 share-based awards were available
for future awards. The company has also established the 1996 Restricted Stock
Plan for non-employee directors, where non-employee directors receive awards of
restricted stock as additional compensation for their services as members of the
Board of Directors. A maximum of 150,000 shares of stock may be awarded under
the Directors Plan and at December 31, 2003, 34,572 shares of common stock were
available for future grants.
56
STOCK OPTION PLANS
Under the stock option plans, certain employees and executives are granted
stock options with an exercise price equal to the fair value of the company's
stock on the date of grant. Generally, the options vest over three years with a
maximum term of ten years and one month. Under certain conditions, the option
awards are forfeitable.
The following is a summary of stock option transactions during 2003, 2002
and 2001:
2003 2002 2001
------------------------ ------------------------ ------------------------
WEIGHTED Weighted Weighted
AVERAGE Average Average
(shares in thousands) OPTIONS EXERCISE PRICE Options Exercise Price Options Exercise Price
===================================== ======= ============== ======= ============== ======= ==============
BEGINNING BALANCE 26,972 $ 24.22 25,390 $ 23.40 18,217 $ 21.53
Granted or issued 5,191 $ 31.13 4,904 $ 26.43 11,039 $ 26.17
Exercised (8,999) $ 22.30 (3,097) $ 21.12 (3,395) $ 22.40
Forfeited or expired (152) $ 24.96 (225) $ 22.52 (471) $ 23.50
------- ------- -------
ENDING BALANCE 23,012 $ 26.53 26,972 $ 24.22 25,390 $ 23.40
OPTIONS EXERCISABLE AT YEAR END 12,535 $ 24.62 16,186 $ 23.33 15,023 $ 22.95
- ------------------------------------- ------- -------------- ------- -------------- ------- --------------
The following is a summary of stock options outstanding at December 31,
2003:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- -------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF REMAINING EXERCISE EXERCISE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
================ ============ ================ ================ ================ ================
$14.88 -- $21.88 2,883,228 6.1 $ 20.37 2,883,228 $ 20.37
$23.13 -- $26.43 9,945,531 5.7 $ 25.80 6,712,650 $ 25.50
$26.75 -- $31.13 10,183,164 8.5 $ 29.06 2,939,602 $ 26.76
- ---------------- ------------ ---------------- ---------------- ---------------- ----------------
$14.88 -- $31.13 23,011,923 7.0 $ 26.53 12,535,480 $ 24.62
- ---------------- ------------ ---------------- ---------------- ---------------- ----------------
RESTRICTED AND PERFORMANCE STOCK PLANS
RESTRICTED STOCK PLANS
Under the restricted stock plans, certain executives are awarded restricted
common stock and the right to receive shares (Share Units). The restricted stock
and Share Units vest between three and five years and are forfeitable under
certain conditions. The Share Units are generally deferred until retirement.
Restricted stock is issued when awarded and is included in both basic and
diluted shares outstanding, while the unvested Share Units are included only in
the diluted shares outstanding. The unvested restricted stock is included in
diluted shares outstanding.
PERFORMANCE STOCK PLANS
Under the performance stock plans, the number of common shares issued at
the end of the performance period of four years will depend upon the attainment
of certain performance objectives, and ranges from 0 to 200 percent of the
target share award. As the amount of expected award is dependent upon actual
performance, these performance awards are variable under APB No. 25 and changes
to the expected award are reflected in income. As the unvested performance stock
awards are contingently issuable shares, they are not included in the
computation of diluted earnings per share calculation.
The number and weighted average grant date value of restricted stock, share
units and performance stock awards were as follows:
2003 2002 2001
=========================================================================== ========== ========== ==========
Restricted stock, share units and performance stock (a) 1,125,612 1,261,421 633,026
Weighted average fair value $ 31.86 $ 26.74 $ 24.51
- --------------------------------------------------------------------------- ---------- ---------- ----------
(a) Performance stock award grants assume a 100-percent payout on the date of
grant.
57
NOTE 13 RETIREMENT PLANS AND POSTRETIREMENT BENEFITS
- --------------------------------------------------------------------------------
Occidental has various defined benefit and defined contribution retirement
plans for its salaried, domestic union and nonunion hourly, and certain foreign
national employees. Participation in the defined benefit plans is limited and
approximately 1,400 domestic and 500 foreign national employees, mainly union,
non-union hourly and certain acquired employees with grandfathered benefits, are
currently accruing benefits under these plans.
All domestic employees and certain foreign national employees are eligible
to participate in one or more of the defined contribution retirement or savings
plans that provide for periodic contributions by Occidental based on
plan-specific criteria, such as base pay, age level, and/or employee
contributions. Certain salaried employees participate in a supplemental
retirement plan that provides restoration of benefits lost due to governmental
limitations on qualified retirement benefits. The accrued liabilities for the
supplemental retirement plan were $55 million, $52 million and $42 million as of
December 31, 2003, 2002 and 2001, respectively, and Occidental expensed $59
million in 2003, $57 million in 2002 and $57 million in 2001 under the
provisions of these defined contribution and supplemental retirement plans.
Occidental provides medical and dental benefits and life insurance coverage
for certain active, retired and disabled employees and their eligible
dependents. The benefits generally are funded by Occidental as the benefits are
paid during the year. The cost of providing these benefits is based on claims
filed and insurance premiums paid for the period. The total benefit costs
including the postretirement costs were approximately $94 million in 2003, $91
million in 2002 and $82 million in 2001.
Pension costs for Occidental's defined benefit pension plans, determined by
independent actuarial valuations, are generally funded by payments to trust
funds, which are administered by independent trustees. A December 31 measurement
date is used for all defined pension and postretirement benefit plans.
In 2002, a 401(h) account was established within one of Occidental's
defined benefit pension plans. This plan allows Occidental to fund
postretirement medical benefits for employees at one of its operations.
Contributions to this 401(h) account are made at Occidental's discretion. All of
Occidental's other postretirement benefit plans are unfunded.
The following table sets forth the components of the net periodic benefit
costs for Occidental's defined benefit pension and postretirement benefit plans
for 2003, 2002, and 2001:
Pension Benefits Postretirement Benefits
------------------------ --------------------------------------------
Unfunded Plans Funded Plans
------------------------ ---------------
For the years ended December 31, (in millions) 2003 2002 2001 2003 2002 2001 2003 2002
==================================================== ====== ====== ====== ====== ====== ====== ====== ======
NET PERIODIC BENEFIT COSTS:
Service cost -- benefits earned during the period $ 13 $ 10 $ 9 $ 6 $ 6 $ 5 $ 1 $ --
Interest cost on benefit obligation 23 26 25 33 33 31 1 1
Expected return on plan assets (20) (20) (24) -- -- -- -- --
Amortization of net transition obligation -- -- -- -- -- -- -- --
Amortization of prior service cost 1 1 1 1 -- -- -- --
Recognized actuarial loss 3 1 4 8 6 -- -- --
Curtailments and settlements -- 1 -- -- -- -- -- --
Currency adjustments 2 (8) (1) -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Net periodic benefit cost $ 22 $ 11 $ 14 $ 48 $ 45 $ 36 $ 2 $ 1
==================================================== ====== ====== ====== ====== ====== ====== ====== ======
Occidental recorded a credit to accumulated other comprehensive income of
$13 million in 2003, a charge of $5 million in 2002 and a credit of $6 million
in 2001, to reflect the net-of-tax difference between the additional liability
required under pension accounting provisions and the corresponding intangible
asset. The change in accumulated other comprehensive income in 2003 reflected an
actual return on plan assets that was greater than the expected return on plan
assets and an additional pension contribution of $18 million in 2003, partially
offset by a decrease in the discount rate.
Occidental's defined benefit pension and postretirement defined benefit
plans are accrued based on various assumptions and discount rates, as described
below. Occidental uses the fair value of assets to determine pension expense.
Occidental funds and expenses negotiated pension increases for domestic union
employees over the term of the collective bargaining agreement.
The actuarial assumptions used could change in the near term as a result of
changes in expected future trends and other factors that, depending on the
nature of the changes, could cause increases or decreases in the plan
liabilities accrued.
58
The following table sets forth the reconciliation of the beginning and
ending balances of the benefit obligation for Occidental's defined benefit
pension and postretirement benefit plans:
Pension Benefits Postretirement Benefits
---------------- -------------------------------------
Unfunded Plans Funded Plans
---------------- ----------------
For the years ended December 31, (in millions) 2003 2002 2003 2002 2003 2002
============================================================ ====== ====== ====== ====== ====== ======
CHANGES IN BENEFIT OBLIGATION:
Benefit obligation -- beginning of year $ 357 $ 337 $ 501 $ 453 $ 14 $ 12
Service cost -- benefits earned during the period 13 10 6 6 1 --
Interest cost on projected benefit obligation 23 26 33 33 1 1
Actuarial loss 19 10 52 59 4 2
Foreign currency exchange rate changes 3 (11) -- -- -- --
Benefits paid (22) (21) (48) (50) (1) (1)
Plan amendments (1) 2 -- -- -- --
Cost recovery percentage -- 6 -- -- -- --
Divestitures -- (3) -- -- -- --
Special termination benefits -- 1 -- -- -- --
------ ------ ------ ------ ------ ------
Benefit obligation -- end of year $ 392 $ 357 $ 544 $ 501 $ 19 $ 14
============================================================ ====== ====== ====== ====== ====== ======
The following table sets forth the reconciliation of the beginning and
ending balances of the fair value of plan assets for Occidental's defined
benefit pension and postretirement benefit plans:
Pension Benefits Postretirement Benefits
---------------- -------------------------
Funded Plans
-------------------------
For the years ended December 31, (in millions) 2003 2002 2003 2002
============================================================ ====== ====== ========== ==========
CHANGES IN PLAN ASSETS:
Fair value of plan assets -- beginning of year $ 251 $ 255 $ -- $ --
Actual return on plan assets 48 (1) -- --
Foreign currency exchange rate changes 1 (3) -- --
Employer contribution 31 23 2 1
Benefits paid (22) (21) (1) (1)
Divestitures -- (2) -- --
------ ------ ---------- ----------
Fair value of plan assets -- end of year $ 309 $ 251 $ 1 $ --
============================================================ ====== ====== ========== ==========
The following table sets forth the asset allocation of Occidental's
domestic defined benefit pension and funded postretirement benefit plans at
December 31, 2003 and 2002.
Pension Benefits Postretirement Benefits
---------------- -------------------------
Funded Plans
-------------------------
For the years ended December 31, 2003 2002 2003 2002
============================================================ ====== ====== ========== ==========
ASSET CATEGORY:
Equity securities 61 % 55 % -- % -- %
Debt securities 39 45 100 100
------ ------ ---------- ----------
Total 100 % 100 % 100 % 100 %
============================================================ ====== ====== ========== ==========
Occidental employs a total return investment approach whereby a mix of
equity and fixed income investments is used to maximize the long-term return of
plan assets at a prudent level of risk. The investments are monitored by
Occidental's Investment Committee in its role as fiduciary. The Investment
Committee, consisting of senior executives of the company, selects and employs
various external professional investment management firms to manage specific
assignments across the spectrum of asset classes. The resulting aggregate
investment portfolio contains a diversified blend of equity and fixed-income
investments. Furthermore, equity investments are diversified across U.S. and
non-U.S. stocks, as well as differing styles and market capitalizations. Other
asset classes such as private equity and real estate may be used to enhance
long-term returns while improving portfolio diversification. Investment
performance is measured and monitored on an ongoing basis through quarterly
investment and manager guideline compliance reviews, annual liability
measurements, and periodic studies.
59
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for defined benefit pension plans with accumulated benefit
obligation in excess of plan assets were $184 million, $166 million and $96
million, respectively, as of December 31, 2003 and $231 million, $211 million
and $124 million, respectively, as of December 31, 2002. The projected benefit
obligation, accumulated benefit obligation and fair value of plan assets for
defined benefit pension plans with plan assets in excess of accumulated benefit
obligation were $208 million, $205 million, and $213 million respectively, as of
December 31, 2003 and $126 million, $126 million, and $127 million,
respectively, as of December 31, 2002.
The following table sets forth the weighted average assumptions used to
determine Occidental's domestic benefit obligation and net periodic benefit cost
for domestic plans:
Pension Benefits Postretirement Benefits
---------------- -------------------------------------
Unfunded Plans Funded Plans
---------------- ----------------
For the years ended December 31, 2003 2002 2003 2002 2003 2002
============================================================ ====== ====== ====== ====== ====== ======
BENEFIT OBLIGATIONS:
Discount rate 6.00% 6.65% 6.00% 6.65% 6.00% 6.65%
Rate of compensation increase 4.00 4.00 -- -- -- --
NET PERIODIC BENEFIT COST:
Discount rate 6.65% 7.00% 6.65% 7.00% 6.65% 7.00%
Expected long term rate of return on assets 8.00 8.00 -- -- 8.00 --
Rate of compensation increase 4.00 4.50 -- -- -- --
- ------------------------------------------------------------ ------ ------ ------ ------ ------ ------
For domestic pension plans, Occidental bases the discount rate on the
average yield provided by the Moody's Aa Corporate Bond Index. The weighted
average rate of increase in future compensation levels is consistent with
Occidental's past and anticipated future compensation increases for employees
participating in retirement plans that determine benefits using compensation.
The long-term rate of return on assets assumption is established with regard to
current market factors but within the context of historical returns. Historical
returns and correlation of equities and fixed income securities are studied.
Current market factors such as inflation and interest rates are also evaluated.
For pension plans outside of the United States, the assumptions used in
determining the benefit obligation vary by country. The discount rates used in
determining the benefit obligation ranged from a low of 4 percent to a high of
13 percent at both December 31, 2003 and 2002. Occidental bases its discount
rate for foreign pension plans on rates indicative of government and or
investment grade corporate debt in the applicable country. The average rate of
increase in future compensation levels ranged from a low of 3 percent to a high
of 8 percent in 2003 and from a low of 3 percent to a high of 9 percent in 2002,
dependent on local economic conditions and salary budgets. The expected
long-term rate of return on plan assets was 5.5 percent in excess of local
inflation in both 2003 and 2002.
The postretirement benefit obligation was determined by application of the
terms of medical and dental benefits and life insurance coverage, including the
effect of established maximums on covered costs, together with relevant
actuarial assumptions and health care cost trend rates projected at a Consumer
Price Index (CPI) increase of 3.0 percent as of December 31, 2003 and 2002,
(beginning in 1993, participants other than certain union employees pay for all
medical cost increases in excess of increases in the CPI). For certain union
employees, the health care cost trend rates were projected at annual rates
ranging ratably from 10 percent in 2003 to 6 percent through the year 2007 and
level thereafter. A 1-percent increase or a 1-percent decrease in these assumed
health care cost trend rates would result in an increase of $16 million or a
reduction of $15 million, respectively, in the postretirement benefit obligation
as of December 31, 2003, and an increase or reduction of $1 million in interest
cost in 2003. The annual service costs would not be materially affected by these
changes.
On December 8, 2003, President Bush signed into law a bill that expands
Medicare, primarily adding a prescription drug benefit for Medicare-eligible
retirees starting in 2006. Occidental intends to review its retirees' health
care plans in light of the new Medicare provisions, which may change
Occidental's obligations under the plan. Therefore, the retiree medical
obligations and costs reported do not reflect the impact of this legislation.
Deferring the recognition of the new Medicare provisions' impact is permitted by
Financial Accounting Standards Board Staff Position 106-1 due to open questions
about some of the new Medicare provisions and a lack of authoritative accounting
guidance about certain matters. The final accounting guidance could require
changes to previously reported information.
Occidental expects to contribute $6 million to its domestic defined benefit
pension plans during 2004. All of the contributions are expected to be in the
form of cash.
60
The following table sets forth the funded status and amounts recognized in
Occidental's consolidated balance sheets for the defined benefit pension and
postretirement benefit plans at December 31, 2003 and 2002:
Pension Benefits Postretirement Benefits
---------------- -------------------------------------
Unfunded Plans Funded Plans
---------------- ----------------
For the years ended December 31, (in millions) 2003 2002 2003 2002 2003 2002
============================================================ ====== ====== ====== ====== ====== ======
Unfunded obligation $ (83) $ (106) $ (544) $ (501) $ (18) $ (14)
Unrecognized prior service cost 4 6 8 9 -- --
Unrecognized net loss 64 76 170 125 8 5
------ ------ ------ ------ ------ ------
Net amount recognized $ (15) $ (24) $ (366) $ (367) $ (10) $ (9)
====== ====== ====== ====== ====== ======
Prepaid benefit cost $ 66 $ 49 $ -- $ -- $ -- $ --
Accrued benefit liability (81) (96) (366) (367) (10) (9)
Intangible assets -- 1 -- -- -- --
Accumulated other comprehensive income -- 22 -- -- -- --
------ ------ ------ ------ ------ ------
Net amount recognized $ (15) $ (24) $ (366) $ (367) $ (10) $ (9)
============================================================ ====== ====== ====== ====== ====== ======
NOTE 14 INVESTMENTS AND RELATED-PARTY TRANSACTIONS
- --------------------------------------------------------------------------------
EQUITY INVESTMENTS
At December 31, 2003, Occidental's equity investments consisted of a
22-percent interest in Lyondell acquired in August 2002, a 24.5-percent interest
in the entity that will own the pipeline being constructed by Dolphin Energy,
the operator of the Dolphin Project, and other various partnerships and joint
ventures, discussed below. Equity investments paid dividends of $81 million, $22
million and $27 million to Occidental in 2003, 2002 and 2001, respectively.
Cumulative undistributed earnings since acquisition, in the amount of $55
million, of 50-percent-or-less-owned companies have been accounted for by
Occidental under the equity method. At December 31, 2003, Occidental's
investments in unconsolidated entities exceeded the underlying equity in net
assets by $471 million, of which $356 million represents goodwill that will not
be amortized and $115 million represents intangible assets, which will be
amortized over the life of the underlying lease of the assets, when placed into
service.
In October 2003, Occidental purchased an additional 2.7 million shares of
Lyondell common stock for $12.40 a share, totaling approximately $33 million. At
December 31, 2003, Occidental owned 22 percent (39.5 million shares) of Lyondell
stock.
The following table presents Occidental's percentage interest in the
summarized financial information of its equity method investments:
For the years ended December 31, (in millions) 2003 2002 2001
================================================================================ ========== ========== ==========
Revenues $ 1,179 $ 1,782 $ 2,223
Costs and expenses 1,188 2,043 2,315
---------- ---------- ----------
Net loss $ (9) $ (261) $ (92)
================================================================================ ========== ========== ==========
Balance at December 31, 2003 2002
================================================================================ ========== ==========
Current assets $ 349 $ 421
Non-current assets $ 1,691 $ 1,946
Current liabilities $ 407 $ 225
Long-term debt $ 960 $ 1,458
Other non-current liabilities $ 377 $ 404
Stockholders' equity $ 365 $ 280
- -------------------------------------------------------------------------------- ---------- ----------
In Ecuador, Occidental has a 14-percent interest in the Oleoducto de Crudos
Pesados (OCP) Ltd. oil export pipeline. Occidental made capital contributions of
$64 million in 2003 and as of December 31, 2003, has contributed a total of $73
million to the project. Occidental reports this investment in its consolidated
statements using the equity method of accounting.
61
The project was funded in part by senior project debt. The senior project
debt is to be repaid with the proceeds of ship-or-pay tariffs of certain
upstream producers in Ecuador, including Occidental. Under their ship-or-pay
commitments, Occidental and the other upstream producers have each assumed their
respective share of project-specific risks, including operating risk and
force-majeure risk. Occidental would be required to make an advance tariff
payment in the event of prolonged force majeure, upstream expropriation events,
bankruptcy of the pipeline company or its parent company, abandonment of the
project, termination of an investment guarantee agreement with Ecuador, or
certain defaults by Occidental. This advance tariff would be used by the
pipeline company to service or prepay project debt. Occidental's obligation
relating to the pipeline company's senior project debt totaled $108 million, and
Occidental's obligations relating to performance bonds totaled $14 million at
December 31, 2003. As Occidental ships product using the pipeline, its overall
obligations will decrease with the reduction of the pipeline company's senior
project debt.
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. Occidental has
concluded it is not the primary beneficiary of EHP and, therefore, accounts for
this investment using the equity method. In January 2002, EHP entered into a
$400 million construction loan facility, which was amended in May 2003 to
increase the facility to $425 million. Upon construction completion on July 17,
2003, the facility converted to a $415 million term loan, 50 percent of which is
guaranteed by Occidental.
AVAILABLE-FOR-SALE SECURITIES
Investments in unconsolidated entities also include Occidental's investment
in Premcor, Inc., which became a publicly traded company in April 2002.
Occidental accounts for its investment in Premcor as available for sale and this
investment is carried at fair value. Prior to becoming public, Occidental
carried its investment in Premcor at cost. As of December 31, 2003 and 2002, the
fair value of the investment in Premcor was $235 million and $172 million,
respectively, with cumulative unrealized after-tax gains of $89 million and $65
million, respectively, in OCI.
RELATED-PARTY TRANSACTIONS
During 2003, 2002 and 2001, Occidental entered into the following
transactions and amounts due from/to with its related parties and had the
following amounts outstanding:
For the years ended December 31, (in millions) 2003 2002 2001
=========================================================================== ========== ========== ==========
Purchases $ 707 $ 604 $ 660
Sales 502 284 252
Services 1 7 7
Amounts due from 34 43 14
Amounts due to 21 70 35
- --------------------------------------------------------------------------- ---------- ---------- ----------
NOTE 15 INDUSTRY SEGMENTS AND GEOGRAPHIC AREAS
- --------------------------------------------------------------------------------
In compliance with the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," Occidental has identified
two reportable segments through which it conducts its continuing operations: oil
and gas and chemical. The factors for determining the reportable segments were
based on the distinct nature of their operations. They are managed as separate
business units because each requires and is responsible for executing a unique
business strategy. The oil and gas segment explores for, develops, produces and
markets crude oil and natural gas domestically and internationally. The chemical
segment manufactures and markets, domestically and internationally, basic
chemicals, vinyls and performance chemicals.
Earnings of industry segments and geographic areas exclude interest income,
interest expense, environmental remediation expenses, unallocated corporate
expenses, discontinued operations and cumulative effect of changes in accounting
principles, but include income from equity investments (except as noted below)
and gains and losses from dispositions of segment and geographic area assets.
Foreign income and other taxes and certain state taxes are included in
segment earnings on the basis of operating results. U.S. federal income taxes
are not allocated to segments except for amounts in lieu thereof that represent
the tax effect of operating charges resulting from purchase accounting
adjustments, which arose from the implementation in 1992 of SFAS No. 109,
"Accounting for Income Taxes," and the tax effects resulting from major,
infrequently occurring transactions such as asset sales and legal settlements
that relate to segment results.
Identifiable assets are those assets used in the operations of the
segments. Corporate and other assets consist of cash, short-term investments,
certain corporate receivables, a 22-percent equity investment in Lyondell, a
12-percent ownership interest in Premcor, Inc. and the leased co-generation
facility in Taft, Louisiana.
62
INDUSTRY SEGMENTS
In millions
Corporate
Oil and Gas Chemical and Other Total
============================================================= =========== =========== =========== ===========
YEAR ENDED DECEMBER 31, 2003
Net sales $ 6,003 (a) $ 3,178 (b) $ 145 (i) $ 9,326
=========== =========== =========== ===========
Pretax operating profit(loss) $ 3,229 $ 213 $ (620)(d) $ 2,822
Income taxes (565) (3) (659)(e) (1,227)
Discontinued operations, net -- -- -- --
Cumulative effect of changes in accounting principles, net -- -- (68) (68)
----------- ----------- ----------- -----------
Net income(loss) (c) $ 2,664 $ 210 $ (1,347)(g) $ 1,527
=========== =========== =========== ===========
Unconsolidated equity investments $ 571 $ 61 $ 523 $ 1,155
=========== =========== =========== ===========
Property, plant and equipment additions, net (h) $ 1,237 $ 345 $ 19 $ 1,601
=========== =========== =========== ===========
Depreciation, depletion and amortization $ 957 $ 205 $ 15 $ 1,177
=========== =========== =========== ===========
Total assets $ 13,274 $ 3,512 $ 1,382 $ 18,168
============================================================= =========== =========== =========== ===========
YEAR ENDED DECEMBER 31, 2002
Net sales $ 4,634 (a) $ 2,704 (b) $ -- $ 7,338
=========== =========== =========== ===========
Pretax operating profit(loss) $ 2,181 $ (128) $ (468)(d) $ 1,585
Income taxes (474) 403 (351)(e) (422)
Discontinued operations, net -- -- (79) (79)
Cumulative effect of changes in accounting principles, net -- -- (95) (95)
----------- ----------- ----------- -----------
Net income(loss) (c, f) $ 1,707 $ 275 $ (993)(g) $ 989
=========== =========== =========== ===========
Unconsolidated equity investments $ 475 $ (11) $ 592 $ 1,056
=========== =========== =========== ===========
Property, plant and equipment additions, net (h) $ 1,038 $ 109 $ 89 $ 1,236
=========== =========== =========== ===========
Depreciation, depletion and amortization $ 819 $ 183 $ 10 $ 1,012
=========== =========== =========== ===========
Total assets $ 12,407 $ 3,069 $ 1,072 $ 16,548
============================================================= =========== =========== =========== ===========
YEAR ENDED DECEMBER 31, 2001
Net sales $ 5,134 (a) $ 2,968 (b) $ -- $ 8,102
=========== =========== =========== ===========
Pretax operating profit(loss) $ 3,292 $ (442) $ (1,115)(d) $ 1,735
Income taxes (447) 43 (152)(e) (556)
Discontinued operations, net -- -- (1) (1)
Cumulative effect of changes in accounting principles, net -- -- (24) (24)
----------- ----------- ----------- -----------
Net income(loss) (c, f) $ 2,845 $ (399) $ (1,292)(g) $ 1,154
=========== =========== =========== ===========
Unconsolidated equity investments $ 75 $ 663 $ 255 $ 993
=========== =========== =========== ===========
Property, plant and equipment additions, net (h) $ 1,138 $ 112 $ 58 $ 1,308
=========== =========== =========== ===========
Depreciation, depletion and amortization $ 750 $ 184 $ 31 $ 965
=========== =========== =========== ===========
Total assets $ 13,316 $ 3,943 $ 591 $ 17,850
============================================================= =========== =========== =========== ===========
Footnotes:
- ----------
(a) Oil sales represented approximately 74 percent, 77 percent and 60 percent
of net oil and gas sales for the periods ended December 31, 2003, 2002 and
2001, respectively.
(b) Total product sales for the chemical segment were as follows:
Basic Chemicals Commodity Vinyl Resins Performance Chemicals
====================== ====================== ======================
YEAR ENDED DECEMBER 31, 2003 35% 54% 11%
Year ended December 31, 2002 37% 50% 13%
Year ended December 31, 2001 38% 48% 14%
63
Footnotes continued:
- --------------------
(c) Segment earnings include charges and credits for major infrequently
occurring transactions in lieu of U.S. federal income taxes. In 2003, the
amounts allocated to the oil and gas segment were charges of $6 million. In
2002, the amounts allocated to the segments were charges of $1 million and
a credit of $403 million in oil and gas and chemical, respectively. In
2001, the amounts allocated to the segments were charges of $56 million and
a credit of $42 million in oil and gas and chemical, respectively.
(d) Includes unallocated net interest expense, administration expense,
environmental remediation and other items. 2001 also includes pipeline
lease income and pipeline depreciation expense.
(e) Includes unallocated income taxes.
(f) Oil and gas includes the 2001 gain on sale of interest in Indonesian
Tangguh LNG project of $399 million, net of tax. Chemicals includes the
2002 gain on sale of Equistar investment of $164 million, net of tax, and
the 2001 writedown of Equistar of $240 million, net of tax.
(g) Includes the following significant items affecting earnings for the years
ended December 31:
Benefit (Charge) (In millions) 2003 2002 2001
======================================================= ========== ========== ==========
CORPORATE
Debt repayment charge $ (61) $ -- $ --
Loss on sale of pipeline-owning entity * -- -- (272)
Discontinued operations, net * -- (79) (1)
Settlement of state tax issue -- -- 70
Tax effect of pre-tax adjustments 21 -- 148
Changes in accounting principles, net * (68) (95) (24)
-------------------------------------------------------- ---------- ---------- ----------
* Amounts shown after-tax.
(h) Excludes acquisitions of businesses. Amounts include capitalized interest
of $4 million in 2003, $12 million in 2002 and $5 million in 2001.
(i) Represents revenue from an electricity co-generation facility in Taft,
Louisiana.
GEOGRAPHIC AREAS
In millions
Net sales (a) Property, plant and equipment, net
---------------------------------- ----------------------------------
For the years ended December 31, 2003 2002 2001 2003 2002 2001
================================ ======== ======== ======== ======== ======== ========
United States $ 6,805 $ 5,198 $ 6,288 $ 11,602 $ 10,996 $ 11,170
Qatar 691 566 539 1,171 955 859
Colombia 489 381 179 100 98 81
Yemen 472 422 377 349 316 273
Ecuador 220 98 82 224 176 109
Canada 206 150 136 38 33 31
Oman 178 158 151 229 155 122
Pakistan 168 151 113 156 189 49
United Arab Emirates -- -- -- 109 93 1
Other Foreign 97 214 237 27 25 96
-------- -------- -------- -------- -------- --------
Total $ 9,326 $ 7,338 $ 8,102 $ 14,005 $ 13,036 $ 12,791
================================ ======== ======== ======== ======== ======== ========
(a) Sales are shown by individual country based on the location of the entity
making the sale.
