SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 1-9210
---------------------
OCCIDENTAL PETROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-4035997
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10889 WILSHIRE BOULEVARD
LOS ANGELES, CALIFORNIA 90024
(Address of principal executive offices) (Zip Code)
(310) 208-8800
(Registrant's telephone number, including area code)
---------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at June 30, 2002
- ----------------------------------- ------------------------------------
Common stock $.20 par value 376,390,779 shares
OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONTENTS
PAGE
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets--
June 30, 2002 and December 31, 2001 2
Consolidated Condensed Statements of Operations--
Three and six months ended June 30, 2002 and 2001 4
Consolidated Condensed Statements of Cash Flows--
Six months ended June 30, 2002 and 2001 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
PART II OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 6. Exhibits and Reports on Form 8-K 21
1
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
JUNE 30, 2002 and December 31, 2001
(Amounts in millions)
2002 2001
================================================================================ ========== ==========
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 430 $ 199
Receivables, net 886 687
Inventories 420 444
Prepaid expenses and other 148 153
---------- ----------
Total current assets 1,884 1,483
LONG-TERM RECEIVABLES, net 264 2,186
INVESTMENTS IN UNCONSOLIDATED ENTITIES 1,103 993
PROPERTY, PLANT AND EQUIPMENT, at cost, net of
accumulated depreciation, depletion and amortization of $6,148
at June 30, 2002 and $5,705 at December 31, 2001 12,937 12,858
OTHER ASSETS 293 330
---------- ----------
$ 16,481 $ 17,850
================================================================================ ========== ==========
The accompanying notes are an integral part of these financial statements.
2
OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
JUNE 30, 2002 and December 31, 2001
(Amounts in millions)
2002 2001
================================================================================ ========== ==========
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Notes payable $ -- $ 54
Accounts payable 807 720
Accrued liabilities 1,370 1,089
Domestic and foreign income taxes 80 27
---------- ----------
Total current liabilities 2,257 1,890
---------- ----------
LONG-TERM DEBT, net of unamortized discount 4,090 4,065
---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred and other domestic and foreign income taxes 1,252 1,103
Obligation under natural gas delivery commitment 74 145
Other 2,258 2,326
---------- ----------
3,584 3,574
---------- ----------
MINORITY INTEREST 259 2,224
---------- ----------
OCCIDENTAL OBLIGATED MANDATORILY REDEEMABLE
TRUST PREFERRED SECURITIES OF A SUBSIDIARY
TRUST HOLDING SOLELY SUBORDINATED NOTES OF
OCCIDENTAL 459 463
---------- ----------
STOCKHOLDERS' EQUITY
Common stock, at par value 75 75
Additional paid-in capital 3,916 3,857
Retained earnings 1,866 1,788
Accumulated other comprehensive income (25) (86)
---------- ----------
5,832 5,634
---------- ----------
$ 16,481 $ 17,850
================================================================================ ========== ==========
The accompanying notes are an integral part of these financial statements.
3
OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(Amounts in millions, except per-share amounts)
Three Months Ended Six Months Ended
June 30 June 30
-------------------- --------------------
2002 2001 2002 2001
=============================================================== ======== ======== ======== ========
REVENUES
Net sales $ 3,141 $ 3,845 $ 5,666 $ 8,320
Interest, dividends and other income 26 53 51 134
Gains (losses) on disposition of assets, net (1) 10 (1) 13
Income (loss) from equity investments 9 -- (26) (35)
-------- -------- -------- --------
3,175 3,908 5,690 8,432
-------- -------- -------- --------
COSTS AND OTHER DEDUCTIONS
Cost of sales 2,398 2,750 4,388 6,039
Selling, general and administrative and other
operating expenses 163 178 317 376
Exploration expense 59 18 86 39
Environmental remediation -- -- -- 49
Minority interest 16 44 41 76
Interest and debt expense, net 78 106 152 222
-------- -------- -------- --------
2,714 3,096 4,984 6,801
-------- -------- -------- --------
Income before taxes 461 812 706 1,631
Provision for domestic and foreign income and
other taxes 221 339 346 647
-------- -------- -------- --------
Income before extraordinary item and effect of changes
in accounting principles 240 473 360 984
Extraordinary loss, net -- -- -- (3)
Cumulative effect of changes in accounting principles, net -- -- (95) (24)
-------- -------- -------- --------
NET INCOME AND EARNINGS APPLICABLE TO
COMMON STOCK $ 240 $ 473 $ 265 $ 957
======== ======== ======== ========
BASIC EARNINGS PER COMMON SHARE
Income before extraordinary item and effect of changes
in accounting principles $ .64 $ 1.27 $ .96 $ 2.65
Extraordinary loss, net -- -- -- (.01)
Cumulative effect of changes in accounting principles, net -- -- (.25) (.06)
-------- -------- -------- --------
Basic earnings per common share $ .64 $ 1.27 $ .71 $ 2.58
======== ======== ======== ========
DILUTED EARNINGS PER COMMON SHARE
Income before extraordinary item and effect of changes
in accounting principles $ .63 $ 1.26 $ .95 $ 2.64
Extraordinary loss, net -- -- -- (.01)
Cumulative effect of changes in accounting principles, net -- -- (.25) (.06)
-------- -------- -------- --------
Diluted earnings per common share $ .63 $ 1.26 $ .70 $ 2.57
======== ======== ======== ========
DIVIDENDS PER COMMON SHARE $ .25 $ .25 $ .50 $ .50
======== ======== ======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 375.8 372.0 375.1 371.1
======== ======== ======== ========
DILUTIVE SHARES 381.5 374.7 380.3 372.8
=============================================================== ======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
4
OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(Amounts in millions)
2002 2001
======================================================================================= ========== ==========
CASH FLOW FROM OPERATING ACTIVITIES
Income before extraordinary item and effect of changes in accounting principles $ 360 $ 984
Adjustments to reconcile income to net cash provided by operating activities:
Depreciation, depletion and amortization of assets 515 482
Deferred income tax provision 114 66
Other noncash charges to income 18 47
Losses (gains) on disposition of assets, net 1 (13)
Loss from equity investments 26 35
Exploration expense 86 39
Changes in operating assets and liabilities (78) (254)
Other operating, net (93) (77)
---------- ----------
Net cash provided by operating activities 949 1,309
---------- ----------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures (600) (547)
Sales of businesses and disposal of property, plant and equipment, net 1 10
Purchase of businesses, net (77) (38)
Equity investments and other investing, net 169 (75)
---------- ----------
Net cash used by investing activities (507) (650)
---------- ----------
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from long-term debt -- 42
Repurchase of trust preferred securities (4) (5)
Purchases for natural gas delivery commitment (63) (59)
Payments on long-term debt, non-recourse debt and capital lease liabilities (3) (459)
Proceeds from issuance of common stock 7 9
Payments of notes payable, net -- (2)
Cash dividends paid (187) (186)
Stock options exercised 40 67
Other financing, net (1) --
---------- ----------
Net cash used by financing activities (211) (593)
---------- ----------
Increase in cash and cash equivalents 231 66
Cash and cash equivalents--beginning of period 199 97
---------- ----------
Cash and cash equivalents--end of period $ 430 $ 163
======================================================================================= ========== ==========
The accompanying notes are an integral part of these financial statements.
5
OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 30, 2002
1. General
The accompanying unaudited consolidated condensed financial statements have
been prepared by Occidental Petroleum Corporation (Occidental) pursuant to
the rules and regulations of the Securities and Exchange Commission.
Certain information and disclosures normally included in notes to
consolidated financial statements have been condensed or omitted pursuant
to such rules and regulations, but resultant disclosures are in accordance
with accounting principles generally accepted in the United States of
America as they apply to interim reporting. Subsequent to the appointment
of Occidental's new independent auditors, at Occidental's request, the new
independent auditors conducted a re-audit of the consolidated financial
statements for the fiscal years ended December 31, 2001, 2000 and 1999.
There were no changes in Occidental's balance sheets, income statements,
cash flow statements or earnings per share as a result of the re-audit. The
consolidated condensed financial statements should be read in conjunction
with the consolidated financial statements and the notes thereto in
Occidental's Annual Report on Form 10-K for the year ended December 31,
2001, as amended by Amendment No. 1 on Form 10-K/A, filed July 19, 2002
(2001 Form 10-K).
