UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ____ to ____
Commission File Number 1-16619
KERR-McGEE CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware 73-1612389
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
Kerr-McGee Center, Oklahoma City, Oklahoma 73125
(Address of Principal Executive Offices and Zip Code)
Registrant's telephone number, including area code (405) 270-1313
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
----- -----
Number of shares of common stock, $1.00 par value, outstanding as of October 31,
2003: 100,848,298.
KERR-McGEE CORPORATION
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements PAGE
----
Consolidated Statement of Operations for the Three and
Nine Months Ended September 30, 2003 and 2002 1
Consolidated Balance Sheet at September 30, 2003 and
December 31, 2002 2
Consolidated Statement of Cash Flows for the Nine
Months Ended September 30, 2003 and 2002 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 31
Item 3. Quantitative and Qualitative Disclosures about Market Risk 40
Item 4. Controls and Procedures 42
Forward-Looking Information 42
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 42
Item 6. Exhibits and Reports on Form 8-K 43
SIGNATURE 44
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
KERR-McGEE CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
Three Months Nine Months
Ended Ended
September 30, September 30,
-------------------- --------------------
(Millions of dollars, except per-share amounts) 2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------------------------------
Sales $1,006.1 $ 964.8 $3,158.3 $2,682.2
-------- ------- -------- --------
Costs and Expenses
Costs and operating expenses 409.9 383.6 1,233.4 1,096.8
Selling, general and administrative expenses 98.3 61.0 248.3 238.1
Shipping and handling expenses 34.4 32.1 101.4 86.3
Depreciation and depletion 180.6 193.7 563.2 602.1
Accretion expense 6.3 - 18.8 -
Asset impairments, net of gains on disposal of assets held for sale (4.4) 24.0 (5.0) 181.5
Exploration, including dry holes and amortization of
undeveloped leases 79.8 70.2 286.9 148.9
Taxes, other than income taxes 23.5 28.8 69.9 83.4
Provision for environmental remediation and restoration,
net of reimbursements 47.2 (20.0) 66.4 70.4
Interest and debt expense 62.8 68.4 191.2 207.7
-------- ------- -------- --------
Total Costs and Expenses 938.4 841.8 2,774.5 2,715.2
-------- ------- -------- --------
67.7 123.0 383.8 (33.0)
Other Income (Expense) (17.5) (14.1) (42.7) (52.0)
-------- ------- -------- --------
Income (Loss) before Income Taxes 50.2 108.9 341.1 (85.0)
Provision for Income Taxes (21.1) (195.7) (138.0) (181.2)
-------- ------- -------- --------
Income (Loss) from Continuing Operations 29.1 (86.8) 203.1 (266.2)
Income (Loss) from Discontinued Operations (net of income tax
provision (benefit) of nil and $.7 for the third quarter of 2003
and 2002, respectively, and $.2 and $(23.8) for the first nine
months of 2003 and 2002, respectively) (.3) .4 (.1) 127.3
Cumulative Effect of Change in Accounting Principle (net of benefit
for income taxes of $18.2) - - (34.7) -
-------- ------- -------- --------
Net Income (Loss) $ 28.8 $(86.4) $ 168.3 $ (138.9)
======== ======= ======== ========
Income (Loss) per Common Share
Basic -
Continuing operations $ .29 $ (.86) $ 2.02 $ (2.65)
Discontinued operations - - - 1.27
Cumulative effect of change in accounting principle - - (.34) -
-------- ------- -------- --------
Total $ .29 $ (.86) $ 1.68 $ (1.38)
======== ======= ======== ========
Diluted -
Continuing operations $ .29 $ (.86) $ 1.98 $ (2.65)
Discontinued operations - - - 1.27
Cumulative effect of change in accounting principle - - (.31) -
-------- ------- -------- --------
Total $ .29 $ (.86) $ 1.67 $ (1.38)
======== ======= ======== ========
Dividends Declared per Common Share $ .45 $ .45 $ 1.35 $ 1.35
======== ======= ======== ========
The accompanying notes are an integral part of this statement.
KERR-McGEE CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
September 30, December 31,
(Millions of dollars) 2003 2002
- -------------------------------------------------------------------------------------------------------------------
ASSETS
- ------
Current Assets
Cash $ 194.9 $ 89.9
Accounts receivable 509.7 607.8
Inventories 375.6 402.4
Deposits, prepaid expenses and other assets 584.7 132.8
Current assets associated with properties held for disposal .6 57.2
--------- ---------
Total Current Assets 1,665.5 1,290.1
--------- ---------
Property, Plant and Equipment 14,024.6 13,722.8
Less reserves for depreciation, depletion and amortization (6,745.8) (6,687.2)
--------- ---------
7,278.8 7,035.6
--------- ---------
Investments and Other Assets 578.7 1,035.2
Goodwill 356.5 355.9
Long-Term Assets Associated with Properties Held for Disposal 36.2 192.0
--------- ---------
Total Assets $ 9,915.7 $ 9,908.8
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities
Accounts payable $ 653.9 $ 785.1
Long-term debt due within one year 672.3 105.8
Other current liabilities 700.2 716.8
Current liabilities associated with properties held for disposal .3 2.1
--------- ---------
Total Current Liabilities 2,026.7 1,609.8
--------- ---------
Long-Term Debt 3,048.2 3,798.1
--------- ---------
Deferred Income Taxes 1,234.1 1,145.1
Other Deferred Credits and Reserves 929.0 803.7
Long-Term Liabilities Associated with Properties Held for Disposal 19.1 16.1
--------- ---------
2,182.2 1,964.9
--------- ---------
Stockholders' Equity
Common stock, par value $1 - 300,000,000 shares
authorized, 100,873,854 shares issued at 9-30-03
and 100,391,054 shares issued at 12-31-02 100.9 100.4
Capital in excess of par value 1,707.5 1,687.3
Preferred stock purchase rights 1.0 1.0
Retained earnings 924.2 885.7
Accumulated other comprehensive income (loss) 10.6 (62.3)
Common shares in treasury, at cost - 25,556 shares
at 9-30-03 and 7,299 at 12-31-02 (1.3) (.4)
Deferred compensation (84.3) (75.7)
--------- ---------
Total Stockholders' Equity 2,658.6 2,536.0
--------- ---------
Total Liabilities and Stockholders' Equity $ 9,915.7 $ 9,908.8
========= =========
The "successful efforts" method of accounting for oil and gas exploration and
production activities has been followed in preparing this balance sheet.
The accompanying notes are an integral part of this statement.
KERR-McGEE CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
---------------------------
(Millions of dollars) 2003 2002
- -------------------------------------------------------------------------------------------------------------------
Operating Activities
- --------------------
Net income (loss) $ 168.3 $ (138.9)
Adjustments to reconcile net income to net cash
provided by operating activities -
Depreciation, depletion and amortization 617.1 656.8
Accretion expense 18.8 -
Asset impairments, net of gains on disposal of assets held for sale 1.2 207.6
Dry hole costs 162.7 48.8
Deferred income taxes 85.8 126.3
Provision for environmental remediation and
restoration, net of reimbursements 66.3 80.0
Gain on divestiture of discontinued operations - (108.6)
(Gain) loss on sale and retirement of assets (2.1) 2.7
Cumulative effect of change in accounting principle 34.7 -
Noncash items affecting net income 123.8 99.5
Other net cash provided by (used in) operating activities (84.5) 68.3
-------- ---------
Net Cash Provided by Operating Activities 1,192.1 1,042.5
-------- ---------
Investing Activities
- --------------------
Capital expenditures (749.4) (886.2)
Dry hole costs (162.7) (48.8)
Proceeds from sales of assets 258.6 463.9
Acquisitions (69.6) (23.8)
Other investing activities (36.6) (43.1)
-------- ---------
Net Cash Used in Investing Activities (759.7) (538.0)
-------- ---------
Financing Activities
- --------------------
Issuance of long-term debt 31.5 783.0
Repayment of long-term debt (225.0) (1,092.4)
Decrease in short-term borrowings - (8.2)
Issuance of common stock - 5.4
Dividends paid (135.9) (135.4)
Other financing activities (.6) -
-------- ---------
Net Cash Used in Financing Activities (330.0) (447.6)
-------- ---------
Effects of Exchange Rate Changes on Cash and Cash Equivalents 2.6 (5.9)
-------- ---------
Net Increase in Cash and Cash Equivalents 105.0 51.0
Cash and Cash Equivalents at Beginning of Period 89.9 91.3
-------- ---------
Cash and Cash Equivalents at End of Period $ 194.9 $ 142.3
======== =========
The accompanying notes are an integral part of this statement.
