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 June 30, 2004
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 July 31,
2004: 150,996,605.
KERR-McGEE CORPORATION
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements PAGE
----
Consolidated Statement of Income for the Three and
Six Months Ended June 30, 2004 and 2003 1
Consolidated Balance Sheet at June 30, 2004 and
December 31, 2003 2
Consolidated Statement of Cash Flows for the Six
Months Ended June 30, 2004 and 2003 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 34
Item 3. Quantitative and Qualitative Disclosures about Market Risk 43
Item 4. Controls and Procedures 46
Forward-Looking Information 46
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 47
Item 4. Submission of Matters to a Vote of Security Holders 47
Item 6. Exhibits and Reports on Form 8-K 47
SIGNATURE 50
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
KERR-McGEE CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
Three Months Six Months
Ended Ended
June 30, June 30,
-------------------- --------------------
(Millions of dollars, except per-share amounts) 2004 2003 2004 2003
- ----------------------------------------------------------------------------------------------------------------------
Revenues $1,097.1 $1,052.6 $2,213.4 $2,152.2
-------- -------- -------- --------
Costs and Expenses
Costs and operating expenses 432.6 439.1 835.6 823.5
Selling, general and administrative expenses 80.1 79.1 163.7 150.0
Shipping and handling expenses 38.4 35.0 76.1 67.0
Depreciation and depletion 191.0 193.0 381.3 382.6
Accretion expense 6.8 6.3 13.4 12.5
Impairments on assets held for use 1.1 - 14.3 5.1
Loss (gain) associated with assets held for sale 3.9 (.5) 7.3 (5.7)
Exploration, including dry holes and amortization of
undeveloped leases 65.5 66.6 116.1 207.1
Taxes, other than income taxes 28.6 21.0 57.0 46.4
Provision for environmental remediation and restoration,
net of reimbursements 7.4 1.9 6.6 19.2
Interest and debt expense 55.7 63.4 112.7 128.4
-------- -------- -------- --------
Total Costs and Expenses 911.1 904.9 1,784.1 1,836.1
-------- -------- -------- --------
186.0 147.7 429.3 316.1
Other Expense (7.0) (26.9) (7.3) (25.2)
-------- -------- -------- --------
Income from Continuing Operations before Income Taxes 179.0 120.8 422.0 290.9
Provision for Income Taxes (68.4) (51.0) (159.2) (116.9)
-------- -------- -------- --------
Income from Continuing Operations 110.6 69.8 262.8 174.0
Income (Loss) from Discontinued Operations
(net of income tax provision) - (.2) - .2
Cumulative Effect of Change in Accounting Principle (net of benefit
for income taxes of $18.2) - - - (34.7)
-------- -------- -------- --------
Net Income $ 110.6 $ 69.6 $ 262.8 $ 139.5
======== ======== ======== ========
Income (Loss) per Common Share
Basic -
Continuing operations $ 1.07 $ .70 $ 2.58 $ 1.73
Discontinued operations - - - -
Cumulative effect of change in accounting principle - - - (.34)
-------- -------- -------- --------
Total $ 1.07 $ .70 $ 2.58 $ 1.39
======== ======== ======== ========
Diluted -
Continuing operations $ 1.01 $ .68 $ 2.42 $ 1.67
Discontinued operations - - - -
Cumulative effect of change in accounting principle - - - (.31)
-------- -------- -------- --------
Total $ 1.01 $ .68 $ 2.42 $ 1.36
======== ======== ======== ========
Dividends Declared per Common Share $ .45 $ .45 $ .90 $ .90
======== ======== ======== ========
The accompanying notes are an integral part of this statement.