In the opinion of Occidental's management, the accompanying consolidated
condensed financial statements contain all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly Occidental's
consolidated financial position as of June 30, 2002 and the consolidated
statements of income for the three and six months then ended and the
consolidated cash flows for the six months then ended. The income and cash
flows for the periods ended June 30, 2002 are not necessarily indicative of
the income or cash flows to be expected for the full year.
Certain financial statements and notes for the prior year have been changed
to conform to the 2002 presentation.
Reference is made to Note 1 to the consolidated financial statements in the
2001 Form 10-K for a summary of significant accounting policies including
critical accounting policies.
2. Acquisitions, Dispositions and Commitments
On June 2, 2002, Occidental signed a definitive agreement with the United
Arab Emirates (UAE) Offsets Group to acquire a 24.5 percent interest in the
Dolphin Project and Dolphin Energy Limited (DEL) for $310 million, plus a
payment of $12 million to account for historical costs through May 31,
2002. DEL is a company that also includes the UAE Offsets Group (51 percent
interest) and TotalFinaElf (24.5 percent interest). The total payment,
which is expected to be made in the third quarter, has been accrued and the
amount has been allocated, on a preliminary basis, primarily to investment
in unconsolidated entities. Occidental will also be responsible for its
24.5 percent share of costs on an ongoing basis. The Dolphin participants
will collaborate on the $3.5 billion Dolphin Project, which consists of two
parts: (1) a development and production sharing agreement with Qatar to
develop and produce natural gas and condensate in Qatar's North Field and
(2) the rights for DEL to build, own and operate a 260-mile-long, 48-inch
export pipeline to transport 2 billion cubic feet per day of dry natural
gas from Qatar to markets in the UAE for a period of 25 years. Construction
on the upstream production and processing facilities and the pipeline is
expected to begin in 2003. Production is scheduled to begin in late 2005.
The partners anticipate securing project financing.
In connection with the acquisition of Altura Energy Ltd. in April 2000, the
sellers retained a preferred limited partnership interest of approximately
$2.0 billion, which was recorded as minority interest. Altura also loaned
approximately $2.0 billion to affiliates of the sellers, evidenced by two
notes recorded as long-term receivables. The partnership exercised an
option in May 2002 to redeem the sellers' remaining partnership interests
in exchange for the outstanding balance on the two notes. Both minority
interest and long-term receivables were reduced by $2.0 billion to reflect
this transaction on the balance sheet.
6
3. Accounting Changes
In July 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (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 does not expect that the adoption of
SFAS No. 146 will have a material impact on its financial statements.
In June 2002, the Emerging Issues Task Force (EITF) reached consensus on
certain issues in EITF Issue No. 02-3, "Accounting for Contracts Involved
in Energy Trading and Risk Management Activities." Consensus was reached on
two issues: 1) that gains and losses on energy trading contracts (whether
realized or unrealized) should be shown net in the income statement, and 2)
that entities should disclose the types of contracts that are accounted for
as energy trading contracts along with a variety of other data regarding
values, sensitivity to changes in estimates, maturity dates and other
factors. Occidental is required to implement this consensus in the third
quarter 2002 and all comparative financial statements will be reclassified
to conform to the consensus on the first issue. Occidental has concluded
the impact of this recent consensus will not have any effect on net income,
cash flow or earnings per share. However, Occidental expects the consensus
will require significant reductions in sales and cost of sales by equal
amounts.
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 must implement
SFAS No. 145 in the first quarter of 2003 and all comparative financial
statements will be reclassified to conform to the 2003 presentation. The
anticipated effect of the statement includes the reclassification of an
extraordinary loss to net income from continuing operations of $3 million
($0.01 per share) in the six months ended June 30, 2001. There will be no
effect on net income or basic earnings per common share.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets and broadens the presentation of discontinued operations
for long-lived assets. The provisions of this statement are effective for
financial statements issued for fiscal years beginning after December 15,
2001. Occidental adopted this statement in the first quarter of 2002 and it
did not have an impact on the financial statements.
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. The provisions
of this statement are effective for financial statements issued for fiscal
years beginning after June 15, 2002. Occidental must implement SFAS No. 143
in the first quarter of 2003 and has not yet determined its impact on the
financial statements.
In June 2001, the FASB issued SFAS No, 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 changes the accounting and reporting requirements for
acquired goodwill and intangible assets. The provisions of this statement
must be applied starting with fiscal years beginning after December 15,
2001. At December 31, 2001, the balance sheet included approximately $108
million of goodwill and intangible assets with annual amortization expense
of approximately $6 million recorded in each of the years' income
statements for the three-year period ended December 31, 2001. As a result,
elimination of goodwill amortization would not have had a material impact
on net income or earnings per share of any of the years presented and, as a
result, the transitional disclosures of adjusted net income excluding
goodwill amortization described by SFAS No. 142 have not been presented.
Occidental implemented SFAS No. 142 in the first quarter of 2002. The
adoption of this accounting standard resulted in a cumulative effect of
changes in accounting principles after-tax reduction in net income of
approximately $95 million due to the impairment of the goodwill. Occidental
now has no remaining goodwill on its financial statements.
7
4. Comprehensive Income
The following table presents Occidental's comprehensive income items (in
millions):
Periods Ended June 30
---------------------------------------------------------
Three Months Six Months
------------------------- -------------------------
2002 2001 2002 2001
=================================================== ========= ========= ========= =========
Net income $ 240 $ 473 $ 265 $ 957
Other comprehensive income items
Foreign currency translation adjustments (12) (4) (12) (12)
Derivative mark-to-market adjustments (7) 9 (9) 9
Cumulative effect of change in
accounting principles -- -- -- (27)
Unrealized gains on securities 82 (a) -- 82 (a) 2
--------- --------- --------- ---------
Other comprehensive income, net of tax 63 5 61 (28)
--------- --------- --------- ---------
Comprehensive income $ 303 $ 478 $ 326 $ 929
=================================================== ========= ========= ========= =========
(a) See Note 10 for further information.
5. Supplemental Cash Flow Information
During the six months ended June 30, 2002 and 2001, net cash (refunds)
payments for federal, foreign and state income taxes were approximately
$(18) million and $310 million, respectively. Interest paid (net of
interest capitalized) totaled approximately $120 million and $223 million
for the six months ended June 30, 2002 and 2001, respectively.
6. Inventories
A portion of inventories is valued under the LIFO method. The valuation of
LIFO inventory for interim periods is based on management's estimates of
year-end inventory levels and costs. Inventories consist of the following
(in millions):
Balance at June 30, 2002 December 31, 2001
======================== =================== ===================
Raw materials $ 51 $ 62
Materials and supplies 129 123
Work in process 2 2
Finished goods 240 268
--------- ---------
422 455
LIFO adjustment (2) (11)
--------- ---------
Total $ 420 $ 444
========= =========
7. Derivative Activities
Occidental's market-risk exposures relate primarily to commodity prices,
and, to a lesser extent, interest rates and foreign currency exchange
rates. Occidental's results are sensitive mainly to fluctuations in crude
oil and natural gas prices. Occidental may periodically use different types
of derivative instruments to achieve the best prices for oil and gas and to
reduce its exposure to price volatility, thus mitigating fluctuations in
commodity-related cash flows. Usually, Occidental does not hedge against
fluctuations in long-term oil and gas prices. Overall, Occidental's use of
derivatives in commodity hedging activity remains at a relatively low
dollar level. Changes in a derivative instrument's fair value must be
recognized in earnings unless specific
8
hedge accounting criteria are met. Changes in the fair value of derivative
instruments that meet specific cash-flow hedge accounting criteria are
reported in other comprehensive income (OCI). The gains and losses on
cash-flow hedge transactions that are reported in OCI are reclassified to
earnings in the periods in which earnings are affected by the variability
of the hedged item's cash flows. Mark-to-market gains and losses from
derivatives that qualify for fair-value hedge accounting are recorded in
earnings throughout the life of the hedge and are generally offset by the
change in fair-value of the hedged item. The ineffective portions of all
hedges are recognized in current period earnings.