64
NOTE 16 COSTS AND RESULTS OF OIL AND GAS PRODUCING ACTIVITIES
- --------------------------------------------------------------------------------
Capitalized costs relating to oil and gas producing activities and related
accumulated depreciation, depletion and amortization, were as follows:
Consolidated Subsidiaries
-------------------------------------------------------------------
Other
United Latin Middle Eastern Other Total
In millions States America East Hemisphere Total Interests(c) Worldwide
=============================== ========== ========= ========= ========== ========= ========= =========
DECEMBER 31, 2003
Proved properties $ 10,547 $ 978 $ 3,298 $ 246 $ 15,069 $ 34 $ 15,103
Unproved properties (a) 867 10 20 -- 897 1 898
---------- --------- --------- ---------- --------- --------- ---------
TOTAL PROPERTY COSTS 11,414 988 3,318 246 15,966 35 16,001
Support facilities 443 57 97 81 678 -- 678
---------- --------- --------- ---------- --------- --------- ---------
TOTAL CAPITALIZED COSTS (b) 11,857 1,045 3,415 327 16,644 35 16,679
Accumulated depreciation,
depletion and amortization (2,949) (720) (1,557) (171) (5,397) (1) (5,398)
---------- --------- --------- ---------- --------- --------- ---------
NET CAPITALIZED COSTS $ 8,908 $ 325 $ 1,858 $ 156 $ 11,247 $ 34 $ 11,281
=============================== ========== ========= ========= ========== ========= ========= =========
DECEMBER 31, 2002
Proved properties $ 9,736 $ 883 $ 2,706 $ 259 $ 13,584 $ 35 $ 13,619
Unproved properties (a) 1,205 2 102 -- 1,309 -- 1,309
---------- --------- --------- ---------- --------- --------- ---------
TOTAL PROPERTY COSTS 10,941 885 2,808 259 14,893 35 14,928
Support facilities 332 50 58 51 491 -- 491
---------- --------- --------- ---------- --------- --------- ---------
TOTAL CAPITALIZED COSTS (b) 11,273 935 2,866 310 15,384 35 15,419
Accumulated depreciation,
depletion and amortization (2,560) (661) (1,348) (121) (4,690) 9 (4,681)
---------- --------- --------- ---------- --------- --------- ---------
NET CAPITALIZED COSTS $ 8,713 $ 274 $ 1,518 $ 189 $ 10,694 $ 44 $ 10,738
=============================== ========== ========= ========= ========== ========= ========= =========
DECEMBER 31, 2001
Proved properties $ 9,027 $ 789 $ 2,372 $ 142 $ 12,330 $ (2) $ 12,328
Unproved properties (a) 1,606 2 13 -- 1,621 -- 1,621
---------- --------- --------- ---------- --------- --------- ---------
TOTAL PROPERTY COSTS 10,633 791 2,385 142 13,951 (2) 13,949
Support facilities 290 43 49 8 390 19 409
---------- --------- --------- ---------- --------- --------- ---------
TOTAL CAPITALIZED COSTS (b) 10,923 834 2,434 150 14,341 17 14,358
Accumulated depreciation,
depletion and amortization (2,210) (622) (1,177) (99) (4,108) 27 (4,081)
---------- --------- --------- ---------- --------- --------- ---------
NET CAPITALIZED COSTS $ 8,713 $ 212 $ 1,257 $ 51 $ 10,233 $ 44 $ 10,277
=============================== ========== ========= ========= ========== ========= ========= =========
(a) Primarily consists of California properties.
(b) Includes costs related to leases, exploration costs, lease and well
equipment, pipelines and terminals, gas plants and other equipment.
(c) Includes capitalized costs for equity investees in Russia and Yemen,
partially offset by minority interest for a Colombian affiliate.
65
Costs incurred in oil and gas property acquisition, exploration and
development activities, whether capitalized or expensed, were as follows:
Consolidated Subsidiaries
----------------------------------------------------------------
Other
United Latin Middle Eastern Other Total
In millions States America East Hemisphere Total Interests (b) Worldwide (c)
=============================== ========== ========= ========= ========== ========= ========= =========
DECEMBER 31, 2003
Acquisition of properties
Proved $ 345 $ -- $ 19 $ -- $ 364 $ -- $ 364
Unproved 4 -- -- -- 4 -- 4
Exploration costs 27 30 17 24 98 (1) 97
Development costs 465 (a) 98 516 18 1,097 10 1,107
---------- --------- --------- ---------- --------- --------- ---------
$ 841 $ 128 $ 552 $ 42 $ 1,563 $ 9 $ 1,572
=============================== ========== ========= ========= ========== ========= ========= =========
DECEMBER 31, 2002
Acquisition of properties
Proved $ 72 $ -- $ 19 $ 72 $ 163 $ -- $ 163
Unproved -- -- 29 -- 29 -- 29
Exploration costs 54 30 34 16 134 -- 134
Development costs 457 (a) 97 312 24 890 7 897
---------- --------- --------- ---------- --------- --------- ---------
$ 583 $ 127 $ 394 $ 112 $ 1,216 $ 7 $ 1,223
=============================== ========== ========= ========= ========== ========= ========= =========
DECEMBER 31, 2001
Acquisition of properties
Proved $ 10 $ -- $ 19 $ -- $ 29 $ -- $ 29
Unproved 43 -- 10 -- 53 -- 53
Exploration costs 57 65 31 23 176 (5) 171
Development costs 602 (a) 58 229 18 907 11 918
---------- --------- --------- ---------- --------- --------- ---------
$ 712 $ 123 $ 289 $ 41 $ 1,165 $ 6 $ 1,171
=============================== ========== ========= ========= ========== ========= ========= =========
(a) Excludes capitalized CO2 of $48 million in 2003, $42 million in 2002 and
$48 million in 2001.
(b) Includes equity investees' costs in Russia and Yemen, partially offset by
minority interest for a Colombian affiliate.
(c) Excludes capitalized asset retirement obligation costs of $12 million in
2003. See Note 4 for transition information on capitalized asset retirement
obligation costs.
66
The results of operations of Occidental's oil and gas producing activities,
which exclude oil and gas trading activities and items such as asset
dispositions, corporate overhead, interest and royalties, were as follows:
Consolidated Subsidiaries
-------------------------------------------------------------------
Other
United Latin Middle Eastern Other Total
In millions States America East Hemisphere Total Interests(c) Worldwide
=============================== ========== ========= ========= ========== ========= ========= =========
FOR THE YEAR ENDED
DECEMBER 31, 2003
Revenues $ 3,637 $ 612 $ 1,341 (a) $ 147 $ 5,737 $ 138 $ 5,875
Production costs 813 122 183 16 1,134 91 1,225
Exploration expenses 79 20 17 23 139 (1) 138
Other operating expenses 207 41 76 13 337 7 344
Depreciation, depletion and
amortization 637 60 209 48 954 17 971
---------- --------- --------- ---------- --------- --------- ---------
PRETAX INCOME 1,901 369 856 47 3,173 24 3,197
Income tax expense(b) 500 179 415 (a) 26 1,120 9 1,129
---------- --------- --------- ---------- --------- --------- ---------
RESULTS OF OPERATIONS $ 1,401 $ 190 $ 441 $ 21 $ 2,053 $ 15 $ 2,068
=============================== ========== ========= ========= ========== ========= ========= =========
FOR THE YEAR ENDED
DECEMBER 31, 2002
Revenues $ 2,622 $ 453 $ 1,146 (a) $ 133 $ 4,354 $ 107 $ 4,461
Production costs 753 92 137 21 1,003 61 1,064
Exploration expenses 105 27 28 15 175 1 176
Other operating expenses 152 (7) 59 8 212 10 222
Depreciation, depletion and
amortization 570 41 171 24 806 13 819
---------- --------- --------- ---------- --------- --------- ---------
PRETAX INCOME 1,042 300 751 65 2,158 22 2,180
Income tax expense(b) 210 113 357 (a) 28 708 10 718
---------- --------- --------- ---------- --------- --------- ---------
RESULTS OF OPERATIONS $ 832 $ 187 $ 394 $ 37 $ 1,450 $ 12 $ 1,462
=============================== ========== ========= ========= ========== ========= ========= =========
FOR THE YEAR ENDED
DECEMBER 31, 2001
Revenues $ 3,471 $ 245 $ 1,066 (a) $ 100 $ 4,882 $ 137 $ 5,019
Production costs 773 68 111 12 964 67 1,031
Exploration expenses 42 91 49 12 194 (10) 184
Other operating expenses 141 5 45 20 211 4 215
Depreciation, depletion and
amortization 535 27 159 12 733 14 747
---------- --------- --------- ---------- --------- --------- ---------
PRETAX INCOME 1,980 54 702 44 2,780 62 2,842
Income tax expense(b) 530 20 395 (a) 35 980 26 1,006
---------- --------- --------- ---------- --------- --------- ---------
RESULTS OF OPERATIONS $ 1,450 $ 34 $ 307 $ 9 $ 1,800 $ 36 1,836
=============================== ========== ========= ========= ========== ========= ========= =========
(a) Revenues and income tax expense include taxes owed by Occidental but paid
by governmental entities on its behalf.
(b) U.S. federal income taxes reflect expenses allocated for U.S. income tax
purposes only related to oil and gas activities, including allocated
interest and corporate overhead. Foreign income taxes were included in
geographic areas on the basis of operating results.
(c) Includes results of operations for equity investees in Russia and Yemen,
partially offset by minority interest for a Colombian affiliate.
67
RESULTS PER UNIT OF PRODUCTION (Unaudited)
Consolidated Subsidiaries
----------------------------------------------------------------
Other
United Latin Middle Eastern Other Total
States America East Hemisphere Total Interests (b) Worldwide (c)
=============================== ========== ========= ========= ========== ========= ========= =========
FOR THE YEAR ENDED
DECEMBER 31, 2003
Revenues from net production
Oil ($/bbl.) $ 28.74 $ 26.98 $ 39.49 (a) $ 26.68 $ 31.02 $ 16.30 $ 29.91 (a)
========== ========= ========= ========== ========= ========= =========
Natural gas ($/Mcf) $ 4.81 $ -- $ -- $ 2.04 $ 4.49 $ -- $ 4.49
========== ========= ========= ========== ========= ========= =========
Barrel of oil equivalent
($/bbl.)(b,c) $ 28.57 $ 26.98 $ 39.49 (a) $ 18.52 $ 29.90 $ 16.30 $ 29.14 (a)
Production costs 6.39 5.38 5.39 2.02 5.91 8.50 6.08
Exploration expenses 0.62 0.88 0.50 2.90 0.72 -- 0.68
Other operating expenses 1.63 1.81 2.24 1.64 1.76 0.79 1.71
Depreciation, depletion and
amortization 5.00 2.64 6.15 6.05 4.97 1.93 4.82
---------- --------- --------- ---------- --------- --------- ---------
PRETAX INCOME 14.93 16.27 25.21 5.91 16.54 5.08 15.85
Income tax expense 3.93 7.89 12.22 (a) 3.27 5.84 2.19 5.60 (a)
---------- --------- --------- ---------- --------- --------- ---------
RESULTS OF OPERATIONS $ 11.00 $ 8.38 $ 12.99 $ 2.64 $ 10.70 $ 2.89 $ 10.25
=============================== ========== ========= ========= ========== ========= ========= =========
FOR THE YEAR ENDED
DECEMBER 31, 2002
Revenues from net production
Oil ($/bbl.) $ 23.47 $ 23.26 $ 34.12 (a) $ 22.63 $ 26.20 $ 14.98 $ 25.37 (a)
========== ========= ========= ========== ========= ========= =========
Natural gas ($/Mcf) $ 2.89 $ -- $ -- $ 2.08 $ 2.81 $ -- $ 2.81
========== ========= ========= ========== ========= ========= =========
Barrel of oil equivalent
($/bbl.)(b,c) $ 21.30 $ 23.26 $ 34.12 (a) $ 17.76 $ 23.71 $ 14.98 $ 23.24 (a)
Production costs 6.12 4.72 4.08 2.80 5.46 6.75 5.54
Exploration expenses 0.85 1.39 0.83 2.00 0.95 0.10 0.92
Other operating expenses 1.23 (0.36) 1.76 1.07 1.15 0.78 1.16
Depreciation, depletion and
amortization 4.63 2.11 5.09 3.20 4.39 1.76 4.27
---------- --------- --------- ---------- --------- --------- ---------
PRETAX INCOME 8.47 15.40 22.36 8.69 11.76 5.59 11.35
Income tax expense 1.71 5.80 10.63 (a) 3.74 3.86 2.35 3.74 (a)
---------- --------- --------- ---------- --------- --------- ---------
RESULTS OF OPERATIONS $ 6.76 $ 9.60 $ 11.73 $ 4.95 $ 7.90 $ 3.24 $ 7.61
=============================== ========== ========= ========= ========== ========= ========= =========
FOR THE YEAR ENDED
DECEMBER 31, 2001
Revenues from net production
Oil ($/bbl.) $ 22.82 $ 19.87 $ 33.47 (a) $ 22.63 $ 25.41 $ 15.70 $ 24.65 (a)
========== ========= ========= ========== ========= ========= =========
Natural gas ($/Mcf) $ 6.40 $ -- $ -- $ 2.29 $ 6.11 $ -- $ 6.11
========== ========= ========= ========== ========= ========= =========
Barrel of oil equivalent
($/bbl.)(b,c) $ 28.34 $ 19.87 $ 33.47 (a) $ 17.99 $ 28.35 $ 15.70 $ 27.69 (a)
Production costs 6.31 5.51 3.49 2.16 5.60 7.20 5.70
Exploration expenses 0.34 7.38 1.54 2.16 1.13 -- 1.02
Other operating expenses 1.15 0.41 1.41 3.60 1.23 0.50 1.19
Depreciation, depletion and
amortization 4.37 2.19 4.99 2.16 4.26 1.70 4.12
---------- --------- --------- ---------- --------- --------- ---------
PRETAX INCOME 16.17 4.38 22.04 7.91 16.13 6.30 15.66
Income tax expense 4.33 1.62 12.40 (a) 6.29 5.69 2.80 5.55 (a)
---------- --------- --------- ---------- --------- --------- ---------
RESULTS OF OPERATIONS $ 11.84 $ 2.76 $ 9.64 $ 1.62 $ 10.44 $ 3.50 $ 10.11
=============================== ========== ========= ========= ========== ========= ========= =========
(a) Revenues and income tax expense include taxes owed by Occidental but paid
by governmental entities on its behalf.
(b) Natural gas volumes have been converted to equivalent barrels based on
energy content of six Mcf of gas to one barrel of oil.
(c) Revenues from net production exclude royalty payments and other
adjustments.
(d) Includes results of operations for equity investees in Russia and Yemen.
(e) The computation of results per unit of production included in the
denominator 2.1 mmboe, 4.2 mmboe and 7.8 mmboe produced by Occidental that
were subject to volumetric production payments for the years 2003, 2002 and
2001, respectively.
68
2003 QUARTERLY FINANCIAL DATA (Unaudited) Occidental Petroleum Corporation
In millions, except per-share amounts and Subsidiaries
Three months ended MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
============================================================= ============ ============ ============ ============
Segment net sales
Oil and gas $ 1,553 $ 1,440 $ 1,480 $ 1,530
Chemical 790 785 793 810
Other 28 41 46 30
------------ ------------ ------------ ------------
Net sales $ 2,371 $ 2,266 $ 2,319 $ 2,370
============ ============ ============ ============
Gross profit $ 1,073 $ 1,001 $ 1,038 $ 1,087
============ ============ ============ ============
Segment earnings
Oil and gas $ 727 $ 637 $ 660 $ 640
Chemical 35 43 61 71
------------ ------------ ------------ ------------
762 680 721 711
Unallocated corporate items
Interest expense, net (124) (53) (59) (53)
Income taxes (178) (167) (160) (157)
Trust preferred distributions and other (11) (11) (12) (10)
Other (56) (75) (44) (109)
------------ ------------ ------------ ------------
Income from continuing operations 393 374 446 382
Discontinued operations, net -- -- -- --
Cumulative effect of changes in accounting principles, net (68) -- -- --
------------ ------------ ------------ ------------
Net income $ 325 $ 374 $ 446 $ 382
============ ============ ============ ============
Basic earnings per common share
Income from continuing operations $ 1.04 $ .98 $ 1.16 $ .99
Discontinued operations, net -- -- -- --
Cumulative effect of changes in accounting principles, net (.18) -- -- --
------------ ------------ ------------ ------------
Basic earnings per common share $ .86 $ .98 $ 1.16 $ .99
============ ============ ============ ============
Diluted earnings per common share
Income from continuing operations $ 1.03 $ .97 $ 1.14 $ .97
Discontinued operations, net -- -- -- --
Cumulative effect of changes in accounting principles, net (.18) -- -- --
------------ ------------ ------------ ------------
Diluted earnings per common share $ .85 $ .97 $ 1.14 $ .97
============ ============ ============ ============
Dividends per common share $ .26 $ .26 $ .26 $ .26
============ ============ ============ ============
Market price per common share
High $ 30.74 $ 34.40 $ 35.84 $ 42.98
Low $ 27.17 $ 29.55 $ 30.64 $ 34.70
============================================================= ============ ============ ============ ============
69
2002 QUARTERLY FINANCIAL DATA (Unaudited) Occidental Petroleum Corporation
In millions, except per-share amounts and Subsidiaries
Three months ended MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
============================================================= ============ ============ ============ ============
Segment net sales
Oil and gas $ 958 $ 1,165 $ 1,224 $ 1,287
Chemical 565 702 739 698
------------ ------------ ------------ ------------
Net sales $ 1,523 $ 1,867 $ 1,963 $ 1,985
============ ============ ============ ============
Gross profit $ 536 $ 742 $ 838 $ 856
============ ============ ============ ============
Segment earnings(loss)
Oil and gas $ 306 $ 421 $ 490 $ 490
Chemical (31) 34 214 58
------------ ------------ ------------ ------------
275 455 704 548
Unallocated corporate items
Interest expense, net (56) (66) (73) (58)
Income taxes (44) (101) (105) (114)
Trust preferred distributions and other (11) (12) (12) (12)
Other (41) (35) (38) (41)
------------ ------------ ------------ ------------
Income from continuing operations 123 241 476 323
Discontinued operations, net (3) (1) (74) (1)
Cumulative effect of changes in accounting principles, net (95) -- -- --
------------ ------------ ------------ ------------
Net income $ 25 $ 240 $ 402 $ 322
============ ============ ============ ============
Basic earnings per common share
Income from continuing operations $ .33 $ .64 $ 1.26 $ .85
Discontinued operations, net (.01) -- (.19) --
Cumulative effect of changes in accounting principles, net (.25) -- -- --
------------ ------------ ------------ ------------
Basic earnings per common share $ .07 $ .64 $ 1.07 $ .85
============ ============ ============ ============
Diluted earnings per common share
Income from continuing operations $ .33 $ .63 $ 1.25 $ .84
Discontinued operations, net (.01) -- (.19) --
Cumulative effect of changes in accounting principles, net (.25) -- -- --
------------ ------------ ------------ ------------
Diluted earnings per common share $ .07 $ .63 $ 1.06 $ .84
============ ============ ============ ============
Dividends per common share $ .25 $ .25 $ .25 $ .25
============ ============ ============ ============
Market price per common share
High $ 29.19 $ 30.75 $ 30.08 $ 30.74
Low $ 24.29 $ 28.05 $ 22.98 $ 26.47
============================================================= ============ ============ ============ ============
70
SUPPLEMENTAL OIL AND GAS INFORMATION (Unaudited)
The following tables set forth Occidental's net interests in quantities of
proved developed and undeveloped reserves of crude oil, condensate and natural
gas and changes in such quantities. Crude oil reserves (in millions of barrels)
include condensate. The reserves are stated after applicable royalties. These
estimates include reserves in which Occidental holds an economic interest under
production-sharing contracts and other economic arrangements.
The reserve estimation process involves reservoir engineers, geoscientists,
planning engineers and financial analysts. As part of this process, all reserve
volumes are estimated by a forecast of production rates, operating costs and
capital expenditures. Price differentials between benchmark prices and prices
realized and specifics of each operating agreement are then used to estimate the
net reserves. Production rate forecasts are derived by a number of methods,
including estimates from decline curve analyses, material balance calculations
that take into account the volume of substances replacing the volumes produced
and associated reservoir pressure changes, or computer simulation of the
reservoir performance. Operating costs and capital costs are forecast based on
past experience combined with expectations of future cost for the specific
reservoirs. In many cases, activity-based cost models for a reservoir are
utilized to project operating costs as production rates and the number of wells
for production and injection vary.
A team consisting of the Chief Engineer of Worldwide Reservoir
Characterization, the Chief Petrophysicist, the Manager of Production
Geoscience, a Manager of Financial Planning and Analysis and the Worldwide
Reserves Coordinator perform a review of the reserve estimates at the location
where the estimates were developed.
Estimates of proven reserves are collected in a database and changes in
this database are reviewed by engineering personnel to ensure accuracy. Finally,
reserve volumes and changes are reviewed and approved by Occidental's senior
management.
OIL RESERVES
In millions of barrels
Consolidated Subsidiaries
-------------------------------------------------------------------
Other
United Latin Middle Eastern Other Total
In millions States America East (b) Hemisphere Total Interests(a) Worldwide
================================= ========== ========= ========= ========== ========= ========= =========
PROVED DEVELOPED AND
UNDEVELOPED RESERVES
BALANCE AT DECEMBER 31, 2000 1,346 144 258 10 1,758 45 1,803
Revisions of previous estimates (14) 10 24 1 21 8 29
Improved recovery 92 -- 47 -- 139 -- 139
Extensions and discoveries 22 10 24 -- 56 -- 56
Purchases of proved reserves 3 -- -- -- 3 -- 3
Sales of proved reserves -- -- -- -- -- -- --
Production (78) (12) (32) (2) (124) (9) (133)
- --------------------------------- ---------- --------- --------- ---------- --------- --------- ---------
BALANCE AT DECEMBER 31, 2001 1,371 152 321 9 1,853 44 1,897
Revisions of previous estimates 28 13 (31) 3 13 (1) 12
Improved recovery 69 1 42 -- 112 5 117
Extensions and discoveries 22 11 6 1 40 -- 40
Purchases of proved reserves 51 -- -- 5 56 2 58
Sales of proved reserves (4) -- -- -- (4) -- (4)
Production (85) (19) (34) (4) (142) (8) (150)
- --------------------------------- ---------- --------- --------- ---------- --------- --------- ---------
BALANCE AT DECEMBER 31, 2002 1,452 158 304 14 1,928 42 1,970
Revisions of previous estimates (11) -- 10 -- (1) 6 5
Improved recovery 58 6 21 -- 85 4 89
Extensions and discoveries 4 11 25 1 41 6 47
Purchases of proved reserves 98 -- -- -- 98 -- 98
Sales of proved reserves (8) -- -- -- (8) -- (8)
Production (93) (23) (34) (3) (153) (10) (163)
- --------------------------------- ---------- --------- --------- ---------- --------- --------- ---------
BALANCE AT DECEMBER 31, 2003 1,500 152 326 12 1,990 48 2,038
================================= ========== ========= ========= ========== ========= ========= =========
PROVED DEVELOPED RESERVES
December 31, 2000 1,079 90 197 8 1,374 36 1,410
========== ========= ========= ========== ========= ========= =========
December 31, 2001 1,106 91 232 8 1,437 35 1,472
========== ========= ========= ========== ========= ========= =========
December 31, 2002 1,183 85 228 12 1,508 34 1,542
========== ========= ========= ========== ========= ========= =========
DECEMBER 31, 2003 1,262 116 227 11 1,616 35 1,651
================================= ========== ========= ========= ========== ========= ========= =========
(a) Includes reserves applicable to equity investees in Russia and Yemen,
partially offset by minority interests for a Colombian affiliate.
(b) All Middle East reserves are related to production-sharing contracts.
71
GAS RESERVES
In billions of cubic feet
Consolidated Subsidiaries
-------------------------------------------------------------------
Other
United Latin Middle Eastern Other Total
In millions States America East (b) Hemisphere Total Interests Worldwide
================================= ========== ========= ========= ========== ========= ========= =========
PROVED DEVELOPED AND
UNDEVELOPED RESERVES
BALANCE AT DECEMBER 31, 2000 2,094 -- -- 116 2,210 -- 2,210
Revisions of previous estimates (53) -- -- 4 (49) -- (49)
Improved recovery 23 -- -- -- 23 -- 23
Extensions and discoveries 118 -- -- 4 122 -- 122
Purchases of proved reserves 4 -- -- -- 4 -- 4
Sales of proved reserves (1) -- -- -- (1) -- (1)
Production (a) (223) -- -- (18) (241) -- (241)
- --------------------------------- ---------- --------- --------- ---------- --------- --------- ---------
BALANCE AT DECEMBER 31, 2001 1,962 -- -- 106 2,068 -- 2,068
Revisions of previous estimates (39) -- -- (15) (54) -- (54)
Improved recovery 39 -- 106 6 151 -- 151
Extensions and discoveries 57 -- -- 3 60 -- 60
Purchases of proved reserves 14 -- -- 45 59 -- 59
Sales of proved reserves (6) -- -- -- (6) -- (6)
Production (a) (206) -- -- (23) (229) -- (229)
- --------------------------------- ---------- --------- --------- ---------- --------- --------- ---------
BALANCE AT DECEMBER 31, 2002 1,821 -- 106 122 2,049 -- 2,049
Revisions of previous estimates 47 -- (10) 7 44 -- 44
Improved recovery 68 -- -- 2 70 9 79
Extensions and discoveries 38 -- 558 1 597 -- 597
Purchases of proved reserves 55 -- -- -- 55 -- 55
Sales of proved reserves (9) -- -- -- (9) -- (9)
Production (a) (194) -- -- (27) (221) -- (221)
- --------------------------------- ---------- --------- --------- ---------- --------- --------- ---------
BALANCE AT DECEMBER 31, 2003 1,826 -- 654 105 2,585 9 2,594
================================= ========== ========= ========= ========== ========= ========= =========
PROVED DEVELOPED RESERVES
December 31, 2000 1,814 -- -- 84 1,898 -- 1,898
========== ========= ========= ========== ========= ========= =========
December 31, 2001 1,718 -- -- 89 1,807 -- 1,807
========== ========= ========= ========== ========= ========= =========
December 31, 2002 1,630 -- -- 110 1,740 -- 1,740
========== ========= ========= ========== ========= ========= =========
DECEMBER 31, 2003 1,618 -- 91 94 1,803 9 1,812
================================= ========== ========= ========= ========== ========= ========= =========
(a) Production excludes 12.7 bcf, 25.3 bcf and 28.0 bcf subject to volumetric
production payments for the years 2003, 2002 and 2001, respectively.
(b) All Middle East reserves are related to production-sharing contracts.
72
STANDARDIZED MEASURE, INCLUDING YEAR-TO-YEAR CHANGES THEREIN, OF DISCOUNTED
FUTURE NET CASH FLOWS
For purposes of the following disclosures, estimates were made of
quantities of proved reserves and the periods during which they are expected to
be produced. Future cash flows were computed by applying year-end prices to
Occidental's share of estimated annual future production from proved oil and gas
reserves, net of royalties. Future development and production costs were
computed by applying year-end costs to be incurred in producing and further
developing the proved reserves. Future income tax expenses were computed by
applying, generally, year-end statutory tax rates (adjusted for permanent
differences, tax credits, allowances and foreign income repatriation
considerations) to the estimated net future pre-tax cash flows. The discount was
computed by application of a 10 percent discount factor. The calculations
assumed the continuation of existing economic, operating and contractual
conditions at each of December 31, 2003, 2002 and 2001. However, such arbitrary
assumptions have not necessarily proven to be the case in the past. Other
assumptions of equal validity would give rise to substantially different
results.
The year-end prices used to calculate future cash flows vary by producing
area and market conditions. For the 2003, 2002 and 2001 disclosures, the West
Texas Intermediate oil prices used were $32.52/bbl, $31.17/bbl and $19.84/bbl,
respectively. The Henry Hub gas prices used for the 2003, 2002 and 2001
disclosures were $5.79/MMBtu, $4.75/MMBtu and $2.57/MMBtu, respectively.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
In millions
Consolidated Subsidiaries
-------------------------------------------------------------------
Other
United Latin Middle Eastern Other
States America East Hemisphere Total Interests(a)
=========================================== ========== ========= ========= ========== ========= =========
AT DECEMBER 31, 2003
Future cash flows $ 53,939 $ 3,977 $ 10,232 $ 556 $ 68,704 $ 987
Future costs
Production costs and other operating
expenses (22,584) (1,404) (2,945) (112) (27,045) (434)
Development costs (b) (1,931) (129) (1,382) (39) (3,481) (87)
---------- --------- --------- ---------- --------- ---------
FUTURE NET CASH FLOWS BEFORE INCOME TAXES 29,424 2,444 5,905 405 38,178 466
Future income tax expense (9,090) (1,070) (626) (169) (10,955) (141)
---------- --------- --------- ---------- --------- ---------
FUTURE NET CASH FLOWS 20,334 1,374 5,279 236 27,223 325
Ten percent discount factor (11,644) (355) (2,390) (47) (14,436) (81)
---------- --------- --------- ---------- --------- ---------
STANDARDIZED MEASURE $ 8,690 $ 1,019 $ 2,889 $ 189 $ 12,787 $ 244
=========================================== ========== ========= ========= ========== ========= =========
AT DECEMBER 31, 2002
Future cash flows $ 46,806 $ 3,407 $ 8,555 $ 628 $ 59,396 $ 429
Future costs
Production costs and other operating
expenses (18,288) (907) (2,227) (102) (21,524) (286)
Development costs (b) (1,997) (165) (969) (28) (3,159) (40)
---------- --------- --------- ---------- --------- ---------
FUTURE NET CASH FLOWS BEFORE INCOME TAXES 26,521 2,335 5,359 498 34,713 103
Future income tax expense (7,929) (906) (333) (190) (9,358) --
---------- --------- --------- ---------- --------- ---------
FUTURE NET CASH FLOWS 18,592 1,429 5,026 308 25,355 103
Ten percent discount factor (10,342) (440) (2,079) (65) (12,926) (22)
---------- --------- --------- ---------- --------- ---------
STANDARDIZED MEASURE $ 8,250 $ 989 $ 2,947 $ 243 $ 12,429 $ 81
=========================================== ========== ========= ========= ========== ========= =========
AT DECEMBER 31, 2001
Future cash flows $ 28,146 $ 2,259 $ 5,670 $ 340 $ 36,415 $ 469
Future costs
Production costs and other operating
expenses (14,404) (868) (1,813) (69) (17,154) (321)
Development costs (b) (2,282) (204) (556) (19) (3,061) (32)
---------- --------- --------- ---------- --------- ---------
FUTURE NET CASH FLOWS BEFORE INCOME TAXES 11,460 1,187 3,301 252 16,200 116
Future income tax expense (2,224) (483) (306) (90) (3,103) (26)
---------- --------- --------- ---------- --------- ---------
FUTURE NET CASH FLOWS 9,236 704 2,995 162 13,097 90
Ten percent discount factor (5,088) (199) (1,238) (38) (6,563) (22)
---------- --------- --------- ---------- --------- ---------
STANDARDIZED MEASURE $ 4,148 $ 505 $ 1,757 $ 124 $ 6,534 $ 68
=========================================== ========== ========= ========= ========== ========= =========
(a) Includes future net cash flows applicable to equity investees in Russia and
Yemen, partially offset by minority interests for a Colombian affiliate.