KERR-McGEE CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
June 30, December 31,
(Millions of dollars) 2004 2003
- -------------------------------------------------------------------------------------------------------------------
ASSETS
- ------
Current Assets
Cash $ 104.7 $ 142.0
Accounts receivable 717.3 583.3
Inventories 404.7 393.4
Investment in equity securities 556.7 509.8
Deposits, prepaid expenses and other assets 145.9 127.6
Deferred income taxes 206.4 76.0
Current assets associated with properties held for disposal - .4
--------- ---------
Total Current Assets 2,135.7 1,832.5
--------- ---------
Property, Plant and Equipment 18,302.5 14,273.1
Less reserves for depreciation, depletion and amortization (7,486.8) (6,870.2)
--------- ---------
10,815.7 7,402.9
--------- ---------
Investments and Other Assets 653.3 628.9
Goodwill 1,196.9 357.3
Long-Term Assets Associated with Properties Held for Disposal 1.3 28.3
--------- ---------
Total Assets $14,802.9 $10,249.9
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities
Accounts payable $ 477.2 $ 475.5
Long-term debt due within one year 827.7 574.3
Taxes on income 80.2 126.6
Taxes, other than income taxes 70.1 36.5
Derivative liabilities 820.5 354.2
Accrued liabilities 726.1 664.5
--------- ---------
Total Current Liabilities 3,001.8 2,231.6
--------- ---------
Long-Term Debt 3,528.0 3,081.2
--------- ---------
Deferred Income Taxes 2,056.6 1,334.7
Asset Retirement Obligations 473.5 384.6
Other Liabilities and Deferred Credits 665.7 566.0
Long-Term Liabilities Associated with Properties Held for Disposal .5 16.0
--------- ---------
3,196.3 2,301.3
--------- ---------
Stockholders' Equity
Common stock, par value $1 - 300,000,000 shares
authorized, 150,557,481 shares issued at 6-30-04
and 100,892,354 shares issued at 12-31-03 150.6 100.9
Capital in excess of par value 4,144.4 1,708.3
Preferred stock purchase rights 1.0 1.0
Retained earnings 1,098.9 927.2
Accumulated other comprehensive loss (244.9) (45.4)
Common shares in treasury, at cost - 105,462 shares
at 6-30-04 and 31,924 at 12-31-03 (5.3) (1.6)
Deferred compensation (67.9) (54.6)
--------- ---------
Total Stockholders' Equity 5,076.8 2,635.8
--------- ---------
Total Liabilities and Stockholders' Equity $14,802.9 $10,249.9
========= =========
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)
Six Months Ended
June 30,
-------------------------
(Millions of dollars) 2004 2003
- ------------------------------------------------------------------------------------------
Operating Activities
- --------------------
Net income $ 262.8 $ 139.5
Adjustments to reconcile net income to net cash
provided by operating activities -
Depreciation, depletion and amortization 407.5 419.9
Accretion expense 13.4 12.5
Impairments on assets held for use 14.3 5.1
Loss associated with assets held for sale 7.3 .5
Dry hole costs 26.1 128.2
Deferred income taxes 110.6 80.8
Provision for environmental remediation and
restoration, net of reimbursements 6.6 19.2
Cumulative effect of change in accounting principle - 34.7
Noncash items affecting net income 70.0 69.2
Other net cash used in operating activities (211.2) (144.7)
------- -------
Net Cash Provided by Operating Activities 707.4 764.9
------- -------
Investing Activities
- --------------------
Capital expenditures (432.9) (517.9)
Dry hole costs (26.1) (128.2)
Cash acquired in Westport acquisition (1) 43.0 -
Proceeds from sales of assets 3.3 195.9
Other investing activities 12.9 (14.8)
------- -------
Net Cash Used in Investing Activities (399.8) (465.0)
------- -------
Financing Activities
- --------------------
Issuance of long-term debt 86.0 31.5
Repayment of long-term debt (347.0) (222.3)
Issuance of common stock 7.0 -
Dividends paid (91.0) (90.6)
Other financing activities - (.6)
------- -------
Net Cash Used in Financing Activities (345.0) (282.0)
------- -------
Effects of Exchange Rate Changes on Cash and Cash Equivalents .1 .8
------- -------
Net Increase (Decrease) in Cash and Cash Equivalents (37.3) 18.7
Cash and Cash Equivalents at Beginning of Period 142.0 89.9
------- -------
Cash and Cash Equivalents at End of Period $ 104.7 $ 108.6
======= =======
(1) See Notes B and E for information regarding the business combination and
related noncash investing and financing activities.
The accompanying notes are an integral part of this statement.
KERR-McGEE CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
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 adjustments that are normal and
recurring in nature, 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, these condensed financial statements should 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.
Employee Stock Option Plans
---------------------------
The company accounts for its stock option plans under the intrinsic-value
method permitted by Accounting Principles Board Opinion 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.