For the three and six months ended June 30, 2002, the results of operations
included a net pre-tax (loss) gain of $(5) million and $4 million,
respectively, related to derivative mark-to-market adjustments. For the
three and six months ended June 30, 2001, the results of operations
included a net pre-tax gain of $26 million and $40 million, respectively,
related to derivative mark-to-market adjustments. The amount of interest
expense recorded in the income statement was lower by approximately $11
million and $22 million for the three and six months ended June 30, 2002,
respectively, to reflect net pre-tax gains from fair-value hedges. At June
30, 2002, approximately $8 million of the $22 million had been received in
cash. During both the three and six months ended June 30, 2002, a $3
million after-tax loss was reclassified from OCI to income resulting from
the expiration of cash-flow hedges. During the three and six months ended
June 30, 2001, a $2 million after-tax loss and a $8 million after-tax loss,
respectively, were reclassified from OCI to income resulting from the
expiration of cash-flow hedges. During the three and six months ended June
30, 2002, net unrealized after-tax losses of $10 million and $12 million,
respectively, were recorded to OCI relating to changes in current cash-flow
hedges. During the three and six months ended June 30, 2001, net unrealized
after-tax gains of $7 million and $1 million, respectively, were recorded
to OCI relating to changes in current cash-flow hedges. During the next
twelve months, Occidental expects that $7 million of net derivative
after-tax losses included in OCI, based on their valuation at June 30,
2002, will be reclassified into earnings. Hedge ineffectiveness did not
have a significant impact on earnings for the three and six months ended
June 30, 2002 and 2001.
8. Lawsuits, Claims, Commitments, Contingencies and Related Matters
Occidental and certain of its subsidiaries have been named as defendants in
a substantial number of lawsuits, claims and proceedings. They have also
been named as potentially responsible parties in governmental proceedings
under the Comprehensive Environmental Response, Compensation and Liability
Act and similar state acts. These governmental proceedings seek funding,
remediation and, in some cases, compensation for alleged property damage,
punitive damages and civil penalties, aggregating substantial amounts.
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. Occidental has accrued reserves at the most likely cost to
be incurred in those proceedings where it is probable that Occidental will
incur remediation costs which can be reasonably estimated.
During the course of its operations, Occidental is subject to audit by
taxing authorities for varying periods in various tax jurisdictions.
Occidental has certain other commitments under contracts, guarantees and
joint ventures, and certain other contingent liabilities.
It is impossible at this time to determine the ultimate liabilities that
Occidental and its subsidiaries may incur resulting from the foregoing
lawsuits, claims and proceedings, audits, commitments, contingencies and
related matters. Several of these matters may involve substantial amounts,
and if these were to be ultimately resolved unfavorably to the full amount
of their maximum potential exposure, an event not currently anticipated, it
is possible that such event could have a material adverse effect upon
Occidental's consolidated financial position or results of operations.
However, in management's opinion, after taking into account reserves, it is
unlikely that any of the foregoing matters will have a material adverse
effect upon Occidental's consolidated financial position or results of
operations.
9
9. Income Taxes
The provision for taxes based on income for the 2002 and 2001 interim
periods was computed in accordance with Interpretation No. 18 of APB
Opinion No. 28 on reporting taxes for interim periods and was based on
projections of total year pre-tax income excluding significant unusual
items. The provision for taxes for the six months ended June 30, 2001,
includes an after-tax benefit of $45 million (pre-federal tax benefit of
$70 million) related to a settlement of a state tax issue.
10. Investments in Unconsolidated Entities
At June 30, 2002, Occidental's equity investments consisted primarily of a
29.5 percent interest in Equistar Chemical, LP (Equistar), an interest in
the Dolphin Project (See Note 2) and interests in various chemical
partnerships and joint ventures. The following table presents Occidental's
proportionate interest in the summarized financial information of its
equity method investments (in millions):
Periods Ended June 30
--------------------------------------------------
Three Months Six Months
---------------------- -----------------------
2002 2001 2002 2001
========= ========= ========= =========
Revenues $ 557 $ 614 $ 989 $ 1,276
Costs and expenses 548 614 1,015 1,311
--------- --------- --------- ---------
Net income $ 9 $ -- $ (26) $ (35)
========= ========= ========= =========
In July 2002, Occidental and Lyondell Chemical Company (Lyondell) signed
definitive agreements for Occidental to sell its share of Equistar to
Lyondell and to purchase an equity interest of approximately 21 percent in
Lyondell. These transactions are subject to corporate and regulatory
approvals. In connection with the agreement in principle that preceded the
definitive agreements, Occidental wrote down its investment in the Equistar
partnership by $240 million, after tax, in December 2001. The transactions
are expected to close in the third quarter of 2002.
In January 2002, Equistar recorded a $1.1 billion cumulative effect of a
change in accounting principles to reflect the impairment of its entire
balance of goodwill. This write-down did not affect Occidental's investment
in Equistar because there was no significant difference between
Occidental's basis in the Equistar investment and the underlying equity in
net assets of Equistar subsequent to the write-down.
At June 30, 2002, investments in unconsolidated entities also included an
interest in Premcor, Inc., which became a publicly-traded company in April
2002. In accordance with the provisions of SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities", this investment is
being accounted for as an available-for-sale security and was adjusted to
fair value with an unrealized gain of $82 million, net of tax, recorded to
OCI in stockholders' equity.
10
11. Industry Segments
The following table presents Occidental's interim industry segment
disclosures (in millions):
Oil and Gas Chemical Corporate Total
===================================== ============ ============ ============ ============
Six months ended June 30, 2002
Net sales $ 4,347 $ 1,319 $ -- $ 5,666
============ ============ ============ ============
Pre-tax operating profit (loss) $ 932 $ 4 (c) $ (230)(a) $ 706
Income taxes (205) (6) (135)(b) (346)
Cumulative effect of changes in
accounting principles, net -- -- (95) (95)
------------ ------------ ------------ ------------
Net income (loss) $ 727 $ (2) $ (460) $ 265
===================================== ============ ============ ============ ============
Six months ended June 30, 2001
Net sales $ 6,576 $ 1,744 $ -- $ 8,320
============ ============ ============ ============
Pre-tax operating profit $ 1,996 (d) $ (16)(e) $ (349)(a)(f) $ 1,631
Income taxes (244) (5) (398)(b)(g) (647)
Extraordinary loss, net -- -- (3) (3)
Cumulative effect of changes in
accounting principles, net -- -- (24) (24)
------------ ------------ ------------ ------------
Net income (loss) $ 1,752 $ (21) $ (774) $ 957
===================================== ============ ============ ============ ============
(a) Includes unallocated net interest expense, administration expense and other
items.
(b) Includes unallocated income taxes.
(c) Includes a pre-tax charge of $14 million related to severance costs.
(d) Includes an after-tax gain of $7 million related to the sale of additional
interests in Gulf of Mexico assets.
(e) Includes a pre-tax charge of $26 million related to severance and plant
shut-down costs.
(f) Includes a pre-tax charge of $49 million related to environmental
remediation costs and an insurance dividend of $6 million.
(g) Includes an after-tax benefit of $45 million (pre-federal tax benefit of
$70 million) related to settlement of a state tax issue.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CONSOLIDATED RESULTS OF OPERATIONS
Occidental Petroleum Corporation (Occidental) reported net income for the first
six months of 2002 of $265 million, on net sales of $5.7 billion, compared with
net income of $957 million, on net sales of $8.3 billion, for the same period of
2001. Occidental's net income for the second quarter of 2002 was $240 million,
on net sales of $3.1 billion, compared with net income of $473 million, on net
sales of $3.8 billion, for the same period of 2001. Basic earnings per common
share were $0.71 for the first six months of 2002, compared with $2.58 per share
for the same period of 2001. Basic earnings per common share were $0.64 for the
second quarter of 2002, compared with $1.27 per share for the same period of
2001.
Earnings before special items were $369 million for the first six months of
2002, compared with earnings before special items of $976 million, for the same
period of 2001. Earnings before special items were $240 million for the second
quarter of 2002, compared with earnings before special items of $466 million for
the second quarter of 2001. See the Special Item table below for a description
of special items. The decrease in earnings before special items for the three
and six months ended June 30, 2002, compared with the same periods in 2001,
reflected lower natural gas and chemical prices and higher exploration expense,
partially offset by higher oil production and lower energy costs. Additionally,
the six months ended June 30, 2002 reflected lower net sales due to lower crude
oil prices and higher Equistar Chemical, LP (Equistar) petrochemical joint
venture losses than the same period in 2001.