(b) Includes dismantlement and abandonment costs.
73
CHANGES IN THE STANDARDIZED MEASURE OF DISCOUNTED FUTURE
NET CASH FLOWS FROM PROVED RESERVE QUANTITIES
In millions
For the years ended December 31, 2003 2002 2001
==================================================================================================== ======== ======== ========
BEGINNING OF YEAR $ 12,429 $ 6,534 $ 15,180
-------- -------- --------
Sales and transfers of oil and gas produced, net of production costs and other operating expenses (4,162) (2,910) (3,383)
Net change in prices received per barrel, net of production costs and other operating expenses 1,874 9,684 (12,737)
Extensions, discoveries and improved recovery, net of future production and development costs 1,287 1,496 1,238
Change in estimated future development costs (833) (543) (931)
Revisions of quantity estimates 133 (87) 58
Development costs incurred during the period 1,078 954 902
Accretion of discount 1,545 757 1,895
Net change in income taxes (638) (2,820) 4,138
Purchases and sales of reserves in place, net 637 448 19
Changes in production rates and other (563) (1,084) 155
-------- -------- --------
NET CHANGE 358 5,895 (8,646)
-------- -------- --------
END OF YEAR $ 12,787 $ 12,429 $ 6,534
==================================================================================================== ======== ======== ========
AVERAGE SALES PRICES AND AVERAGE PRODUCTION COSTS OF OIL AND GAS
The following table sets forth, for each of the three years in the period
ended December 31, 2003, Occidental's approximate average sales prices and
average production costs of oil and gas. Production costs are the costs incurred
in lifting the oil and gas to the surface and include gathering, treating,
primary processing, field storage, property taxes and insurance on proved
properties, but do not include depreciation, depletion and amortization,
royalties, income taxes, interest, general and administrative and other
expenses.
Consolidated Subsidiaries
-------------------------------------------------------
Other
United Latin Middle Eastern Other Total
States America(a) East Hemisphere(a) Total Interests(c) Worldwide
================================================== ======= ======= ======= ========== ======= ========= =========
2003
Oil -- Average sales price ($/bbl.) $ 28.74 $ 27.21 $ 27.81(d) $ 26.61 $ 28.18 $ 15.95 $ 27.25
Gas -- Average sales price ($/Mcf) $ 4.81 $ -- $ -- $ 2.04 $ 4.45 $ -- $ 4.45
Average oil and gas production cost ($/bbl.) (b) $ 6.39 $ 5.38 $ 5.39 $ 2.02 $ 5.91 $ 8.50 $ 6.08
- -------------------------------------------------- ------- ------- ------- ---------- ------- --------- ---------
2002
Oil -- Average sales price ($/bbl.) $ 23.47 $ 23.14 $ 24.13(d) $ 23.02 $ 23.56 $ 14.80 $ 22.91
Gas -- Average sales price ($/Mcf) $ 2.89 $ -- $ -- $ 2.08 $ 2.81 $ -- $ 2.81
Average oil and gas production cost ($/bbl.) (b) $ 6.12 $ 4.72 $ 4.08 $ 2.80 $ 5.46 $ 6.75 $ 5.54
- -------------------------------------------------- ------- ------- ------- ---------- ------- --------- ---------
2001
Oil -- Average sales price ($/bbl.) $ 21.74 $ 20.10 $ 23.00(d) $ 22.64 $ 21.91 $ 15.57 $ 21.41
Gas -- Average sales price ($/Mcf) $ 6.40 $ -- $ -- $ 2.29 $ 6.09 $ -- $ 6.09
Average oil and gas production cost ($/bbl.) (b) $ 6.31 $ 5.51 $ 3.49 $ 2.16 $ 5.60 $ 7.20 $ 5.70
- -------------------------------------------------- ------- ------- ------- ---------- ------- --------- ---------
(a) Sales prices include royalties with respect to certain of Occidental's
interests.
(b) Natural gas volumes have been converted to equivalent barrels based on
energy content of six Mcf of gas to one barrel of oil.
(c) Includes prices and costs applicable to equity investees in Russia and
Yemen.
(d) Excludes implied taxes.
74
NET PRODUCTIVE AND DRY -- EXPLORATORY AND DEVELOPMENT WELLS COMPLETED
The following table sets forth, for each of the three years in the period
ended December 31, 2003, Occidental's net productive and dry-exploratory and
development wells completed.
Consolidated Subsidiaries
------------------------------------------------------------------
Other
United Latin Middle Eastern Other Total
States America East Hemisphere Total Interests(a) Worldwide
================================= ========= ========= ========= ========== ========= ========= =========
2003
Oil -- Exploratory 1.0 2.2 1.3 0.4 4.9 (0.1) 4.8
Development 277.2 26.2 61.0 2.1 366.5 4.0 370.5
Gas -- Exploratory -- -- -- -- -- -- --
Development 35.1 -- 1.3 -- 36.4 -- 36.4
Dry -- Exploratory 4.0 6.0 3.6 1.3 14.9 (0.9) 14.0
Development 15.7 1.2 1.7 -- 18.6 0.1 18.7
- --------------------------------- --------- --------- --------- ---------- --------- --------- ----------
2002
Oil -- Exploratory 2.9 1.2 3.8 -- 7.9 -- 7.9
Development 258.5 16.8 58.1 2.7 336.1 8.6 344.7
Gas -- Exploratory -- -- -- 0.5 0.5 -- 0.5
Development 17.9 -- -- 0.6 18.5 -- 18.5
Dry -- Exploratory 5.1 1.2 1.6 0.5 8.4 -- 8.4
Development 20.8 1.1 -- 0.8 22.7 (0.1) 22.6
- --------------------------------- --------- --------- --------- ---------- --------- --------- ----------
2001
Oil -- Exploratory 3.0 -- 2.6 0.5 6.1 -- 6.1
Development 432.1 15.1 45.6 2.3 495.1 11.4 506.5
Gas -- Exploratory 7.8 -- -- -- 7.8 -- 7.8
Development 38.1 -- -- 0.5 38.6 -- 38.6
Dry -- Exploratory 10.1 1.2 0.7 1.1 13.1 (0.3) 12.8
Development 34.7 -- -- 0.3 35.0 -- 35.0
- --------------------------------- --------- --------- --------- ---------- --------- --------- ----------
(a) Includes amounts applicable to equity investees in Russia and Yemen,
partially offset by minority interests in a Colombian affiliate.
PRODUCTIVE OIL AND GAS WELLS
The following table sets forth, as of December 31, 2003, Occidental's
productive oil and gas wells (both producing wells and wells capable of
production). The numbers in parentheses indicate the number of wells with
multiple completions.
Consolidated Subsidiaries
-------------------------------------------------------------------
Other
United Latin Middle Eastern Other Total
Wells at December 31, 2003 States America East Hemisphere Total Interests (c) Worldwide
========================== =========== =========== =========== =========== =========== =========== ===========
Oil -- Gross (a) 17,346 (403) 321 (--) 678 (21) 72 (--) 18,417 (424) 425 (62) 18,842 (486)
Net (b) 11,743 (291) 169 (--) 380 (21) 32 (--) 12,342 (312) 197 (33) 12,539 (345)
Gas -- Gross (a) 2,441 (60) -- (--) 6 (1) 35 (--) 2,482 (61) 2 (--) 2,484 (61)
Net (b) 2,046 (40) -- (--) 5 (1) 15 (--) 2,066 (41) 1 (--) 2,067 (41)
- -------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
(a) The total number of wells in which interests are owned.
(b) The sum of fractional interests.
(c) Includes amounts applicable to equity investees in Russia and Yemen,
partially offset by minority interests in a Colombian affiliate.
75
PARTICIPATION IN EXPLORATORY AND DEVELOPMENT WELLS BEING DRILLED
The following table sets forth, as of December 31, 2003, Occidental's
participation in exploratory and development wells being drilled.
Consolidated Subsidiaries
--------------------------------------------------------------
Other
United Latin Middle Eastern Other Total
Wells at December 31, 2003 States America East Hemisphere Total Interests(a) Worldwide
================================= ========== ========== ========== ========== ========== ========== ==========
Exploratory and development wells
-- Gross 30 4 6 3 43 5 48
-- Net 20 3 4 1 28 2 30
- --------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(a) Includes amounts applicable to equity investees in Russia and Yemen,
partially offset by minority interests in a Colombian affiliate.
At December 31, 2003, Occidental was participating in 101 pressure
maintenance projects in the United States, 5 in Latin America, 43 in the Middle
East and 5 in the Other Eastern Hemisphere.
OIL AND GAS ACREAGE
The following table sets forth, as of December 31, 2003, Occidental's
holdings of developed and undeveloped oil and gas acreage.
Consolidated Subsidiaries
--------------------------------------------------------------
Other
Thousands of acres at United Latin Middle Eastern Other Total
December 31, 2003 States America East Hemisphere Total Interests(e) Worldwide
============================== ========== ========== ========== ========== ========== ========== ==========
Developed (a) -- Gross (b) 4,248 39 520 554 5,361 16 5,377
-- Net (c) 2,853 23 210 264 3,350 35 3,385
Undeveloped (d) -- Gross (b) 1,932 3,929 16,346 12,606 34,813 6 34,819
-- Net (c) 1,181 2,440 6,973 5,918 16,512 (195) 16,317
- ------------------------------ ---------- ---------- ---------- ---------- ---------- ---------- ----------
(a) Acres spaced or assigned to productive wells.
(b) Total acres in which interests are held.
(c) Sum of the fractional interests owned based on working interests, or
interests under production-sharing contracts and other economic
arrangements.
(d) Acres on which wells have not been drilled or completed to a point that
would permit the production of commercial quantities of oil and gas,
regardless of whether the acreage contains proved reserves.
(e) Includes amounts applicable to equity investees in Russia and Yemen,
partially offset by minority interests in a Colombian affiliate.
76
OIL AND NATURAL GAS PRODUCTION PER DAY
The following table sets forth, for each of the three years in the period
ended December 31, 2003, Occidental's oil, NGL and natural gas production per
day.
2003 2002 2001
=========================================================================== ========== ========== ==========
United States
Crude oil and liquids (MBL)
California 81 86 76
Permian 150 142 137
Horn Mountain 21 1 --
Hugoton 4 3 --
---------- ---------- ----------
TOTAL 256 232 213
Natural Gas (MMCF)
California 252 286 303
Hugoton 138 148 159
Permian 129 130 148
Horn Mountain 13 -- --
---------- ---------- ----------
TOTAL 532 564 610
Latin America
Crude oil (MBL)
Colombia 37 40 21
Ecuador 25 13 13
---------- ---------- ----------
TOTAL 62 53 34
Middle East
Crude oil (MBL)
Oman 12 13 12
Qatar 45 42 43
Yemen 35 37 33
---------- ---------- ----------
TOTAL 92 92 88
Other Eastern Hemisphere
Crude oil (MBL)
Pakistan 9 10 7
Natural Gas (MMCF)
Pakistan 74 63 50
Barrels of Oil Equivalent (MBOE)
- --------------------------------
Subtotal consolidated subsidiaries 520 492 452
Colombia - minority interest (5) (5) (3)
Russia - Occidental net interest 30 27 27
Yemen - Occidental net interest 2 1 --
---------- ---------- ----------
Total worldwide production 547 515 476
=========================================================================== ========== ========== ==========
77
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Occidental Petroleum Corporation
In millions and Subsidiaries
Additions
-----------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
of Period Expenses Accounts Deductions Period
========================================================= ========== ========== ========== ========== ==========
2003
Allowance for doubtful accounts $ 28 $ -- $ -- $ (4) $ 24
========== ========== ========== ========== ==========
Environmental $ 393 $ 64 $ -- $ (85)(a) $ 372
Foreign and other taxes, litigation and other reserves 1,104 14 80 (31) 1,167
---------- ---------- ---------- ---------- ----------
$ 1,497 $ 78 $ 80 $ (116) $ 1,539 (b)
========================================================= ========== ========== ========== ========== ==========
2002
Allowance for doubtful accounts $ 35 $ -- $ -- $ (7) $ 28
========== ========== ========== ========== ==========
Environmental $ 454 $ 25 $ -- $ (86)(a) $ 393
Foreign and other taxes, litigation and other reserves 930 8 193 (27) 1,104
---------- ---------- ---------- ---------- ----------
$ 1,384 $ 33 $ 193 $ (113) $ 1,497 (b)
========================================================= ========== ========== ========== ========== ==========
2001
Allowance for doubtful accounts $ 25 $ 12 $ -- $ (2) $ 35
========== ========== ========== ========== ==========
Environmental $ 402 $ 111 $ 16 $ (75)(a) $ 454
Foreign and other taxes, litigation and other reserves 1,001 10 27 (108)(c) 930
---------- ---------- ---------- ---------- ----------
$ 1,403 $ 121 $ 43 $ (183) $ 1,384 (b)
========================================================= ========== ========== ========== ========== ==========
(a) Primarily represents payments.
(b) Of these amounts, $132 million, $160 million and $165 million in 2003, 2002
and 2001, respectively, are classified as current.
(c) Included a reclassification of $46 million to the "Deferred and other
domestic and foreign income taxes" account.
78
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A 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 fourth quarter of 2003 that has materially affected, or is
reasonably likely to materially affect, Occidental's internal control over
financial reporting.
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Occidental has adopted a Code of Business Conduct (Code). The Code applies
to the chief executive officer, chief financial officer, chief accounting
officer and persons performing similar functions (Key Personnel). The Code also
applies to the company's directors, its employees and the employees of entities
it controls. The Code is posted on the Occidental website www.oxy.com and a copy
is available to stockholders upon request. Occidental will satisfy any
disclosure requirement under Item 10 of Form 8-K regarding an amendment to, or
waiver from, any provision of the Code with respect to its Key Personnel or
directors by disclosing the nature of that amendment or waiver on its website.
This item incorporates by reference the information regarding Occidental's
directors appearing under the caption "Election of Directors" in Occidental's
definitive proxy statement filed in connection with its April 30, 2004, Annual
Meeting of Stockholders (2004 Proxy Statement). See also the list of
Occidental's executive officers and related information under "Executive
Officers of the Registrant" in Part I of this report.
ITEM 11 EXECUTIVE COMPENSATION
This item incorporates by reference the information appearing under the
captions "Executive Compensation" (excluding, however, the information appearing
under the subcaptions "Report of the Executive Compensation and Human Resources
Committee" and "Performance Graph") and "Election of Directors -- Information
Regarding the Board of Directors and Its Committees" in the 2004 Proxy
Statement.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This item incorporates by reference the information with respect to
security ownership appearing under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the 2004 Proxy Statement.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES
This item incorporates by reference the information with respect to
accountant fees and services appearing under the sub-captions "Audit and Other
Fees" and "Report of the Audit Committee" in the 2004 Proxy Statement.
PART IV
ITEM 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) AND (2). FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Reference is made to the Index to Financial Statements and Related Information
under Item 8 in Part II hereof, where these documents are listed.
(a) (3). EXHIBITS
3.(i)* Restated Certificate of Incorporation of Occidental, dated
November 12, 1999 (filed as Exhibit 3.(i) to the Annual Report on
Form 10-K of Occidental for the fiscal year ended December 31,
1999, File No. 1-9210).
3.(i)(a)* Certificate of Change of Location of Registered Office and of
Registered Agent, dated July 6, 2001. (filed as Exhibit 3.1(i) to
the Registration Statement on Form S-3 of Occidental, File No.
333-82246).
- -----------------------------------
* Incorporated herein by reference
79
3.(ii) Bylaws of Occidental, as amended through February 12, 2004.
4.1* Occidental Petroleum Corporation Five-Year Credit Agreement,
dated as of January 4, 2001 among Occidental, Chase Securities
Inc. and Banc of America Securities, LLC, as Co-Lead Arrangers,
The Chase Manhattan Bank, as Syndication Agent, Bank of America,
N.A. and ABN Amro Bank N.V., as Co-Documentation Agents, and The
Bank of Nova Scotia, as Administrative Agent (filed as Exhibit
4.1 to the Annual Report on Form 10-K of Occidental for the
fiscal year ended December 31, 2000, File No. 1-9210).
4.2* Indenture (Senior Debt Securities), dated as of April 1, 1998,
between Occidental and The Bank of New York, as Trustee (filed as
Exhibit 4 to the Registration Statement on Form S-3 of
Occidental, File No. 333-52053).
4.3* Specimen certificate for shares of Common Stock (filed as Exhibit
4.9 to the Registration Statement on Form S-3 of Occidental, File
No. 333-82246).
4.4 Instruments defining the rights of holders of other long-term
debt of Occidental and its subsidiaries are not being filed since
the total amount of securities authorized under each of such
instruments does not exceed 10 percent of the total assets of
Occidental and its subsidiaries on a consolidated basis.
Occidental agrees to furnish a copy of any such instrument to the
Commission upon request.
All of the Exhibits numbered 10.1 to 10.51 are management contracts and
compensatory plans required to be identified specifically as responsive to Item
601(b)(10)(iii)(A) of Regulation S-K pursuant to Item 15(c) of Form 10-K.
10.1* Employment Agreement, dated as of November 17, 2000, between
Occidental and Dr. Ray R. Irani (filed as Exhibit 10.2 to the
Annual Report on Form 10-K of Occidental for the fiscal year
ended December 31, 2000, File No. 1-9210).
10.2* Employment Agreement, dated as of November 17, 2000, between
Occidental and Dr. Dale R. Laurance (filed as Exhibit 10.3 to the
Annual Report on Form 10-K of Occidental for the fiscal year
ended December 31, 2000, File No. 1-9210).
10.3* Employment Agreement, dated as of November 17, 2000, between
Occidental and Stephen I. Chazen (filed as Exhibit 10.4 to the
Annual Report on Form 10-K of Occidental for the fiscal year
ended December 31, 2000, File No. 1-9210).
10.4* Employment Agreement, dated May 19, 2003, between Occidental and
Donald P. de Brier (filed as Exhibit 10.1 to the Quarterly Report
on Form 10-Q of Occidental for the quarterly period ended June
30, 2003, File No. 1-9210).
10.5* Form of Indemnification Agreement between Occidental and each of
its directors and certain executive officers (filed as Exhibit B
to the Proxy Statement of Occidental for its May 21, 1987, Annual
Meeting of Stockholders, File No. 1-9210).
10.6* Occidental Petroleum Corporation Split Dollar Life Insurance
Program and Related Documents (filed as Exhibit 10.2 to the
Quarterly Report on Form 10-Q of Occidental for the quarterly
period ended September 30, 1994, File No. 1-9210).
10.7* Split Dollar Life Insurance Agreement, dated January 24, 2002, by
and between Occidental and Donald P. de Brier (filed as Exhibit
10.1 to the Quarterly Report on Form 10-Q of Occidental for the
quarterly period ended March 31, 2002, File No. 1-9210).
10.8* Occidental Petroleum Insured Medical Plan, as amended and
restated effective April 29, 1994, amending and restating the
Occidental Petroleum Corporation Executive Medical Plan (as
amended and restated effective April 1, 1993) (filed as Exhibit
10 to the Quarterly Report on Form 10-Q of Occidental for the
quarterly period ending March 31, 1994, File No. 1-9210).
10.9* Occidental Petroleum Corporation 1987 Stock Option Plan, as
amended through September 12, 2002 (filed as Exhibit 10.1 to the
Quarterly Report on Form 10-Q of Occidental for the quarterly
period ended September 30, 2002, File No. 1-9210).
10.10* Form of Nonqualified Stock Option Agreement under Occidental
Petroleum Corporation 1987 Stock Option Plan (filed as Exhibit
10.2 to the Quarterly Report on Form 10-Q of Occidental for the
quarterly period ended March 31, 1992, File No. 1-9210).
10.11* Form of Nonqualified Stock Option Agreement, with Stock
Appreciation Right, under Occidental Petroleum Corporation 1987
Stock Option Plan (filed as Exhibit 10.3 to the Quarterly Report
on Form 10-Q of Occidental for the quarterly period ended March
31, 1992, File No. 1-9210).
- -----------------------------------
* Incorporated herein by reference
80
10.12* Form of Incentive Stock Option Agreement under Occidental
Petroleum Corporation 1987 Stock Option Plan (filed as Exhibit
10.4 to the Quarterly Report on Form 10-Q of Occidental for the
quarterly period ended March 31, 1992, File No. 1-9210).
10.13* Form of Incentive Stock Option Agreement, with Stock Appreciation
Right, under Occidental Petroleum Corporation 1987 Stock Option
Plan (filed as Exhibit 10.5 to the Quarterly Report on Form 10-Q
of Occidental for the quarterly period ended March 31, 1992, File
No. 1-9210).
10.14 Occidental Petroleum Corporation Deferred Compensation Plan,
Second Amendment and Restatement Effective as of January 1, 2003.
10.15* Occidental Petroleum Corporation Senior Executive Supplemental
Life Insurance Plan (effective as of January 1, 1986, as amended
and restated effective as of January 1, 1996) (filed as Exhibit
10.25 to the Annual Report on Form 10-K of Occidental for the
fiscal year ended December 31, 1995, File No. 1-9210).
10.16* Occidental Petroleum Corporation Senior Executive Survivor
Benefit Plan (effective as of January 1, 1986, as amended and
restated effective as of January 1, 1996) (filed as Exhibit 10.27
to the Annual Report on Form 10-K of Occidental for the fiscal
year ended December 31, 1995, File No. 1-9210).
10.17* Amendment No. 1 to Occidental Petroleum Corporation Senior
Executive Survivor Benefit Plan, dated February 28, 2002 (filed
as Exhibit 10.2 to the Quarterly Report on Form 10-Q of
Occidental for the quarterly period ended March 31, 2002, File
No. 1-9210).
10.18* Occidental Petroleum Corporation 1995 Incentive Stock Plan, as
amended (filed as Exhibit 10.28 to the Annual Report on Form 10-K
of Occidental for the fiscal year ended December 31, 1999, File
No. 1-9210).
10.19* Form of Incentive Stock Option Agreement under Occidental
Petroleum Corporation 1995 Incentive Stock Plan (filed as Exhibit
99.2 to the Registration Statement on Form S-8 of Occidental,
File No. 33-64719).
10.20* Form of Nonqualified Stock Option Agreement under Occidental
Petroleum Corporation 1995 Incentive Stock Plan (filed as Exhibit
99.3 to the Registration Statement on Form S-8 of Occidental,
File No. 33-64719).
10.21* Form of Restricted Stock Agreement under Occidental Petroleum
Corporation 1995 Incentive Stock Plan (filed as Exhibit 99.5 to
the Registration Statement on Form S-8 of Occidental, File No.
33-64719).
10.22* Form of Performance Stock Agreement under Occidental Petroleum
Corporation 1995 Incentive Stock Plan (filed as Exhibit 99.6 to
the Registration Statement on Form S-8 of Occidental, File No.
33-64719).
10.23* Form of Incentive Stock Option Agreement under Occidental
Petroleum Corporation 1995 Incentive Stock Plan (filed as Exhibit
10.2 to the Current Report on Form 8-K of Occidental, dated
January 6, 1999 (date of earliest event reported), filed January
6, 1999, File No. 1-9210, amends Form previously filed as Exhibit
10.1 to the Registration Statement on Form S-8 of Occidental,
File No. 33-64719 and incorporated by reference as Exhibit 10.39
to the Annual Report on Form 10-K of Occidental for the fiscal
year ended December 31, 1997, File No. 1-9210).
10.24* Form of Nonqualified Stock Option Agreement under Occidental
Petroleum Corporation 1995 Incentive Stock Plan (filed as Exhibit
10.3 to the Current Report on Form 8-K of Occidental, dated
January 6, 1999 (date of earliest event reported), filed January
6, 1999, File No. 1-9210, amends Form previously filed as Exhibit
10.2 to the Registration Statement on Form S-8 of Occidental,
File No. 33-64719 and incorporated by reference as Exhibit 10.40
to the Annual Report on Form 10-K of Occidental for the fiscal
year ended December 31, 1997, File No. 1-9210).
10.25* Form of Incentive Stock Option Agreement (With Accelerated
Performance Vesting) under Occidental Petroleum Corporation 1995
Incentive Stock Plan (filed as Exhibit 10.2 to the Quarterly
Report on Form 10-Q of Occidental for the quarterly period ended
June 30, 1999, File No. 1-9210).
10.26* Form of Nonqualified Stock Option Agreement (With Accelerated
Performance Vesting) under Occidental Petroleum Corporation 1995
Incentive Stock Plan (filed as Exhibit 10.3 to the Quarterly
Report on Form 10-Q of Occidental for the quarterly period ended
June 30, 1999, File No. 1-9210).
10.27* Form of 1997 Performance Stock Option Agreement under the 1995
Incentive Stock Plan of Occidental Petroleum Corporation (filed
as Exhibit 10.2 to the Quarterly Report on Form 10-Q of
Occidental for the quarterly period ended June 30, 1997, File No.
1-9210).
- -----------------------------------
* Incorporated herein by reference
81
10.28* Form of Amendment to 1997 Performance Stock Option Agreement
under the 1995 Incentive Stock Plan of Occidental Petroleum
Corporation (filed as Exhibit 10.43 to the Annual Report on Form
10-K of Occidental for the fiscal year ended December 31, 1999,
File No. 1-9210).
10.29* Occidental Petroleum Corporation 1996 Restricted Stock Plan for
Non-Employee Directors (as amended effective April 25, 2003)
(filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q of
Occidental for the quarterly period ended March 31, 2003, File
No. 1-9210).
10.30* Form of Restricted Stock Option Assignment under Occidental
Petroleum Corporation 1996 Restricted Stock Plan for Non-Employee
Directors (filed as Exhibit 99.2 to the Registration Statement on
Form S-8 of Occidental, File No. 333-02901).
10.31* Form of Restricted Stock Agreement under Occidental Petroleum
Corporation 1996 Restricted Stock Plan for Non-Employee Directors
(filed as Exhibit 10.3 to the Quarterly Report on Form 10-Q of
Occidental for the quarterly period ended March 31, 2003, File
No. 1-9210).
10.32* Occidental Petroleum Corporation Supplemental Retirement Plan,
Amended and Restated Effective as of January 1, 1999, reflecting
amendments effective through March 1, 2001 (filed as Exhibit 10.3
to the Quarterly Report on Form 10-Q of Occidental for the
quarterly period ended March 31, 2001, File No. 1-9210).
10.33* Occidental Petroleum Corporation 2001 Incentive Compensation Plan
(as amended through September 12, 2002) (filed as Exhibit 10.2 to
the Quarterly Report on Form 10-Q of Occidental for the quarterly
period ended September 30, 2002, File No. 1-9210).
10.34* Form of Incentive Stock Option Agreement under Occidental
Petroleum Corporation 2001 Incentive Compensation Plan (filed as
Exhibit 10.1 to the Quarterly Report on Form 10-Q of Occidental
for the quarterly period ended September 30, 2001, File No.
1-9210).
10.35* Form of Nonqualified Stock Option Agreement under Occidental
Petroleum Corporation 2001 Incentive Compensation Plan (filed as
Exhibit 10.2 to the Quarterly Report on Form 10-Q of Occidental
for the quarterly period ended September 30, 2001, File No.
1-9210).
10.36* Form of Restricted Common Share Agreement under Occidental
Petroleum Corporation 2001 Incentive Compensation Plan (filed as
Exhibit 10.40 to the Annual Report on Form 10-K of Occidental for
the fiscal year ended December 31, 2001, File No. 1-9210).
10.37* Form of Performance Based Stock Agreement under Occidental
Petroleum Corporation 2001 Incentive Compensation Plan (filed as
Exhibit 10.41 to the Annual Report on Form 10-K of Occidental for
the fiscal year ended December 31, 2001, File No. 1-9210).
10.38* Form of Incentive Stock Option Agreement under Occidental
Petroleum Corporation 2001 Incentive Compensation Plan (July 2002
version) (filed as Exhibit 10.4 to the Quarterly Report on Form
10-Q for the quarterly period ended September 30, 2002, File No.
1-9210).
10.39* Form of Nonqualified Stock Option Agreement under Occidental
Petroleum Corporation 2001 Incentive Compensation Plan (July 2002
version) (filed as Exhibit 10.5 to the Quarterly Report on Form
10-Q for the quarterly period ended September 30, 2002, File No.
1-9210).