KERR-McGEE CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
A. Basis of Presentation and Accounting Policies
Basis of Presentation
---------------------
The condensed financial statements included herein have been prepared by the
company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission and, in the opinion of management,
include all adjustments, consisting only of normal recurring accruals,
necessary to present fairly the resulting operations for the indicated
periods. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States have been condensed or omitted
pursuant to such rules and regulations. Although the company believes that
the disclosures are adequate to make the information presented not
misleading, it is suggested that these condensed financial statements be
read in conjunction with the financial statements and the notes thereto
included in the company's latest annual report on Form 10-K.
Business Segments
-----------------
The company has three reportable segments: oil and gas exploration and
production, production and marketing of titanium dioxide pigment (chemicals
- pigment), and production and marketing of other chemicals (chemicals -
other). Other chemicals include the company's electrolytic manufacturing and
marketing operations and forest products treatment business.
Change in Accounting Principle - Asset Retirement Obligations
-------------------------------------------------------------
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (FAS) No. 143, "Accounting for
Asset Retirement Obligations." FAS 143 requires that an asset retirement
obligation (ARO) associated with the retirement of a tangible long-lived
asset be recognized as a liability in the period in which it is incurred and
becomes determinable (as defined by the standard), with an offsetting
increase in the carrying amount of the associated asset. The cost of the
tangible asset, including the initially recognized ARO, is depreciated such
that the cost of the ARO is recognized over the useful life of the asset.
The ARO is recorded at fair value, and accretion expense will be recognized
over time as the discounted liability is accreted to its expected settlement
value. The fair value of the ARO is measured using expected future cash
outflows discounted at the company's credit-adjusted risk-free interest
rate.
The company adopted FAS 143 on January 1, 2003, which resulted in an
increase in net property of $127.5 million, an increase in abandonment
liabilities of $180.4 million and a decrease in deferred income tax
liabilities of $18.2 million. The net impact of these changes resulted in an
after-tax charge to earnings of $34.7 million to recognize the cumulative
effect of retroactively applying the new accounting standard. In accordance
with the provisions of FAS 143, Kerr-McGee accrues an abandonment liability
associated with its oil and gas wells and platforms when those assets are
placed in service, rather than its past practice of accruing the expected
abandonment costs on a unit-of-production basis over the productive life of
the associated oil and gas field. No market risk premium has been included
in the company's calculation of the ARO for oil and gas wells and platforms
since no reliable estimate can be made by the company. In connection with
the change in accounting principle, abandonment expense of $9.1 million and
$26.7 million for the third quarter and first nine months of 2002,
respectively, has been reclassified from Costs and operating expenses to
Depreciation and depletion in the Consolidated Statement of Operations to be
consistent with the 2003 presentation. In January 2003, the company
announced its plan to close the synthetic rutile plant in Mobile, Alabama,
and closed the plant in June 2003. Since the plant had a determinate closure
date, the company accrued an abandonment liability of $17.6 million as of
January 1, 2003, associated with its plans to decommission the Mobile
facility.
A summary of the changes in the asset retirement obligation during the first
nine months of 2003 is included in the table below.
(Millions of dollars)
----------------------------------------------------------------------------
January 1, 2003 $395.6
Obligations incurred 6.8
Accretion expense 18.8
Abandonment expenditures (12.5)
Abandonment obligations settled through property divestitures (13.5)
------
September 30, 2003 $395.2
======
Pro forma net loss for the three months ended September 30, 2002, would have
been $88 million, with basic and diluted loss per share of $.88, if the
provisions of FAS 143 had been applied as of January 1, 2002, compared with
net income for the three months ended September 30, 2003, of $28.8 million,
with basic and diluted earnings per share of $.29. Pro forma net loss for
the nine months ended September 30, 2002, would have been $144.5 million,
with basic and diluted loss per share of $1.44, if the provisions of FAS 143
had been applied as of January 1, 2002, compared with net income for the
nine months ended September 30, 2003, of $203 million before the cumulative
effect of change in accounting principle, with basic and diluted earnings
per share of $2.02 and $1.98, respectively.
Employee Stock Option Plans
---------------------------
In December 2002, the FASB issued FAS 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," an amendment to FAS 123,
"Accounting for Stock-Based Compensation." FAS 148 provides alternative
methods of transition for companies choosing to voluntarily adopt the
fair-value based methodology of FAS 123 and amends the disclosure provisions
of FAS 123 and Accounting Principles Board Opinion (APB) No. 28, "Interim
Financial Reporting," to require pro forma disclosures in interim financial
statements of net income, stock-based compensation expense and earnings per
share as if a fair-value based method had been used. The amended disclosure
requirements of FAS 148 were effective for the company's first quarter of
2003.
The company accounts for its stock option plans under the intrinsic-value
method permitted by APB No. 25, "Accounting for Stock Issued to Employees."
Accordingly, no stock-based employee compensation cost is reflected in net
income for the issuance of stock options under the company's plans, since
all options were fixed-price options with an exercise price equal to the
market value of the underlying common stock on the date of grant.
The following table illustrates the effect on net income and earnings per
share as if the company had applied the fair-value recognition provisions of
FAS 123 to stock-based employee compensation.
Three Nine
Months Ended Months Ended
September 30, September 30,
(Millions of dollars, ---------------- -----------------
except per share amounts) 2003 2002 2003 2002
------------------------------------- ----------------------------------------------------------------------
Net income (loss) as reported $28.8 $(86.4) $168.3 $(138.9)
Less stock-based compensation expense
determined using a fair-value method,
net of taxes (4.0) (4.0) (12.1) (11.0)
----- ------ ------ -------
Pro forma net income (loss) $24.8 $(90.4) $156.2 $(149.9)
===== ====== ====== =======
Net income (loss) per share -
Basic -
As reported $ .29 $ (.86) $ 1.68 $ (1.38)
Pro forma .25 (.90) 1.56 (1.49)
Diluted -
As reported .29 (.86) 1.67 (1.38)
Pro forma .25 (.90) 1.56 (1.49)
Goodwill and Intangible Assets
------------------------------
In accordance with FAS 142, "Goodwill and Other Intangible Assets," which
the company adopted on January 1, 2002, goodwill and certain
indefinite-lived intangibles are not amortized but are reviewed annually for
impairment, or more frequently if impairment indicators arise. The annual
test for impairment was completed in the second quarter of 2003, with no
impairment indicated for the $356.5 million of goodwill or the $54 million
of indefinite-lived intangible assets.
New Accounting Standards
------------------------
In January 2003, the FASB issued FASB Interpretation (FIN) No. 46,
"Consolidation of Variable Interest Entities - an Interpretation of ARB No.
51." For variable interest entities in existence as of February 1, 2003, FIN
46, as originally issued, required consolidation by the primary beneficiary
in the third quarter of 2003. In October 2003, the FASB deferred the
effective date of FIN 46 to the fourth quarter. In accordance with the
provisions of FIN 46, the company believes it would be required to
consolidate the business trust created to construct and finance the Gunnison
production platform. The construction is being financed by a synthetic lease
credit facility between the trust and groups of financial institutions for
up to $157 million. The company is required to make lease payments
sufficient to pay interest on the financing over the term of the synthetic
lease credit facility, which terminates in November 2006. Completion of the
Gunnison platform is anticipated to occur in either December 2003 or early
2004. The company is currently in negotiations to convert the Gunnison
synthetic lease to an operating lease agreement, under which different
trusts will become the lessor/owner of the platform and related equipment.
The new agreements are expected to close in December 2003 and/or January
2004; however, the ultimate closing date will be dependent on the completion
of the platform and the timeliness of the negotiation process and may occur
sometime thereafter. If the synthetic lease is converted to an operating
lease before year end, the company believes the variable interest entity
lessor will not be subject to consolidation. However, the ultimate
accounting treatment for the proposed restructured lease agreement or the
lessor trust can not be determined until the significant terms of the
agreement are finalized. If the synthetic lease is not replaced before year
end, the financing trust will be subject to consolidation at December 31,
2003. The company has reviewed the effects of FIN 46 relative to its other
relationships with possible variable interest entities, such as the lessor
trusts that are party to the Nansen and Boomvang operating leases and
certain joint-venture arrangements, and does not believe that consolidation
of these entities is required.