The decrease in net sales of $704 million and $2.7 billion for the three and six
months ended June 30, 2002, compared with the same periods in 2001, primarily
reflected lower natural gas and chemical prices and lower oil and gas trading
revenues, partially offset by higher oil production. Additionally, for the six
months ended June 30, 2002, net sales decreased due to lower crude oil prices
compared with the same period in 2001. The lower trading revenues resulted from
lower oil and gas prices partially offset by higher gas volumes. Interest,
dividends and other income for the three and six months ended June 30, 2002
includes $8 million and $22 million, respectively, of interest income on notes
receivable from Altura partners, compared to $28 million and $61 million,
respectively, for the three and six months ended June 30, 2001.
The decrease in cost of sales of $352 million and $1.7 billion for the three
and six months ended June 30, 2002, compared with the same periods in 2001,
primarily reflected lower oil and gas trading costs and lower energy costs in
the chemical segment. The lower trading costs resulted from lower oil and gas
prices partially offset by higher gas volumes. The decrease of $15 million and
$59 million in selling, general and administrative and other operating expenses
for the three and six months ended June 30, 2002, respectively, compared with
the same periods in 2001, primarily reflected lower oil and gas production
taxes. Additionally, for the six months ended June 30, 2002, severance costs for
the chemical segment were lower than severance and plant shutdown costs for the
six months ended June 30, 2001. The increase in exploration expense of $41
million and $47 million for the three and six months ended June 30, 2002,
respectively, compared with the same periods in 2001, reflected the write-off of
leases in the San Joaquin Valley. The decrease in minority interest of $28
million and $35 million for the three and six months ended June 30, 2002,
respectively, compared with the same periods in 2001, was primarily the result
of the redemption of the remaining minority interests held by BP plc and Royal
Dutch/Shell relating to the Altura acquisition. The decrease in interest and
debt expense, net of $28 million and $70 million for the three and six months
ended June 30, 2002, respectively, compared to the same periods in 2001, was
primarily due to lower outstanding debt and lower interest rates. The provision
for income taxes for the six months ended June 30, 2001 included a $45 million
after-tax benefit ($70 million pre-federal tax benefit) for the settlement of a
state tax issue.
12
SEGMENT OPERATIONS
The following table sets forth the sales and earnings of each operating segment
and corporate items (in millions):
Periods Ended June 30
---------------------------------------------------
Three Months Six Months
----------------------- -----------------------
2002 2001 2002 2001
============================================================= ========= ========= ========= =========
SEGMENT NET SALES
Oil and Gas $ 2,410 $ 2,964 $ 4,347 $ 6,576
Chemical 731 881 1,319 1,744
--------- --------- --------- ---------
NET SALES $ 3,141 $ 3,845 $ 5,666 $ 8,320
========= ========= ========= =========
SEGMENT EARNINGS (LOSS)
Oil and Gas $ 421 $ 806 $ 727 $ 1,752
Chemical 33 58 (2) (21)
--------- --------- --------- ---------
454 864 725 1,731
UNALLOCATED CORPORATE ITEMS
Interest expense, net (66) (71) (122) (147)
Income taxes (101) (249) (144) (424)
Trust preferred distributions and others (12) (14) (23) (30)
Other (35) (57) (76) (146)
--------- --------- --------- ---------
INCOME BEFORE EXTRAORDINARY ITEMS AND EFFECT OF CHANGES IN
ACCOUNTING PRINCIPLES 240 473 360 984
Extraordinary loss, net -- -- -- (3)
Cumulative effect of changes in accounting
principles, net -- -- (95) (24)
--------- --------- --------- ---------
NET INCOME $ 240 $ 473 $ 265 $ 957
========= ========= ========= =========
EARNINGS BEFORE SPECIAL ITEMS (a) $ 240 $ 466 $ 369 $ 976
============================================================= ========= ========= ========= =========
(a) Earnings before special items reflect adjustments to net income to exclude
the after-tax effect of certain infrequent transactions that may affect
comparability between periods. These transactions are shown in the table
below. Management believes the presentation of earnings before special
items provides a meaningful comparison of earnings between periods to the
readers of the consolidated financial statements. Earnings before special
items is not considered to be an alternative to operating income in
accordance with generally accepted accounting principles.
13
SPECIAL ITEMS
The following table sets forth the special items for each operating segment and
corporate:
Periods Ended June 30
---------------------------------------------------
Three Months Six Months
Benefit (Charge) ----------------------- -----------------------
(in millions) 2002 2001 2002 2001
============================================================= ========= ========= ========= =========
OIL AND GAS
Sale of additional interests in Gulf of Mexico assets * $ -- $ 7 $ -- $ 7
- ------------------------------------------------------------- --------- --------- --------- ---------
CHEMICAL
Severance, plant shutdown and plant writedown costs $ -- $ -- $ (14) $ (26)
- ------------------------------------------------------------- --------- --------- --------- ---------
CORPORATE
Settlement of state tax issue $ -- $ -- $ -- $ 70
Environmental remediation -- -- -- (49)
Insurance dividend -- -- -- 6
Changes in accounting principles, net * -- -- (95) (24)
Extraordinary loss on debt redemption, net * -- -- -- (3)
Tax effect of pre-tax adjustments -- -- 5 --
============================================================= ========= ========= ========= =========
* These amounts are shown after-tax.
OIL AND GAS SEGMENT
Periods Ended June 30
---------------------------------------------------
Three Months Six Months
----------------------- -----------------------
Summary of Operating Statistics 2002 2001 2002 2001
============================================================= ========= ========= ========= =========
NET PRODUCTION PER DAY:
CRUDE OIL AND NATURAL GAS LIQUIDS (MBL)
United States 232 209 232 208
Latin America 49 14 47 23
Eastern Hemisphere 128 118 134 121
NATURAL GAS (MMCF)
United States 565 607 579 619
Eastern Hemisphere 50 47 50 48
BARRELS OF OIL EQUIVALENT - THOUSANDS (MBOE) 512 450 518 463
- ------------------------------------------------------------- --------- --------- --------- ---------
AVERAGE SALES PRICE:
CRUDE OIL ($/BBL)
United States 23.88 23.11 21.35 23.71
Latin America 22.77 18.90 20.65 21.69
Eastern Hemisphere 22.16 23.36 20.24 22.69
NATURAL GAS ($/MCF)
United States 2.92 8.55 2.64 9.30
Eastern Hemisphere 2.04 2.41 2.28 2.30
============================================================= ========= ========= ========= =========
Oil and gas earnings for the first six months of 2002 were $727 million,
compared with $1.752 billion for the same period of 2001. Oil and gas earnings
for the second quarter of 2002 were $421 million, compared with $806 million for
the same period of 2001. The oil and gas segment had no special items in 2002.
The oil and gas segment had earnings before special items of $799 million and
$1.745 billion for the three and six months ended June 30, 2001. See Special
Items table for a description of special items. The decline in earnings for the
three and six months
14
ended June 30, 2002 compared with the same periods in 2001, reflected the effect
of lower gas prices and higher exploration expense, partially offset by higher
oil production volumes. Additionally, for the six months ended June 30, 2002,
earnings decreased due to lower crude oil prices compared with the same period
in 2001.
The decrease in net sales of $554 million and $2.2 billion for the three and six
months ended June 30, 2002, respectively, compared with the same periods in
2001, primarily reflected lower natural gas prices and lower oil and gas trading
revenues, partially offset by higher oil production. Additionally, for the six
months ended June 30, 2002, net sales decreased due to lower crude oil prices
compared with the same period in 2001. The lower trading revenues resulted from
lower oil and gas prices partially offset by higher gas volumes. Approximately
52 percent and 54 percent of oil and gas net sales were attributable to oil and
gas trading activities in the first six months of 2002 and 2001, respectively.
These trading activities focus primarily on obtaining the highest sales price
available. Other than the positive effect on oil and gas realized prices, the
results of oil and gas trading activities were not significant.
Occidental's sensitivity to changes in oil and gas prices is similar to prior
quarters. The average West Texas Intermediate price in the second quarter of
2002 was $26.25 per barrel and Occidental's average price realization for
natural gas was $2.92 per thousand cubic feet. A swing of 25-cents per million
BTU's in New York Mercantile Exchange gas prices impacts quarterly oil and gas
segment earnings by $13.5 million while a $1.00 per barrel change in oil prices
has a quarterly impact of $28 million.