10.40* Form of Restricted Common Share Agreement (with mandatory
deferred issuance of shares) under Occidental Petroleum
Corporation 2001 Incentive Compensation Plan (filed as Exhibit
10.6 to the Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 2002, File No. 1-9210).
10.41* Form of Restricted Common Share Agreement (with mandatory
deferred issuance of shares) under Occidental Petroleum
Corporation 2001 Incentive Compensation Plan (December 2002
version) (filed as Exhibit 10.47 to the Annual Report on Form
10-K of Occidental for the fiscal year ended December 31, 2002,
File No. 1-9210).
10.42* Terms and Conditions for Incentive Stock Option Award under
Occidental Petroleum Corporation 2001 Incentive Compensation Plan
(July 2003 version) (filed as Exhibit 10.3 to the Quarterly
Report on Form 10-Q of Occidental for the quarterly period ended
June 30, 2003, File No. 1-9210).
10.43* Terms and Conditions for Nonqualified Stock Option Award under
Occidental Petroleum Corporation 2001 Incentive Compensation Plan
(July 2003 version) (filed as Exhibit 10.4 to the Quarterly
Report on Form 10-Q of Occidental for the quarterly period ended
June 30, 2003, File No. 1-9210).
- -----------------------------------
* Incorporated herein by reference
82
10.44* Terms and Conditions of Restricted Share Unit Award (with
mandatory deferred issuance of shares) under Occidental Petroleum
Corporation 2001 Incentive Compensation Plan (July 2003 version)
(filed as Exhibit 10.5 to the Quarterly Report on Form 10-Q of
Occidental for the quarterly period ended June 30, 2003, File No.
1-9210).
10.45 Terms and Conditions of Restricted Share Unit Award (with
mandatory deferred issuance of shares) under Occidental Petroleum
Corporation 2001 Incentive Compensation Plan (December 2003
version).
10.46 Terms and Conditions of Performance Based Stock Award (deferred
issuance of shares) under Occidental Petroleum Corporation 2001
Incentive Compensation Plan (December 2003 version - Corporate)
10.47 Terms and Conditions of Performance Based Stock Award (deferred
issuance of shares) under Occidental Petroleum Corporation 2001
Incentive Compensation Plan (December 2003 version - Occidental
Chemical).
10.48* Occidental Petroleum Corporation Deferred Stock Program (filed as
Exhibit 10.3 to the Quarterly Report on Form 10-Q of Occidental
for the quarterly period ended September 30, 2002, File No.
1-9210).
10.49* Occidental Petroleum Corporation Executive Incentive Compensation
Plan (filed as Exhibit 10.2 to the Quarterly Report on Form 10-Q
of Occidental for the quarterly period ended March 31, 2001, File
No. 1-9210).
10.50 Description of financial counseling program.
10.51 Description of group excess liability insurance program.
10.52* Securities Purchase Agreement, dated as of July 8, 2002, by and
between Lyondell Chemical Company and Occidental Chemical Holding
Corporation (incorporated by reference to Exhibit 10.1 to the
Current Report on Form 8-K of Occidental dated August 22, 2002
(date of earliest event reported), filed September 6, 2002, File
No. 1-9210).
10.53* Stockholders Agreement, dated as of August 22, 2002, by and among
Lyondell Chemical Company and the Stockholders as defined therein
(incorporated by reference to Exhibit 10.2 to the Current Report
on Form 8-K of Occidental dated August 22, 2002 (date of earliest
event reported), filed September 6, 2002, File No. 1-9210).
10.54* Warrant for the Purchase of Shares of Common Stock, issued August
22, 2002 (incorporated by reference to Exhibit 10.3 to the
Current Report on Form 8-K of Occidental dated August 22, 2002
(date of earliest event reported), filed September 6, 2002, File
No. 1-9210).
10.55* Registration Rights Agreement, dated as of August 22, 2002, by
and between Occidental Chemical Holding Corporation and Lyondell
Chemical Company (incorporated by reference to Exhibit 10.4 to
the Current Report on Form 8-K of Occidental dated August 22,
2002 (date of earliest event reported), filed September 6, 2002,
File No. 1-9210).
10.56* Occidental Partner Sub Purchase Agreement, dated July 8, 2002, by
and among Lyondell Chemical Company, Occidental Chemical Holding
Corporation, Oxy CH Corporation and Occidental Chemical
Corporation (incorporated by reference to Exhibit 10.5 to the
Current Report on Form 8-K of Occidental dated August 22, 2002
(date of earliest event reported), filed September 6, 2002, File
No. 1-9210).
12 Statement regarding computation of total enterprise ratios of
earnings to fixed charges for the five years ended December 31,
2003.
21 List of subsidiaries of Occidental at December 31, 2003.
23 Independent Auditors' Consent.
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.
- -----------------------------------
* Incorporated herein by reference
83
(b) REPORTS ON FORM 8-K
During the fourth quarter of 2003, 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 (which information
under Items 9 and 12 shall not be deemed to be filed).
2. Current Report on Form 8-K dated November 18, 2003 (date of earliest
event reported), filed on November 18, 2003, for the purpose of reporting, under
Item 9, a presentation by Dr. Ray R. Irani, Chief Executive Officer (which
information under Item 9 shall not be deemed to be filed).
During the first quarter of 2004, Occidental filed the following Current Reports
on Form 8-K:
1. Current Report on Form 8-K dated January 22, 2004 (date of earliest
event reported), filed on January 22, 2004, for the purpose of reporting, under
Items 9 and 12, Occidental's results of operations for the fourth quarter ended
December 31, 2003, and speeches and supplemental investor information relating
to Occidental's fourth quarter 2003 earnings announcement (which information
under Items 9 and 12 shall not be deemed to be filed).
2. Current Report on Form 8-K dated February 5, 2004 (date of earliest
event reported), filed on February 5, 2004, for the purpose of reporting, under
Item 9, a presentation by Dr. Dale R. Laurance, President (which information
under Item 9 shall not be deemed to be filed).
84
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
OCCIDENTAL PETROLEUM CORPORATION
March 1, 2004 By: /s/ RAY R. IRANI
--------------------------------------
Ray R. Irani
Chairman of the Board of Directors and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ RAY R. IRANI Chairman of the Board of March 1, 2004
- ------------------------------- Directors and Chief
Ray R. Irani Executive Officer
/s/ STEPHEN I. CHAZEN Executive Vice President - March 1, 2004
- ------------------------------- Corporate Development
Stephen I. Chazen and Chief Financial Officer
/s/ SAMUEL P. DOMINICK, JR. Vice President and March 1, 2004
- ------------------------------- Controller (Chief
Samuel P. Dominick, Jr. Accounting Officer)
/s/ RONALD W. BURKLE Director March 1, 2004
- -------------------------------
Ronald W. Burkle
/s/ JOHN S. CHALSTY Director March 1, 2004
- -------------------------------
John S. Chalsty
/s/ EDWARD P. DJEREJIAN Director March 1, 2004
- -------------------------------
Edward P. Djerejian
/s/ R. CHAD DREIER Director March 1, 2004
- -------------------------------
R. Chad Dreier
/s/ JOHN E. FEICK Director March 1, 2004
- -------------------------------
John E. Feick
/s/ DALE R. LAURANCE Director March 1, 2004
- -------------------------------
Dale R. Laurance
85
SIGNATURE TITLE DATE
--------- ----- ----
/s/ IRVIN W. MALONEY Director March 1, 2004
- -------------------------------
Irvin W. Maloney
/s/ RODOLFO SEGOVIA Director March 1, 2004
- -------------------------------
Rodolfo Segovia
/s/ AZIZ D. SYRIANI Director March 1, 2004
- -------------------------------
Aziz D. Syriani
/s/ ROSEMARY TOMICH Director March 1, 2004
- -------------------------------
Rosemary Tomich
/s/ WALTER L. WEISMAN Director March 1, 2004
- -------------------------------
Walter L. Weisman
86
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87
EXHIBIT INDEX
EXHIBITS
--------
3.(ii) Bylaws of Occidental, as amended through February 12, 2004.
10.14 Occidental Petroleum Corporation Deferred Compensation Plan,
Second Amendment and Restatement Effective as of January 1, 2003.
10.45 Terms and Conditions of Restricted Share Unit Award (with
mandatory deferred issuance of shares) under Occidental Petroleum
Corporation 2001 Incentive Compensation Plan (December 2003
version).
10.46 Terms and Conditions of Performance Based Stock Award (deferred
issuance of shares) under Occidental Petroleum Corporation 2001
Incentive Compensation Plan (December 2003 version - Corporate).
10.47 Terms and Conditions of Performance Based Stock Award (deferred
issuance of shares) under Occidental Petroleum Corporation 2001
Incentive Compensation Plan (December 2003 version - Occidental
Chemical).
10.50 Description of financial counseling program.
10.51 Description of group excess liability insurance program.
12 Statement regarding the computation of total enterprise ratios of
earnings to fixed charges for the five years ended December 31,
2003.
21 List of subsidiaries of Occidental at December 31, 2003.
23 Independent Auditors' Consent.
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
EXHIBIT 3.(II)
[AS AMENDED FEBRUARY 12, 2004]
BY-LAWS
OF
OCCIDENTAL PETROLEUM CORPORATION
(HEREINAFTER CALLED THE "CORPORATION")
ARTICLE I
OFFICES
SECTION 1. Registered Office. The registered office of the Corporation
shall be in the State of Delaware.
SECTION 2. Other Offices. The Corporation may also have offices at such
other places both within and without the State of Delaware as the Board of
Directors may from time to time determine.
ARTICLE II
MEETING OF STOCKHOLDERS
SECTION 1. Place and Conduct of Meetings. Meetings of the stockholders for
the election of directors or for the transaction of only such other business as
may properly be brought before the meeting in accordance with these By-laws
shall be held at such time and place, either within or without the State of
Delaware, as shall be designated from time to time by the Board of Directors and
stated in the notice of the meeting or in a duly executed waiver of notice
thereof. The Chairman of such meetings shall have plenary power and authority
with respect to all matters relating to the conduct thereof including, without
limitation, the authority to limit the amount of time which may be taken by any
stockholder or stockholders, the authority to appoint and be advised by a
parliamentarian, and the authority to appoint and to instruct a sergeant or
sergeants at arms.
SECTION 2. Annual Meetings. The Annual Meetings of Stockholders shall be
held on such date and at such time as shall be designated from time to time by
the Board of Directors and stated in the notice of the meeting, for the purpose
of electing directors and for the transaction of only such other business as may
properly be brought before the meeting in accordance with these By-laws.
To be properly brought before the Annual Meeting, business must be either
(a) specified in the notice of Annual Meeting (or any supplement thereto) given
by or at the direction of the Board of Directors, (b) otherwise properly brought
before the Annual Meeting by or at the direction of the Board of Directors, or
(c) otherwise properly brought before the Annual Meeting by a stockholder of the
Corporation (i) who is a stockholder of record on the date of the giving of the
notice provided for in this Section 2 and on the record date for the
determination of stockholders entitled to vote at such Annual Meeting and (ii)
who complies with the notice procedures set forth in this Section 2.
In addition to any other applicable requirements, for business to be
properly brought before an Annual Meeting by a stockholder, the stockholder must
have given timely notice thereof in proper written form to the Secretary of the
Corporation.
To be timely, a stockholder's notice must be delivered to or mailed to and
received at the principal executive offices of the Corporation, not less than
seventy (70) days nor more than ninety (90) days prior to the anniversary date
of the immediately preceding Annual Meeting; provided, however, that in the
event that the Annual Meeting is called for a date that is not within thirty
(30) days before or after such anniversary date, notice by the stockholder to be
timely must be so received not later than the close of business on the tenth
(10th) day following the day on which such notice of the date of the Annual
Meeting
-1-
was mailed or such public disclosure was made, whichever first occurs. In no
event shall the public announcement of an adjournment of an Annual Meeting
commence a new time period for the giving of a stockholder's notice as described
above.
To be in proper written form, a stockholder's notice to the Secretary shall
set forth as to each matter the stockholder proposes to bring before the Annual
Meeting (i) a brief description of the business desired to be brought before the
Annual Meeting, the reasons for conducting such business at the Annual Meeting
and any material interest in such business of the stockholder and the beneficial
owner, if any, on whose behalf the proposal is made, (ii) the name and record
address of the stockholder proposing such business, (iii) the class, series and
number of shares of the Corporation which are beneficially owned by the
stockholder, (iv) a description of all arrangements or understandings between
the stockholder and any other person or persons (including their names) in
connection with such business, (v) whether the stockholder or the beneficial
owner, if any, intends or is part of a group which intends to distribute proxy
materials, and (vi) a representation that the stockholder intends to appear, in
person or by another person authorized in accordance with the General
Corporation Law of the State of Delaware to act as proxy for the stockholder, at
the Annual Meeting to present such business.
Notwithstanding anything in the By-laws to the contrary, no business shall
be conducted at the Annual Meeting except in accordance with the procedures set
forth in this Section 2; provided, however, that nothing in this Section 2 shall
be deemed to preclude discussion by any stockholder of any business properly
brought before the Annual Meeting.
The Chairman of an Annual Meeting shall, if the facts warrant, determine
and declare to the Annual Meeting that business was not properly brought before
the Annual Meeting in accordance with the provisions of this Section 2, and if
he should so determine, he shall so declare to the Annual Meeting and any such
business not properly brought before the Annual Meeting shall not be transacted.
Written notice of the Annual Meeting stating the place, date and hour of
the Annual Meeting shall be given to each stockholder entitled to vote at such
meeting not less than ten (10) nor more than sixty (60) days before the date of
the meeting.
SECTION 3. Special Meetings. Unless otherwise prescribed by law or by the
Certificate of Incorporation, Special Meetings of Stockholders, for any purpose
or purposes, may be called by the Board of Directors or the Chairman of the
Board. Written notice of a Special Meeting stating the place, date and hour of
the meeting and the purpose or purposes for which the meeting is called shall be
given not less than ten nor more than sixty days before the date of the meeting
to each stockholder entitled to vote at such meeting.
SECTION 4. Quorum. Except as otherwise provided by law or by the
Certificate of Incorporation, the holders of a majority of the capital stock
issued and outstanding and entitled to vote thereat, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business. If, however, such quorum shall not
be present or represented at any meeting of the stockholders, the stockholders
entitled to vote thereat, present in person or represented by proxy, shall have
power to adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present or represented. At
such adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally noticed. If the adjournment is for more than thirty days, or if after
the adjournment a new record date is fixed for the adjourned meeting, a notice
of the adjourned meeting shall be given to each stockholder entitled to vote at
the meeting.
SECTION 5. Voting. Unless otherwise required by law, the Certificate of
Incorporation or these By-laws, any question brought before any meeting of
stockholders shall be decided by the affirmative vote of a majority of the
shares present in person or by proxy at the meeting for the purposes of
determining the presence of a quorum at such meeting. Unless otherwise provided
in the Certificate of Incorporation, each stockholder represented at a meeting
of stockholders shall be entitled to cast one vote for each share of the
-2-
capital stock entitled to vote thereat held by such stockholder. Such votes may
be cast in person or by proxy but no proxy shall be voted on or after three
years from its date, unless such proxy provides for a longer period. No vote at
any meeting of stockholders need be by written ballot unless the Board of
Directors, in its discretion, or the officer of the Corporation presiding at the
meeting, in his discretion, specifically directs the use of a written ballot.
SECTION 6. List of Stockholders Entitled to Vote. The officer of the
Corporation who has charge of the stock ledger of the Corporation shall prepare
and make, at least ten days before every meeting of stockholders, a complete
list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder of the Corporation who is
present.
SECTION 7. Stock Ledger. The stock ledger of the Corporation shall be the
only evidence as to who are the stockholders entitled to examine the stock
ledger, the list required by Section 6 of this Article II or the books of the
Corporation, or to vote in person or by proxy at any meeting of stockholders.
SECTION 8. Voting Procedures and Inspectors of Election. The corporation
shall, in advance of any meeting of stockholders, appoint one or more inspectors
to act at the meeting and make a written report thereof. The corporation may
designate one or more persons as alternate inspectors to replace any inspector
who fails to act. If no inspector or alternate is able to act at a meeting of
stockholders, the person presiding at the meeting shall appoint one or more
inspectors to act at the meeting. Each inspector, before entering upon the
discharge of his duties, shall take and sign an oath faithfully to execute the
duties of inspector with strict impartiality and according to the best of his
ability.
The inspectors shall (i) ascertain the number of shares outstanding and the
voting power of each, (ii) determine the shares represented at a meeting and the
validity of proxies and ballots, (iii) count all votes and ballots, (iv)
determine and retain for a reasonable period a record of the disposition of any
challenges made to any determination by the inspectors, and (v) certify their
determination of the number of shares represented at the meeting, and their
count of all votes and ballots. The inspectors may appoint or retain other
persons or entities to assist the inspectors in the performance of the duties of
the inspectors.
The date and time of the opening and the closing of the polls for each
matter upon which the stockholders will vote at a meeting shall be announced at
the meeting.
ARTICLE III
DIRECTORS
SECTION 1. Number and Election of Directors. Subject to the rights, if any,
of holders of preferred stock issued by the Corporation to elect directors of
the Corporation, the Board of Directors shall consist of one or more directors,
the number of which shall be eleven (11) until changed by resolution duly
adopted by the Board of Directors from time to time. Except as provided in
Section 2 of this Article III, directors shall be elected by a plurality of the
votes cast at Annual Meetings of Stockholders, and each director so elected
shall hold office until his successor is duly elected and qualified, or until
his earlier death, disqualification, resignation or removal. No person shall be
eligible for election as a director of the Corporation who shall have reached
the age of seventy-five (75) at the date of such election, unless such
requirement shall have been unanimously waived by the members of the Nominating
and Corporate Governance Committee and such Committee's action shall have been
ratified and approved by a majority of the disinterested directors on the Board
of Directors. Any director may resign at any time effective upon
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giving written notice to the Corporation, unless the notice specifies a later
time for such resignation to become effective. If the resignation of a director
is effective at a future time, the Board of Directors may elect a successor
prior to such effective time to take office when such resignation becomes
effective. Directors need not be stockholders.
SECTION 2. Nominations of Directors. Only persons who are nominated in
accordance with the following procedures shall be eligible for election as
directors, except as may be otherwise provided in the Certificate of
Incorporation of the Corporation with respect to the right of holders of
preferred stock of the Corporation to nominate and elect a specified number of
directors in certain circumstances. Nominations of persons for election to the
Board of Directors of the Corporation may be made at any Annual Meeting (a) by
or at the direction of the Board of Directors (or any duly authorized committee
thereof) or (b) by any stockholder of the Corporation (i) who is a stockholder
of record on the date of the giving of the notice provided for in this Section 2
and on the record date for the determination of stockholders entitled to vote at
the Annual Meeting and (ii) who complies with the notice procedures set forth in
this Section 2.
In addition to any other applicable requirements, for a nomination to be
made by a stockholder, the stockholder must have given timely notice thereof in
proper written form to the Secretary of the Corporation.
To be timely, a stockholder's notice to the Secretary must be delivered to
or mailed and received at the principal executive offices of the Corporation
between September 1 and November 30 of the year preceding the Annual Meeting.To
be in proper written form, a stockholder's notice to the Secretary must set
forth (a) as to each person whom the stockholder proposes to nominate for
election or re-election as a director, (i) the name, age, business address and
residence address of the person, (ii) principal occupation or employment of the
person, (iii) the class or series and number of shares of capital stock of the
Corporation which are owned beneficially or of record by the person, and (iv)
any other information relating to the person that is required to be disclosed in
solicitations for proxies for election of directors pursuant to the Rules and
Regulations of the Securities and Exchange Commission under Section 14 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and (b) as to
the stockholder giving the notice, (i) the name and record address of such
stockholder, (ii) the class or series and number of shares of capital stock of
the Corporation which are beneficially owned by the stockholder, (iii) a
description of all arrangements or understandings between the stockholder or the
beneficial owner, if any, on whose behalf the nomination is made and each
proposed nominee and any other person or persons (including their names)
pursuant to which the nominations are to be made by such stockholder, (iv)
whether the stockholder or the beneficial owner, if any, intends or is part of a
group which intends to distribute proxy materials, (v) a representation that the
stockholder intends to appear, in person or by another person authorized in
accordance with the General Corporation Law of the State of Delaware to act as
proxy for the stockholder, at the Annual Meeting to nominate the persons named
in the stockholder's notice, and (vi) any other information relating to the
person that is required to be disclosed in solicitations for proxies for
election of directors pursuant to the Rules and Regulations of the Securities
and Exchange Commission under Section 14 of the Exchange Act. Such notice must
be accompanied by a written consent of each proposed nominee to being named as a
nominee and to serve as a director if elected.
No person shall be eligible for election as a director of the Corporation
unless nominated in accordance with the procedures set forth in this Section 2.
If the Chairman of the Annual Meeting determines that a nomination was not made
in accordance with the foregoing procedure, the Chairman shall declare to the
meeting that the nomination was defective and the defective nomination shall be
disregarded.
SECTION 3. Vacancies. Any newly created directorship resulting from an
increase in the number of directors or any other vacancy on the Board of
Directors may be filled by a majority of the Board of Directors then in office,
even if less than a quorum, or by a sole remaining director. Any director
elected to fill a newly created directorship resulting from an increase in the
number of directors or any other vacancy shall hold office for a term that shall
expire at the next Annual Meeting of Stockholders.
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SECTION 4. Duties and Powers. The business of the Corporation shall be
managed by or under the direction of the Board of Directors which may exercise
all such powers of the Corporation and do all such lawful acts and things as are
not by statute or by the Certificate of Incorporation or by these By-laws
directed or required to be exercised or done by the stockholders.
SECTION 5. Meetings. The Board of Directors of the Corporation may hold
meetings, both regular and special, either within or without the State of
Delaware. Regular meetings of the Board of Directors may be held without notice
at such time and at such place as may from time to time be determined by the
Board of Directors. Special meetings of the Board of Directors may be called by
the Chairman, if there be one, the President, or any three directors. Notice
thereof stating the place, date and hour of the meeting shall be given to each
director either by mail not less than forty-eight hours before the date of the
meeting, by telephone, telegram or telecopy on twenty-four hours notice, or on
such shorter notice as the person or persons calling such meeting may deem
necessary or appropriate in the circumstances.
SECTION 6. Quorum. Except as may be otherwise specifically provided by law,
at all meetings of the Board of Directors or of any committee thereof, a
majority of the members of the entire Board of Directors or of the said
committee shall constitute a quorum for the transaction of business; and the act
of a majority of the directors or members of the committee present at any
meeting at which there is a quorum shall be the act of the Board of Directors or
of the said committee, as the case may be. A meeting at which a quorum is
initially present may continue to transact business notwithstanding the
withdrawal of directors or members of the committee if any action taken is
approved by at least a majority of the required quorum for that meeting. If a
quorum shall not be present at any meeting of the Board of Directors or of any
committee thereof, the directors or members of the committee present thereat may
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present.
SECTION 7. Actions of Board. Any action required or permitted to be taken
at any meeting of the Board of Directors or of any committee thereof may be
taken without a meeting, if all the members of the Board of Directors or
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board of Directors or
committee.
SECTION 8. Meetings by Means of Conference Telephone. Members of the Board
of Directors of the Corporation, or any committee designated by the Board of
Directors, may participate in a meeting of the Board of Directors or such
committee by means of a conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other,
and participation in a meeting pursuant to this Section 8 shall constitute
presence in person at such meeting.
SECTION 9. Committees. The Board of Directors may designate one or more
committees, each committee to consist of one or more of the directors of the
Corporation. The Board of Directors may designate one or more directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of any such committee. In the absence or disqualification
of a member of a committee, and in the absence of a designation by the Board of
Directors of an alternate member to replace the absent or disqualified member,
the member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in the place of
any absent or disqualified member. Any committee, to the extent allowed by law
and provided in the resolution establishing such committee, shall have and may
exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of the Corporation. Meetings of any
committee may be called by the Chairman of such committee, if there be one, or
by any two members thereof other than such Chairman. Notice thereof stating the
place, date and hour of the meeting shall be given to each member by mail not
less than forty-eight hours before the date of the meeting; by telephone,
telegram or telecopy on twenty-four hours notice; or on such shorter notice as
the person or persons calling such meeting may deem necessary or appropriate in
the circumstances. Each committee shall keep regular minutes and report to the
Board of Directors when required.
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SECTION 10. Compensation. The directors may be paid their expenses, if any,
of attendance at each meeting of the Board of Directors and may be paid a fixed
sum for attendance at each meeting of the Board of Directors and/or a stated
annual fee as a director. No such payment shall preclude any director from
serving the Corporation in any other capacity and receiving compensation
therefor. Members of special or standing committees may be allowed like
compensation for attending committee meetings.
SECTION 11. Interested Directors. No contract or transaction between the
Corporation and one or more of its directors or officers, or between the
Corporation and any other corporation, partnership, association, or other
organization in which one or more of its directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the Board of Directors or committee thereof which
authorizes the contract or transaction, or solely because his or their votes are
counted for such purpose if (i) the material facts as to his or their
relationship or interest and as to the contract or transaction are disclosed or
are known to the Board of Directors or the committee, and the Board of Directors
or committee in good faith authorizes the contract or transaction by the
affirmative votes of a majority of the disinterested directors, even though the
disinterested directors be less than a quorum; or (ii) the material facts as to
his or their relationship or interest and as to the contract or transaction are
disclosed or are known to the stockholders entitled to vote thereon, and the
contract or transaction is specifically approved in good faith by vote of the
stockholders; or (iii) the contract or transaction is fair as to the Corporation
as of the time it is authorized, approved or ratified by the Board of Directors,
a committee thereof or the stockholders. Common or interested directors may be
counted in determining the presence of a quorum at a meeting of the Board of
Directors or of a committee which authorizes the contract or transaction.
ARTICLE IV
OFFICERS
SECTION 1. General. The officers of this Corporation shall be chosen by the
Board of Directors and shall be a Chairman of the Board, who shall be the Chief
Executive Officer, any number of Vice Chairmen, a President, a Senior Operating
Officer, any number of Executive Vice Presidents, one or more of whom may be
designated Senior Executive Vice President, any number of Vice Presidents with
such rank as the Board of Directors may designate, a Secretary, any number of
Assistant Secretaries, a Treasurer, and any number of Assistant Treasurers. One
of such Executive Vice Presidents or Vice Presidents shall be designated Chief
Financial Officer and shall have responsibility, subject to the direction of the
Board of Directors, the Chairman of the Board and the President, for the
management of the Corporation's financial affairs. Any number of offices may be
held by the same person, unless otherwise prohibited by law, the Certificate of
Incorporation or these By-laws. The officers of the Corporation need not be
stockholders of the Corporation nor, except in the case of the Chairman of the
Board of Directors, need such officers be directors of the Corporation.
SECTION 2. Election. The Board of Directors at its first meeting held after
each Annual Meeting of Stockholders shall elect the officers of the Corporation
who shall hold their offices for such terms and shall exercise such powers and
perform such duties as shall be determined from time to time by the Board of
Directors; and all officers of the Corporation shall hold office until their
successors are chosen and qualified, or until their earlier resignation or
removal. Any officer elected by the Board of Directors may be removed at any
time by the affirmative vote of a majority of the Board of Directors. Any
vacancy occurring in an office of the Corporation shall be filled by the Board
of Directors.
SECTION 3. Remuneration. The Board of Directors shall have the power to fix
and determine the salaries and other remuneration, and the terms and conditions
thereof, of all executive officers of the Corporation.
SECTION 4. Chairman of the Board of Directors. The Chairman of the Board of
Directors shall preside at all meetings of the stockholders and of the Board of
Directors and the Executive Committee, if
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any, shall have general and active management of the business and affairs of the
Corporation, shall have plenary power to issue orders and instructions to all
officers and employees of the Corporation, and shall see that all orders and
resolutions of the Board of Directors and the Executive Committee, if any, are
carried into effect. He shall be the Chief Executive Officer of the Corporation,
and except where by law the signature of the President is required, the Chairman
of the Board of Directors shall possess the power to enter into and sign all
contracts, certificates and other instruments of the Corporation, and shall have
the power to delegate any portion of his authority under these By-laws to any
other officer of the Corporation. During the absence or disability of the
President, the Chairman of the Board of Directors shall exercise all the powers
and discharge all the duties of the President. The Chairman of the Board of
Directors shall also perform such other duties and may exercise such other
powers as from time to time may be assigned to him by these By-laws or by the
Board of Directors.
SECTION 5. Vice Chairmen of the Board of Directors. The Vice Chairman of
the Board of Directors or Vice Chairmen of the Board of Directors, if there is
more than one (in the order designated by the Board of Directors), shall perform
such duties and may exercise such powers as from time to time may be assigned to
him by the Board of Directors or the Chairman of the Board of Directors.
SECTION 6. President. The President shall perform such duties and have such
powers as the Board of Directors or the Chairman of the Board may from time to
time prescribe. In the absence or disability of the Chairman of the Board of
Directors, or if there be none, the President shall preside at all meetings of
the stockholders and the Board of Directors. If there be no Chairman of the
Board of Directors, the President shall be the Chief Executive Officer of the
Corporation. The President shall also perform such other duties and may exercise
such other powers as from time to time may be assigned to him by these By-laws,
by the Board of Directors or by the Chairman of the Board of Directors.
SECTION 7. Senior Operating Officer. The Senior Operating Officer shall
perform such duties and have such powers as are prescribed for Executive Vice
Presidents and Vice Presidents under these By-laws and under any resolution of
the Board of Directors and shall perform such additional duties and have such
additional powers as the Board of Directors or the Chairman of the Board of
Directors may from time to time prescribe. The Senior Operating Officer shall
also perform such other duties and may exercise such other powers as from time
to time may be assigned to him by these By-laws, by the Board of Directors, or
by the Chairman of the Board of Directors.