Reclassifications
-----------------
Certain reclassifications have been made to the prior year financial
statements to conform with the current year presentation. In the current
year, the company began recording in revenues only the net marketing fee
received from sales of non-equity North Sea crude oil marketed on behalf of
other partners. Prior to the third quarter of 2003, the company reported
purchases and sales of non-equity oil on a gross basis. For the six months
ended June 30, 2003, $48.7 million has been reclassified from Costs and
operating expenses to Sales in the Consolidated Statement of Operations. For
the three and nine months ended September 30, 2002, $19.6 million and $32.7
million, respectively, have been reclassified from Costs and operating
expenses to Sales in the Consolidated Statement of Operations. This change
in reporting had no impact on operating profit or net income.
B. Derivatives
The company is exposed to risk from fluctuations in crude oil and natural
gas prices, foreign currency exchange rates, and interest rates. To reduce
the impact of these risks on earnings and to increase the predictability of
its cash flow, from time to time the company enters into certain derivative
contracts, primarily swaps, collars and basis contracts for a portion of its
oil and gas production; forward contracts to buy and sell foreign
currencies; and interest rate swaps.
The company accounts for all its derivative financial instruments in
accordance with FAS 133, "Accounting for Derivative Instruments and Hedging
Activities." Derivative financial instruments are recorded as assets or
liabilities in the Consolidated Balance Sheet, measured at fair value. When
available, quoted market prices are used in determining fair value; however,
if quoted market prices are not available, the company estimates the fair
value using either quoted market prices of financial instruments with
similar characteristics or other valuation techniques.
Changes in the fair value of instruments that are designated as cash flow
hedges and that qualify for hedge accounting under the provisions of FAS 133
are recorded in accumulated other comprehensive income (loss). These hedging
gains or losses will be recognized in earnings in the periods during which
the hedged forecasted transactions affect earnings. The ineffective portion
of the change in fair value of such hedges, if any, is included in current
earnings. Instruments that do not meet the criteria for hedge accounting and
those designated as fair-value hedges under FAS 133 are recorded at fair
value with gains or losses reported currently in earnings.
Kerr-McGee Rocky Mountain Corp. and its marketing subsidiary, Kerr-McGee
Energy Services Corp., are parties to a number of derivative contracts for
purchases and sales of gas, basis differences and energy-related contracts.
Prior to 2002, the company had treated all of these derivatives as
speculative and marked to market through income each month the change in
derivative fair values. In 2002, the company designated the remaining
portion of the gas basis swaps that settled in 2002 and all that settle in
2003 as hedges.
In March 2002, the company began hedging a portion of its 2002 oil and
natural gas production with fixed-price swaps to increase the predictability
of its cash flow and support additional capital expenditures. During the
fourth quarter of 2002, the company expanded the hedging program to cover a
portion of the estimated 2003 crude oil and natural gas production by adding
fixed-price swaps, basis swaps and costless collars. The company has
continued to expand its hedging program, which now covers a portion of its
expected 2004 production. At September 30, 2003, the outstanding
commodity-related derivatives accounted for as hedges had a net liability
fair value of $48.6 million, of which $1 million was recorded in current
assets, $.7 million was recorded in non-current assets and $50.3 million was
recorded in current liabilities. At December 31, 2002, the outstanding
commodity-related derivatives accounted for as hedges had a net liability
fair value of $83.4 million, of which $27.1 million was recorded in current
assets and $110.5 million was recorded in current liabilities. The fair
value of these derivative instruments was determined based on prices
actively quoted, generally NYMEX and Dated Brent prices as of the balance
sheet dates. The company had after-tax deferred losses of $28.3 million and
$50.3 million in accumulated other comprehensive income associated with
these contracts at September 30, 2003 and December 31, 2002, respectively.
The company expects to reclassify deferred losses of $27.8 million into
earnings during the next twelve months, assuming no further changes in
fair-market value of the contracts.
The physical sale of crude oil and natural gas at prices higher than those
in the derivative contracts is offset by the losses realized on the contract
settlements. During the third quarter of 2003, the company realized pretax
losses on contract settlements of $13.4 million on domestic oil hedging,
$14.2 million on North Sea oil hedging and $30.9 million on domestic natural
gas hedging. During the first nine months of 2003, the company realized
pretax losses on contract settlements of $55.4 million on domestic oil
hedging, $46.7 million on North Sea oil hedging and $123 million on domestic
natural gas hedging. During the third quarter of 2002, the company realized
pre-tax losses on contract settlements of $11.4 million and $19.8 million on
domestic and North Sea oil hedging, respectively, and pre-tax gains of $12.3
million on domestic natural gas hedging. During the first nine months of
2002, the company realized pre-tax losses on contract settlements of $17.3
million and $32.2 million on domestic and North Sea oil hedging,
respectively, and pre-tax gains of $8.9 million on domestic natural gas
hedging. Hedge ineffectiveness is recognized in Sales in the Consolidated
Statement of Operations. A gain of $1.8 million for hedge ineffectiveness
was recognized in the 2003 third quarter, and losses of $1.9 million were
recognized in the first nine months of 2003. Losses for hedge
ineffectiveness of $1.2 million and $1.3 million were recognized in the 2002
third quarter and first nine months, respectively.
As discussed in the company's 2002 Form 10-K, the company is also party to
other commodity contracts associated with its Rocky Mountain marketing
activities (fixed-price natural gas physical and derivative contracts) that
have not been designated as cash flow hedges. These commodity contracts are
recorded in the balance sheet at fair value, with any changes in fair value
recorded through earnings. At September 30, 2003, the fair value of these
contracts was $14.4 million. Of this amount, $15.4 million was recorded in
current assets, $13.7 million in Investments and Other Assets, $11.5 million
in current liabilities, and $3.2 million in deferred credits. At December
31, 2002, the fair value of these contracts was $29.1 million. Of this
amount, $30.7 million was recorded in current assets, $22.4 million in
Investments and Other Assets, $23.3 million in current liabilities, and $.7
million in deferred credits. The net loss associated with the derivative
contracts was $5.3 million for the three months ended September 30, 2003, of
which $1.5 million was recorded as a gain in Sales in the Consolidated
Statement of Operations and $6.8 million was recorded as a loss in Other
Income. The net loss associated with the derivative contracts was $21.5
million for the nine months ended September 30, 2003, of which $8.2 million
loss was included in Sales in the Consolidated Statement of Operations and a
$13.3 million loss was included in Other Income. The net gain associated
with the derivative contracts totaled $1.6 million in the third quarter of
2002, of which $8.1 million was included as a loss in Sales and a $9.7
million was included as a gain in Other Income. For the first nine months of
2002, the net loss associated with the derivative contracts totaled $25.6
million, of which $18.9 million was included in Sales and $6.7 million was
included in Other Income.
From time to time, the company enters into forward contracts to buy and sell
foreign currencies. Certain of these contracts (purchases of Australian
dollars and British pound sterling, and sales of Euro) have been designated
and have qualified as cash flow hedges of the company's anticipated future
cash flow needs for a portion of its capital expenditures, raw material
purchases and operating costs. These forward contracts generally have
durations of less than three years. At September 30, 2003, the outstanding
foreign exchange derivative contracts accounted for as hedges had a net
asset fair value of $12.1 million, of which $11.6 million was recorded in
current assets, $1.8 million in Investments and Other Assets, $.9 million in
current liabilities, and $.4 million in deferred credits. Changes in the
fair value of these contracts are recorded in accumulated other
comprehensive income and will be recognized in earnings in the periods
during which the hedged forecasted transactions affect earnings (i.e., when
the hedged assets are depreciated in the case of a hedge of capital
expenditures, when finished inventory is sold in the case of a hedged raw
material purchase and when the forward contracts close in the case of a
hedge of operating costs). At September 30, 2003, the company had an
after-tax deferred gain of $8.3 million in accumulated other comprehensive
income related to these contracts. During the third quarter and first nine
months of 2003, the company reclassified $4.7 million and $9.7 million of
gains on forward contracts from accumulated other comprehensive income to
operating expenses in the statement of operations. Of the existing net gains
at September 30, 2003, approximately $6.1 million will be reclassified into
earnings during the next 12 months, assuming no further changes in fair
value of the contracts. No hedges were discontinued during the third
quarter, and no ineffectiveness was recognized.
The company has entered into other forward contracts to sell foreign
currencies, which will be collected as a result of pigment sales denominated
in foreign currencies, primarily European currencies. These contracts have
not been designated as hedges even though they do protect the company from
changes in foreign currency rates. The estimated fair value of these
contracts was not material at September 30, 2003.