For the first six months of 2002, production volumes increased approximately 12
percent to 518,000 barrels of oil equivalent (BOE) per day compared with 463,000
BOE per day for the same period of 2001. For the second quarter of 2002,
production volumes increased approximately 14 percent to 512,000 BOE per day
compared with 450,000 BOE per day for the same period in 2001. The increase
reflects higher worldwide crude oil and liquids production, particularly in
California, Colombia and the Middle East. Occidental expects third quarter 2002
oil and gas production to remain at approximately the same level as the second
quarter 2002.
CHEMICAL SEGMENT
Three Months Ended Six Months Ended
June 30 June 30
----------------------- -----------------------
Summary of Operating Statistics 2002 2001 2002 2001
========================================================== ========= ========= ========= =========
MAJOR PRODUCT VOLUMES
Chlorine (M Tons) 735 786 1,436 1,491
Caustic (M Tons) 743 750 1,317 1,419
Ethylene Dichloride (M Tons) 140 154 292 376
PVC Resins (MM Lbs.) 1,151 1,050 2,193 2,113
MAJOR PRODUCT PRICE INDEX (BASE 1987-1990 = 1.0)
Chlorine 0.77 0.76 0.64 0.82
Caustic 0.66 1.42 0.79 1.37
Ethylene Dichloride 1.29 0.74 0.94 0.78
PVC Resins 0.70 0.77 0.62 0.75
========================================================== ========= ========= ========= =========
Chemical results for the first six months of 2002 were a loss of $2 million,
compared with a loss of $21 million for the same period of 2001. Chemical
earnings for the second quarter of 2002 were $33 million, compared with $58
million for the same period of 2001. Chemical earnings before special items were
$12 million for the first six months of 2002, compared with $5 million for the
first six months of 2001. There were no special items for the second quarter of
2002 or 2001. See Special Items table for a description of special items. The
decrease in second quarter 2002 earnings was the result of lower sales prices,
mainly for caustic soda and polyvinyl chloride resins (PVC), partially offset by
higher ethylene dichloride (EDC) prices and lower energy and raw material costs,
compared to the same period in 2001. The increase in six months 2002 earnings
before special items was the result of lower energy and raw material costs and
higher EDC prices, partially offset by lower sales prices mainly for
15
caustic soda and PVC and higher Equistar petrochemical joint venture losses,
compared with the same period in 2001.
The decrease in net sales of $150 million and $425 million for the three and six
months ended June 30, 2002, compared with the same periods in 2001, primarily
reflected lower sales prices, mainly for caustic soda and PVC, and lower
chemical sales volumes, partially offset by higher prices for EDC.
The sale of Occidental's interest in Equistar to Lyondell Chemical Company
(Lyondell) is anticipated to close in the third quarter 2002. It is currently
expected that an after-tax gain will be recognized at that time. The chrome
business is expected to be adversely affected by the phase-out of a
wood-treatment product that uses chromic acid. The chrome business is an
immaterial portion of Occidental's earnings. Occidental anticipates that the
chemical business, as a whole, will improve in the third quarter 2002, compared
to the second quarter 2002, because of continued strengthening in chemical
prices.
CORPORATE AND OTHER
Segment earnings include credits/(charges) in lieu of U.S. federal income taxes.
In the first six months of 2002 and 2001, segment earnings benefited by $9
million and $20 million, respectively, from credits allocated. This includes a
credit of $1 million to oil and gas and $8 million to chemical results in the
first six months of 2002 and a charge of $(2) million to oil and gas and a
credit of $22 million to chemical results in the first six months of 2001.
Occidental and certain of its subsidiaries have been named as defendants or as
potentially responsible parties (PRPs) in a substantial number of lawsuits,
claims and proceedings, including governmental proceedings under the
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA)
and corresponding state acts. These governmental proceedings seek funding,
remediation and, in some cases, compensation for alleged property damage,
punitive damages and civil penalties, aggregating substantial amounts.
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. Occidental has accrued reserves at the most likely cost to be
incurred in those proceedings where it is probable that Occidental will incur
remediation costs which can be reasonably estimated.
During the course of its operations, Occidental is subject to audit by taxing
authorities for varying periods in various tax jurisdictions. Occidental has
certain other commitments under contracts, guarantees and joint ventures, and
certain other contingent liabilities.
It is impossible at this time to determine the ultimate liabilities that
Occidental and its subsidiaries may incur resulting from the foregoing lawsuits,
claims and proceedings, audits, commitments, contingencies and related matters.
Several of these matters may involve substantial amounts, and if these were to
be ultimately resolved unfavorably to the full amount of their maximum potential
exposure, an event not currently anticipated, it is possible that such event
could have a material adverse effect upon Occidental's consolidated financial
position or results of operations. However, in management's opinion, after
taking into account reserves, it is unlikely that any of the foregoing matters
will have a material adverse effect upon Occidental's consolidated financial
position or results of operations.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Occidental's net cash provided by operating activities from continuing
operations was $949 million for the first six months of 2002, compared with net
cash provided of $1.3 billion for the same period of 2001. The decrease of
approximately $360 million from 2001 to 2002 is primarily attributed to lower
earnings before special items partially offset by lower working capital usage
compared with the first six months of the prior year.
Occidental's net cash used by investing activities was $507 million for the
first six months of 2002, compared with net cash used of $650 million for the
same period of 2001. The 2002 amount includes the receipt of partial repayments
of amounts that were advanced to equity affiliates in 2001. Capital expenditures
for the first six months of 2002 were $600 million, including $537 million in
oil and gas. Capital expenditures for the first six months of 2001 were $547
million, including $498 million in oil and gas.
16
Financing activities used net cash of $211 million in the first six months of
2002, compared with cash used of $593 million for the same period of 2001. The
2001 amount included net debt payments of approximately $417 million.
Available but unused lines of committed bank credit totaled approximately $2.1
billion at June 30, 2002 and December 31, 2001. Occidental currently expects to
spend approximately $1.2 billion on its 2002 capital spending program with about
$1.1 billion for oil and gas, excluding the capital for the Dolphin Project
which is discussed below. Occidental expects to have sufficient cash in 2002
from operations, and from proceeds from existing credit facilities, as
necessary, to fund its operating needs, capital expenditure requirements
(including the Dolphin Project), dividend payments and mandatory debt
repayments.
ACQUISITIONS, DISPOSITIONS AND COMMITMENTS
In July 2002, Occidental and Lyondell signed definitive agreements for
Occidental to sell its share of Equistar to Lyondell and to purchase an equity
interest of approximately 21 percent in Lyondell. These transactions are subject
to corporate and regulatory approvals. In connection with the agreement in
principle that preceded the definitive agreements, Occidental wrote down its
investment in the Equistar partnership by $240 million, after tax, in December
2001. The transactions are expected to close in the third quarter of 2002, and
Occidental expects to recognize an after-tax gain at that time.
On June 2, 2002, Occidental signed a definitive agreement with the United Arab
Emirates (UAE) Offsets Group to acquire a 24.5 percent interest in the Dolphin
Project and Dolphin Energy Limited (DEL) for $310 million, plus a payment of $12
million to account for historical costs through May 31, 2002. DEL is a company
that also includes the UAE Offsets Group (51 percent interest) and TotalFinaElf
(24.5 percent interest). The total payment, which is expected to be made in the
third quarter, has been accrued and the amount has been allocated, on a
preliminary basis, primarily to investment in unconsolidated entities.
Occidental will also be responsible for its 24.5 percent share of costs on an
ongoing basis. The Dolphin participants will collaborate on the $3.5 billion
Dolphin Project, which consists of two parts: (1) a development and production
sharing agreement with Qatar to develop and produce natural gas and condensate
in Qatar's North Field and (2) the rights for DEL to build, own and operate a
260-mile-long, 48-inch export pipeline to transport 2 billion cubic feet per day
of dry natural gas from Qatar to markets in the UAE for a period of 25 years.
When fully operational, the Dolphin Project is expected to add incremental
production of about 125 million cubic feet of gas and 9,000 barrels of liquids,
net to Oxy, which is approximately 30,000 barrels of oil equivalent (BOE) per
day. The project is also expected to add approximately 900 billion cubic feet of
gas equivalent, which is equivalent to 150 million BOE, to Occidental's proved
reserves. Construction on the upstream production and processing facilities and
the pipeline is expected to begin in 2003. Production is scheduled to begin in
late 2005. The partners anticipate securing project financing.