SECTION 8. Executive Vice Presidents and Vice Presidents. At the request of
the President or in his absence or in the event of his inability or refusal to
act (and if there be no Chairman of the Board of Directors), the Executive Vice
Presidents and Vice Presidents (in the order designated by the Board of
Directors) shall perform the duties of the President, and when so acting, shall
have all the powers of and be subject to all the restrictions upon the
President. Each Vice President shall perform such other duties and have such
other powers as the Board of Directors or the Chairman of the Board of Directors
from time to time may prescribe. If there be no Chairman of the Board of
Directors and no Vice President, the Board of Directors shall designate the
officer of the Corporation who, in the absence of the President or in the event
of the inability or refusal of the President to act, shall perform the duties of
the President, and when so acting, shall have all the powers of and be subject
to all the restrictions upon the President.
SECTION 9. Secretary. The Secretary shall attend all meetings of the Board
of Directors and all meetings of stockholders and record all the proceedings
thereat in a book or books to be kept for that purpose; the Secretary shall also
perform like duties for the standing committees of the Board of Directors when
required. The Secretary shall give, or cause to be given, notice of all meetings
of the stockholders and special meetings of the Board of Directors, and shall
perform such other duties as may be prescribed by the Board of Directors or the
Chairman of the Board of Directors, under whose supervision he shall be. If the
Secretary shall be unable or shall refuse to cause to be given notice of all
meetings of the stockholders and special meetings of the Board of Directors, and
if there be no Assistant Secretary, then either the Board of Directors or the
President may choose another officer to cause such notice to be given. The
Secretary shall have custody of the seal of the Corporation and the Secretary or
any Assistant Secretary, if there be any, shall have authority to affix the same
to any instrument requiring it, and when so affixed, it may be
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attested by the signature of the Secretary or by the signature of any such
Assistant Secretary. The Board of Directors may give general authority to any
other officer to affix the seal of the Corporation and to attest the affixing by
his signature. The Secretary shall see that all books, reports, statements,
certificates and other documents and records required by law to be kept or filed
are properly kept or filed, as the case may be.
SECTION 10. Treasurer. Subject to the direction of the Chief Financial
Officer, the Treasurer shall have the custody of the corporate funds and
securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the Corporation and shall deposit all moneys
and other valuable effects in the name and to the credit of the Corporation in
such depositories as may be designated by the Board of Directors. The Treasurer
shall disburse the funds of the Corporation as may be ordered by the Board of
Directors, taking proper vouchers for such disbursements, and shall render to
the Chairman of the Board and the Board of Directors, at its regular meetings,
or when the Board of Directors so requires, an account of all his transactions
as Treasurer and of the financial condition of the Corporation. If required by
the Board of Directors, the Treasurer shall give the Corporation a bond in such
sum and with such surety or sureties as shall be satisfactory to the Board of
Directors for the faithful performance of the duties of his office and for the
restoration to the Corporation, in case of his death, resignation, retirement or
removal from office, of all books, papers, vouchers, money and other property of
whatever kind in his possession or under his control belonging to the
Corporation.
SECTION 11. Assistant Secretaries. Except as may be otherwise provided in
these By-laws, Assistant Secretaries, if there be any, shall perform such duties
and have such powers as from time to time may be assigned to them by the Board
of Directors, the Chairman of the Board of Directors, the President, any Vice
President, if there be any, or the Secretary, and in the absence of the
Secretary or in the event of his disability or refusal to act, shall perform the
duties of the Secretary, and when so acting, shall have all the powers of and be
subject to all the restrictions upon the Secretary.
SECTION 12. Assistant Treasurers. Assistant Treasurers, if there be any,
shall perform such duties and have such powers as from time to time may be
assigned to them by the Board of Directors, the Chairman of the Board of
Directors, the President, any Vice President, if there be any, or the Treasurer,
and in the absence of the Treasurer or in the event of his disability or refusal
to act, shall perform the duties of the Treasurer, and when so acting, shall
have all the powers of and be subject to all the restrictions upon the
Treasurer. If required by the Board of Directors, an Assistant Treasurer shall
give the Corporation a bond in such sum and with such surety or sureties as
shall be satisfactory to the Board of Directors for the faithful performance of
the duties of his office and for the restoration to the Corporation, in case of
his death, resignation, retirement or removal from office, of all books, papers,
vouchers, money and other property of whatever kind in his possession or under
his control belonging to the Corporation.
SECTION 13. Other Officers. Such other officers as the Board of Directors
may choose shall perform such duties and have such powers as from time to time
may be assigned to them by the Board of Directors. The Board of Directors may
delegate to any other officer of the Corporation the power to choose such other
officers and to prescribe their respective duties and powers.
SECTION 14. Officers of Divisions. The officers of divisions of the
Corporation shall perform such duties and may exercise such powers as the
Chairman of the Board may from time to time prescribe.
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ARTICLE V
STOCK
SECTION 1. Uncertificated Shares. Effective April 25, 2003, the shares of
Common Stock of the Corporation shall be uncertificated. Notwithstanding that
the shares of Common Stock of the corporation shall be uncertificated, every
holder of stock of any class or series in the Corporation shall be entitled to
have a certificate signed by, or in the name of the Corporation (i) by the
Chairman or Vice Chairman of the Board of Directors, or the President, an
Executive Vice President or a Vice President and (ii) by the Treasurer or an
Assistant Treasurer, or the Secretary or an Assistant Secretary of the
Corporation, representing the number of shares registered in certificate form.
SECTION 2. Signatures. Where a certificate is countersigned by (i) a
transfer agent other than the Corporation or its employee, or (ii) a registrar
other than the Corporation or its employee, any other signature on the
certificate may be a facsimile. In case any officer, transfer agent or registrar
who has signed or whose facsimile signature has been placed upon a certificate
shall have ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the Corporation with the same effect
as if he were such officer, transfer agent or registrar at the date of issue.
SECTION 3. Lost, Stolen or Destroyed Certificates. The Board of Directors
may direct a new certificate to be issued in accordance with Section 1 of this
Article V in place of any certificate theretofore issued by the Corporation
alleged to have been lost, stolen or destroyed, upon the making of an affidavit
of that fact by the person claiming the certificate of stock to be lost, stolen
or destroyed. When authorizing such issue of a new certificate, the Board of
Directors may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed certificate, or his
legal representative, to advertise the same in such manner as the Board of
Directors shall require and/or to give the Corporation a bond in such sum as it
may direct as indemnity against any claim that may be made against the
Corporation with respect to the certificate alleged to have been lost, stolen or
destroyed.
SECTION 4. Transfers. Stock of the Corporation shall be transferable in the
manner prescribed by law and in these By-laws. Transfers of stock shall be made
on the books of the Corporation (i) in the case of uncertificated shares, only
by the person named in the stock register of the Corporation, by an attorney
lawfully constituted in writing by such person or by any other representative of
such person acceptable to the Corporation, and (ii) in the case of shares
registered in certificate form, only by the person named in the certificate, by
an attorney lawfully constituted in writing by such person or by any other
representative of such person acceptable to the Corporation and upon the
surrender of the certificate therefor, which shall be cancelled before a new
certificate shall be issued in accordance with Section 1 of this Article V.
SECTION 5. Record Date. In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock, or for the purpose of
any other lawful action, the Board of Directors may fix a record date, which
record date shall not precede the date upon which the resolution fixing the
record date is adopted by the Board of Directors, and which record date shall
not be more than sixty days nor less than ten days before the date of such
meeting, nor more than sixty days prior to any other action. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting, provided, however,
that the Board of Directors may fix a new record date for the adjourned meeting.
SECTION 6. Beneficial Owners. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and to hold liable
for calls and assessments a person registered on its books as the owner of
shares, and shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the
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part of any other person, whether or not it shall have express or other notice
thereof, except as otherwise provided by law.
ARTICLE VI
NOTICES
SECTION 1. Notices. Whenever written notice is required by law, the
Certificate of Incorporation or these By-laws, to be given to any director,
member of a committee or stockholder, such notice may be given by mail,
addressed to such director, member of a committee or stockholder, at his address
as it appears on the records of the Corporation, with postage thereon prepaid,
and such notice shall be deemed to be given at the time when the same shall be
deposited in the United States mail. Written notice may also be given personally
or by telegram, telex or cable or by facsimile or other electronic transmission.
Notice given by any such means shall be deemed to have been given at the time
delivered, sent or transmitted.
SECTION 2. Waivers of Notice. Whenever any notice is required by law, the
Certificate of Incorporation or these By-laws, to be given to any director,
member of a committee or stockholder, a waiver thereof in writing, signed by the
person or persons entitled to said notice, whether before or after the time
stated therein, shall be deemed equivalent thereto.
ARTICLE VII
GENERAL PROVISIONS
SECTION 1. Dividends. Dividends upon the capital stock of the Corporation,
subject to the provisions of the Certificate of Incorporation, if any, may be
declared by the Board of Directors at any regular or special meeting, and may be
paid in cash, in property, or in shares of the capital stock. Before payment of
any dividend, there may be set aside out of any funds of the Corporation
available for dividends such sum or sums as the Board of Directors from time to
time, in its absolute discretion, deems proper as a reserve or reserves to meet
contingencies, or for equalizing dividends, or for repairing or maintaining any
property of the Corporation, or for any proper purpose, and the Board of
Directors may modify or abolish any such reserve.
SECTION 2. Disbursements. All checks or demands for money and notes of the
Corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
SECTION 3. Fiscal Year. The fiscal year of the Corporation shall be fixed
by resolution of the Board of Directors.
SECTION 4. Corporate Seal. The corporate seal shall have inscribed thereon
the name of the Corporation, the year of its organization and the words
"Corporate Seal, Delaware". The seal may be used by causing it or a facsimile
thereof to be impressed or affixed or reproduced or otherwise.
SECTION 5. Stock Held by Corporation. Powers of attorney, proxies, waivers
of meeting, consents and other instruments relating to securities owned by the
Corporation may be executed in the name and on behalf of the Corporation by the
Chairman of the Board, or such other officer or officers as the Board of
Directors or the Chairman of the Board may designate, and any such officer shall
have full power and authority on behalf of the Corporation, in person or by
proxy, to attend, and to act and vote at, any meeting of stockholders of any
corporation in which the Corporation may hold securities, and at any such
meeting shall possess, and may exercise, any and all of the rights and powers
incident to the ownership of such securities.
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ARTICLE VIII
INDEMNIFICATION
SECTION 1. Power to Indemnify in Actions, Suits or Proceedings other than
Those by or in the Right of the Corporation. Subject to Section 3 of this
Article VIII, the Corporation shall indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the Corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
SECTION 2. Power to Indemnify in Actions, Suits or Proceedings by or in the
Right of the Corporation. Subject to Section 3 of this Article VIII, the
Corporation shall indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action or suit by or in
the right of the Corporation to procure a judgment in its favor by reason of the
fact that he is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Corporation; except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the Corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
SECTION 3. Authorization of Indemnification. Any indemnification under this
Article VIII (unless ordered by a court) shall be made by the Corporation only
as authorized in the specific case upon a determination that indemnification of
the director, officer, employee or agent is proper in the circumstances because
he has met the applicable standard of conduct set forth in Section 1 or Section
2 of this Article VIII, as the case may be. Such determination shall be made (i)
by the Board of Directors by a majority vote of a quorum consisting of directors
who were not parties to such action, suit or proceeding, or (ii) if such a
quorum is not obtainable, or, even if obtainable a quorum of disinterested
directors so directs, by independent legal counsel in a written opinion, or
(iii) by the stockholders. To the extent, however, that a director, officer,
employee or agent of the Corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in Section 1
or Section 2 of this Article VIII, or in defense of any claim, issue or matter
therein, he shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection therewith, without the
necessity of authorization in the specific case.
SECTION 4. Good Faith Defined. For purposes of any determination under
Section 3 of this Article VIII, a person shall be deemed to have acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the Corporation, or, with respect to any criminal action or
proceeding, to have had no reasonable cause to believe his conduct was unlawful,
if his action is based on
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the records or books of account of the Corporation or another enterprise, or on
information, opinions, reports or statements supplied to him by the officers or
employees of the Corporation or another enterprise in the course of their
duties, or by a committee of the Board of Directors of the Corporation, or on
the advice of legal counsel for the Corporation or another enterprise or on
information or records given or reports or statements made to the Corporation or
another enterprise by an independent certified public accountant, by an
appraiser or by another person selected with reasonable care by or on behalf of
the Corporation or another enterprise as to matters such person reasonably
believes are within such certified public accountant's, appraiser's, or other
person's professional or expert competence. The term "another enterprise" as
used in this Section 4 shall mean any other corporation or any partnership,
joint venture, trust or other enterprise of which such person is or was serving
at the request of the Corporation as a director, officer, employee or agent. The
provisions of this Section 4 shall not be deemed to be exclusive or to limit in
any way the circumstances in which a person may be deemed to have met the
applicable standard of conduct set forth in Sections 1 or 2 of this Article
VIII, as the case may be.
SECTION 5. Indemnification by a Court. Notwithstanding any contrary
determination in the specific case under Section 3 of this Article VIII, and
notwithstanding the absence of any determination thereunder, any director,
officer, employee or agent may apply to any court of competent jurisdiction in
the State of Delaware for indemnification to the extent otherwise permissible
under Sections 1 and 2 of this Article VIII. The basis of such indemnification
by a court shall be a determination by such court that indemnification of the
director, officer, employee or agent is proper in the circumstances because he
has met the applicable standards of conduct set forth in Sections 1 or 2 of this
Article VIII, as the case may be. Notice of any application for indemnification
pursuant to this Section 5 shall be given to the Corporation promptly upon the
filing of such application.
SECTION 6. Expenses Payable in Advance. Expenses incurred in defending or
investigating a threatened or pending action, suit or proceeding may be paid by
the Corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of the director,
officer, employee or agent to repay such amount if it shall ultimately be
determined that he is not entitled to be indemnified by the Corporation as
authorized in this Article VIII.
SECTION 7. Non-exclusivity and Survival of Indemnification. The
indemnification and advancement of expenses provided by this Article VIII shall
not be deemed exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under any By-law,
agreement, contract, vote of stockholders or disinterested directors or pursuant
to the direction (howsoever embodied) of any court of competent jurisdiction or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office, it being the policy of the
Corporation that indemnification of the persons specified in Sections 1 and 2 of
this Article VIII shall be made to the fullest extent permitted by law. The
provisions of this Article VIII shall not be deemed to preclude the
indemnification of any person who is not specified in Sections 1 or 2 of this
Article VIII but whom the Corporation has the power or obligation to indemnify
under the provisions of the General Corporation Law of the State of Delaware, or
otherwise. The indemnification and advancement of expenses provided by this
Article VIII shall continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such person.
SECTION 8. Insurance. The Corporation may purchase and maintain insurance
on behalf of any person who is or was a director, officer, employee or agent of
the Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the Corporation would have the power or the obligation to
indemnify him against such liability under the provisions of this Article VIII.
SECTION 9. Meaning of "Corporation" for Purposes of Article VIII. For
purposes of this Article VIII, references to "the Corporation" shall include, in
addition to the resulting corporation, any constituent corporation (including
any constituent of a constituent) absorbed in a consolidation or merger which,
if its
-12-
separate existence had continued, would have had power and authority to
indemnify its directors, officers, and employees or agents, so that any person
who is or was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, shall stand in the same position under
the provisions of this Article VIII with respect to the resulting or surviving
corporation as he would have with respect to such constituent corporation if its
separate existence had continued.
OPCB0204.DOC
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EXHIBIT 10.14
OCCIDENTAL PETROLEUM CORPORATION
DEFERRED COMPENSATION PLAN
(Second Amendment and Restatement Effective as of January 1, 2003)
OCCIDENTAL PETROLEUM CORPORATION
DEFERRED COMPENSATION PLAN
(Second Amendment and Restatement Effective as of January 1, 2003)
ARTICLE I
PURPOSE
This document sets forth the terms of the Occidental Petroleum
Corporation Deferred Compensation Plan (the "Plan") as amended and restated
effective as of January 1, 2003. The prior Plan document, which was effective
January 1, 1999, constituted the amendment, restatement and merger of the
Occidental Petroleum Corporation 1988 Deferred Compensation Plan (the "1988
DCP") and the Occidental Petroleum Corporation Senior Executive Deferred
Compensation Plan (the "SEDCP").
The purpose of the Plan is to provide a tax-deferred opportunity for
key management and highly compensated employees of the Occidental Petroleum
Corporation and its Affiliates (as defined below) to accumulate additional
retirement income through deferrals of compensation.
ARTICLE II
DEFINITIONS
Whenever the following words and phrases are used in this Plan with
the first letter capitalized, they shall have the meanings specified below:
Affiliate. "Affiliate" means: (i) any corporation that is a member of
a controlled group of corporations (within the meaning of Code Section 1563(a),
determined without regard to Code Sections 1563(a)(4) and (e)(3)(C), and with
the phrase "more than 50%" substituted for the phrase "at least 80%" each place
it appears in Code Section 1563(a)) of which Occidental Petroleum Corporation is
a component member, or (ii) any entity (whether or not incorporated) that is
under common control with Occidental Petroleum Corporation (as defined in Code
Section 414(c) and the Treasury Regulations thereunder, and with the phrase
"more than 50%" substituted for the phrase "at least 80%" each place it appears
in the Treasury Regulations under Code Section 414(c)).
Alternate Payee. "Alternate Payee" means a former spouse of a
Participant who is recognized by a Divorce Order as having a right to receive
all, or a portion of, the benefits payable under this Plan with respect to such
Participant.
Amortization Method. "Amortization Method" means an annual installment
method of paying a Participant's benefits under which the Company will pay the
Participant an initial payment in an amount equal to (i) plus (ii) divided by
(iii), where (i) is the value of the Participant's Deferral Accounts as of the
end of the month preceding such payment, (ii) is the amount of interest that
would accrue during the entire payout period on the unpaid balance credited to
the Participant's Deferral Accounts immediately following such initial payment
if the Declared Rate then in effect remained unchanged and (iii) is the number
of years over which annual installments are to be paid. For each Plan Year after
the initial benefit payment is made,
the annual benefit payment will be determined under the same equation where (i)
is the value of the Participant's Deferral Accounts as of the end of the month
preceding the benefit payment, (ii) is the amount of interest that would accrue
during the remaining payout period on the unpaid balance credited to the
Participant's Deferral Accounts immediately following such annual payment if the
Declared Rate then in effect remained unchanged and (iii) is the number of
annual payments remaining.
Base Salary. "Base Salary" means the base salary earned by a
Participant during pay periods beginning in a Plan Year, excluding Bonus, all
severance allowances, forms of incentive compensation, Savings Plan, Retirement
Plan or other Company qualified plan contributions or benefits, retainers,
insurance premiums or benefits, reimbursements, and all other payments, prior to
reduction for any deferrals under this Plan or any other plan of the Company or
reductions under the Company's Savings Plan allowed under Section 401(k) of the
Code.
Beneficiary. "Beneficiary" means the person or persons designated as
such in accordance with Article VI.
Beneficiary Benefit. "Beneficiary Benefit" means the payment to a
Participant's Beneficiary of the value of the Participant's Deferral Accounts
pursuant to Section 5.2 on account of the Participant's death.
Board. "Board" means the Board of Directors of the Company.
Bonus. "Bonus" means the bonus earned by a Participant under a regular
annual incentive compensation plan (excluding without limitation a special
individual or group bonus, a project bonus, and any other special bonus) during
a Plan Year prior to reduction for any deferral under this Plan or any other
plan of the Company.
Code. "Code" means the Internal Revenue Code of 1986, as amended.
Committee. "Committee" means the administrative committee appointed to
administer the Plan pursuant to Article III.
Company. "Company" means Occidental Petroleum Corporation, or any
successor thereto, and any Affiliates.
Company Management. "Company Management" means the Chairman of the
Board, President or any Executive Vice President of Occidental Petroleum
Corporation.
Compensation. "Compensation" means Base Salary and/or Bonus.
DCP Deferral Account. "DCP Deferral Account" means the account
maintained on the books of account of the Company for each Participant pursuant
to Article IV to account for amounts deferred under the 1988 DCP prior to
January 1, 1999 and amounts deferred under this Plan after that date.
2
DCP Deferral Amount. "DCP Deferral Amount" means an amount of a
Participant's Base Salary and/or Bonus that is deferred under the Plan,
including both amounts deferred under the 1988 DCP prior to January 1, 1999, and
amounts deferred under this Plan after that date.
Declared Rate. "Declared Rate" with respect to any Plan Year means the
rate at which interest will be credited on Deferral Accounts for such Plan Year.
The Declared Rate for each Plan Year commencing in 1999 and thereafter will be
equal to the greater of: (i) (A) plus (B) where (A) is the Moody's Long-Term
Corporate Bond Index Monthly Average Corporates as published by Moody's Investor
Services, Inc. (or successor thereto) for the month of July in the year prior to
the Plan Year in question, and (B) is 3% ("Moodys Plus Three"), or (ii) the
highest yield on any unsecured debt or preferred stock of the Company that was
outstanding on the last day of July in the year prior to the Plan Year in
question. The Declared Rate will be announced on or before January 1 of the
applicable Plan Year. Notwithstanding the foregoing, the Declared Rate for DCP
Deferral Amounts that were earned and deferred prior to 1994 under the 1988 DCP
(including bonuses which were earned for 1993), together with accumulated
interest thereon, will in no event be less than 8% for any Plan Year.
Accordingly, the Declared Rate for any Plan Year may be different for DCP
Deferral Amounts that were earned and deferred under the 1988 DCP prior to
January 1, 1994 than for DCP Deferral Amounts earned and deferred after such
date.
Deferral Account(s). "Deferral Account(s)" means a Participant's DCP
Deferral Account and/or SEDCP Deferral Account (if any) and/or Savings Plan
Restoration Account (if any) maintained on the books of account of the Company
for each Participant pursuant to Article IV.
Deferral Election Form. "Deferral Election Form" means a paper or
electronic election form provided by the Committee on which an Eligible Employee
may elect to defer Base Salary and/or Bonus and may elect to receive an Early
Payment Benefit in accordance with Article IV.
Disability. "Disability" means a condition that qualifies as a
disability under the Company's Retirement Plan and is approved by the Committee.
Disability Benefit. "Disability Benefit" means the payment to a
Participant of the value of the Participant's Deferral Accounts pursuant to
Section 5.1 on account of the Participant's termination of employment due to a
Disability.
Distribution Election Form. "Distribution Election Form" means a paper
or electronic election form provided by the Committee on which a Participant may
elect the form of payment of his Retirement Benefits and/or the form of payment
of Beneficiary Benefits to his Beneficiary in accordance with Article V.
Divorce Order. "Divorce Order" means any judgment, decree, or order
(including judicial approval of a property settlement agreement) that relates to
the settlement of marital property rights between a Participant and his or her
former spouse pursuant to state domestic relations law (including, without
limitation and if applicable, community property law).
3
Early Payment Benefit. "Early Payment Benefit" means the payment to a
Participant of part or all of the Participant's DCP Deferral Account on an Early
Payment Date prior to Retirement pursuant to Section 5.4.
Early Payment Date. "Early Payment Date" means any year prior to
Retirement that a Participant elects pursuant to Section 4.1(b) to have an Early
Payment Benefit paid or commenced to be paid.
Early Payment Date Subaccount. "Early Payment Date Subaccount" means
any subaccount of a Participant's DCP Deferral Account established to separately
account for deferred Compensation (and interest credited thereto) that is
subject to an Early Payment Benefit election.
Eligible Employee. "Eligible Employee" means each key management or
other highly compensated employee of the Company who is selected by Company
Management to participate in the Plan.
Emergency Benefit. "Emergency Benefit" means the payment to a
Participant of part or all of his Deferral Accounts in the event that the
Participant has an unforeseeable financial emergency pursuant to Section 5.5.
Fractional Method. "Fractional Method" means an installment method of
paying a Participant's Retirement Benefit under which the Company will determine
the amount of each annual installment by dividing the value of the Participant's
Deferral Accounts as of the end of the month preceding the payment date by the
number of annual installments remaining to be paid.
1988 DCP. "1988 DCP" means the Occidental Petroleum Corporation 1988
Deferred Compensation Plan.
Participant. "Participant" means (i) each individual who, as of
December 31, 1998, was a participant in the 1988 DCP or the SEDCP and has not
received a complete distribution of the benefits accrued under those plans, (ii)
an Eligible Employee who has filed a completed and fully executed Deferral
Election Form with the Committee and is participating in the Plan in accordance
with the provisions of Article IV or (iii) any person who has a Deferral Account
by reason of his prior status as an Eligible Employee. Under no circumstances
shall "Participant" mean any Alternate Payee.
Plan Year. "Plan Year" means the calendar year beginning on January 1
and ending on December 31.
Qualified Divorce Order. "Qualified Divorce Order" means a Divorce
Order that (a) creates or recognizes the existence of an Alternate Payee's right
to, or assigns to an Alternate Payee the right to, receive all or a portion of
the benefits payable to a Participant under this Plan; (b) clearly specifies (i)
the name and the last known mailing address of the Participant and the name and
mailing address of the Alternate Payee covered by the order, (ii) the amount or
percentage of the Participant's benefits to be paid by this Plan to the
Alternate Payee, or the manner in which such amount or percentage is to be
determined, (iii) the number of payments or period to which such
4
order applies, and (iv) that it applies to this Plan; and (c) does not (i)
require this Plan to provide any type or form of benefit, or any option, not
otherwise provided under the Plan, (ii) require this Plan to provide increased
benefits, or (iii) require the payment of benefits to an Alternate Payee that
are required to be paid to another Alternate Payee under another Divorce Order
previously determined to be a Qualified Divorce Order.
Retirement. "Retirement" means: (i) the termination of a Participant's
employment with the Company for reasons other than Disability or death after the
Participant attains age 65, (ii) the termination of a Participant's employment
with the Company for reasons other than Disability or death after the
Participant attains age 55 and completes five (5) Years of Service or (iii)
effective January 1, 2001, the Participant's attainment of age 55 following the
Participant's termination of employment with the Company for reasons other than
Disability or death prior to attainment of age 55 if the Participant qualifies
for retiree medical coverage under the Occidental Petroleum Corporation Medical
Plan on the date of the Participant's termination of employment.
Retirement Benefit. "Retirement Benefit" means the payment to a
Participant of the value of the Participant's Deferral Accounts pursuant to
Section 5.1 following Retirement.
Retirement Plan. "Retirement Plan" means the Occidental Petroleum
Corporation Retirement Plan, as amended from time to time.
Savings Plan. "Savings Plan" means the Occidental Petroleum
Corporation Savings Plan, as amended from time to time.
Savings Plan Restoration Account. "Savings Plan Restoration Account"
means the account maintained on the books of account of the Company to reflect
Savings Plan Restoration Contributions made by the Company pursuant to Section
4.6.
Savings Plan Restoration Contribution. "Savings Plan Restoration
Contribution" means the amount credited to a Participant's Savings Plan
Restoration Account pursuant to Section 4.6.
SEDCP. "SEDCP" means the Occidental Petroleum Corporation Senior
Executive Deferred Compensation Plan under which certain Company executives
deferred compensation.
SEDCP Deferral Account. "SEDCP Deferral Account" means the account
maintained on the books of account of the Company for certain Participants
pursuant to Article IV to account for amounts deferred under the SEDCP.
Termination Benefit. "Termination Benefit" means the payment to a
Participant of the value of the Participant's Deferral Accounts pursuant to
Section 5.1 on account of the Participant's termination of employment other than
due to Retirement, Disability or death.
Termination Event. "Termination Event" means any of the following:
5
(a) Approval by the stockholders of the Company (or, if no
stockholder approval is required, by the Board) of the dissolution or
liquidation of the Company, other than in the context of a transaction that
does not constitute a Termination Event under clause (b) below;
(b) Consummation of a merger, consolidation, or other
reorganization, with or into, or the sale of all or substantially all of
the Company's business and/or assets as an entirety to, one or more
entities that are not subsidiaries or other affiliates of the Company (a
"Business Combination"), unless (i) as a result of the Business
Combination, more than 50% of the outstanding voting power of the surviving
or resulting entity or a parent thereof (the "Successor Entity")
immediately after the Business Combination is, or will be, owned, directly
or indirectly, by holders of the Company's voting securities immediately
before the Business Combination; (ii) no "person" (as such term is used in
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended
from time (the "Exchange Act")), excluding the Successor Entity or any
employee benefit plan of the Company and any trustee or other fiduciary
holding securities under a Company employee benefit plan or any person
described in and satisfying the conditions of Rule 13d-1(b)(i) of the
Exchange Act (an "Excluded Person"), beneficially owns, directly or
indirectly, more than 20% of the outstanding shares or the combined voting
power of the outstanding voting securities of the Successor Entity, after
giving effect to the Business Combination, except to the extent that such
ownership existed prior to the Business Combination; and (iii) at least 50%
of the members of the board of directors of the entity resulting from the
Business Combination were members of the Board at the time of the execution
of the initial agreement or of the action of the Board approving the
Business Combination;
(c) Any "person" (as such term is used in Sections 13(d) and
14(d) of the Exchange Act, but excluding any Excluded Person) is or becomes
the beneficial owner (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Company representing 20% or
more of the combined voting power of the Company's then outstanding voting
securities, other than as a result of (i) an acquisition directly from the
Company; (ii) an acquisition by the Company; or (iii) an acquisition by any
employee benefit plan (or related trust) sponsored or maintained by the
Company or a Successor Entity; or
(d) During any period not longer than two consecutive years,
individuals who at the beginning of such period constituted the Board cease
to constitute at least a majority thereof, unless the election, or the
nomination for election by the Company's stockholders, of each new Board
member was approved by a vote of at least two-thirds (2/3) of the Board
members then still in office who were Board members at the beginning of
such period (including for these purposes, new members whose election or
nomination was so approved), but excluding, for this purpose, any such
individual whose initial assumption of office occurs as a result of an
actual or threatened election contest with respect to the election or
removal of directors or other actual or threatened solicitation of proxies
or consents by or on behalf of a person other than the Board.