Selected pigment receivables have been sold in an asset securitization
program at their equivalent U.S. dollar value at the date the receivables
were sold. As collection agent, the company retains the risk of foreign
currency rate changes between the date of sale and collection of the
receivables. Under the terms of the asset securitization agreement, the
company is required to enter into forward contracts for the value of the
Euro denominated receivables sold into the program to mitigate its foreign
currency risk. Gains or losses on the forward contracts are recognized
currently in earnings. For the three and nine months ended September 30,
2003, the company recognized losses of $1.3 million associated with these
contracts.
The company issued 5-1/2% debt exchangeable for common stock (DECS) in
August 1999, allowing each holder to receive between .85 and 1.0 share of
Devon stock or the equivalent amount of cash at maturity in August 2004.
Embedded options in the DECS provide Kerr-McGee a floor price on Devon's
common stock of $33.19 per share (the put option). The company also retains
the right to 15% of the shares if Devon's stock price is greater than $39.16
per share (the DECS holders have an imbedded call option on 85% of the
shares). If Devon's stock price at maturity is greater than $33.19 per share
but less than $39.16 per share, the company's right to retain Devon stock
will be reduced proportionately. The company is not entitled to retain any
Devon stock if the price of Devon stock at maturity is less than or equal to
$33.19 per share. Using the Black-Scholes valuation model, the company
recognizes in Other Income on a monthly basis any gains or losses of the put
and call options. At September 30, 2003, the fair values of the embedded put
and call options were nil and $79.4 million, respectively. On December 31,
2002, the fair values of the embedded put and call options were nil and
$66.6 million, respectively. During the third quarter of 2003, the company
recorded a gain of $45.3 million in Other Income for the changes in the fair
values of the put and call options, compared with a gain of $19.7 million
during the third quarter of 2002. During the first nine months of 2003 and
2002, the company recorded losses of $12.8 million and $54.5 million,
respectively, in Other Income for the changes in the fair values of the put
and call options. The fluctuation in the value of the put and call
derivative financial instruments will generally offset the increase or
decrease in the market value of 85% of the Devon stock owned by the company.
The fair value of the 8.4 million shares of Devon classified as trading
securities was $406.5 million at September 30, 2003, and $387.2 million at
December 31, 2002. During the third quarter of 2003 and 2002, the company
recorded unrealized losses of $44 million and $8.7 million, respectively, in
Other Income for the changes in fair value of the Devon shares classified as
trading. During the first nine months of 2003 and 2002, the company recorded
unrealized gains of $19.3 million and $81 million, respectively, in Other
Income for the changes in fair value of the Devon shares classified as
trading. The company accounts for the remaining 15% of the Devon shares as
available-for-sale securities in accordance with FAS 115, "Accounting for
Certain Investments in Debt and Equity Securities," with changes in market
value recorded in accumulated other comprehensive income. The DECS, the
derivative liability associated with the call option and the Devon shares
have been classified as current assets or current liabilities, as
appropriate, in the Consolidated Balance Sheet as of September 30, 2003.
In connection with the issuance of $350 million of 5.375% notes due April
15, 2005, the company entered into an interest rate swap agreement in April
2002. The terms of the agreement effectively change the interest the company
will pay on the debt until maturity from the fixed rate to a variable rate
of LIBOR plus .875%. The company considers the swap to be a hedge against
the change in fair value of the debt as a result of interest rate changes.
The estimated fair value of the interest rate swap was $23.1 million and
$20.6 million at September 30, 2003 and December 31, 2002, respectively. The
company recognized a reduction in interest expense from the swap arrangement
of $2.9 million and $8.4 million in the three and nine months ended
September 30, 2003, respectively, and $2.1 million and $3.9 million in the
three and nine months ended September 30, 2002, respectively.
C. Discontinued Operations, Asset Impairments and Asset Disposals
In August 2001, the FASB issued FAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." FAS 144 supersedes FAS 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," and the portion of Accounting Principles Board Opinion No. 30 that
deals with disposal of a Discontibusiness segment. The company adopted FAS
144 as of January 1, 2002, and, in accordance with the standard,
Operatioclassified certain asset disposal groups whose operations and cash
flows could be clearly distinguished from Asset the rest of the company as
discontinued operations.
During the first quarter of 2002, the company approved a plan to dispose of
its exploration and production Asset operations in Kazakhstan and of its
interest in the Bayu-Undan project in the East Timor Sea offshore
DisposalAustralia. During the second quarter of 2002, the company approved a
plan to dispose of its exploration and production interest in the Jabung
block in Sumatra, Indonesia. These divestiture decisions were made as part
of the company's strategic plan to rationalize noncore oil and gas
properties. The results of these operations have been reported separately as
discontinued operations in the company's Consolidated Statement of
Operations. In connection with the then-planned disposals, the related
assets were evaluated and impairment losses were recorded for the Kazakhstan
operations, calculated as the difference between the estimated sales price
for the operation, less costs to sell, and the company's carrying value of
the assets. Impairment losses on the Kazakhstan operations of $1.4 million
and $26.1 million were recorded during the three and nine months ended
September 30, 2002, respectively, and are reported as part of discontinued
operations.
On May 3, 2002, the company completed the sale of its interest in the
Bayu-Undan project for $132.3 million in cash. The sale resulted in a pretax
gain of $34.8 million. On June 13, 2002, the company completed the sale of
its interest in the Jabung block in Sumatra for $170.7 million in cash with
an $11 million contingent purchase price pending government approval of an
LPG project. The sale resulted in a pretax gain of $72.5 million (excluding
the contingent purchase price). On March 31, 2003, the company completed the
sale of its Kazakhstan operations for $168.6 million in cash. In connection
with this sale, the company recorded a settlement liability due to the
purchaser for the net cash flow of the Kazakhstan operations from the
effective date of the transaction to the closing date. The settlement
liability, which totaled $18.6 million, was paid during the third quarter of
2003. The net proceeds received by the company for these divestitures were
used to reduce outstanding debt.
Revenues applicable to the discontinued operations were nil and $4.6 million
for the three months ended September 30, 2003 and 2002, respectively, and
$5.6 million and $29.8 million for the nine months ended September 30, 2003
and 2002, respectively. Pretax income (loss) for the discontinued operations
was $(.3) million and $1.1 million (including the impairment loss of $1.4
million) for the three months ended September 30, 2003 and 2002,
respectively, and $.1 million and $103.5 million (including the gains on
sale of $107.3 million and the impairment loss of $26.1 million) for the
nine months ended September 30, 2003 and 2002, respectively.
As part of the company's plan to divest noncore properties discussed above,
certain individually insignificant exploration and production segment assets
for which operations and cash flows were not clearly distinguishable from
the company's operations have been identified for disposal and classified as
held for sale. Pretax asset impairment charges related to certain assets
held for sale in the U.S. onshore, Gulf of Mexico shelf and U.K. North Sea
regions totaled $11.5 million and $20 million during the third quarter and
first nine months of 2003, respectively. The impairment charges on assets
held for sale for the three and nine months ended September 30, 2002,
totaled $6.7 million and $153.3 million, respectively. For the nine months
ended September 30, 2002, the $153.3 million of asset impairment charges
included $83 million related to certain domestic properties, $65.6 million
related to certain North Sea properties and $4.7 million for properties in
Ecuador. The impairment losses reflect the difference between the estimated
sales prices for the individual properties or group of properties, less the
costs to sell, and the carrying amount of the net assets. Impairment losses
on properties held for sale are subject to revision in future periods based
on final negotiated sales prices and normal post-closing adjustments.
Pretax impairment losses totaling $6.8 million and $11.9 million were also
recognized during the three and nine months ended September 30, 2003,
respectively, for certain mature oil and gas properties that are not
considered held for sale. For the three and nine months ended September 30,
2002, pretax impairment losses totaled $17.3 million and $28.2 million,
respectively, on assets not considered held for sale. These impairment
losses were related to properties located in the U.S. onshore, Gulf of
Mexico shelf and North Sea regions that were deemed impaired because
expectations of future cash flows were less than the carrying value of the
related assets.