In connection with the acquisition of Altura Energy Ltd. in April 2000, the
sellers retained a preferred limited partnership interest of approximately $2.0
billion, which was recorded as minority interest. Altura also loaned
approximately $2.0 billion to affiliates of the sellers, evidenced by two notes
recorded as long-term receivables. The partnership exercised an option in May
2002 to redeem the sellers' remaining partnership interests in exchange for the
outstanding balance on the two notes. Both minority interest and long-term
receivables were reduced by $2.0 billion to reflect this transaction on the
balance sheet.
DERIVATIVE ACTIVITIES
Occidental's market-risk exposures relate primarily to commodity prices, and, to
a lesser extent, interest rates and foreign currency exchange rates.
Occidental's results are sensitive mainly to fluctuations in crude oil and
natural gas prices. Occidental may periodically use different types of
derivative instruments to achieve the best prices for oil and gas and to reduce
its exposure to price volatility, thus mitigating fluctuations in
commodity-related cash flows. Usually, Occidental does not hedge against
fluctuations in long-term oil and gas prices. Overall, Occidental's use of
derivatives in commodity hedging activity remains at a relatively low dollar
level. Changes in a derivative instrument's fair value must be recognized in
earnings unless specific hedge accounting criteria are met. Changes in the fair
value of derivative instruments that meet specific cash-flow hedge accounting
criteria are reported in other comprehensive income (OCI). The gains and losses
on cash-flow hedge transactions that are reported in OCI are reclassified to
earnings in the periods in which earnings are affected by the variability of the
hedged item's cash flows. Mark-to-market gains and losses from derivatives that
qualify for fair-value hedge
17
accounting are recorded in earnings throughout the life of the hedge and are
generally offset by the change in fair-value of the hedged item. The ineffective
portions of all hedges are recognized in current period earnings.
For the three and six months ended June 30, 2002, the results of operations
included a net pre-tax (loss) gain of $(5) million and $4 million, respectively,
related to derivative mark-to-market adjustments. For the three and six months
ended June 30, 2001, the results of operations included a net pre-tax gain of
$26 million and $40 million, respectively, related to derivative mark-to-market
adjustments. The amount of interest expense recorded in the income statement was
lower by approximately $11 million and $22 million for the three and six months
ended June 30, 2002, respectively, to reflect net pre-tax gains from fair-value
hedges. At June 30, 2002, approximately $8 million of the $22 million had been
received in cash. During both the three and six months ended June 30, 2002, a $3
million after-tax loss was reclassified from OCI to income resulting from the
expiration of cash-flow hedges. During the three and six months ended June 30,
2001, a $2 million after-tax loss and a $8 million after-tax loss, respectively,
were reclassified from OCI to income resulting from the expiration of cash-flow
hedges. During the three and six months ended June 30, 2002, net unrealized
after-tax losses of $10 million and $12 million, respectively, were recorded to
OCI relating to changes in current cash-flow hedges. During the three and six
months ended June 30, 2001, net unrealized after-tax gains of $7 million and $1
million, respectively, were recorded to OCI relating to changes in current
cash-flow hedges. During the next twelve months, Occidental expects that $7
million of net derivative after-tax losses included in OCI, based on their
valuation at June 30, 2002, will be reclassified into earnings. Hedge
ineffectiveness did not have a significant impact on earnings for the three and
six months ended June 30, 2002 and 2001.
ENVIRONMENTAL MATTERS
Occidental's operations in the United States are subject to stringent federal,
state and local laws and regulations relating to improving or maintaining the
quality of the environment. Foreign operations also are subject to varied
environmental protection laws. Costs associated with environmental compliance
have increased over time and may continue 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 previous waste disposal practices. Also, in many cases, the
laws apply regardless of fault, legality of the original activities or ownership
or control of sites. Occidental is currently participating in environmental
assessments and cleanups under these laws at federal CERCLA sites, comparable
state sites and other remediation sites, including Occidental facilities and
previously owned sites. Also, Occidental 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 as defendants and/or as PRPs under the federal CERCLA law.
These proceedings seek funding and/or remediation and, in some cases,
compensation for alleged personal injury or property damage, punitive damages
and civil penalties, aggregating substantial amounts.
Occidental does not consider the number of CERCLA and similar state sites, at
which it has been notified that it has been identified as being involved, to be
a relevant measure of exposure. Although the liability of a potentially
responsible party may be joint and several, Occidental is usually one of many
companies cited as a PRP at these sites and has, to date, been successful in
sharing cleanup costs with other financially sound companies. Also, many of
these sites are still under investigation by the Environmental Protection Agency
(EPA) or the equivalent state agencies. Prior to actual cleanup, the parties
involved assess site conditions and responsibility and determine the appropriate
remedy. The majority of remediation costs are incurred after the parties obtain
EPA or other equivalent state agency approval to proceed. The ultimate future
cost of remediation of certain of the sites for which Occidental has been
notified that it has been identified as being involved cannot reasonably be
determined at this time.
As of June 30, 2002, Occidental had been notified by the EPA or equivalent state
agencies or otherwise had become aware that it had been identified as being
involved at 124 Superfund or comparable state sites. (This number does not
include those sites where Occidental has been successful in resolving its
involvement.) The 124 sites include 34 former Diamond Shamrock Chemical sites as
to which Maxus Energy Corporation has retained all liability. Of the remaining
90 sites, Occidental has denied involvement at 9 sites and has yet to determine
involvement in 19 sites. With respect to the remaining 62 of these sites,
Occidental is in various stages of evaluation, and the extent of
18
liability retained by Maxus Energy Corporation is disputed at 2 of these sites.
For 53 of these sites, where environmental remediation efforts are probable and
the costs can be reasonably estimated, Occidental has accrued reserves at the
most likely cost to be incurred. The 53 sites include 10 sites as to which
present information indicates that it is probable that Occidental's aggregate
exposure is insignificant. In determining the reserves, Occidental uses the most
current information available, including similar past experiences, available
technology, regulations in effect, the timing of remediation and cost-sharing
arrangements. For the remaining 9 of the 62 sites being evaluated, Occidental
does not have sufficient information to determine a range of liability, but
Occidental does have sufficient information on which to base the opinion
expressed above under the caption "Results of Operations."
ACCOUNTING CHANGES
In July 2002, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (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 does not expect that the adoption of SFAS No. 146 will have a
material impact on its financial statements.
In June 2002, the Emerging Issues Task Force (EITF) reached consensus on certain
issues in EITF Issue No. 02-3, "Accounting for Contracts Involved in Energy
Trading and Risk Management Activities." Consensus was reached on two issues: 1)
that gains and losses on energy trading contracts (whether realized or
unrealized) should be shown net in the income statement, and 2) that entities
should disclose the types of contracts that are accounted for as energy trading
contracts along with a variety of other data regarding values, sensitivity to
changes in estimates, maturity dates and other factors. Occidental is required
to implement this consensus in the third quarter 2002 and all comparative
financial statements will be reclassified to conform to the consensus on the
first issue. Occidental has concluded the impact of this recent consensus will
not have any effect on net income, cash flow or earnings per share. However,
Occidental expects the consensus will require significant reductions in sales
and cost of sales by equal amounts.
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 must implement SFAS No. 145 in the first quarter
of 2003 and all comparative financial statements will be reclassified to conform
to the 2003 presentation. The anticipated effect of the statement includes the
reclassification of an extraordinary loss to net income from continuing
operations of $3 million ($0.01 per share) in the six months ended June 30,
2001. There will be no effect on net income or basic earnings per common share.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and broadens the
presentation of discontinued operations for long-lived assets. The provisions of
this statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001. Occidental adopted this statement in the
first quarter of 2002 and it did not have an impact on the financial statements.
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. The provisions of this statement are
effective for financial statements issued for fiscal years beginning after June
15, 2002. Occidental must implement SFAS No. 143 in the first quarter of 2003
and has not yet determined its impact on the financial statements.
In June 2001, the FASB issued SFAS No, 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 changes the accounting and reporting requirements for
acquired goodwill and intangible assets. The provisions of this statement must
be applied starting with fiscal years beginning after December 15, 2001. At
December 31, 2001, the balance
19
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. Occidental
implemented SFAS No. 142 in the first quarter of 2002. The adoption of this
accounting standard resulted in a cumulative effect of changes in accounting
principles after-tax reduction in net income of approximately $95 million due to
the impairment of the goodwill. Occidental now has no remaining goodwill on its
financial statements.