Statement of Financial Accounting Standards (FAS) No. 123, "Accounting for
Stock-Based Compensation," prescribes a fair-value method of accounting for
employee stock options under which compensation expense is measured based
on the estimated fair value of stock options at the grant date and
recognized over the period of time that the options vest. 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 Six
Months Ended Months Ended
June 30, June 30,
(Millions of dollars, ----------------- ----------------
except per share amounts) 2004 2003 2004 2003
---------------------------------------------------------------------------------------------------
Net income as reported $110.6 $69.6 $262.8 $139.5
Less stock-based compensation expense determined
using a fair-value method, net of taxes (3.4) (4.1) (6.8) (8.1)
------ ----- ------ ------
Pro forma net income $107.2 $65.5 $256.0 $131.4
====== ===== ====== ======
Net income per share -
Basic -
As reported $ 1.07 $ .70 $ 2.58 $ 1.39
Pro forma 1.03 .65 2.51 1.31
Diluted -
As reported 1.01 .68 2.42 1.36
Pro forma .98 .64 2.36 1.28
Goodwill and Intangible Assets
------------------------------
In accordance with FAS 142, "Goodwill and Other Intangible Assets,"
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 2004, with no impairment indicated. The amounts tested
for impairment exclude goodwill and intangible assets recorded in
connection with the company's June 25, 2004 acquisition of Westport
Resources Corporation (Westport).
Reclassifications
-----------------
Certain reclassifications have been made to the prior year financial
statements to conform with the current year presentation. In the third
quarter of 2003, the company began reporting in revenues the net marketing
fee received from sales of nonequity North Sea crude oil marketed on behalf
of other partners. Prior to the 2003 third quarter, the company reported
purchases and sales of nonequity crude oil on a gross basis.
B. Business Combination
On June 25, 2004, Kerr-McGee completed its acquisition of Westport, an
independent oil and gas exploration and production company with operations
in the Rocky Mountain, Mid-Continent and Gulf Coast areas onshore U.S. and
in the Gulf of Mexico. The acquisition increases Kerr-McGee's proved
reserves by approximately 30%, bringing the combined company's total
reserves as of December 31, 2003, to approximately 1.3 billion barrels of
oil equivalent.
On the effective date of the merger, each issued and outstanding share of
Westport common stock was converted into .71 shares of Kerr-McGee common
stock. As a result, Kerr-McGee issued 48.9 million shares of common stock
to Westport's stockholders. The common stock exchanged in the merger was
valued at $2.4 billion based on Kerr-McGee's weighted average stock price
two days before and after April 7, 2004, the date the acquisition was
publicly announced. Kerr-McGee also exchanged 1.9 million stock options for
options held by Westport employees. The fair value of the vested options
exchanged was $33.7 million, determined using the Black-Scholes option
pricing model.
The acquisition price, net of cash acquired of $43 million, totaled $4.5
billion, which includes the value of common stock and stock options
exchanged, plus debt and other liabilities assumed, and merger costs.
Kerr-McGee has reflected Westport's assets and liabilities in the company's
balance sheet at June 30, 2004, and has included Westport's results of
operations in the company's statement of income for the five-day period
ending June 30, 2004. The purchase price was allocated preliminarily to
specific assets and liabilities based on their estimated fair values at the
date of acquisition, with $840 million recorded as goodwill and
approximately $600 million recorded for deferred tax liabilities. Since the
Westport acquisition closed at the end of the second quarter, certain data
necessary to determine the fair values of the acquired assets and
liabilities is not yet available including, but not limited to: final
acquisition-date economic valuations of acquired proved and unproved oil
and gas properties, data necessary for the identification and valuation of
pre-acquisition contingencies, and tax return data providing the underlying
tax bases of Westport's assets and liabilities at June 25, 2004. The
company expects to complete its purchase price allocation later this year,
at which time the preliminary allocation will be revised and goodwill will
be adjusted accordingly.
The strategic benefits of the merger and the principal factors that
contributed to Kerr-McGee recognizing goodwill are as follows:
o Provides complementary high-quality assets in core U.S. onshore and
Gulf of Mexico regions
o Enhances the stability of high-margin production
o Expands low-risk exploitation opportunities
o Increases free cash flow for Kerr-McGee's high-potential exploration
opportunities
o Reduces leverage and enables greater financial flexibility
o Provides opportunities for synergies and related cost savings
The pro forma information presented below has been prepared to give effect
to the Westport acquisition as if it had occurred at the beginning of the
periods presented. The pro forma information is presented for illustrative
purposes only and is based on estimates and assumptions deemed appropriate
by Kerr-McGee. If the Westport acquisition had occurred in the past,
Kerr-McGee's operating results would have been different from those
reflected in the pro forma information below; therefore, the pro forma
information should not be relied upon as an indication of the operating
results that Kerr-McGee would have achieved if the transactions had
occurred on January 1, 2003. The pro forma information also should not be
used as an indication of the future results that Kerr-McGee will achieve
after the Westport acquisition.