During the third quarter of 2003, the company recognized a gain on disposal
of oil and gas properties of $22.7 million, primarily related to property
disposals in China and the Gulf of Mexico shelf region, as well as final
closing of North Sea divestitures. These gains are included with total asset
impairment charges of $18.3 million in the Consolidated Statement of
Operations. The company recognized a net gain on disposal of oil and gas
properties of $36.9 million during the first nine months of 2003, which is
included with total asset impairment charges of $31.9 million in the
Consolidated Statement of Operations. No gain on disposal of oil and gas
properties was recognized in the first nine months of 2002. The company
expects to complete the divestiture of its remaining held-for-sale assets in
the fourth quarter of 2003. The assets and liabilities of discontinued
operations and other assets held for sale have been classified as
Assets/Liabilities Associated with Properties Held for Disposal in the
Consolidated Balance Sheet.
D. Cash Flow Information
Net cash provided by operating activities reflects cash payments for income
taxes and interest as follows:
Nine Months Ended
September 30,
-------------------------
(Millions of dollars) 2003 2002
----------------------------------------------------------------------------
Income tax payments $ 92.8 $ 69.3
Less refunds received (46.5) (264.3)
------ -------
Net income tax payments (refunds) $ 46.3 $(195.0)
====== =======
Interest payments $198.7 $ 217.0
====== =======
Noncash items affecting net income included in the reconciliation of net
income to net cash provided by operating activities include the following:
Nine Months Ended
September 30,
-----------------
(Millions of dollars) 2003 2002
----------------------------------------------------------------------------
Unrealized gain on trading securities $(19.3) $(81.0)
Litigation reserve provisions 6.5 72.0
Increase in fair value of embedded options in the DECS 12.8 54.5
Other employee benefits 39.4 33.8
Loss from equity affiliates 23.7 20.5
Postretirement liability accrual, including curtailment
charges 24.1 15.7
Periodic pension credit for qualified plan, net of
curtailment charges (6.0) (37.1)
All other (1) 42.6 21.1
------ ------
Total $123.8 $ 99.5
====== ======
(1) No other individual item is material to total cash flows from
operations.
Other net cash provided by (used in) operating activities in the
Consolidated Statement of Cash Flows consists of the following:
Nine Months Ended
September 30,
------------------------
(Millions of dollars) 2003 2002
----------------------------------------------------------------------------
Changes in working capital accounts $ 18.8 $204.4
Environmental expenditures (61.8) (77.0)
Cash abandonment expenditures - exploration
and production (13.2) (37.0)
All other (1) (28.3) (22.1)
------ ------
Total $(84.5) $ 68.3
====== ======
(1) No other individual item is material to total cash flows from
operations.
E. Comprehensive Income and Financial Instruments
Comprehensive income (loss) for the three and nine months ended September
30, 2003 and 2002, is as follows:
Three Months Nine Months
Ended Ended
September 30, September 30,
----------------- ------------------
(Millions of dollars) 2003 2002 2003 2002
-------------------------------------------------------------------------------------------------------------
Net income (loss) $28.8 $ (86.4) $168.3 $(138.9)
Unrealized gains (losses) on securities (5.1) (1.2) 2.3 29.7
Change in fair value of cash flow hedges 51.9 (32.0) 38.2 (57.1)
Foreign currency translation adjustment 3.6 (1.0) 31.6 9.4
Other - - 0.8 -
----- ------- ------ --------
Comprehensive income (loss) $79.2 $(120.6) $241.2 $(156.9)
===== ======= ====== =======
The company has certain investments that are considered to be available for
sale. These financial instruments are carried in the Consolidated Balance
Sheet at fair value, which is based on quoted market prices. The company had
no securities classified as held to maturity at September 30, 2003 or
December 31, 2002. At September 30, 2003 and December 31, 2002,
available-for-sale securities for which fair value can be determined were as
follows:
September 30, 2003 December 31, 2002
-------------------------------- -------------------------------
Gross Gross
Unrealized Unrealized
Fair Holding Fair Holding
(Millions of dollars) Value Cost Gain Value Cost Gain
-------------------------------------------------------------------------------------------------------------
Equity securities $73.2 $31.9 $13.3 (1) $69.7 $31.9 $9.8 (1)
U.S. government obligations -
Maturing within one year 3.9 3.9 - 2.4 2.4 -
Maturing between one year
and four years - - - 1.6 1.6 -
----- ----
Total $13.3 $9.8
===== ====
(1) These amounts include $28 million of gross unrealized hedging losses on
15% of the exchangeable debt at the time of adoption of FAS 133.
F. Equity Affiliates
Investments in equity affiliates totaled $119.9 million at September 30,
2003, and $122.9 million at December 31, 2002. Equity loss related to the
investments is included in Other Income in the Consolidated Statement of
Operations and totaled $10.9 million and $4.8 million for the three months
ended September 30, 2003 and 2002, respectively. For the first nine months
of 2003, the loss in equity affiliates totaled $23.7 million, compared with
$20.5 million for the same 2002 period.
G. Workforce Reduction
In September 2003, the company announced a program to reduce its U.S.
nonbargaining workforce by 7% to 9%, or 200 to 250 employees. The program
consists of both voluntary early retirements and involuntary terminations.
Qualifying employees whose employment is terminated in connection with this
program will be given enhanced benefits under the company's pension and
postretirement plans, along with severance payments. The program is expected
to be completed by the end of 2003, with certain retiring employees staying
into 2004 for transition purposes.
The company has estimated the total cost of the program will be
approximately $40 million after-tax. Offers of voluntary early retirement
have been made to 260 employees with acceptances due by November 20, 2003.
Based on similar voluntary programs in the past, the company anticipates an
acceptance rate of approximately 75% resulting in a probable curtailment (as
defined in FAS 88) of the company's qualified pension plan and
postretirement plan. Based on the assumed acceptance rate and actuarial
calculations, the company recognized a pretax curtailment expense of $16.7
million in the third quarter of 2003 for the voluntary early retirements.
Other costs for special termination benefits within the retirement plans,
severance payments and outplacement expenses will be recognized in the
fourth quarter of 2003 or during 2004, as appropriate.
H. Restructuring Provisions and Exit Activities
The company closed its synthetic rutile plant in Mobile, Alabama, during
June 2003. During the third quarter and first nine months of 2003, the
company's chemical - pigment operating unit provided nil and $24.6 million
for costs associated with the closure of this facility. Included in the
$24.6 million were $14.1 million recorded as a cumulative effect of change
in accounting principle related to the recognition of an asset retirement
obligation and $10.5 million for the accrual of severance benefits. The
provision for severance benefits is included in the restructuring reserve
balance below (see Note A for a discussion of the asset retirement
obligation). Of the total provision of $10.5 million, $7.4 million has been
paid through the 2003 third quarter and $3.1 million remained in the accrual
at September 30, 2003. Approximately 140 employees will ultimately be
terminated in connection with this plant closure, of which 110 had been
terminated as of September 30, 2003. Additionally, during the first nine
months of 2003, the company recognized $15.1 million in accelerated
depreciation on the plant assets, $6.1 million for curtailment costs related
to pension and postretirement benefits, $8.2 million for cleanup and
decommissioning costs associated with the plant, and $.7 million for other
settlement costs.
During 2002, the company's chemical - other operating unit provided $16.5
million for costs associated with its plans to exit the forest products
business, of which $2.3 million was recorded in the third quarter of 2002
and $3 million was recorded during the first nine months of 2002. During the
first nine months of 2003, the company provided an additional $5.4 million
associated with exiting the forest products business. Included in the total
provision of $21.9 million were $15.6 million for dismantlement and closure
costs, and $6.3 million for severance costs. These costs are reflected in
costs and operating expenses in the Consolidated Statement of Operations. Of
the total accrual, $4.8 million has been paid through the 2003 third quarter
and $17.1 million remained in the accrual at September 30, 2003. In
connection with the plant closures, 252 employees will be terminated, of
which 95 were terminated as of September 30, 2003. Additionally, during the
first nine months of 2003, the company recognized $8.1 million for
curtailment costs related to pension and postretirement benefits, and $2.2
million in accelerated depreciation on plant assets.
In 2001, the company's chemical - pigment operating unit provided $31.8
million related to the closure of a plant in Antwerp, Belgium. The provision
consisted of $12 million for severance costs, $11.5 million for
dismantlement costs, $6.7 million for contract settlement costs and $1.6
million for other plant closure costs. Of this total accrual, $27 million
has been paid through the 2003 third quarter and $7.8 million remained in
the accrual at September 30, 2003. As a result of this plant closure, 121
employees have been terminated as of September 30, 2003.