SAFE HARBOR STATEMENT REGARDING OUTLOOK AND FORWARD-LOOKING INFORMATION
Portions of this report contain forward-looking statements and involve risks and
uncertainties that could significantly affect expected results of operations,
liquidity, cash flows and business prospects. Factors that could cause results
to differ materially include, but are not limited to: global commodity pricing
fluctuations; competitive pricing pressures; higher-than-expected costs
including feedstocks; crude oil and natural gas prices; chemical prices;
potential liability for remedial actions under existing or future environmental
regulations and litigation; potential liability resulting from pending or future
litigation; general domestic and international political conditions; potential
disruption or interruption of Occidental's production or manufacturing
facilities due to accidents, political events or insurgent activity; potential
failure to achieve expected production from existing and future oil and gas
development projects; the supply/demand considerations for Occidental's
products; any general economic recession or slowdown domestically or
internationally; regulatory uncertainties; and not successfully completing, or
any material delay of, any development of new fields, expansion, capital
expenditure, efficiency improvement project, acquisition or disposition.
Forward-looking statements are generally accompanied by words such as
"estimate", "project", "predict", "will", "anticipate", "plan", "intend",
"believe", "expect" or similar expressions that convey the uncertainty of future
events or outcomes. Occidental undertakes no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information or
otherwise. In light of these risks, uncertainties and assumptions, the
forward-looking events discussed might not occur.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For the period ended June 30, 2002, there were no material changes in the
information required to be provided under Item 305 of Regulation S-X included
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations (Incorporating Item 7A) - Derivative Activities" in
Occidental's 2001 Annual Report on Form 10-K.
20
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
GENERAL
There is incorporated by reference herein the information regarding legal
proceedings in Note 8 to the consolidated condensed financial statements in Part
I hereof.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Amendment No. 1 to Occidental Petroleum Corporation
Supplemental Retirement Plan (as amended and restated
effective January 1, 1999)
11 Statement regarding the computation of earnings per share
for the three and six months ended June 30, 2002 and 2001
12 Statement regarding the computation of total enterprise
ratios of earnings to fixed charges for the six months ended
June 30, 2002 and 2001 and the five years ended December 31,
2001
(b) Reports on Form 8-K
During the quarter ended June 30, 2002, Occidental filed the
following Current Reports on Form 8-K:
1. Current Report on Form 8-K dated April 10, 2002 (date of
earliest event reported), filed on April 10, 2002, for the
purpose of reporting, under Item 9, a presentation by Dr. Ray
R. Irani, Chief Executive Officer, at the Howard Weil Energy
Conference.
2. Current Report on Form 8-K dated April 25, 2002 (date of
earliest event reported), filed on April 25, 2002, for the
purpose of reporting, under Item 5, Occidental's results of
operations for the first quarter ended March 31, 2002, and
under Item 9, speeches and supplemental investor information
relating to Occidental's first quarter 2002 earnings
announcement.
3. Current Report on Form 8-K dated May 3, 2002 (date of earliest
event reported), filed on May 3, 2002, for the purpose of
reporting, under Item 9, a speech made by Dr. Ray R. Irani,
Chief Executive Officer, at Occidental's 2002 Annual Meeting
of Stockholders.
4. Current Report on Form 8-K of the Occidental Petroleum
Corporation Savings Plan (including by merger the Occidental
Chemical Corporation Savings and Investment Plan and the Oxy
Vinyls, LP Savings Plan) dated June 10, 2002 (date of earliest
event reported), filed on June 12, 2002, for the purpose of
reporting, under Item 4, a change in the certifying public
accountant, and under Item 7, the filing of certain exhibits
related thereto.
5. Current Report on Form 8-K dated June 18, 2002 (date of
earliest event reported), filed on June 19, 2002, for the
purpose of reporting, under Item 9, a presentation by Stephen
I. Chazen, Chief Financial Officer and Executive Vice
President - Corporate Development, at the Bank of America
Securities Energy & Power Conference
From June 30, 2002 to the date hereof, Occidental filed the
following Current Reports on Form 8-K:
1. Current Report on Form 8-K dated July 22, 2002 (date of
earliest event reported), filed on July 22, 2002, for the
purpose of reporting, under Item 5, Occidental's results of
operations.
21
for the second quarter ended June 30, 2002, and under Item 9,
speeches and supplemental investor information relating to
Occidental's second quarter 2002 earnings announcement.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OCCIDENTAL PETROLEUM CORPORATION
DATE: August 9, 2002 S. P. Dominick, Jr.
--------------------------------------------------
S. P. Dominick, Jr., Vice President and Controller
(Chief Accounting and Duly Authorized Officer)
EXHIBIT INDEX
EXHIBITS
- --------
10.1 Amendment No. 1 to Occidental Petroleum Corporation Supplemental
Retirement Plan (as amended and restated effective January 1, 1999)
11 Statement regarding the computation of earnings per share for the
three and six months ended June 30, 2002 and 2001
12 Statement regarding the computation of total enterprise ratios of
earnings to fixed charges for the six months ended June 30, 2002 and
2001 and the five years ended December 31, 2001
EXHIBIT 10.1
AMENDMENT NUMBER 1
TO THE
OCCIDENTAL PETROLEUM CORPORATION
SUPPLEMENTAL RETIREMENT PLAN
(As Amended and Restated Effective January 1, 1999)
The Occidental Petroleum Corporation Supplemental Retirement Plan ("Plan"), as
amended and restated effective January 1, 1999, is hereby amended as of March 1,
2002 (unless a different effective date is specified), as follows:
1. Section 1.1, relating to "Establishment and Purpose" is amended by adding
the following paragraph immediately after the existing last paragraph:
It is the purpose of this Plan to provide eligible employees with
benefits that will compensate them for maximums imposed by law upon
contributions to qualified plans.
2. Section 1.2, relating to the applicability of the Plan, is amended by
adding the following sentence to the end of the section effective as of
February 28, 2002:
Effective with the merger of the OxyVinyls, LP Retirement Plan into the
Occidental Petroleum Corporation Retirement Plan and the merger of the
Oxy Vinyls, LP Savings Plan into the Occidental Petroleum Corporation
Savings Plan as of February 28, 2002, the Oxy Vinlys, LP Supplemental
Retirement Plan is merged into this Plan.
3. Section 2.1(b), relating to the definition of "Affiliate", is amended in
its entirety to read as follows:
(c) "AFFILIATE" means:
(1) Any corporation or other business organization while it is
controlled by or under common control with the Company within
the meaning of Code sections 414 and 1563, or
(2) Any member of an affiliated service group (within the meaning of
Code section 414(m) of which the Company or any Affiliate is a
member;
(3) Any entity which, pursuant to Code section 414(o) and related
Treasury regulations, must be aggregated with the Company or any
Affiliate for plan qualification purposes; and
(4) Any corporation, trade or business which is more than 50 percent
owned, directly or indirectly, by the Company and which is
designated by the Board
1
or, if authorized by the Board, the Administrative Committee as
an Affiliate.
4. Section 2.1(c), relating to the definition of "Beneficiary", is amended by
adding the following paragraph thereto:
Notwithstanding the foregoing, where an Employee becomes a
Participant through merger another plan into this Plan, "Beneficiary"
means the person or persons so designated under such other plan until
a new Beneficiary designation is effected under the Retirement Plan
or Appendix A, as applicable, by such Employee.
5. A new section 2.1(h), relating to the definition of Controlled Group, is
added to read as follows:
(h) "CONTROLLED GROUP" means each Employer and all entities that must be
aggregated with that Employer pursuant to Code sections 414(b), (c),
(m), or (o).
6. Sections 2.1(h) through 2.1(p) shall be renumbered as Section 2.1(i) to
Section (q), respectively.
7. Existing Section 2.1(i), relating to the definition of Employee, is
amended in its entirety to read as follows:
(i) "EMPLOYEE" means any person employed by the Employer or, where the
context requires, a member of the relevant Controlled Group.
8. Existing Section 2.1(j), relating to the definition of "Employer", is
amended in its entirety to read as follows:
(j) "EMPLOYER" means the Company and any Affiliate which is designated by
the Board or the Administrative Committee and which adopts the Plan.
The Board or, if authorized by the Board, the Administrative
Committee may designate any Affiliate as an Employer under this Plan.
The Affiliate shall become an Employer and a party to this Plan upon
acceptance of such designation effective as of the date specified by
the Board or Administrative Committee.