6
(e) Notwithstanding the foregoing, a Termination Event shall not
occur if, prior to the Termination Event, the Executive Compensation and
Human Resources Committee of the Board deems such an event to not be a
Termination Event for the purposes of this Plan.
Years of Service. "Years of Service" means the number of full years
credited to a Participant under the Retirement Plan for vesting purposes.
ARTICLE III
ADMINISTRATION OF THE PLAN
A Committee shall be appointed by the Board to administer the Plan and
establish, adopt, or revise such rules and regulations as the Committee may deem
necessary or advisable for the administration of the Plan and to interpret the
provisions of the Plan, and, except as otherwise indicated herein, any such
interpretations shall be conclusive and binding. All decisions of the Committee
shall be by vote of at least two of the Committee members and shall be final.
The Committee may appoint any agent and delegate to such agent such powers and
duties in connection with the administration of the Plan as the Committee may
from time to time prescribe.
Members of the Committee shall be eligible to participate in the Plan
while serving as members of the Committee, but a member of the Committee shall
not vote or act upon any matter which relates solely to such member's interest
in the Plan as a Participant.
7
ARTICLE IV
PARTICIPATION
4.1 Election to Participate.
(a) Deferral Elections. An Eligible Employee may elect to participate
in the Plan and elect to defer annual Base Salary and/or Bonus under the Plan by
filing a completed and fully executed Deferral Election Form prior to the
beginning of the Plan Year during which such Base Salary and Bonus are to be
earned or at such other time as the Committee may permit. Deferral Election
Forms must be filed in accordance with the instructions set forth in the
Deferral Election Forms.
Various deferral options will be made available to Eligible Employees
under the Plan, subject to such limitations and conditions as the Committee may
impose from time to time, in its complete and sole discretion. A Deferral
Election Form filed for the Plan Year beginning January 1, 2003, or for any
subsequent Plan Year shall be effective for Base Salary and/or Bonus to be
earned during that Plan Year and shall remain in effect for that Plan Year and
subsequent Plan Years, notwithstanding any change in the Participant's Base
Salary or Bonus, until changed or terminated in accordance with the terms of
this Section 4.1; provided, however, that such election shall terminate if the
Participant ceases to be an Eligible Employee. Subject to the minimum deferral
requirements and maximum deferral limitations set forth below, a Participant may
increase, decrease or terminate his deferral election effective for Compensation
to be earned during any Plan Year by filing a new Deferral Election Form with
the Committee prior to January 1 of such Plan Year.
Each Deferral Election Form will designate the DCP Deferral Amounts as
a fixed dollar amount or fixed percentage (in increments of 1%) of Base Salary
and/or (i) a fixed dollar amount or a fixed percentage of Bonus, or (ii) 100% of
any Bonus exceeding a specified dollar amount, as elected by the Participant.
Deferrals of Base Salary will normally be deducted ratably during the Plan Year.
In its sole discretion, the Committee may also permit amounts that an Eligible
Employee has previously elected to defer under other plans or agreements with
the Company to be transferred to this Plan and credited to his Deferral Accounts
that are maintained hereunder.
(A) Minimum Deferral. For each Plan Year, the minimum amount of
Base Salary that a Participant may elect to defer is $5,000, if expressed
as a dollar amount, or 5% of Base Salary, if expressed as a percentage, and
the minimum amount of Bonus that a Participant may elect to defer is any of
the following: (I) $5,000, (II) 5% of Bonus, or (III) 100% of that portion
of any Bonus that exceeds a dollar amount specified by the Participant on
his Deferral Election Form.
(B) Maximum Deferral. For each Plan Year, the maximum amount of
Base Salary that a Participant may elect to defer is 75% of Base Salary,
and the maximum amount of Bonus that a Participant may elect to defer is
100% of Bonus.
(b) Early Payment Benefit Election. On the Deferral Election Form
filed pursuant to Section 4.1(a), an Eligible Employee may irrevocably elect to
receive the
8
Compensation deferred pursuant to that election in a lump sum payment or in
annual installments over two (2) to five (5) years commencing prior to
Retirement on an Early Payment Date. If a Participant fails to designate the
form of distribution for an Early Payment Benefit, the distribution shall be in
the form of a lump sum. The Early Payment Date elected must be a year that
begins at least two (2) years after the end of the first Plan Year to which the
election applies. An Early Payment Benefit election filed for the Plan Year
beginning January 1, 2003, or for any subsequent Plan Year, shall be effective
for Compensation earned and deferred during that Plan Year and each subsequent
Plan Year until terminated in accordance with the terms of this Section 4.1;
provided, however, that deferrals of Compensation earned during any Plan Year
that ends less than two (2) years prior to the Early Payment Date will not be
subject to the Early Payment Benefit election and shall be paid upon the
Participant's termination of employment as set forth in Section 5.1 or 5.2, as
the case may be. A Participant may terminate an election for an Early Payment
Benefit with respect to Compensation deferred in any future Plan Year by filing
a new Deferral Election Form with the Committee prior to January 1 of such Plan
Year. A Participant may not, however, change the form of benefit or time of
commencement of Early Payment Benefit with respect to Compensation deferred
pursuant to a Deferral Election Form after that Deferral Election is filed
pursuant to Section 4.1(a).
A Participant may not at any time have more than two Early Payment
Dates scheduled. However, after an Early Payment Date has occurred and all
payments with respect to the corresponding Early Payment Date election have been
completed, a Participant may elect a new Early Payment Date for future deferrals
of Compensation.
4.2 DCP Deferral Accounts. The Committee shall establish and maintain a
separate DCP Deferral Account for each Participant. The amount credited to a
Participant's Deferral Account under the 1988 DCP as of December 31, 1998
remained credited to his DCP Deferral Account under this Plan as of January 1,
1999. A DCP Deferral Amount shall be credited by the Company to the
Participant's DCP Deferral Account as of the date that the Participant's Base
Salary or Bonus would otherwise have been paid. Such DCP Deferral Account shall
be debited by the amount of any payments made by the Company to the Participant
or the Participant's Beneficiary therefrom as of the date of payment. The
Committee shall establish an Early Payment Date Subaccount within a
Participant's DCP Deferral Account for each Early Payment Date elected by that
Participant. Any such Early Payment Date Subaccount shall be debited by the
amount of any Early Payment Benefit paid by the Company to the Participant on or
beginning on such Early Payment Date pursuant to Section 5.4 as of the date of
payment.
4.3 SEDCP Deferral Accounts. The Committee shall maintain a separate SEDCP
Deferral Account for each Participant who was a participant in the SEDCP on
December 31, 1998. The balance of such Participant's accounts under the SEDCP as
of December 31, 1998 remained credited to each such Participant's SEDCP Deferral
Account under this Plan as of January 1, 1999. SEDCP Deferral Accounts shall be
debited by the amount of any payments made by the Company to the Participant or
the Participant's Beneficiary therefrom as of the date of payment.
4.4 Interest. Each Deferral Account of a Participant shall be deemed to
bear interest on the monthly balance of such Deferral Account at the Declared
Rate for each Plan Year, compounded monthly. Except as provided in Section
5.2(a) with respect to SEDCP Deferral
9
Accounts for Participants who die prior to becoming eligible for Retirement,
interest will be credited to each Deferral Account on a monthly basis on the
last day of each month as long as any amount remains credited to such Deferral
Account. Effective January 1, 2003, amounts of deferred Compensation that are
credited to a Deferral Account and amounts of Savings Plan Restoration
Contributions that are credited to a Savings Plan Restoration Account prior to
the end of a calendar month shall accrue interest from the date of crediting,
computed on the basis of a 30-day month based on days elapsed from date of
crediting to the end of the month.
4.5 Valuation of Deferral Accounts. The value of a Deferral Account as of
any date shall equal the amounts previously credited to such Deferral Account
less any payments debited to such Deferral Account plus the interest deemed to
be earned on such Deferral Account in accordance with Section 4.4 through the
end of the preceding month. When payments are made from a DCP Deferral Account
for any reason other than an Early Payment Benefit elected after January 1,
1994, such payments shall be deemed to be made on a proportionate or pro-rata
basis from DCP Deferral Amounts (including accumulated interest thereon) that
were earned and deferred under the 1988 DCP prior to January 1, 1994 and DCP
Deferral Amounts (including accumulated interest thereon) that were earned and
deferred after that date.
4.6 Savings Plan Restoration Contribution. For each Plan Year, the Company
shall credit to the Savings Plan Restoration Account of any Participant, an
amount equal to the amount by which the contribution that would otherwise have
been made by the Company on behalf of the Participant to the Savings Plan for
such Plan Year is reduced by reason of the reduction in the Participant's Base
Salary for such Plan Year because of deferrals under this Plan. The Savings Plan
Restoration Contribution shall be credited to the Savings Plan Restoration
Account of each Participant for each Plan Year at the same time as the Company
contribution for such Plan Year is made to the Savings Plan. A Participant's
interest in any credit to his Savings Plan Restoration Account and earnings
thereon shall vest at the same rate and at the same time as would have been the
case had such contribution been made to the Savings Plan. Notwithstanding
anything contained herein to the contrary, if, upon a Participant's termination
of employment, the Participant has not or does not become 100% vested in his
Savings Plan Restoration Account, the unvested portion of his Savings Plan
Restoration Account shall be forfeited prior to the determination of the amount
of any benefits under Sections 5.1, 5.6 or 5.7.
4.7 Statement of Deferral Accounts. The Committee shall submit to each
Participant, within 120 days after the close of each Plan Year, a statement in
such form as the Committee deems desirable, setting forth the Participant's
Deferral Account(s).
ARTICLE V
BENEFITS
5.1 Termination of Employment for a Reason Other Than Death.
(a) Form and Time of Benefit. Except as otherwise provided in this
Section 5.1, upon a Participant's termination of employment for a reason other
than death (including Retirement and Disability), the Company shall pay to the
Participant in a single lump sum within the first 90 days of the calendar year
following the Participant's termination of employment an amount equal to the
value of the Participant's Deferral Accounts as of the end of
10
the month preceding payment (after reduction for any forfeitures as set forth in
Section 4.6). Any Retirement or Termination Benefits paid in annual installments
pursuant to Section 5.1(b) or 5.1(c) shall be paid within the first 90 days of
each calendar year, beginning with the year following the Participant's
Retirement or other termination of employment and shall be determined based on
the value of the Participant's Deferral Accounts as of the last day of the month
preceding payment.
(b) Retirement. A Participant may elect in his Distribution Election
Form to have the Retirement Benefit, which may consist solely of the
participant's Savings Plan Restoration Account, paid to him in a lump sum,
annual payments for any other number of years between two (2) and 20 years or,
if available as an option on the Distribution Election Form provided to the
Participant, in a combination of an initial lump sum payment followed by annual
installments over the next one (1) to 20 years. The amount of each annual
installment will be determined under either the Amortization Method or the
Fractional Method. Unless the Participant otherwise elects, the amount of any
such annual payments shall be calculated under the Amortization Method in the
case of a Participant retiring before 2004 and under the Fractional Method in
the case of a Participant retiring in 2004 and subsequent years. Any election of
an alternative form of distribution or the alternate method of calculating
installment amounts under this Section 5.1(b) must be made on a Distribution
Election Form and must be received by the Committee no later than the December
31 preceding the date of the Participant's Retirement and shall become effective
on the date that is 12 months after the Distribution Election Form is received
by the Committee.
A Participant may change his election as to the form of payment and/or
method of calculating annual installment amounts, provided that his change
election is made on a Distribution Election Form and such election is received
by the Committee no later than the December 31 preceding the date of the
Participant's Retirement, unless otherwise permitted by the Committee. Such
change in election shall become effective on the date that is 12 months after
the Distribution Election Form is received by the Committee. Subject to the
foregoing limitations, a Participant may make such election (or revoke a prior
election and make a new election) at any time. Any election (or modification or
revocation of a prior election) that is made later than the December 31
preceding the Participant's Retirement will be considered void and shall have no
force or effect, except as otherwise determined by the Committee.
(c) Termination Prior to Retirement. If a Participant's employment
with the Company terminates for any reason other than Retirement, Disability or
death, then Participant shall receive a Termination Benefit in a lump sum as
provided in Section 5.1(a); provided, however, at the sole discretion of the
Committee, no lump sum shall be payable and instead, the Company shall pay to
the Participant an annual amount for a period not to exceed three (3) years,
determined using the Fractional Method.
(d) Disability. If a Participant's employment with the Company
terminates prior to Retirement due to a Disability, then the Participant shall
receive a Disability Benefit in a lump sum within the first 90 days of the
calendar year following the calendar year in which the Participant attains age
55 in an amount equal to the value of the Participant's Deferral Accounts as of
the end of the month preceding payment.
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(e) Effect of Pre-Retirement Termination of Employment on Spousal
Survivor Benefits. Spousal survivor benefits (if any) under Section 5.3 of the
Plan shall not be payable to the spouse of a Participant who terminates
employment prior to Retirement and receives a Termination Benefit or a
Disability Benefit under this Section 5.1.
5.2 Beneficiary Benefits.
(a) If a Participant dies while employed by the Company prior to
becoming eligible for Retirement, the Company shall pay to the Participant's
Beneficiary in a single lump sum an amount equal to the value of the
Participant's DCP Deferral Account and Savings Plan Restoration Account, if any.
If such Participant also has an SEDCP Deferral Account, the Company will also
pay to the Participant's Beneficiary annual payments over the greater of (i) 10
years or (ii) until the Participant would have attained age 65 equal to 25% of
the amount deferred under the SEDCP (excluding any interest on such deferrals),
which payments shall be in full satisfaction of the benefits payable with
respect to the Participant's SEDCP Deferral Account. Notwithstanding the
foregoing, the Participant's Beneficiary shall instead be paid the amount
credited to the Participant's SEDCP Deferral Account as of the end of the month
in which his death occurred plus interest at a rate of 8% per annum, compounded
annually, from the end of such month and credited annually on each anniversary
of the end of such month payable in equal installments (using the Amortization
method) over the period described in the succeeding sentence, if the Committee
determines that the present value of such benefit is greater than the present
value of the benefit described in the preceding sentence. In comparing the
present value of these two alternative benefits, the Committee shall use in each
case a discount factor of 8%.
(b) If a Participant dies while employed by the Company after
becoming eligible for Retirement, the Company will pay to the Participant's
Beneficiary in a single lump sum a Beneficiary Benefit that is an amount equal
to the value of the Participant's Deferral Accounts.
(c) If a Participant dies after the commencement of payment of his
Retirement Benefit, then the remaining installments of the Retirement Benefit
shall be payable to his Beneficiary in the same amounts and at the same times as
such installment would have been paid to the Participant if he were living.
(d) Notwithstanding the foregoing provisions of this Section 5.2, a
Participant may elect at any time that if he dies prior to the commencement of
his Retirement Benefits, then the payment to his Beneficiary shall be made in
any form and calculated in any other manner described in Section 5.1(b). Such an
election shall be on a Distribution Election Form.
(e) The payment or payments to a Beneficiary of a deceased
Participant under this Section 5.2 shall be made or commence during the first 90
days of the calendar year following the year in which the Participant's death
occurred, and the amount of such payment shall be equal to, or determined based
on, the value of the Participant's Deferral Accounts as of the end of the month
preceding payment.
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(f) In the event that the Beneficiary of a deceased Participant dies
prior to the completion of payments under this Plan to that Beneficiary, all
remaining payments to that Beneficiary shall be paid in a lump sum to that
Beneficiary's estate.
5.3 Spousal Survivor Benefits with Respect to SEDCP Deferral Accounts. If
a Participant who has an SEDCP Deferral Account dies after becoming eligible for
Retirement or after commencement of payment of his Retirement Benefit and a
spouse to whom he had been married to for at least one (1) year prior to his
death survives beyond completion of payment of the Participant's SEDCP Deferral
Account balance, the Company shall pay such spouse a lump sum payment in an
amount equal to 10% of the Participant's SEDCP Deferral Account balance valued
as of the earlier of the date of the Participant's Retirement or death. Such
lump sum spousal survivor benefit shall be paid as soon as administratively
practicable following the later of the completion of payment of the
Participant's SEDCP Deferral Account balance or the Participant's death. No
benefit shall be payable under this Section 5.3 if the Participant's spouse does
not survive beyond completion of payment of the Participant's SEDCP Deferral
Account balance. Notwithstanding the foregoing, no spousal survivor benefit
shall be payable to the spouse of any Participant who received benefits pursuant
to Section 5.1(c) (Termination Benefit), Section 5.1(d) (Disability Benefit) or
Section 5.6 (Immediate Payment on Termination Event).
5.4 Early Payment. Payment of the amounts credited to any Early Payment
Date Subaccount of a Participant shall be paid or commence to be paid within the
first 90 days of the year elected as the Early Payment Date in accordance with
the Participant's election under Section 4.1(b), with any subsequent annual
payments paid in the first 90 days of each applicable year. The amount of each
annual installment will be determined under either the Amortization Method or
the Fractional Method. The amount of any such annual payments shall be
calculated under the Amortization Method for Early Payment Dates elected prior
to 2003 and unless the Participant otherwise irrevocably elects at the time of
making the Early Payment Benefit Election, under the Fractional Method for Early
Payment Dates elected in 2003 and later.
Notwithstanding the foregoing, if the Participant terminates
employment with the Company for any reason prior to commencement or completion
of all Early Payment Benefits, all such elections made by the Participant to
receive Early Payment Benefits shall terminate and any amounts remaining
credited to the Participant's Early Payment Date Subaccount(s) shall be paid,
together with the other amounts credited to the Participant's Deferral Account,
as set forth in Section 5.1 or 5.2, as the case may be.
5.5 Emergency Benefit. In the event that the Committee, upon written
petition of the Participant, determines in its sole discretion that the
Participant has suffered an unforeseeable financial emergency, the Company shall
pay to the Participant, as soon as practicable following such determination, an
amount up to the balance of the Participant's Deferral Accounts that is
necessary to meet the emergency ("Emergency Benefit"). Such payment shall come
first from the amounts not credited to any Early Payment Date Subaccount and, if
the Participant has elected two (2) Early Payment Dates, next from the Early
Payment Date Subaccount for the later Early Payment Date. No amount may be paid
to the Participant under this Section 5.5 from any unvested portion of the
Participant's Savings Plan Restoration Account. For purposes of this Plan, an
unforeseeable financial emergency is a severe financial hardship to the
Participant arising from a sudden and unexpected illness or accident of the
Participant or a dependent of the
13
Participant, loss of the Participant's property due to a casualty, or other
similar extraordinary and unforeseeable circumstances arising as a result of
events beyond the control of the Participant. Cash needs arising from
foreseeable events such as the purchase of a home or education expenses for
children shall normally not be considered to be the result of an unforeseeable
financial emergency.
Whenever a Participant receives a distribution under this Section 5.5,
the Participant will be deemed to have revoked all current deferral elections
under the Plan effective as of the date of the distribution. The Participant
will not be permitted to participate in the next enrollment period under the
Plan and will be precluded from electing to make new deferrals under the Plan
for a minimum period of one (1) year (or such lesser period as the Committee may
permit) following receipt of the distribution.
5.6 Immediate Payment on Termination Event. Upon petition of a Participant
within 60 days after any Termination Event or such other period as the Committee
may permit, the Committee, in its sole discretion, may direct the Company to pay
the balance of the Participant's Deferral Accounts, reduced by any unvested
portion of the Participant's Savings Plan Restoration Account, to him
immediately in a lump sum as a Termination Benefit pursuant to Section 5.1,
irrespective of whether the Participant terminates or continues employment with
the Company. Spousal survivor benefits (if any) under Section 5.3 of the Plan
shall not be payable to the spouse of a Participant who receives benefits under
this Section 5.6.
5.7 Small Benefit. Notwithstanding anything contained herein to the
contrary, in the event that the value of a Participant's Deferral Accounts as of
the end of the Plan Year in which the Participant's Retirement or other
termination of employment occurs is less than $20,000 (after reduction for any
forfeiture pursuant to Section 4.6), such amount (with interest to the end of
the month preceding the payment date) shall be paid in a cash lump sum without
regard to any contrary elections, unless the Committee determines otherwise.
5.8 Lump Sum Payment With Penalty. Notwithstanding any other provisions of
the Plan, in lieu of payments in accordance with the form previously elected by
the Participant, a Participant (or his Beneficiary, in the event of the
Participant's death) may elect at any time to receive an immediate lump sum
payment of all or part of the vested balance of the Participant's Deferral
Accounts, reduced by a penalty, which shall be forfeited to the Company, equal
to 10% of the amount withdrawn from the Participant's Deferral Accounts. Such
payment shall come first from the amounts not credited to any Early Payment Date
Subaccount and, if the Participant has elected two (2) Early Payment Dates, next
from the Early Payment Date Subaccount for the later Early Payment Date. No
amount may be paid to a Participant under this Section 5.8 from any unvested
portion of the Participant's Savings Plan Restoration Account.
Whenever a Participant receives a lump sum payment under this Section
5.8, the Participant will be deemed to have revoked all current deferral
elections under the Plan effective as of the date of the lump sum payment. The
Participant will not be permitted to participate in the next enrollment period
under the Plan and will be precluded from electing to make new deferrals under
the Plan for a minimum period of one (1) year (or such lesser period as the
Committee may permit) following receipt of the lump sum payment.
14
5.9 Tax Withholding and Reporting.
(a) To the extent required by the law in effect at the time payments
are made, the Company shall withhold from payments made hereunder the taxes
required to be withheld by Federal, state and local law.
(b) The Company shall have the right at its option to (i) require a
Participant to pay or provide for payment of the amount of any taxes that the
Company may be required to withhold with respect to interest or other amounts
that the Company credits to a Participant's Deferral Accounts or (ii) deduct
from any amount of salary, bonus or other payment otherwise payable in cash to
the Participant the amount of any taxes that the Company may be required to
withhold with respect to interest or other amounts that the Company credits to a
Participant's Deferral Accounts.
(c) The tax withholding and reporting rules described in this
subsection shall apply to payments made under the Plan pursuant to a Qualified
Divorce Order, shall be subject to any applicable superceding guidance
promulgated by the Internal Revenue Service, and shall apply in addition to (not
in substitution of) the preceding two subsections. Amounts paid to an Alternate
Payee shall be subject to federal income tax withholding and, together with
amounts so withheld, shall be reportable to the Alternate Payee. In addition,
amounts paid to an Alternate Payee shall be subject to taxation under the
Federal Insurance Contributions Act ("FICA") and the Federal Unemployment Tax
Act ("FUTA") to the same extent as if such amounts had been paid to the
Participant. To the extent that amounts paid to an Alternate Payee are subject
to taxation under FICA and/or FUTA, such payments shall be treated as the wages
of the Participant, and shall be so reportable, but any amounts required under
FICA to be withheld from such payments shall be withheld from the payments to
the Alternate Payee.
5.10 Termination of Employment. For the purpose of this Article V, a
Participant will be deemed to have terminated employment if the Participant
ceases to be an employee of any of the following:
(a) the Company;
(b) an Affiliate; or
(c) any other entity, whether or not incorporated, in which the
Company has an ownership interest, and the Committee has designated that
the Participant's commencement of employment with such entity upon
Participant's ceasing to be an employee of an entity described in (a) or
(b) above will not be deemed to be a termination of employment for purposes
of this Plan, provided that such designation shall be made in writing by
the Committee and shall be communicated to the Participant prior to his
commencement of employment with the entity so designated.
For the purposes of the preceding provisions, a Participant who ceases to be an
employee of an entity described in (a), (b) or (c) above shall not be deemed to
have terminated employment if such cessation of employment is followed
immediately by his commencement of employment with another entity described in
(a), (b) or (c) above.
15
5.11 Re-Employment. If a Participant's employment with the Company is
terminated and such Participant is re-employed by the Company prior to the
payment of his benefits in a cash lump sum payment or while he is receiving
benefits in the form of annual installment payments, the payment of the lump sum
amount or the future installments, as the case may be, shall be suspended until
he again terminates employment with the Company. Such Participant may elect to
again participate in this Plan and to defer additional Base Salary and/or Bonus
as provided in Section 4.1. Such rehired Participant may file a Distribution
Election Form as provided in Section 5.1(b) and/or Section 5.2(d) to be
applicable to all amounts deferred under this Plan (both before and after his
original termination of employment); provided, however, that such Distribution
Election Form shall not be effective as to the form of payment of Retirement
Benefits until 12 months after it is received by the Committee. Upon the
Participant's subsequent termination of employment with the Company, the total
amounts then credited to his Deferral Accounts shall be distributed in
accordance with Article V of this Plan and the most recently filed Distribution
Election Form (if any) that has become effective. If the Participant's original
termination of employment was on account of Retirement and he had elected a form
of installment payout, then the amounts credited to his Deferral Accounts at the
time of his subsequent Retirement shall be distributed over the number of years
that were remaining in the payout period at the time of his re-employment unless
he filed a new Distribution Election Form at least 12 months prior to his
subsequent Retirement.
5.12 Qualified Divorce Orders. Subject to the policies and procedures
established by the Committee under Section 9.3(b) hereof and the provisions of
this Plan, benefits may be paid from the balance of a Participant's Deferral
Account(s) in accordance with a Qualified Divorce Order without regard to
whether the Participant has terminated employment in accordance with Section
5.10 hereof. In addition, and notwithstanding any provision in the Plan to the
contrary, the Committee shall follow any distribution requirement contained in a
Qualified Divorce Order that provides for an earlier lump sum distribution than
would otherwise be permitted under this Plan.
ARTICLE VI
BENEFICIARY DESIGNATION
Each Participant shall have the right, at any time, to designate any
person or persons as the Beneficiary to whom payments under this Plan shall be
made in the event of the Participant's death prior to complete distribution to
the Participant of the benefits due under the Plan. Each Beneficiary designation
shall become effective only when filed in writing with the Committee during the
Participant's lifetime on a paper form prescribed by the Committee. The filing
of a new Beneficiary designation form will cancel any inconsistent Beneficiary
designation previously filed.
If a Participant fails to designate a Beneficiary as provided above,
or if all designated Beneficiaries predecease the Participant, any benefits
remaining unpaid shall be paid in accordance with the Participant's Beneficiary
designation under the Company's Retirement Plan, and if there is no such valid
Beneficiary designation, to the Participant's then surviving spouse, or if none,
to the Participant's estate, unless directed otherwise by the court that has
jurisdiction over the assets belonging to the Participant's probate estate.
16
ARTICLE VII
CLAIMS PROCEDURE
All applications for benefits under the Plan shall be submitted to:
Occidental Petroleum Corporation, Attention: Deferred Compensation Plan
Committee, 10889 Wilshire Blvd., Los Angeles, CA 90024. Applications for
benefits must be in writing on the forms prescribed by the Committee and must be
signed by the Participant, or in the case of a Beneficiary Benefit, by the
Beneficiary or legal representative of the deceased Participant. Each
application shall be acted upon and approved or disapproved within 60 days
following its receipt by the Committee. If any application for a benefit is
denied, in whole or in part, the Committee shall notify the applicant in writing
of such denial and of his right to a review by the Committee and shall set forth
in a manner calculated to be understood by the applicant, specified reasons for
such denial, specific references to pertinent Plan provisions on which the
denial is based, a description of any additional material or information
necessary for the applicant to perfect his application, an explanation of why
such material or information is necessary, and an explanation of the Plan's
review procedure.
Any person, or his duly authorized representative, whose application
for benefits is denied in whole or in part, may appeal such denial to the
Committee for a review of the decision by submitting to the Committee within 60
days after receiving notice of the denial, a written statement:
(a) requesting a review of his application for benefits by the
Committee;
(b) setting forth all of the grounds upon which his request for
review is based and any facts in support thereof; and
(c) setting forth any issues or comments which the applicant deems
relevant to his application.
The Committee shall act upon each such application within 60 days
after the later of receipt of the applicant's request for review by the
Committee or receipt of any additional materials reasonably requested by the
Committee from such applicant.
The Committee shall make a full and fair review of each such
application and any written materials submitted by the applicant or the Company
in connection therewith, and may require the Company or the applicant to submit
within 30 days of written notice by the Committee, such additional facts,
documents, or other evidence as the Committee, in its sole discretion, deems
necessary or advisable in making such a review. On the basis of its review, the
Committee shall make an independent determination of the applicant's eligibility
for benefits under the Plan. The decision of the Committee on any application
for benefits shall be final and conclusive upon all persons.
If the Committee denies an application in whole or in part, the
Committee shall give written notice of its decision to the applicant setting
forth in a manner calculated to be understood by the applicant, the specific
reasons for such denial and specific references to the pertinent Plan provisions
on which the Committee's decision was based.
17
No legal action may be commenced prior to the completion of the
benefit claims procedure described herein. In addition, no legal action may be
commenced after the later of (a) 180 days after receiving the written response
of the Committee to an appeal, or (b) 365 days after an applicant's original
application for benefits.