Also in 2001, the company's chemical - other operating unit provided $11.9
million for the discontinuation of manganese metal production at its
Hamilton, Mississippi, facility. The provision consisted of $6.6 million for
pond-closure cost, $2.4 million for severance costs and $2.9 million for
other plant closure costs. Of the total provision, $10.5 million has been
paid through the 2003 third quarter and $1.4 million remained in the accrual
at September 30, 2003, for pond closure costs.
The provisions, payments, adjustments and restructuring reserve balances for
the nine-month period ended September 30, 2003, are included in the table
below.
Dismantlement
Personnel and
(Millions of dollars) Total Costs Closure
----------------------------------------------------------------------------
December 31, 2002 $26.6 $3.8 $22.8
Provisions 15.9 15.9 -
Payments (14.2) (8.3) (5.9)
Adjustments (1) 1.1 .4 .7
----- ----- -----
September 30, 2003 $29.4 $11.8 $17.6
===== ===== =====
(1) Foreign-currency translation adjustments related to Antwerp, Belgium,
accrual.
I. Debt
As of September 30, 2003, long-term debt due within one year consists of the
following.
September 30,
(Millions of dollars) 2003
----------------------------------------------------------------------------
5-1/2% Exchangeable Notes (DECS) due August 2, 2004, net
of unamortized discount of $6.5 million $323.8
8.375% Notes due July 15, 2004 145.0
8% Notes due October 15, 2003 100.0
Floating rate notes due June 28, 2004 100.0
Guaranteed Debt of Employee Stock Ownership Plan 9.61% Notes
due in installments through January 2, 2005 3.5
------
Total $672.3
======
J. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings
per share (EPS) from continuing operations for the three-month and
nine-month periods ended September 30, 2003 and 2002.
For the Three Months Ended September 30,
--------------------------------------------------------------------------------
2003 2002
------------------------------------ ------------------------------------
Income from Loss from
(In millions, except Continuing Per-Share Continuing Per-Share
per-share amounts) Operations Shares Income Operations Shares Loss
-------------------------------------------------------------------------------------------------------------
Basic EPS $29.1 100.1 $ .29 $(86.8) 100.4 $(.86)
===== =====
Effect of dilutive securities:
Restricted stock - .7 - -
Stock options - .1 - -
---- ----- ------ -----
Diluted EPS $29.1 100.9 $ .29 $(86.8) 100.4 $(.86)
===== ===== ===== ====== ===== =====
For the Nine Months Ended September 30,
--------------------------------------------------------------------------------
2003 2002
------------------------------------ -----------------------------------
Income from Loss from
(In millions, except Continuing Per-Share Continuing Per-Share
per-share amounts) Operations Shares Income Operations Shares Loss
-------------------------------------------------------------------------------------------------------------
Basic EPS $203.1 100.1 $2.02 $(266.2) 100.3 $(2.65)
===== ======
Effect of dilutive securities:
5 1/4% convertible
debentures 16.0 9.8 - -
Restricted stock - .7 - -
Stock options - .1 - -
------ ----- ------- -----
Diluted EPS $219.1 110.7 $1.98 $(266.2) 100.3 $(2.65)
====== ===== ===== ======= ===== ======
K. Accounts Receivable Sales
In December 2000, the company began an accounts receivable monetization
program for its pigment business through the sale of selected accounts
receivable with a three-year, credit-insurance-backed asset securitization
program. On July 30, 2003, the company restructured the existing accounts
receivable monetization program to include the sale of receivables
originated by the company's European chemical operations. The maximum
availability under the new program is $168 million. In addition, certain
other terms of the program have been modified as part of the restructuring.
Under the terms of the program, selected qualifying customer accounts
receivable may be sold monthly to a special-purpose entity (SPE), which in
turn sells an undivided ownership interest in the receivables to a
third-party multi-seller commercial paper conduit sponsored by an
independent financial institution. The company sells, and retains an
interest in, excess receivables to the SPE as over-collateralization for the
program. The company's retained interest in the SPE's receivables is
classified in trade accounts receivable in the accompanying Consolidated
Balance Sheet. The retained interest is subordinate to, and provides credit
enhancement for, the conduit's ownership interest in the SPE's receivables,
and is available to the conduit to pay certain fees or expenses due to the
conduit, and to absorb credit losses incurred on any of the SPE's
receivables in the event of termination. However, the company believes that
the risk of credit loss is very low since its bad-debt experience has
historically been insignificant. The company retains servicing
responsibilities and receives a servicing fee of 1.07% of the receivables
sold for the period of time outstanding, generally 60 to 120 days. No
recourse obligations were recorded since the company has no obligations for
any recourse actions on the sold receivables. The company also holds
preference stock in the special-purpose entity equal to 3.5% of the
receivables sold. The preference stock is essentially a retained deposit to
provide further credit enhancements, if needed, but otherwise recoverable by
the company at the end of the program.
The company sold $287.6 million and $199.2 million of its pigment
receivables during the third quarter of 2003 and 2002, respectively. The
sale of the receivables resulted in pretax losses of $1.3 million and $1.2
million during the third quarter of 2003 and 2002, respectively. The company
sold $600.1 million and $485.1 million of its pigment receivables during the
first nine months of 2003 and 2002, respectively. The sale of the
receivables resulted in pretax losses of $3.4 million and $3.5 million
during the first nine months of 2003 and 2002, respectively. The losses were
equal to the difference in the book value of the receivables sold and the
total of cash and the fair value of the deposit retained by the
special-purpose entity. The outstanding balance on receivables sold, net of
the company's retained interest in receivables serving as
over-collateralization, totaled $157.9 million at September 30, 2003, and
$110.6 million at December 31, 2002.
L. Income Taxes
The reported amount of income tax expense attributable to income (loss) from
continuing operations for the first nine months of 2003 and 2002 differs
from the amount that would be computed using the U.S. Federal income tax
rate. The primary reasons for the differences and related tax effects are as
follows:
Nine Months Ended
September 30,
------------------------
(Millions of dollars) 2003 2002
----------------------------------------------------------------------------
U.S. statutory provision (benefit) - 35% $119.4 $(29.8)
U.K. tax rate change - 146.4
Reversal of deferred tax asset associated
with U.K. properties held for sale - 51.6
U.K. petroleum revenue tax 12.1 19.5
All other 6.5 (6.5)
------ ------
Provision for income taxes $138.0 $181.2
====== ======
On July 24, 2002, the United Kingdom government made certain changes to its
existing tax laws. Under one of these changes, companies are now required to
pay a supplementary corporate tax charge of 10% on profits from their U.K.
oil and gas production. This is in addition to the previously required 30%
corporate tax on these profits. The U.K. government also accelerated tax
depreciation for capital investments in U.K. upstream activities and
abolished North Sea royalty. The catch-up adjustment for the tax rate
changes increased the company's 2002 third-quarter provision for deferred
income taxes by $137.6 million and the current provision on operations for
the first two quarters of 2002 by $8.8 million.
M. Condensed Consolidating Financial Information
In connection with the acquisition of HS Resources in 2001, a holding
company structure was implemented. The company formed a new holding company,
Kerr-McGee Holdco, which then changed its name to Kerr-McGee Corporation.
The former Kerr-McGee Corporation's name was changed to Kerr-McGee Operating
Corporation. At the end of 2002, another reorganization took place whereby
among other changes, Kerr-McGee Operating Corporation distributed its
investment in certain subsidiaries (primarily the oil and gas operating
subsidiaries) to a newly formed intermediate holding company, Kerr-McGee
Worldwide Corporation. Kerr-McGee Operating Corporation formed a new
subsidiary, Kerr-McGee Chemical Worldwide LLC, and merged into it.
On October 3, 2001, Kerr-McGee Corporation issued $1.5 billion of long-term
notes in a public offering. The notes are general, unsecured obligations of
the company and rank in parity with all of the company's other unsecured and
unsubordinated indebtedness. Kerr-McGee Chemical Worldwide LLC (formerly
Kerr-McGee Operating Corporation, which was previously the original
Kerr-McGee Corporation) and Kerr-McGee Rocky Mountain Corporation have
guaranteed the notes. Additionally, Kerr-McGee Corporation has guaranteed
all indebtedness of its subsidiaries, including the indebtedness assumed in
the purchase of HS Resources. As a result of these guarantee arrangements,
the company is required to present condensed consolidating financial
information. The top holding company is Kerr-McGee Corporation. The
guarantor subsidiaries include Kerr-McGee Chemical Worldwide LLC at
September 30, 2003 and December 31, 2002, and its predecessor, Kerr-McGee
Operating Corporation, at September 30, 2002, along with Kerr-McGee Rocky
Mountain Corporation in 2003 and 2002.