By accepting such designation or continuing as a party to the Plan
and Trust, each Employer acknowledges that:
(a) It is bound by such terms and conditions relating to the Plan as
the Company or the Administrative Committee may reasonably
require;
2
(b) It hereby acknowledges the authority of the Company and the
Administrative Committee to review the Affiliate's compliance
procedures and to require changes in such procedures to protect
the Plan;
(c) It has authorized the Company and the Administrative Committee
to act on its behalf with respect to Employer matters pertaining
to the Plan;
(d) It will cooperate fully with the Plan officials and their agents
by providing such information and taking such other actions, as
they deem appropriate for the efficient administration of the
Plan; and
(e) Its status as an Employer under the Plan is expressly
conditioned on its being and continuing to be an Affiliate of
the Company.
Subject to the concurrence of the Board or Administrative Committee,
any Affiliate may withdraw from the Plan, and end its status as an
Employer hereunder, by communicating to the Administrative Committee
its desire to withdraw. Upon withdrawal, which shall be effective as
of the date agreed to by Board or Administrative Committee, as the
case may be, and the Affiliate, the Plan shall be considered frozen
as to Employees of such Affiliate.
9. Existing Section 2.1(k), relating to the definition of "Long-Term
Disability Plan", is amended in its entirety to read as follows:
(k) "LONG-TERM DISABILITY PLAN" means the Occidental Petroleum
Corporation Long-Term Disability Plan or, effective March 1, 2002,
as appropriate to the Participant or context, the Oxy Vinyls, LP
Long-Term Disability Plan.
10. Existing Section 2.1(n), relating to the definition of "Retirement Plan",
is amended in its entirety to read as follows:
(n) "RETIREMENT PLAN" means the Occidental Petroleum Corporation
Retirement Plan or, as appropriate to the Participant or context,
the Oxy Vinyls, LP Retirement Plan before it was merged into the
Occidental Petroleum Corporation Retirement Plan.
11. Existing Section 2.1(o), relating to the definition of "Savings Plan", is
amended in its entirety to read as follows:
(o) "SAVINGS PLAN" means the Occidental Petroleum Corporation Savings
Plan or, where appropriate to the Participant or context, includes
the Oxy Vinyls, LP Savings Plan before it was merged into the
Occidental Petroleum Corporation Savings Plan.
3
12. Section 3.2, relating to "Participation after 1998" is amended by adding
the following paragraph immediately after the existing last paragraph:
Due to the merger of the OxyVinyls, LP Supplemental Retirement Plan on
February 28, 2002 into the Plan, all Participants in the OxyVinyls, LP
Supplemental Retirement Plan on that date became Participants under
this Plan effective as of March 1, 2002.
13. Except as amended above, the Plan as in effect prior to this amendment
shall continue unchanged.
* * * * * * * * * *
IN WITNESS WHEREOF, the Company has caused this amendment to be signed on its
behalf by its duly authorized officer this 2nd day of May, 2002.
OCCIDENTAL PETROLEUM CORPORATION
By /s/ Richard W. Hallock
------------------------------
Its Executive Vice President -
-----------------------------
Human Resources
4
EXHIBIT 11
OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(Amounts in millions, except per-share amounts)
Three Months Ended Six Months Ended
June 30 June 30
------------------------- -------------------------
2002 2001 2002 2001
- ----------------------------------------------------- ---------- ---------- ---------- ----------
BASIC EARNINGS PER SHARE
Income before extraordinary item and effect
of changes in accounting principles $ 240 $ 473 $ 360 $ 984
Effect of repurchase of Trust Preferred Securities -- -- -- --
---------- ---------- ---------- ----------
Earnings before extraordinary item and effect of
changes in accounting principles 240 473 360 984
Extraordinary loss, net -- -- -- (3)
Cumulative effect of changes in
accounting principles, net -- -- (95) (24)
---------- ---------- ---------- ----------
Earnings applicable to common stock $ 240 $ 473 $ 265 $ 957
========== ========== ========== ==========
Weighted average common shares outstanding 375.8 372.0 375.1 371.1
========== ========== ========== ==========
Basic earnings per share
Income before extraordinary item and effect
of changes in accounting principles $ .64 $ 1.27 $ .96 $ 2.65
Extraordinary loss, net -- -- -- (.01)
Cumulative effect of changes in
accounting principles, net -- -- (.25) (.06)
---------- ---------- ---------- ----------
Basic earnings per common share $ .64 $ 1.27 $ .71 $ 2.58
========== ========== ========== ==========
DILUTED EARNINGS PER SHARE
Earnings before extraordinary item and effect of
changes in accounting principles $ 240 $ 473 $ 360 $ 984
Extraordinary loss, net -- -- -- (3)
Cumulative effect of changes in
accounting principles, net -- -- (95) (24)
---------- ---------- ---------- ----------
Earnings applicable to common stock $ 240 $ 473 $ 265 $ 957
========== ========== ========== ==========
Weighted average common shares outstanding 375.8 372.0 375.1 371.1
Dilutive effect of exercise of options outstanding 5.7 2.7 5.2 1.7
---------- ---------- ---------- ----------
381.5 374.7 380.3 372.8
========== ========== ========== ==========
Diluted earnings per share
Income before extraordinary item and effect
of changes in accounting principles $ .63 $ 1.26 $ .95 $ 2.64
Extraordinary loss, net -- -- -- (.01)
Cumulative effect of changes in
accounting principles, net -- -- (.25) (.06)
---------- ---------- ---------- ----------
Diluted earnings per common share $ .63 $ 1.26 $ .70 $ 2.57
===================================================== ========== ========== ========== ==========
EXHIBIT 11 (CONTINUED)
OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(Amounts in millions, except per-share amounts)
The following items were not included in the computation of diluted earnings per
share because their effect was antidilutive:
Three Months Ended Six Months Ended
June 30 June 30
--------------------------------------------- ---------------------------------------------
2002 2001 2002 2001
-------------------- -------------------- -------------------- --------------------
STOCK OPTIONS
Number of shares .006 .021 .021 .021
Price range per share $29.438 $29.063 -- $29.438 $29.063 -- $29.438 $29.063 -- $29.438
Expiration range 12/01/07 12/01/07 -- 04/29/08 12/01/07 -- 04/29/08 12/01/07 -- 04/29/08
- ------------------------- -------------------- -------------------- -------------------- --------------------
EXHIBIT 12
OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
COMPUTATION OF TOTAL ENTERPRISE RATIOS OF EARNINGS TO FIXED CHARGES
(Amounts in millions, except ratios)
Six Months Ended
June 30 Year Ended December 31
-------------------- --------------------------------------------------------
2002 2001 2001 2000 1999 1998 1997
- -------------------------------------- -------- -------- -------- -------- -------- -------- --------
Income from continuing
operations (a) $ 446 $ 1,095 $ 1,418 $ 1,785 $ 699 $ 400 $ 245
-------- -------- -------- -------- -------- -------- --------
Add:
Provision for taxes on
income (other than foreign
and gas taxes) 461 359 172 871 306 204 47
Interest and debt expense(b) 159 232 411 540 515 576 446
Portion of lease rentals
representative of the interest
factor 13 15 7 6 31 36 39
-------- -------- -------- -------- -------- -------- --------
633 606 590 1,417 852 816 532
-------- -------- -------- -------- -------- -------- --------
Earnings before fixed charges $ 1,079 $ 1,701 $ 2,008 $ 3,202 $ 1,551 $ 1,216 $ 777
======== ======== ======== ======== ======== ======== ========
Fixed charges
Interest and debt expense
including capitalized
interest (b) $ 163 $ 235 $ 417 $ 543 $ 522 $ 594 $ 462
Portion of lease rentals
representative of the interest
factor 13 15 7 6 31 36 39
-------- -------- -------- -------- -------- -------- --------
Total fixed charges $ 176 $ 250 $ 424 $ 549 $ 553 $ 630 $ 501
======== ======== ======== ======== ======== ======== ========
Ratio of earnings to fixed charges 6.13 6.80 4.74 5.83 2.80 1.93 1.55
- -------------------------------------- ======== ======== ======== ======== ======== ======== ========
(a) Includes (1) minority interest in net income of majority-owned subsidiaries
and partnerships having fixed charges and (2) income from
less-than-50-percent-owned equity investments adjusted to reflect only
dividends received.
(b) Includes proportionate share of interest and debt expense of
50-percent-owned equity investments.