ARTICLE VIII
AMENDMENT AND TERMINATION OF PLAN
8.1 Amendment. The Board may amend the Plan in whole or in part at any
time for any reason, including but not limited to, tax, accounting or other
changes, which may result in termination of the Plan for future deferrals. The
Committee, in its discretion, may amend the Plan if the Committee determines
that such amendment does not significantly increase or decrease Plan benefits or
costs. Notwithstanding the foregoing, no amendment shall: (a) reduce the amounts
that have been credited to the Deferral Account(s) of any Participant prior to
the date such amendment is adopted, (b) eliminate the spousal survivor benefit
under Section 5.3, or (c) change the definition of the Declared Rate set forth
in Article II to a rate or to a formula that, as of the last day of the month
preceding the date such amendment is adopted, produces a rate that is less than
the lesser of: (i) Moodys Plus Three (as defined in Article II and calculated as
of the last day of the month preceding the date such amendment is adopted), or
(ii) the highest yield on any unsecured debt or preferred stock of the Company
that was outstanding on the last day of the month immediately preceding the date
such amendment is adopted. Any amendment that would either (i) reduce the
Declared Rate to a rate or to a formula that, as of the last day of the month
preceding the date such amendment is adopted, produces a rate that is less than
Moodys Plus Three (as defined in Article II and calculated as of the last day of
the month preceding the date such amendment is adopted), or (ii) change the
terms of the amendment provisions of this Section 8.1 or the terms of the
termination provisions of Section 8.2, shall not be effective prior to the date
that is two years after the date such amendment is adopted, unless the amendment
is required by a change in the tax or other applicable laws or accounting rules.
Notwithstanding the foregoing, following a Termination Event, no amendment
shall: (a) reduce the amounts that have been credited to the Deferral Account(s)
of any Participant prior to the date such amendment is adopted, (b) eliminate
the spousal survivor benefit under Section 5.3, (c) change the definition of the
Declared Rate set forth in Article II to a rate or to a formula that, as of the
last day of the month preceding the date of the Termination Event, produces a
rate that is less than Moodys Plus Three (as defined in Article II and
calculated as of the last day of the month preceding the date of the Termination
Event), or (d) change the terms of the amendment provisions of this Section 8.1
or the terms of the termination provisions of Section 8.2.
8.2 Termination.
(a) Company's Right to Terminate. The Board may terminate the Plan at
any time, if in the Board's judgment, the continuance of the Plan would not be
in the Company's best interest due to tax, accounting or other effects thereof,
or potential payouts thereunder, provided that any termination of the Plan shall
not be effective prior to the date that is two years after the date the Board
adopts a resolution to terminate the Plan, unless the termination of the Plan is
required by a change in the tax or other applicable laws or accounting rules.
Notwithstanding the foregoing, following a Termination Event, the Plan may not
be terminated prior to the date that is three years after the date the
Termination Event occurs. In the event the Board adopts a
18
resolution terminating the Plan, the Board or the Committee shall determine the
date as of which all deferral elections shall cease to apply so that no further
Base Salary or Bonus shall be deferred under the Plan.
(b) Payments Upon Termination. Upon any termination of the Plan under
this Section 8.2, the Board or Committee shall determine the date or dates of
Plan distributions to the Participants, which date or dates shall not be later
than the date or dates on which the Participants or their Beneficiaries would
otherwise receive benefits hereunder.
ARTICLE IX
MISCELLANEOUS
9.1 Unsecured General Creditor. The rights of a Participant, Beneficiary,
or their heirs, successors, and assigns, as relates to any Company promises
hereunder, shall not be secured by any specific assets of the Company, nor shall
any assets of the Company be designated as attributable or allocated to the
satisfaction of such promises.
9.2 Trust Fund. The Company shall be responsible for the payment of all
benefits provided under the Plan. At its discretion, the Company may establish
one or more trusts, with such trustees as the Board or Committee may approve,
for the purpose of providing for the payment of such benefits. Such trust or
trusts may be irrevocable, but the assets thereof shall be subject to the claims
of the Company's creditors. To the extent any benefits provided under the Plan
are actually paid from any such trust, the Company shall have no further
obligation with respect thereto, but to the extent not so paid, such benefits
shall remain the obligation of, and shall be paid by, the Company.
9.3 Nonassignability.
(a) Neither a Participant nor any other person shall have any right
to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise
encumber, hypothecate or convey in advance of actual receipt the amounts, if
any, payable hereunder, or any part thereof, or interest therein which are, and
all rights to which are, expressly declared to be unassignable and
non-transferable. No part of the amounts payable shall, prior to actual payment,
be subject to seizure or sequestration for the payment of any debts, judgments,
alimony or separate maintenance owed by a Participant or any other person, nor
be transferable by operation of law in the event of a Participant's or any other
person's bankruptcy or insolvency.
(b) Notwithstanding subsection (a), the right to benefits payable
with respect to a Participant pursuant to a Qualified Divorce Order may be
created, assigned, or recognized. The Committee shall establish appropriate
policies and procedures to determine whether a Divorce Order presented to the
Committee constitutes a Qualified Divorce Order under this Plan, and to
administer distributions pursuant to the terms of Qualified Divorce Orders. In
the event that a Qualified Divorce Order exists with respect to benefits payable
under the Plan, such benefits otherwise payable to the Participant specified in
the Qualified Divorce Order shall be payable to the Alternate Payee specified in
such Qualified Divorce Order.
9.4 Release from Liability to Participant. A Participant's right to
receive benefits under the Plan shall be reduced to the extent that any portion
of a Participant's Deferral Account(s) has
19
been paid or set side for payment to an Alternate Payee pursuant to a Qualified
Divorce Order or to the extent that the Company or the Plan is otherwise subject
to a binding judgment, decree, or order for the attachment, garnishment or
execution of any portion of the Participant's Deferral Account(s) or of any
distributions therefrom. The Participant shall be deemed to have released the
Company and the Plan from any claim with respect to such amounts in any case in
which (a) the Company, the Plan, or any Plan representative has been served with
legal process or otherwise joined in a proceeding relating to such amounts, and
(b) the Participant fails to obtain an order of the court in the proceeding
relieving the Company and the Plan from the obligation to comply with the
judgment, decree or order.
9.5 Employment Not Guaranteed. Nothing contained in this Plan nor any
action taken hereunder shall be construed as a contract of employment or as
giving any Participant any right to be retained in employment with the Company.
Accordingly, subject to the terms of any written employment agreement to the
contrary, the Company shall have the right to terminate or change the terms of
employment of a Participant at any time and for any reason whatsoever, with or
without cause.
9.6 Gender, Singular & Plural. All pronouns and any variations thereof
shall be deemed to refer to the masculine or feminine as the identity of the
person or persons may require. As the context may require, the singular may be
read as the plural and the plural as the singular.
9.7 Captions. The captions of the articles, sections, and paragraphs of
the Plan are for convenience only and shall not control or affect the meaning or
construction of any of its provisions.
9.8 Validity. In the event any provision of this Plan is held invalid,
void, or unenforceable, the same shall not affect, in any respect whatsoever,
the validity of any other provision of this Plan.
9.9 Notice. Any notice or filing required or permitted to be given to the
Committee under the Plan shall be sufficient if in writing and hand delivered,
or sent by registered or certified mail, to the principal office of the Company.
Such notice shall be deemed given as to the date of delivery or, if delivery is
made by mail, as of the date shown on the postmark on the receipt for
registration or certification.
9.10 Applicable Law. The Plan shall be governed by and construed in
accordance with the laws of the State of California to the extent such laws are
not preempted by the Employee Retirement Income Security Act of 1974, as
amended.
20
IN WITNESS WHEREOF, the Company has executed this document this ___
day of _______________, 2003.
OCCIDENTAL PETROLEUM CORPORATION
By
-----------------------------------------
Richard W. Hallock
Executive Vice-President, Human Resources
21
EXHIBIT 10.45
OCCIDENTAL PETROLEUM CORPORATION
2001 INCENTIVE COMPENSATION PLAN
RESTRICTED SHARE UNIT AWARD
TERMS AND CONDITIONS
(MANDATORY DEFERRED ISSUANCE OF SHARES)
Date of Grant: December 8, 2003
Number of Restricted
Share Units: See "Shares Granted/Awarded" (Grant Acknowledgment
screen)
Vesting Schedule: 1st Anniversary 20 Percent of Restricted Share Units
2nd Anniversary 20 Percent of Restricted Share Units
3rd Anniversary 20 Percent of Restricted Share Units
4th Anniversary 20 Percent of Restricted Share Units
5th Anniversary 20 Percent of Restricted Share Units
The following TERMS AND CONDITIONS (these "Terms and Conditions") are set forth
as of the Date of Grant between OCCIDENTAL PETROLEUM CORPORATION, a Delaware
corporation ("Occidental") and, with its subsidiaries, (the "Company"), and the
Eligible Employee receiving this Award (the "Grantee").
1. GRANT OF RESTRICTED SHARE UNITS. In accordance with these Terms and
Conditions and the Occidental Petroleum Corporation 2001 Incentive Compensation
Plan, as amended from time to time (the "Plan"), Occidental grants to the
Grantee as of the Date of Grant, the right to receive, at the end of the
Deferral Period (as defined below) in accordance with Grantee's distribution
election, Common Shares equal to the number of Restricted Share Units (as
defined below) that vest according to the schedule set forth above. For the
purposes of these Terms and Conditions, (a) "Deferral Period" means the period
commencing on the date the Restricted Share Units vest and ending on the earlier
of the date the Grantee retires under a Company-sponsored retirement plan or the
date the Grantee's employment with the Company terminates for any other reason,
and (b) "Restricted Share Unit" means a bookkeeping entry equivalent to a whole
or fractional Common Share. Restricted Share Units are not shares and have no
voting rights or, except as stated in Section 5, dividend rights.
2. RESTRICTIONS ON TRANSFER. Neither these Terms and Conditions, the
Restricted Share Units nor the right to receive Common Shares may be transferred
or assigned by the Grantee other than (i) to a beneficiary designated on a form
approved by the Company (if permitted by local law), by will or, if the Grantee
dies without designating a beneficiary or a valid will, by the laws of descent
and distribution, or (ii) pursuant to a domestic relations order, if applicable,
(if approved or ratified by the Administrator).
3. VESTING AND FORFEITURE OF RESTRICTED SHARE UNITS. (a) Subject to Sections
3(b) and (c), on each anniversary of the Date of Grant the amount of Restricted
Share Units indicated above in the Vesting Schedule for such anniversary will
vest and become non-forfeitable if the Grantee remains in the continuous employ
of the Company through such Date. The projected Vesting Schedule with the number
of Restricted Share Units vesting on each anniversary is shown on the Grant
Detail screen (from Grant Summary page, click "View Detail & History").
DEC 2003 RSU
The continuous employment of the Grantee will not be deemed to have been
interrupted by reason of the transfer of the Grantee's employment among the
Company and its affiliates or an approved leave of absence.
(b) Notwithstanding Section 3(a), if the Grantee dies or becomes
permanently disabled while in the employ of the Company, retires under a
Company-sponsored retirement plan or with the consent of the Company, or
terminates employment for the convenience of the Company (each of the foregoing,
a "Vesting Event"), then Restricted Share Units that have not vested prior to
the date of the Vesting Event will become fully vested and nonforfeitable as of
such date.
(c) Notwithstanding Section 3(a), if a Change in Control Event occurs
prior to the end of the Vesting Schedule, all of the Restricted Share Units that
have not yet vested shall immediately become fully vested and nonforfeitable.
4. DEFERRAL OF COMMON SHARE PAYOUT. By accepting these Terms and Conditions,
the Grantee has agreed that the receipt of the Common Shares will be deferred in
accordance with the terms and conditions of the Occidental Petroleum Corporation
Deferred Stock Program as such Program may be amended from time to time ("the
Deferral Program"). The administration of the Deferral Program is governed by
the Executive Compensation and Human Resources Committee, whose decision on all
matters shall be final. The deferral of receipt of any Common Shares upon the
vesting of the Restricted Share Units is irrevocable and cannot be changed or
canceled. As a result of the deferral, no Common Shares will be issued pursuant
to these Terms and Conditions upon the vesting of the Restricted Share Units,
and the Restricted Share Units will continue to be recorded as a bookkeeping
entry.
5. CREDITING AND PAYMENT OF DIVIDEND EQUIVALENTS. With respect to the number
of Restricted Share Units listed above, the Grantee will be credited on the
books and records of Occidental with an amount (the "Dividend Equivalent") equal
to the amount per share of any cash dividends declared by the Board on the
outstanding Common Shares until the shares vest, or, if earlier, up to the date
on which the Grantee forfeits all or any portion of the Restricted Share Units.
Until the Restricted Share Units have vested, Occidental will pay in cash to the
Grantee an amount equal to the Dividend Equivalents credited to such Grantee as
promptly as may be practicable after the Grantee has been credited with a
Dividend Equivalent.
6. NO EMPLOYMENT CONTRACT. Nothing in these Terms and Conditions confers upon
the Grantee any right with respect to continued employment by the Company, nor
limits in any manner the right of the Company to terminate the employment or
adjust the compensation of the Grantee.
7. TAXES AND WITHHOLDING. The Grantee is responsible for any federal, state,
local or foreign tax, including income tax, social insurance, payroll tax,
payment on account or other tax-related withholding with respect to the grant of
Restricted Share Units (including the grant, the vesting, the receipt of Common
Shares, the sale of Common Shares and the receipt of dividends or dividend
equivalents, if any). If the Company must withhold any tax in connection with
the issuance of any Common Shares or other securities or the payment of any
other consideration pursuant to the grant of Restricted Share Units (other than
the payment of Dividend Equivalents), this obligation shall be satisfied in
accordance with the provisions of the Deferral Program. If the Company must
withhold any tax in connection with granting or vesting of Restricted Share
Units or the payment of Dividend Equivalents pursuant to this grant of
2
Restricted Share Units, the Grantee by acknowledging these Terms and Conditions
agrees that, so long as the Grantee is an employee of the Company for tax
purposes, all or any part of any such withholding obligation shall be deducted
from the Grantee's wages or other cash compensation (including regular pay). The
Grantee shall pay to the Company any amount that cannot be satisfied by the
means previously described.
8. COMPLIANCE WITH LAW. The Company will make reasonable efforts to comply
with all applicable federal, state and foreign securities laws; however, the
Company will not issue any Common Shares or other securities pursuant to these
Terms and Conditions if their issuance would result in a violation of any such
law.
9. RELATION TO OTHER BENEFITS. The benefits received by the Grantee under
these Terms and Conditions will not be taken into account or treated as normal
salary or compensation in determining any benefits to which the Grantee may be
entitled under any profit sharing, retirement or other benefit or compensation
plan maintained by the Company, including the amount of any life insurance
coverage available to any beneficiary of the Grantee under any life insurance
plan covering employees of the Company, or as part of the calculation of any
severance, resignation, termination, redundancy or end of service payments. This
grant of Restricted Share Units does not create any contractual or other right
to receive future grants of Restricted Share Units, or benefits in lieu of
Restricted Share Units, even if the Grantee has a history of receiving
Restricted Share Units or other stock awards.
10. ADJUSTMENTS. The number or kind of shares of stock covered by this
Restricted Share Unit Award may be adjusted as the Administrator determines
pursuant to Section 6.2 of the Plan in order to prevent dilution or expansion of
the Grantee's rights under these Terms and Conditions as a result of events such
as stock dividends, stock splits, or other change in the capital structure of
Occidental, or any merger, consolidation, spin-off, liquidation or other
corporate transaction or event having a similar effect. If any such adjustment
occurs, the Company will give the Grantee written notice of the adjustment
containing an explanation of the nature of the adjustment.
11. AMENDMENTS. The Plan may be modified, amended, suspended or terminated by
the Company at any time, as provided in the Plan. Any amendment to the Plan or
the Deferred Stock Program will be deemed to be an amendment to these Terms and
Conditions to the extent it is applicable to these Terms and Conditions or the
deferrals made pursuant to these Terms and Conditions; however, no amendment
will adversely affect the rights of the Grantee under these Terms and Conditions
without the Grantee's consent.
12. SEVERABILITY. If one or more of the provisions of these Terms and
Conditions is invalidated for any reason by a court of competent jurisdiction,
the invalidated provisions shall be deemed to be separable from the other
provisions of these Terms and Conditions, and the remaining provisions of these
Terms and Conditions will continue to be valid and fully enforceable.
13. RELATION TO PLAN; INTERPRETATION. These Terms and Conditions are subject to
the terms and conditions of the Plan. In the event of any inconsistent
provisions between these Terms and Conditions and the Plan, the provisions of
the Plan control. Capitalized terms used in these Terms and Conditions without
definition have the meanings assigned to them in the Plan. References to
Sections are to Sections of these Terms and Conditions unless otherwise noted.
3
14. SUCCESSORS AND ASSIGNS. Subject to Sections 2 and 3, the provisions of
these Terms and Conditions shall be for the benefit of, and be binding upon, the
successors, administrators, heirs, legal representatives and assigns of the
Grantee, and the successors and assigns of the Company.
15. GOVERNING LAW. The laws of the State of Delaware govern the interpretation,
performance, and enforcement of these Terms and Conditions.
16. PRIVACY RIGHTS. By accepting this award, the Grantee explicitly and
unambiguously consents to the collection, use and transfer, in electronic or
other form, of the Grantee's personal data as described in these Terms and
Conditions by and among, as applicable, the Company and its affiliates for the
exclusive purpose of implementing, administering and managing the Grantee's
participation in the Plan. The Company holds or may receive from any agent
designated by the Company certain personal information about the Grantee,
including, but not limited to, the Grantee's name, home address and telephone
number, date of birth, social insurance number or other identification number,
salary, nationality, job title, any shares of stock or directorships held in
Occidental, details of this Restricted Share Unit award or any other entitlement
to shares of stock awarded, canceled, exercised, vested, unvested or outstanding
in the Grantee's favor, for the purpose of implementing, administering and
managing the Plan, including complying with applicable tax and securities laws
("Data"). Data may be transferred to any third parties assisting in the
implementation, administration and management of the Plan. These recipients may
be located in the Grantee's country or elsewhere, and may have different data
privacy laws and protections than the Grantee's country. By accepting these
Terms and Conditions, the Grantee authorizes the recipients to receive, possess,
use, retain and transfer the Data, in electronic or other form, for the purposes
described above. The Grantee may, at any time, view Data, request additional
information about the storage and processing of Data, require any necessary
amendments to Data or refuse or withdraw the consents herein, in any case
without cost, by contacting the Administrator in writing. Refusing or
withdrawing consent may affect the Grantee's ability to participate in the Plan.
17. ELECTRONIC DELIVERY. The Company may, in its sole discretion, decide to
deliver any documents related to this Restricted Share Unit award granted under
the Plan or future awards that may be granted under the Plan (if any) by
electronic means or to request the Grantee's consent to participate in the Plan
by electronic means. The Grantee hereby consents to receive such documents by
electronic delivery and, if requested, to participate in the Plan through an
on-line or electronic system established and maintained by the Company or
another third party designated by the Company.
18. GRANTEE'S REPRESENTATIONS AND RELEASES. By accepting this award, the
Grantee acknowledges that the Grantee has read these Terms and Conditions and
understands that (i) the grant of this Restricted Share Unit award is made
voluntarily by Occidental in its discretion with no liability on the part of any
of its direct or indirect subsidiaries and that, if the Grantee is not an
employee of Occidental, the Grantee is not, and will not be considered, an
employee of Occidental but the Grantee is a third party (employee of a
subsidiary) to whom this Restricted Share Unit award is granted; (ii) the
Grantee's participation in the Plan is voluntary; (iii) the future value of any
Common shares issued pursuant to this Restricted Share Unit award cannot be
predicted and Occidental does not assume liability in the event such Common
Shares have no value in the future; and, (iv) subject to the terms of any tax
equalization agreement between
4
the Grantee and the entity employing the Grantee, the Grantee will be solely
responsible for the payment or nonpayment of taxes imposed or threatened to be
imposed by any authority of any jurisdiction.
In consideration of the grant of this Restricted Share Unit award, no claim or
entitlement to compensation or damages shall arise from termination of this
Restricted Share Unit award or diminution in value of this Restricted Share Unit
award or Common Shares issued pursuant to this Restricted Share Unit award
resulting from termination of the Grantee's employment by the Company (for any
reason whatsoever and whether or not in breach of local labor laws) and the
Grantee irrevocably releases the Company from any such claim that may arise; if,
notwithstanding the foregoing, any such claim is found by a court of competent
jurisdiction to have arisen, then, by accepting these Terms and Conditions, the
Grantee shall be deemed irrevocably to have waived his or her entitlement to
pursue such claim.
5
EXHIBIT 10.46
OCCIDENTAL PETROLEUM CORPORATION
2001 INCENTIVE COMPENSATION PLAN
PERFORMANCE-BASED STOCK AWARD TERMS AND CONDITIONS
(DEFERRED ISSUANCE OF SHARES)
DATE OF GRANT: JANUARY 1, 2004
TARGET PERFORMANCE SHARES: SEE "SHARES GRANTED/AWARDED"
(GRANT ACKNOWLEDGMENT SCREEN)
PERFORMANCE PERIOD: JANUARY 1, 2004 THROUGH DECEMBER 31, 2007
These TERMS AND CONDITIONS (these "Terms and Conditions") are set forth as of
the Date of Grant between OCCIDENTAL PETROLEUM CORPORATION, a Delaware
corporation ("Occidental") and, with its subsidiaries, (the "Company"), and
Grantee.
1. GRANT OF TARGET PERFORMANCE SHARES. In accordance with these Terms and
Conditions and the Occidental Petroleum Corporation 2001 Incentive Compensation
Plan, as amended from time to time (the "Plan"), Occidental grants to the
Grantee as of the Date of Grant, the right to receive in Common Shares up to
200% of the number of Target Performance Shares. For the purposes of these Terms
and Conditions, "Target Performance Shares" means a bookkeeping entry that
records the equivalent of Common Shares awarded pursuant to Section 4.2 of the
Plan that is payable upon the achievement of the Performance Goals. Target
Performance Shares are not Common Shares and have no voting rights or, except as
stated in Section 6, dividend rights.
2. RESTRICTIONS ON TRANSFER. Neither these Terms and Conditions nor any right
to receive Common Shares pursuant to these Terms and Conditions may be
transferred or assigned by the Grantee other than (i) to a beneficiary
designated on a form approved by the Company (if permitted by local law), by
will or, if the Grantee dies without designating a beneficiary of a valid will,
by the laws of descent and distribution, or (ii) pursuant to a domestic
relations order, if applicable, (if approved or ratified by the Administrator).
3. PERFORMANCE GOALS. The Performance Goal for the Performance Period is a
peer company comparison based on Total Shareholder Return, as set forth on
Exhibit 1. Total Shareholder Return shall be calculated for each peer company
using the average of its last reported sale price per share of common stock on
the New York Stock Exchange - Composite Transactions for the last ten trading
days of 2003 and the average of its last reported sale price per share of common
stock on the New York Stock Exchange - Composite Transactions for the last ten
trading days of 2007. In addition to the Company, the peer companies are:
Amerada Hess Corporation, Anadarko Petroleum Corporation, Burlington Resources
Inc., ChevronTexaco Corp., ConocoPhillips, Kerr-McGee Corporation, and Unocal
Corporation. If a peer company ceases to be a publicly-traded company at any
time during the Performance Period or the Administrator determines pursuant to
Section 7 of these Terms and Conditions to reflect a change in circumstances
with respect to any peer company, then such company will be removed as a peer
company and the achievement of the Performance Goal will be determined with
respect to the remaining peer companies as set forth on Exhibit 1.
4. VESTING AND FORFEITURE OF COMMON SHARES. (a) The Grantee must remain in the
continuous employ of the Company through the last day of the Performance Period
to receive
2004 PSA - OPC
Common Shares. The continuous employment of the Grantee will not be deemed to
have been interrupted by reason of the transfer of the Grantee's employment
among the Company and its affiliates or an approved leave of absence. However,
if, prior to the end of the Performance Period, the Grantee dies or becomes
permanently disabled while in the employ of the Company, retires under a
Company-sponsored retirement plan or with the consent of the Company, or
terminates employment for the convenience of the Company (each of the foregoing,
a "Forfeiture Event"), then the number of Target Performance Shares upon which
the Grantee's award is based will be reduced on a pro rata basis based upon the
number of days remaining in the Performance Period following the date of the
Forfeiture Event.
(b) The Grantee's right to receive Common Shares in an amount not to
exceed 200% of the Target Performance Shares, rounded up to the nearest whole
share, will be based and become nonforfeitable upon, the Administrator's
certification of the attainment of the Performance Goals.
(c) For the purposes of Section 4(b), if prior to the end of the
Performance Period, the Grantee transfers his employment among the Company and
its affiliates, the number of Common Shares attained by the Grantee shall be
determined by assessing the level of achievement of the Performance Goals
certified by the Administrator for each employing entity and multiplying the
number of Target Performance Shares attainable at such level by a fraction equal
to the number of months in the Performance Period that the Grantee worked for
the entity divided by the total number of months in the Performance Period.
(d) Notwithstanding Section 4(b), if a Change in Control Event occurs
prior to the end of the Performance Period, the Grantee's right to receive
Common Shares equal to the number of Target Performance Shares (as adjusted for
any Forfeiture Event pursuant to Section 4(a)) will become nonforfeitable. The
right to receive Common Shares in excess of the number of Target Performance
Shares (as adjusted for any Forfeiture Event pursuant to Section 4(a)) will be
forfeited.
5. PAYMENT OF AWARDS. The Common Shares covered by these Terms and Conditions
or any prorated portion thereof shall be issued to the Grantee as promptly as
practicable after the Administrator's certification of the attainment of the
Performance Goals or the Change in Control Event, as the case may be.
6. CREDITING AND PAYMENT OF DIVIDEND EQUIVALENTS. With respect to the number
of Target Performance Shares listed above, the Grantee will be credited on the
books and records of Occidental with an amount (the "Dividend Equivalent") equal
to the amount per share of any cash dividends declared by the Board on the
outstanding Common Shares during the period beginning on the Date of Grant and
ending with respect to any portion of the Target Performance Shares covered by
these Terms and Conditions on the date on which the Grantee's right to receive
such portion becomes nonforfeitable, or, if earlier, the date on which the
Grantee forfeits the right to receive such portion. Occidental will pay in cash
to the Grantee an amount equal to the Dividend Equivalents credited to such
Grantee as promptly as may be practicable after the Grantee has been credited
with a Dividend Equivalent.
7. ADJUSTMENTS. (a) The number or kind of shares of stock covered by these
Terms and Conditions may be adjusted as the Administrator determines pursuant to
Section 6.2 of the Plan in order to prevent dilution or expansion of the
Grantee's rights under these Terms and Conditions as a result of events such as
stock dividends, stock splits or other changes in the
2
capital structure of Occidental, or any merger, consolidation, spin-off,
liquidation or other corporate transaction having a similar effect. If any such
adjustment occurs, the Company will give the Grantee written notice of the
adjustment.
(b) In addition, the Administrator may adjust the Performance Goal or
other features of this Grant as permitted by Section 4.2.3 of the Plan.
8. NO EMPLOYMENT CONTRACT. Nothing in these Terms and Conditions confers upon
the Grantee any right with respect to continued employment by the Company, nor
limits in any manner the right of the Company to terminate the employment or
adjust the compensation of the Grantee.
9. TAXES AND WITHHOLDING. The Grantee is responsible for any federal, state,
local or foreign tax, including income tax, social insurance, payroll tax,
payment on account or other tax-related withholding with respect to the grant of
Target Performance Shares (including the grant, the vesting, the receipt of
Common Shares, the sale of Common Shares and the receipt of dividends or
dividend equivalents, if any). If the Company must withhold any tax in
connection with the issuance of any Common Shares or the payment of any other
consideration pursuant to the grant of Target Performance Shares (other than the
payment of Dividend Equivalents), the Grantee shall satisfy all or any part of
any such withholding obligation by surrendering to the Company a portion of the
Common Shares (or other securities) that are issued or transferred to the
Grantee pursuant to these Terms and Conditions. Any Common Shares (or other
securities) so surrendered by the Grantee shall be credited against the
Grantee's withholding obligation at their Fair Market Value on the date of
surrender to the Company. If the Company must withhold any tax in connection
with granting or vesting of Target Performance Shares or the payment of Dividend
Equivalents pursuant to this grant of Target Performance Shares, the Grantee by
acknowledging these Terms and Conditions agrees that, so long as the Grantee is
an employee of the Company for tax purposes, all or any part of any such
withholding obligation shall be deducted from the Grantee's wages or other cash
compensation (including regular pay). The Grantee shall pay to the Company any
amount that cannot be satisfied by the means previously described.
10. COMPLIANCE WITH LAW. The Company will make reasonable efforts to comply
with all applicable federal, state and foreign securities laws; however, the
Company will not issue any Common Shares or other securities pursuant to these
Terms and Conditions if their issuance would result in a violation of any such
law.
11. RELATION TO OTHER BENEFITS. The benefits received by the Grantee under
these Terms and Conditions will not be taken into account in determining any
benefits to which the Grantee may be entitled under any profit sharing,
retirement or other benefit or compensation plan maintained by the Company,
including the amount of any life insurance coverage available to any beneficiary
of the Grantee under any life insurance plan covering employees of the Company.
Additionally, the Target Performance Shares are not part of normal or expected
compensation or salary for any purposes, including, but not limited to
calculation of any severance, resignation, termination, redundancy, end of
service payments, bonuses or long-service awards. This grant of Target
Performance Shares does not create any contractual or other right to receive
future grants of Target Performance Shares, or benefits in lieu of Target
Performance Shares, even if Grantee has a history of receiving Target
Performance Shares or other stock awards.
3
12. AMENDMENTS. The Plan may be modified, amended, suspended or terminated by
the Company at any time, as provided in the Plan. Any amendment to the Plan will
be deemed to be an amendment to these Terms and Conditions to the extent it is
applicable to these Terms and Conditions; however, no amendment will adversely
affect the rights of the Grantee under these Terms and Conditions without the
Grantee's consent.
13. SEVERABILITY. If one or more of the provisions of these Terms and
Conditions is invalidated for any reason by a court of competent jurisdiction,
the invalidated provisions shall be deemed to be separable from the other
provisions of these Terms and Conditions, and the remaining provisions of these
Terms and Conditions will continue to be valid and fully enforceable.