The following tables present condensed consolidating financial information
for (a) Kerr-McGee Corporation, the parent company, (b) the guarantor
subsidiaries, and (c) the non-guarantor subsidiaries on a consolidated
basis.
Kerr-McGee Corporation and Subsidiaries
Condensed Consolidating Statement of Operations
For the Three Months Ended September 30, 2003
Non-
Kerr-McGee Guarantor Guarantor
(Millions of dollars) Corporation Subsidiaries Subsidiaries Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
Sales $ - $180.6 $819.1 $ 6.4 $1,006.1
------ ------ ------ ------ --------
Costs and Expenses
Costs and operating expenses - 94.8 307.9 7.2 409.9
Selling, general and administrative expenses - 2.4 95.9 - 98.3
Shipping and handling expenses - 2.1 32.3 - 34.4
Depreciation and depletion - 30.7 149.9 - 180.6
Accretion expense - .6 5.7 - 6.3
Asset impairments, net of gains on disposal of
assets held for sale - (.3) (4.1) - (4.4)
Exploration, including dry holes and
amortization of undeveloped leases - 5.0 74.8 - 79.8
Taxes, other than income taxes - 7.9 15.6 - 23.5
Provision for environmental remediation
and restoration, net of reimbursements - 28.6 18.6 - 47.2
Interest and debt expense 29.3 9.4 65.1 (41.0) 62.8
------ ------ ------ ------ --------
Total Costs and Expenses 29.3 181.2 761.7 (33.8) 938.4
------ ------ ------ ------ --------
(29.3) (.6) 57.4 40.2 67.7
Other Income (Expense) 79.2 (17.5) 11.4 (90.6) (17.5)
------ ------ ------ ------ --------
Income (Loss) before Income Taxes 49.9 (18.1) 68.8 (50.4) 50.2
Benefit (Provision) for Income Taxes (21.1) 7.8 (28.9) 21.1 (21.1)
------ ------ ------ ------ --------
Income (Loss) from Continuing Operations 28.8 (10.3) 39.9 (29.3) 29.1
Loss from Discontinued Operations,
net of tax - - (.3) - (.3)
------ ------ ------ ------ --------
Net Income (Loss) $ 28.8 $(10.3) $ 39.6 $(29.3) $ 28.8
====== ====== ====== ====== ========
Kerr-McGee Corporation and Subsidiaries
Condensed Consolidating Statement of Operations
For the Three Months Ended September 30, 2002
Non-
Kerr-McGee Guarantor Guarantor
(Millions of dollars) Corporation Subsidiaries Subsidiaries Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
Sales $ - $ 83.5 $ 881.3 $ - $ 964.8
------- ------ ------- ------- -------
Costs and Expenses
Costs and operating expenses - 26.1 357.5 - 383.6
Selling, general and administrative expenses - 1.5 59.5 - 61.0
Shipping and handling expenses - 1.3 30.8 - 32.1
Depreciation and depletion - 29.0 164.7 - 193.7
Asset impairments - (.1) 24.1 - 24.0
Exploration, including dry holes and
amortization of undeveloped leases - 2.2 68.0 - 70.2
Taxes, other than income taxes - 4.1 24.7 - 28.8
Provision for environmental remediation
and restoration, net of reimbursements - - (20.0) - (20.0)
Interest and debt expense 29.0 9.5 80.0 (50.1) 68.4
------- ------ ------- ------- -------
Total Costs and Expenses 29.0 73.6 789.3 (50.1) 841.8
------- ------ ------- ------- -------
(29.0) 9.9 92.0 50.1 123.0
Other Income (Expense) 138.9 12.0 7.3 (172.3) (14.1)
------- ------ ------- ------- -------
Income before Income Taxes 109.9 21.9 99.3 (122.2) 108.9
Provision for Income Taxes (196.3) (9.0) (192.5) 202.1 (195.7)
------- ------ ------- ------- -------
Income (Loss) from Continuing Operations (86.4) 12.9 (93.2) 79.9 (86.8)
Income from Discontinued Operations,
net of tax - - .4 - .4
------- ------ ------- ------- -------
Net Income (Loss) $ (86.4) $ 12.9 $ (92.8) $ 79.9 $ (86.4)
======= ====== ======= ======= =======
Kerr-McGee Corporation and Subsidiaries
Condensed Consolidating Statement of Operations
For the Nine Months Ended September 30, 2003
Non-
Kerr-McGee Guarantor Guarantor
(Millions of dollars) Corporation Subsidiaries Subsidiaries Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
Sales $ - $503.7 $2,654.6 $ - $3,158.3
------- ------ -------- ------- --------
Costs and Expenses
Costs and operating expenses - 248.4 985.0 - 1,233.4
Selling, general and administrative expenses - 12.5 235.8 - 248.3
Shipping and handling expenses - 6.8 94.6 - 101.4
Depreciation and depletion - 91.0 472.2 - 563.2
Accretion expense - 1.8 17.0 - 18.8
Asset impairments, net of gains on disposal of
assets held for sale - 1.4 (6.4) - (5.0)
Exploration, including dry holes and
amortization of undeveloped leases - 11.8 275.1 - 286.9
Taxes, other than income taxes .2 16.6 53.1 - 69.9
Provision for environmental remediation
and restoration, net of reimbursements - 34.4 32.0 - 66.4
Interest and debt expense 87.0 26.0 208.0 (129.8) 191.2
------- ------ -------- ------- --------
Total Costs and Expenses 87.2 450.7 2,366.4 (129.8) 2,774.5
------- ------ -------- ------- --------
(87.2) 53.0 288.2 129.8 383.8
Other Income (Expense) 375.5 (42.7) 56.0 (431.5) (42.7)
------- ------ -------- ------- --------
Income before Income Taxes 288.3 10.3 344.2 (301.7) 341.1
Benefit (Provision) for Income Taxes (120.0) 5.0 (136.0) 113.0 (138.0)
------- ------ -------- ------- --------
Income from Continuing Operations 168.3 15.3 208.2 (188.7) 203.1
Income (Loss) from Discontinued Operations,
net of tax - 12.4 (12.5) - (.1)
Cumulative Effect of Change in Accounting
Principle, net of tax - (1.3) (33.4) - (34.7)
------- ------ -------- ------- --------
Net Income $ 168.3 $ 26.4 $ 162.3 $(188.7) $ 168.3
======= ====== ======== ======= ========
Kerr-McGee Corporation and Subsidiaries
Condensed Consolidating Statement of Operations
For the Nine Months Ended September 30, 2002
Non-
Kerr-McGee Guarantor Guarantor
(Millions of dollars) Corporation Subsidiaries Subsidiaries Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
Sales $ - $243.6 $2,438.6 $ - $2,682.2
------- ------ -------- ------- --------
Costs and Expenses
Costs and operating expenses - 73.8 1,023.0 - 1,096.8
Selling, general and administrative expenses - 3.1 235.0 - 238.1
Shipping and handling expenses - 3.9 82.4 - 86.3
Depreciation and depletion - 90.3 511.8 - 602.1
Asset impairments - 3.1 178.4 - 181.5
Exploration, including dry holes and
amortization of undeveloped leases - 7.4 141.5 - 148.9
Taxes, other than income taxes .1 11.4 71.9 - 83.4
Provision for environmental remediation
and restoration, net of reimbursements - - 70.4 - 70.4
Interest and debt expense 84.1 27.0 247.7 (151.1) 207.7
------- ------ -------- ------- --------
Total Costs and Expenses 84.2 220.0 2,562.1 (151.1) 2,715.2
------- ------ -------- ------- --------
(84.2) 23.6 (123.5) 151.1 (33.0)
Other Income (Expense) 102.6 19.9 48.9 (223.4) (52.0)
------- ------ -------- ------- --------
Income (Loss) before Income Taxes 18.4 43.5 (74.6) (72.3) (85.0)
Provision for Income Taxes (157.3) (21.5) (185.0) 182.6 (181.2)
------- ------ -------- ------- --------
Income (Loss) from Continuing Operations (138.9) 22.0 (259.6) 110.3 (266.2)
Income from Discontinued Operations,
net of tax - - 127.3 - 127.3
------- ------ -------- ------- --------
Net Income (Loss) $(138.9) $22.0 $ (132.3) $ 110.3 $ (138.9)
======= ====== ======== ======= ========
Kerr-McGee Corporation and Subsidiaries
Condensed Consolidating Balance Sheet
September 30, 2003
Non-
Kerr-McGee Guarantor Guarantor
(Millions of dollars) Corporation Subsidiaries Subsidiaries Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS
- ------
Current Assets
Cash $ 1.5 $ - $ 193.4 $ - $ 194.9
Intercompany receivables 791.2 (31.5) 1,385.2 (2,144.9) -
Accounts receivable - 97.9 411.8 - 509.7
Inventories - 5.2 370.4 - 375.6
Deposits, prepaid expenses and other assets - 19.7 565.0 - 584.7
Current assets associated with properties
held for disposal - - .6 - .6
-------- -------- -------- --------- --------
Total Current Assets 792.7 91.3 2,926.4 (2,144.9) 1,665.5
Property, Plant and Equipment, net - 1,973.6 5,305.2 - 7,278.8
Investments and Other Assets 10.6 93.3 473.2 1.6 578.7
Goodwill - 346.4 10.1 - 356.5
Long-Term Assets Associated with Properties
Held for Disposal - - 36.2 - 36.2
Investments in and Advances to Subsidiaries 3,960.2 442.7 45.9 (4,448.8) -
-------- -------- -------- --------- --------
Total Assets $4,763.5 $2,947.3 $8,797.0 $(6,592.1) $9,915.7
======== ======== ======== ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities
Accounts payable $ 45.4 $ 62.0 $ 546.5 $ - $ 653.9
Intercompany borrowings 68.9 538.6 1,450.1 (2,057.6) -
Long-Term debt due within one year - - 672.3 - 672.3
Other current liabilities (4.0) 130.2 553.3 20.7 700.2
Current liabilities associated with
properties held for disposal - - .3 - .3
-------- -------- -------- --------- --------
Total Current Liabilities 110.3 730.8 3,222.5 (2,036.9) 2,026.7
Long-Term Debt 1,847.3 - 1,200.9 - 3,048.2
Other Deferred Credits and Reserves - 752.2 1,431.6 (20.7) 2,163.1
Long-Term Liabilities Associated with
Properties Held for Disposal - - 19.1 - 19.1
Investments by and Advances from Parent - - 579.3 (579.3) -
Stockholders' Equity 2,805.9 1,464.3 2,343.6 (3,955.2) 2,658.6
-------- -------- -------- --------- --------
Total Liabilities and Stockholders' Equity $4,763.5 $2,947.3 $8,797.0 $(6,592.1) $9,915.7
======== ======== ======== ========= ========
Kerr-McGee Corporation and Subsidiaries
Condensed Consolidating Balance Sheet
December 31, 2002
Non-
Kerr-McGee Guarantor Guarantor
(Millions of dollars) Corporation Subsidiaries Subsidiaries Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS
- ------
Current Assets
Cash $ 2.5 $ - $ 87.4 $ - $ 89.9
Intercompany receivables 956.6 46.6 1,641.2 (2,644.4) -
Accounts receivable - 73.5 534.3 - 607.8
Inventories - 6.5 395.9 - 402.4
Deposits, prepaid expenses and other assets - 59.6 75.0 (1.8) 132.8
Current assets associated with properties
held for disposal - - 57.2 - 57.2
-------- -------- -------- --------- --------
Total Current Assets 959.1 186.2 2,791.0 (2,646.2) 1,290.1
Property, Plant and Equipment, net - 1,956.1 5,079.5 - 7,035.6
Investments and Other Assets 11.8 117.9 985.7 (80.2) 1,035.2
Goodwill - 346.8 9.1 - 355.9
Long-Term Assets Associated with Properties
Held for Disposal - - 187.1 4.9 192.0
Investments in and Advances to Subsidiaries 3,673.0 694.9 80.1 (4,448.0) -
-------- -------- -------- --------- --------
Total Assets $4,643.9 $3,301.9 $9,132.5 $(7,169.5) $9,908.8
======== ======== ======== ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities
Accounts payable $ 45.2 $ 78.1 $ 661.8 $ - $ 785.1
Intercompany borrowings 68.5 842.2 1,732.1 (2,642.8) -
Long-term debt due within one year - - 105.8 - 105.8
Other current liabilities 17.8 195.0 478.2 25.8 716.8
Current liabilities associated with
properties held for disposal - - 2.1 - 2.1
-------- -------- -------- --------- --------
Total Current Liabilities 131.5 1,115.3 2,980.0 (2,617.0) 1,609.8
Long-Term Debt 1,847.2 - 1,950.9 - 3,798.1
Other Deferred Credits and Reserves - 675.4 1,297.4 (24.0) 1,948.8
Long-Term Liabilities Associated with
Properties Held for Disposal - - 16.1 - 16.1
Investments by and Advances from Parent - - 728.7 (728.7) -
Stockholders' Equity 2,665.2 1,511.2 2,159.4 (3,799.8) 2,536.0
-------- -------- -------- --------- --------
Total Liabilities and Stockholders' Equity $4,643.9 $3,301.9 $9,132.5 $(7,169.5) $9,908.8
======== ======== ======== ========= ========
Kerr-McGee Corporation and Subsidiaries
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2003
Non-
Kerr-McGee Guarantor Guarantor
(Millions of dollars) Corporation Subsidiaries Subsidiaries Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
Operating Activities
- --------------------
Net income $ 168.3 $ 26.4 $ 162.3 $(188.7) $ 168.3
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities -
Depreciation, depletion and amortization - 94.5 522.6 - 617.1
Accretion expense - 1.8 17.0 - 18.8
Asset impairments, net of gains on
disposal of assets held for sale - - 1.2 - 1.2
Equity in (earnings) losses of subsidiaries (188.3) 38.9 - 149.4 -
Dry hole costs - - 162.7 - 162.7
Deferred income taxes - 54.2 31.6 - 85.8
Provision for environmental remediation
and restoration, net of reimbursements - 34.4 31.9 - 66.3
(Gain) loss on sale and retirement of
assets - (12.0) 9.9 - (2.1)
Cumulative effect of change in accounting
principle - 1.3 33.4 - 34.7
Noncash items affecting net income 1.3 39.9 82.6 - 123.8
Other net cash used in operating activities (36.2) (135.6) 87.3 - (84.5)
------- ------- -------- ------- --------
Net Cash Provided by (Used in)
Operating Activities (54.9) 143.8 1,142.5 (39.3) 1,192.1
------- ------- -------- ------- --------
Investing Activities
- --------------------
Capital expenditures - (91.6) (657.8) - (749.4)
Dry hole costs - - (162.7) - (162.7)
Proceeds from sales of assets - 7.1 251.5 - 258.6
Acquisitions - - (69.6) - (69.6)
Other investing activities - - (36.6) - (36.6)
------- ------- -------- ------- --------
Net Cash Used in Investing Activities - (84.5) (675.2) - (759.7)
------- ------- -------- ------- --------
Financing Activities
- --------------------
Issuance of long-term debt - - 31.5 - 31.5
Repayment of long-term debt - - (225.0) - (225.0)
Increase (decrease) in intercompany
notes payable 189.8 (59.3) (130.2) (.3) -
Dividends paid (135.9) - (40.9) 40.9 (135.9)
Other financing activities - - .7 (1.3) (.6)
------- ------- -------- ------- --------
Net Cash Provided by (Used in)
Financing Activities 53.9 (59.3) (363.9) 39.3 (330.0)
------- ------- -------- ------- --------
Effects of Exchange Rate Changes on Cash
and Cash Equivalents - - 2.6 - 2.6
------- ------- -------- ------- --------
Net Increase (Decrease) in Cash and Cash
Equivalents (1.0) - 106.0 - 105.0
Cash and Cash Equivalents at Beginning of
Period 2.5 - 87.4 - 89.9
------- ------- -------- ------- --------
Cash and Cash Equivalents at End of Period $ 1.5 $ - $ 193.4 $ - $ 194.9
======= ======= ======== ======= ========
Kerr-McGee Corporation and Subsidiaries
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2002
Non-
Kerr-McGee Guarantor Guarantor
(Millions of dollars) Corporation Subsidiaries Subsidiaries Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
Operating Activities
- --------------------
Net income (loss) $(138.9) $ 22.0 $ (132.3) $ 110.3 $ (138.9)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities -
Depreciation, depletion and amortization - 92.5 564.3 - 656.8
Asset impairments - - 207.6 - 207.6
Equity in (earnings) losses of 121.4 (11.1) - (110.3) -
subsidiaries
Dry hole costs