14. RELATION TO PLAN; INTERPRETATION. These Terms and Conditions are subject to
the terms and conditions of the Plan. In the event of any inconsistent
provisions between these Terms and Conditions and the Plan, the provisions of
the Plan control. Capitalized terms used in these Terms and Conditions without
definition have the meanings assigned to them in the Plan. References to
Sections are to Sections of these Terms and Conditions unless otherwise noted.
15. SUCCESSORS AND ASSIGNS. Subject to Sections 2 and 4, the provisions of
these Terms and Conditions shall be for the benefit of, and be binding upon, the
successors, administrators, heirs, legal representatives and assigns of the
Grantee, and the successors and assigns of the Company.
16. GOVERNING LAW. The laws of the State of Delaware govern the interpretation,
performance, and enforcement of these Terms and Conditions.
17. PRIVACY RIGHTS. By accepting this award, the Grantee explicitly and
unambiguously consents to the collection, use and transfer, in electronic or
other form, of the Grantee's personal data as described in these Terms and
Conditions by and among, as applicable, the Company and its affiliates for the
exclusive purpose of implementing, administering and managing the Grantee's
participation in the Plan. The Company holds or may receive from any agent
designated by the Company certain personal information about the Grantee,
including, but not limited to, the Grantee's name, home address and telephone
number, date of birth, social insurance number or other identification number,
salary, nationality, job title, any shares of stock or directorships held in
Occidental, details of this Target Performance Share award or any other
entitlement to shares of stock awarded, canceled, exercised, vested, unvested or
outstanding in the Grantee's favor, for the purpose of implementing,
administering and managing the Plan, including complying with applicable tax and
securities laws ("Data"). Data may be transferred to any third parties assisting
in the implementation, administration and management of the Plan. These
recipients may be located in the Grantee's country or elsewhere, and may have
different data privacy laws and protections than the Grantee's country. By
accepting these Terms and Conditions, the Grantee authorizes the recipients to
receive, possess, use, retain and transfer the Data, in electronic or other
form, for the purposes described above. The Grantee may, at any time, view Data,
request additional information about the storage and processing of Data, require
any necessary amendments to Data or refuse or withdraw the consents herein, in
any case without cost, by contacting the Administrator in writing. Refusing or
withdrawing consent may affect the Grantee's ability to participate in the Plan.
4
18. ELECTRONIC DELIVERY. The Company may, in its sole discretion, decide to
deliver any documents related to this Target Performance Share award granted
under the Plan or future awards that may be granted under the Plan (if any) by
electronic means or to request the Grantee's consent to participate in the Plan
by electronic means. The Grantee hereby consents to receive such documents by
electronic delivery and, if requested, to participate in the Plan through an
on-line or electronic system established and maintained by the Company or
another third party designated by the Company.
19. GRANTEE'S REPRESENTATIONS AND RELEASES. By accepting this award, the
Grantee acknowledges that the Grantee has read these Terms and Conditions and
understands that (i) the grant of this Target Performance Share award is made
voluntarily by Occidental in its discretion with no liability on the part of any
of its direct or indirect subsidiaries and that, if the Grantee is not an
employee of Occidental, the Grantee is not, and will not be considered, an
employee of Occidental but the Grantee is a third party (employee of a
subsidiary) to whom this Target Performance Share award is granted; (ii) the
Grantee's participation in the Plan is voluntary; (iii) the future value of any
Common shares issued pursuant to this Target Performance Share award cannot be
predicted and Occidental does not assume liability in the event such Common
Shares have no value in the future; and, (iv) subject to the terms of any tax
equalization agreement between the Grantee and the entity employing the Grantee,
the Grantee will be solely responsible for the payment or nonpayment of taxes
imposed or threatened to be imposed by any authority of any jurisdiction.
In consideration of the grant of this Target Performance Share award, no claim
or entitlement to compensation or damages shall arise from termination of this
Target Performance Share award or diminution in value of this Target Performance
Share award or Common Shares issued pursuant to this Target Performance Share
award resulting from termination of the Grantee's employment by the Company (for
any reason whatsoever and whether or not in breach of local labor laws) and the
Grantee irrevocably releases the Company from any such claim that may arise; if,
notwithstanding the foregoing, any such claim is found by a court of competent
jurisdiction to have arisen, then, by accepting these Terms and Conditions, the
Grantee shall be deemed irrevocably to have waived his or her entitlement to
pursue such claim.
5
EXHIBIT 1
2004 GRANT TO OPC PARTICIPANTS
(% of Number of Target Shares of Performance Stock that become Nonforfeitable
based on Comparison of Total Shareholder Return for the Peer Companies for the
Performance Period)
- --------- --------- --------- --------- --------- --------- --------- ---------
Ranking 8 COS. 7 COS. 6 COS. 5 COS. 4 COS. 3 COS. 2 COS.
- --------- --------- --------- --------- --------- --------- --------- ---------
1 200% 200% 200% 200% 200% 200% *
2 167% 167% 150% 150% 133% 100% 0%
3 133% 133% 100% 100% 67% 0%
4 100% 100% 100% 50% 0%
5 100% 67% 50% 0%
6 67% 33% 0%
7 33% 0%
8 0%
* Subject to Committee Discretion.
6
EXHIBIT 10.47
OCCIDENTAL PETROLEUM CORPORATION
2001 INCENTIVE COMPENSATION PLAN
PERFORMANCE-BASED STOCK AWARD TERMS AND CONDITIONS
(DEFERRED ISSUANCE OF SHARES)
DATE OF GRANT: JANUARY 1, 2004
TARGET PERFORMANCE SHARES: SEE "SHARES GRANTED/AWARDED"
(GRANT ACKNOWLEDGMENT SCREEN)
PERFORMANCE PERIOD: JANUARY 1, 2004 THROUGH DECEMBER 31, 2007
These TERMS AND CONDITIONS (these "Terms and Conditions") are set forth as of
the Date of Grant between OCCIDENTAL PETROLEUM CORPORATION, a Delaware
corporation ("Occidental") and, with its subsidiaries, (the "Company"), and
Grantee.
1. GRANT OF TARGET PERFORMANCE SHARES. In accordance with these Terms and
Conditions and the Occidental Petroleum Corporation 2001 Incentive Compensation
Plan, as amended from time to time (the "Plan"), Occidental grants to the
Grantee as of the Date of Grant, the right to receive in Common Shares up to
200% of the number of Target Performance Shares. For the purposes of these Terms
and Conditions, "Target Performance Shares" means a bookkeeping entry that
records the equivalent of Common Shares awarded pursuant to Section 4.2 of the
Plan that is payable upon the achievement of the Performance Goals. Target
Performance Shares are not Common Shares and have no voting rights or, except as
stated in Section 6, dividend rights.
2. RESTRICTIONS ON TRANSFER. Neither these Terms and Conditions nor any right
to receive Common Shares pursuant to these Terms and Conditions may be
transferred or assigned by the Grantee other than to a beneficiary designated on
a form approved by the Company (if permitted by local law), by will or, if the
Grantee dies without designating a beneficiary of a valid will, by the laws of
descent and distribution, or (ii) pursuant to a domestic relations order, if
applicable, (if approved or ratified by the Administrator).
3. PERFORMANCE GOALS. The Performance Goal for the Performance Period is based
on (i) Return on Assets and (ii) a peer company comparison based on Total
Shareholder Return, as set forth on Exhibit 1.
For the purposes of these Terms and Conditions, "Return on Assets" means
the percentage obtained by (A) multiplying the sum of the before tax earnings
for each year in the Performance Period of the division of the Company employing
the Grantee by 0.65 and (B) dividing the resulting product by the sum of such
division's Assets as of December 31 for each year in the Performance Period. For
the purposes of the foregoing sentence, "Assets" will reflect all acquisitions,
divestitures and write-downs during the Performance Period. For the purposes of
these Terms and Conditions, Total Shareholder Return shall be calculated for
each peer company using the average of its last reported sale price per share of
common stock on the New York Stock Exchange - Composite Transactions for the
last ten trading days of 2003 and the average of its last reported sale price
per share of common stock on the New York Stock Exchange - Composite
Transactions for the last ten trading days of 2007. In addition to the Company,
the peer companies are: Amerada Hess Corporation, Anadarko Petroleum
Corporation, Burlington Resources Inc., ChevronTexaco Corp., ConocoPhillips,
Kerr-McGee Corporation, and Unocal Corporation. If a peer company ceases to be a
publicly-traded
2004 PSA - OCC
company at any time during the Performance Period or the Administrator
determines pursuant to Section 7 of these Terms and Conditions to reflect a
change in circumstances with respect to any peer company, then such company will
be removed as a peer company, and the achievement of the Performance Goal will
be determined with respect to the remaining peer companies as set forth on
Exhibit 1.
4. VESTING AND FORFEITURE OF COMMON SHARES. (a) The Grantee must remain in the
continuous employ of the Company through the last day of the Performance Period
to receive Common Shares. The continuous employment of the Grantee will not be
deemed to have been interrupted by reason of the transfer of the Grantee's
employment among the Company and its affiliates or an approved leave of absence.
However, if, prior to the end of the Performance Period, the Grantee dies or
becomes permanently disabled while in the employ of the Company, retires under a
Company-sponsored retirement plan or with the consent of the Company, or
terminates employment for the convenience of the Company (each of the foregoing,
a "Forfeiture Event"), then the number of Target Performance Shares upon which
the Grantee's award is based will be reduced on a pro rata basis based upon the
number of days remaining in the Performance Period following the date of the
Forfeiture Event.
(b) The Grantee's right to receive Common Shares in an amount not to
exceed 200% of the Target Performance Shares, rounded up to the nearest whole
share, will be based and become nonforfeitable upon, the Administrator's
certification of the attainment of the Performance Goals.
(c) For the purposes of Section 4(b), if prior to the end of the
Performance Period, the Grantee transfers his employment among the Company and
its affiliates, the number of Common Shares attained by the Grantee shall be
determined by assessing the level of achievement of the Performance Goals
certified by the Administrator for each employing entity and multiplying the
number of Target Performance Shares attainable at such level by a fraction equal
to the number of months in the Performance Period that the Grantee worked for
the entity divided by the total number of months in the Performance Period.
(d) Notwithstanding Section 4(b), if a Change in Control Event occurs
prior to the end of the Performance Period, the Grantee's right to receive
Common Shares equal to the number of Target Performance Shares (as adjusted for
any Forfeiture Event pursuant to Section 4(a)) will become nonforfeitable. The
right to receive Common Shares in excess of the number of Target Performance
Shares (as adjusted for any Forfeiture Event pursuant to Section 4(a)) will be
forfeited.
5. PAYMENT OF AWARDS. The Common Shares covered by these Terms and Conditions
or any prorated portion thereof shall be issued to the Grantee as promptly as
practicable after the Administrator's certification of the attainment of the
Performance Goals or the Change in Control Event, as the case may be.
6. CREDITING AND PAYMENT OF DIVIDEND EQUIVALENTS. With respect to the number
of Target Performance Shares listed above, the Grantee will be credited on the
books and records of Occidental with an amount (the "Dividend Equivalent") equal
to the amount per share of any cash dividends declared by the Board on the
outstanding Common Shares during the period beginning on the Date of Grant and
ending with respect to any portion of the Target Performance Shares covered by
these Terms and Conditions on the date on which the Grantee's right to receive
such portion becomes nonforfeitable, or, if earlier, the date on which
2
the Grantee forfeits the right to receive such portion. Occidental will pay in
cash to the Grantee an amount equal to the Dividend Equivalents credited to such
Grantee as promptly as may be practicable after the Grantee has been credited
with a Dividend Equivalent.
7. ADJUSTMENTS. (a) The number or kind of shares of stock covered by these
Terms and Conditions may be adjusted as the Administrator determines pursuant to
Section 6.2 of the Plan in order to prevent dilution or expansion of the
Grantee's rights under these Terms and Conditions as a result of events such as
stock dividends, stock splits or other changes in the capital structure of
Occidental, or any merger, consolidation, spin-off, liquidation or other
corporate transaction having a similar effect. If any such adjustment occurs,
the Company will give the Grantee written notice of the adjustment.
(b) In addition, the Administrator may adjust the Performance Goal or
other features of this Grant as permitted by Section 4.2.3 of the Plan.
8. NO EMPLOYMENT CONTRACT. Nothing in these Terms and Conditions confers upon
the Grantee any right with respect to continued employment by the Company, nor
limits in any manner the right of the Company to terminate the employment or
adjust the compensation of the Grantee.
9. TAXES AND WITHHOLDING. The Grantee is responsible for any federal, state,
local or foreign tax, including income tax, social insurance, payroll tax,
payment on account or other tax-related withholding with respect to the grant of
Target Performance Shares (including the grant, the vesting, the receipt of
Common Shares, the sale of Common Shares and the receipt of dividends or
dividend equivalents, if any). If the Company must withhold any tax in
connection with the issuance of any Common Shares or the payment of any other
consideration pursuant to the grant of Target Performance Shares (other than the
payment of Dividend Equivalents), the Grantee shall satisfy all or any part of
any such withholding obligation by surrendering to the Company a portion of the
Common Shares (or other securities) that are issued or transferred to the
Grantee pursuant to these Terms and Conditions. Any Common Shares (or other
securities) so surrendered by the Grantee shall be credited against the
Grantee's withholding obligation at their Fair Market Value on the date of
surrender to the Company. If the Company must withhold any tax in connection
with granting or vesting of Target Performance Shares or the payment of Dividend
Equivalents pursuant to this grant of Target Performance Shares the Grantee by
acknowledging these Terms and Conditions agrees that, so long as the Grantee is
an employee of the Company for tax purposes, all or any part of any such
withholding obligation shall be deducted from the Grantee's wages or other cash
compensation (including regular pay). The Grantee shall pay to the Company any
amount that cannot be satisfied by the means previously described.
10. COMPLIANCE WITH LAW. The Company will make reasonable efforts to comply
with all applicable federal, state and foreign securities laws; however, the
Company will not issue any Common Shares or other securities pursuant to these
Terms and Conditions if their issuance would result in a violation of any such
law.
11. RELATION TO OTHER BENEFITS. The benefits received by the Grantee under
these Terms and Conditions will not be taken into account in determining any
benefits to which the Grantee may be entitled under any profit sharing,
retirement or other benefit or compensation plan maintained by the Company,
including the amount of any life insurance coverage available to any beneficiary
of the Grantee under any life insurance plan covering employees of the
3
Company. Additionally, the Target Performance Shares are not part of normal or
expected compensation or salary for any purposes, including, but not limited to
calculation of any severance, resignation, termination, redundancy, end of
service payments, bonuses or long-service awards. This grant of Target
Performance Shares does not create any contractual or other right to receive
future grants of Target Performance Shares, or benefits in lieu of Target
Performance Shares, even if Grantee has a history of receiving Target
Performance Shares or other stock awards.
12. AMENDMENTS. The Plan may be modified, amended, suspended or terminated by
the Company at any time, as provided in the Plan. Any amendment to the Plan will
be deemed to be an amendment to these Terms and Conditions to the extent it is
applicable to these Terms and Conditions; however, no amendment will adversely
affect the rights of the Grantee under these Terms and Conditions without the
Grantee's consent.
13. SEVERABILITY. If one or more of the provisions of these Terms and
Conditions is invalidated for any reason by a court of competent jurisdiction,
the invalidated provisions shall be deemed to be separable from the other
provisions of these Terms and Conditions, and the remaining provisions of these
Terms and Conditions will continue to be valid and fully enforceable.
14. RELATION TO PLAN; INTERPRETATION. These Terms and Conditions are subject to
the terms and conditions of the Plan. In the event of any inconsistent
provisions between these Terms and Conditions and the Plan, the provisions of
the Plan control. Capitalized terms used in these Terms and Conditions without
definition have the meanings assigned to them in the Plan. References to
Sections are to Sections of these Terms and Conditions unless otherwise noted.
15. SUCCESSORS AND ASSIGNS. Subject to Sections 2 and 4, the provisions of
these Terms and Conditions shall be for the benefit of, and be binding upon, the
successors, administrators, heirs, legal representatives and assigns of the
Grantee, and the successors and assigns of the Company.
16. GOVERNING LAW. The laws of the State of Delaware govern the interpretation,
performance, and enforcement of these Terms and Conditions.
17. PRIVACY RIGHTS. By accepting this award, the Grantee explicitly and
unambiguously consents to the collection, use and transfer, in electronic or
other form, of the Grantee's personal data as described in these Terms and
Conditions by and among, as applicable, the Company and its affiliates for the
exclusive purpose of implementing, administering and managing the Grantee's
participation in the Plan. The Company holds or may receive from any agent
designated by the Company certain personal information about the Grantee,
including, but not limited to, the Grantee's name, home address and telephone
number, date of birth, social insurance number or other identification number,
salary, nationality, job title, any shares of stock or directorships held in
Occidental, details of this Target Performance Share award or any other
entitlement to shares of stock awarded, canceled, exercised, vested, unvested or
outstanding in the Grantee's favor, for the purpose of implementing,
administering and managing the Plan, including complying with applicable tax and
securities laws ("Data"). Data may be transferred to any third parties assisting
in the implementation, administration and management of the Plan. These
recipients may be located in the Grantee's country or elsewhere, and may have
different data privacy laws and protections than the Grantee's country. By
accepting these Terms and
4
Conditions, the Grantee authorizes the recipients to receive, possess, use,
retain and transfer the Data, in electronic or other form, for the purposes
described above. The Grantee may, at any time, view Data, request additional
information about the storage and processing of Data, require any necessary
amendments to Data or refuse or withdraw the consents herein, in any case
without cost, by contacting the Administrator in writing. Refusing or
withdrawing consent may affect the Grantee's ability to participate in the Plan.
18. ELECTRONIC DELIVERY. The Company may, in its sole discretion, decide to
deliver any documents related to this Target Performance Share award granted
under the Plan or future awards that may be granted under the Plan (if any) by
electronic means or to request the Grantee's consent to participate in the Plan
by electronic means. The Grantee hereby consents to receive such documents by
electronic delivery and, if requested, to participate in the Plan through an
on-line or electronic system established and maintained by the Company or
another third party designated by the Company.
19. GRANTEE'S REPRESENTATIONS AND RELEASES. By accepting this award, the
Grantee acknowledges that the Grantee has read these Terms and Conditions and
understands that (i) the grant of this Target Performance Share award is made
voluntarily by Occidental in its discretion with no liability on the part of any
of its direct or indirect subsidiaries and that, if the Grantee is not an
employee of Occidental, the Grantee is not, and will not be considered, an
employee of Occidental but the Grantee is a third party (employee of a
subsidiary) to whom this Target Performance Share award is granted; (ii) the
Grantee's participation in the Plan is voluntary; (iii) the future value of any
Common shares issued pursuant to this Target Performance Share award cannot be
predicted and Occidental does not assume liability in the event such Common
Shares have no value in the future; and, (iv) subject to the terms of any tax
equalization agreement between the Grantee and the entity employing the Grantee,
the Grantee will be solely responsible for the payment or nonpayment of taxes
imposed or threatened to be imposed by any authority of any jurisdiction.
In consideration of the grant of this Target Performance Share award, no claim
or entitlement to compensation or damages shall arise from termination of this
Target Performance Share award or diminution in value of this Target Performance
Share award or Common Shares issued pursuant to this Target Performance Share
award resulting from termination of the Grantee's employment by the Company (for
any reason whatsoever and whether or not in breach of local labor laws) and the
Grantee irrevocably releases the Company from any such claim that may arise; if,
notwithstanding the foregoing, any such claim is found by a court of competent
jurisdiction to have arisen, then, by accepting these Terms and Conditions, the
Grantee shall be deemed irrevocably to have waived his or her entitlement to
pursue such claim.
5
EXHIBIT 1
2004 GRANT TO OCC PARTICIPANTS
(% of Number of Target Shares of Performance Stock that become Nonforfeitable
based on Comparison of Total Shareholder Return for the Peer Companies for the
Performance Period)
- --------- --------- --------- --------- --------- --------- --------- ---------
Ranking 8 COS. 7 COS. 6 COS. 5 COS. 4 COS. 3 COS. 2 COS.
- --------- --------- --------- --------- --------- --------- --------- ---------
1 100% 100% 100% 100% 100% 100% *
2 83.5% 83.5% 75% 75% 66.5% 50% 0%
3 66.5% 66.5% 50% 50% 33.5% 0%
4 50% 50% 50% 25% 0%
5 50% 33.5% 25% 0%
6 33.5% 16.5% 0%
7 16.5% 0%
8 0%
* Subject to Committee Discretion
PLUS
(% of Number of Target Shares of Performance Stock that become Nonforfeitable
based on Return on Assets for the Performance Period)
Return on Assets Payout Percentage
-------------------- ---------------------
10% 100%
9% 75%
8% 50%
7% 25%
6% 0%
If actual ROA falls between stated ROA's, payout percentages will be
interpolated.
6
EXHIBIT 10.50
OCCIDENTAL PETROLEUM CORPORATION
FINANCIAL COUNSELING PROGRAM
Certain executives of Occidental Petroleum Corporation ("Occidental" or the
"Company") and its subsidiaries are selected to participate in the Company's
Financial Counseling Program (the "Program"). Generally, the selected
participants include the Chairman and Chief Executive Officer; the President;
Chairman, President and Chief Executive Officer of Occidental Oil and Gas; and
the Chief Financial Officer and Executive Vice President Corporate Development
and their direct reports. Under the Program, the Company pays for covered
financial planning services provided by the financial counselor and/or attorney
of the participant's choice or, in some cases, a provider recommended by the
Company. Covered financial services may include one or more of the following:
o Income tax planning
o Tax return preparation
o Retirement planning
o Will or trust preparation
o Insurance/risk management advice and planning
o Investment planning
o Company compensation and benefit assessment
o Debt management/cash flow analysis
o Estate and gift tax planning
EXHIBIT 10.51
OCCIDENTAL PETROLEUM CORPORATION
GROUP EXCESS LIABILITY INSURANCE PROGRAM
Certain executives of Occidental Petroleum Corporation and its subsidiaries are
selected to participate in Occidental's Group Excess Liability Insurance
Program. Occidental pays the premium for the insurance. The insurance is an
umbrella policy which provides excess coverage beyond regular liability
policies, with required minimum coverage for underlying policies such as auto
and home policies. The program provides $10 million of coverage for a small
number of executives and $5 million of coverage for certain other executives.
040224b
EXHIBIT 12
OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
COMPUTATION OF TOTAL ENTERPRISE RATIOS OF EARNINGS TO FIXED CHARGES
(Amounts in millions, except ratios)
For the years ended December 31, 2003 2002 2001 2000 1999
================================================================= ======== ======== ======== ======== ========
Income from continuing operations $ 1,595 $ 1,163 $ 1,179 $ 1,557 $ 461
Add:
Minority interest (a) 62 77 143 185 58
Adjusted income from equity investments (b) 69 308 89 31 73
-------- -------- -------- -------- --------
1,726 1,548 1,411 1,773 592
-------- -------- -------- -------- --------
Add:
Provision (credit) for taxes on income (other than
foreign oil and gas taxes) 682 (41) 172 871 306
Interest and debt expense (c) 335 309 411 540 515
Portion of least rentals representative of the interest factor 8 6 7 6 31
-------- -------- -------- -------- --------
1,025 274 590 1,417 852
-------- -------- -------- -------- --------
Earnings before fixed charges $ 2,751 $ 1,822 $ 2,001 $ 3,190 $ 1,444
======== ======== ======== ======== ========
Fixed charges:
Interest and debt expense including capitalized interest (c) $ 341 $ 321 $ 417 $ 543 $ 522
Portion of lease rentals representative of the interest factor 8 6 7 6 31
-------- -------- -------- -------- --------
Total fixed charges $ 349 $ 327 $ 424 $ 549 $ 553
======== ======== ======== ======== ========
Ratio of earnings to fixed charges 7.88 5.57 4.72 5.81 2.61
================================================================= ======== ======== ======== ======== ========
(a) Represents minority interests in net income of majority-owned subsidiaries
and partnerships having fixed charges.
(b) Represents income from less-than-50-percent-owned equity investments
adjusted to reflect only dividends received.
(c) Includes proportionate share of interest and debt expense of
50-percent-owned equity investments.
EXHIBIT 21
LIST OF SUBSIDIARIES
The following is a list of the Registrant's subsidiaries at December 31, 2003,
other than certain subsidiaries that did not in the aggregate constitute a
significant subsidiary.
Name Jurisdiction of Formation
- ---------------------------------------------------------------- -----------------------------
D. S. Ventures, Inc. Texas
Glenn Springs Holdings, Inc. Delaware
INDSPEC Chemical Corporation Delaware
Laguna Petroleum Corporation Texas
La Porte Chemicals Corp. Delaware
Occidental Andina, LLC Delaware
Occidental C.O.B. Partners Delaware
Occidental Chemical Chile Limitada Chile
Occidental Chemical Corporation New York
Occidental Chemical Holding Corporation California
Occidental Chile Investments, LLC Delaware
Occidental Crude Sales, Inc. (International) Delaware
Occidental de Colombia, Inc. Delaware
Occidental del Ecuador, Inc. Nevis
Occidental Energy Marketing, Inc. Delaware
Occidental Exploration and Production Company California
Occidental Gas de Mexico LLC Delaware
Occidental International Exploration and Production Company California
Occidental International Holdings Ltd. Bermuda
Occidental International Oil and Gas Ltd. Bermuda
Occidental Mexico Holdings, Inc. Nevis
Occidental of Elk Hills, Inc. Delaware
Occidental of Oman, Inc. Nevis
Occidental Oil and Gas Holding Corporation California
Occidental Oil and Gas Pakistan LLC Nevis
Occidental OOOI Holder, Inc. Delaware
Occidental Overseas Operations, Inc. Delaware
Occidental Peninsula, Inc. Delaware
Occidental Peninsula II, Inc. Nevis
Occidental Permian Ltd. Texas
Occidental Petroleum (Pakistan), Inc. Delaware
Occidental Petroleum Investment Co. California
Occidental Petroleum of Qatar Ltd. Bermuda
Occidental PVC LP, Inc. Delaware
Occidental Quimica do Brasil Ltda. Brazil
Occidental Yemen Ltd. Bermuda
OOG Partner Inc. Delaware
OOOI Chemical International, LLC Delaware
OOOI Chemical Management, Inc. Delaware
OOOI Chile Holder, Inc. Nevis
OOOI Oil and Gas Management, Inc. Delaware
OOOI Oil and Gas Sub, LLC Delaware
OXYMAR Texas
Oxy CH Corporation California
Oxy Chemical Corporation California
OXY Dolphin E&P, LLC Nevis
OXY Dolphin Pipeline, LLC Nevis
Oxy Energy Services, Inc. Delaware
OXY Long Beach, Inc. Delaware
OXY Oil Partners, Inc. Delaware
OXY Receivables Corporation Delaware
OXY USA Inc. Delaware
Oxy Vinyls Canada Inc. Canada
Oxy Vinyls, LP Delaware
Oxy Westwood Corporation California
Repsol Occidental Corporation Delaware
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors, Occidental Petroleum Corporation
We consent to the incorporation by reference in the registration statements
(Nos. 33-14662, 33-47636, 33-59395, 33-64719, 333-49207, 333-72719, 333-78031,
333-37970, 333-55404, 333-63444, 333-82246, 333-83124, 333-96951 and 333-104827)
on Forms S-3 and S-8 of Occidental Petroleum Corporation of our report dated
February 13, 2004, with respect to the consolidated balance sheets of Occidental
Petroleum Corporation as of December 31, 2003 and 2002, and the related
consolidated statements of operations, stockholders' equity, comprehensive
income, and cash flows for each of the years in the three-year period ended
December 31, 2003 and the related financial statement schedule, which report
appears in the Form 10-K dated March 1, 2004 of Occidental Petroleum
Corporation. Our report refers to (i) a change in the method of accounting for
inventories purchased from third parties, (ii) a change in the method of
accounting for asset retirement obligations, (iii) a change in the method of
accounting for the consolidation of variable interest entities, (iv) a change in
the method of accounting for certain financial instruments with characteristics
of both liabilities and equity, (v) a change in the method of accounting for the
impairment of goodwill and other intangibles, and (vi) a change in the method of
accounting for derivative instruments and hedging activities.
/s/ KPMG LLP
Los Angeles, California
March 1, 2004
CERTIFICATIONS EXHIBIT 31.1
I, Ray R. Irani, certify that:
1. I have reviewed this annual report on Form 10-K of Occidental Petroleum
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: March 1, 2004
/S/ RAY R. IRANI
------------------------------
Ray R. Irani
Chief Executive Officer
I, Stephen I. Chazen, certify that: EXHIBIT 31.2
1. I have reviewed this annual report on Form 10-K of Occidental Petroleum
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: March 1, 2004
/S/ STEPHEN I. CHAZEN
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Stephen I. Chazen
Chief Financial Officer
EXHIBIT 32.1
CERTIFICATION OF CEO AND CFO PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of Occidental Petroleum
Corporation (the "Company") for the fiscal period ended December 31, 2003, as
filed with the Securities and Exchange Commission on March 1, 2004 (the
"Report"), Ray R. Irani, as Chief Executive Officer of the Company, and Stephen
I. Chazen, as Chief Financial Officer of the Company, each hereby certifies,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ RAY R. IRANI
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Name: Ray R. Irani
Title: Chairman of the Board of Directors and Chief Executive Officer
Date: March 1, 2004
/s/ STEPHEN I. CHAZEN
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Name: Stephen I. Chazen
Title: Executive Vice President - Corporate Development and Chief Financial
Officer
Date: March 1, 2004
A signed original of this written statement required by Section 906 has been
provided to Occidental Petroleum Corporation and will be retained by Occidental
Petroleum Corporation and furnished to the Securities and Exchange Commission or
its staff upon request.
This certification accompanies the Report pursuant to Section906 of the
Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the
Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of
Section18 of the Securities Exchange Act of 1934, as amended.