Pro Forma Information
--------------------------------------------
Three Months Six Months
Ended Ended
June 30, June 30,
-------------------- --------------------
(Millions of dollars, except per-share amounts) 2004 2003 2004 2003
-----------------------------------------------------------------------------------------------------------
Revenues $1,305.6 $1,227.6 $2,663.9 $2,508.2
Income from Continuing Operations 136.5 78.0 323.7 198.4
Net Income 136.5 77.8 323.7 159.9
Income per Common Share -
Basic $ .91 $ .52 $ 2.17 $ 1.07
Diluted .88 .55 2.08 1.06
C. 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 and collars for a portion of its oil
and gas production, forward contracts to buy and sell foreign currencies,
and interest rate swaps.
The following tables summarize the balance sheet presentation of the
company's derivatives as of June 30, 2004 and December 31, 2003:
As of June 30, 2004
--------------------------------------------------------------------
Derivative Fair Value
-------------------------------------------------
Current Long-Term Current Long-Term Deferred Gain
Asset Asset Liability Liability (Loss) in AOCI(1)
--------------------------------------------------------------------
Oil and gas commodity derivatives -
Kerr-McGee positions $16.6 $14.0 $(436.7) $(101.6) $(291.6)
Acquired Westport positions 2.7 3.1 (142.4) (43.9) -
Gas marketing-related derivatives 11.2 2.7 (11.0) (2.7) -
Foreign currency forward contracts 17.4 4.2 (3.6) - 16.3
Interest rate swaps - - - 3.6 -
DECS call option - - (226.8) - -
Other 2.2 1.1 - - 2.1
----- ----- ------- ------- -------
Total derivative contracts $50.1 $25.1 $(820.5) $(144.6) $(273.2)
===== ===== ======= ======= =======
As of December 31, 2003
--------------------------------------------------------------------
Derivative Fair Value
-------------------------------------------------
Current Long-Term Current Long-Term Deferred Gain
Asset Asset Liability Liability (Loss) in AOCI(1)
--------------------------------------------------------------------
Oil and gas commodity derivatives $ 7.7 $14.9 $(181.3) $ - $(106.3)
Gas marketing-related derivatives 8.0 2.1 (6.9) (2.1) -
Foreign currency forward contracts 28.0 - (11.1) - 17.0
Interest rate swaps - - - 15.1 -
DECS call option - - (154.9) - -
Other .3 .5 - - .5
----- ----- ------- ----- -------
Total derivative contracts $44.0 $17.5 $(354.2) $13.0 $ (88.8)
===== ===== ======= ===== =======
(1) Amounts deferred in accumulated other comprehensive income (AOCI) are
reflected net of tax.
The following tables summarize the gain (loss) and classification of the
company's financial derivative instruments in the Statement of Income for
the three and six month periods ending June 30, 2004 and 2003:
Three Months Ended Six Months Ended
June 30, 2004 June 30, 2004
-------------------------------- ----------------------------------
Costs and Other Costs and Other
Revenues Expenses Expense Revenues Expenses Expense
-------------------------------- ----------------------------------
Hedge Activity:
Oil and gas commodity derivatives $(155.4) $ - $ - $(216.8) $ - $ -
Foreign currency contracts .3 4.1 - .3 8.1 -
Interest rate swaps - 5.0 - - 9.3 -
Other - .3 - - .3 -
------- ---- ------ ------- ----- ------
Total hedging contracts (155.1) 9.4 - (216.5) 17.7 -
------- ---- ------ ------- ----- ------
Nonhedge Activity:
Oil and gas commodity derivatives
Kerr-McGee positions (9.8) - 2.6 (9.8) - 2.2
Acquired Westport positions 15.2 - - 15.2 - -
Gas marketing-related derivatives 1.4 - - 3.4 - (.9)
DECS call option - - (65.5) - - (71.9)
Other - - (.2) - - (.8)
------- ---- ------ ------- ----- ------
6.8 - (63.1) 8.8 - (71.4)
Total nonhedge contracts ------- ---- ------ ------- ----- ------
Total derivative contracts $(148.3) $9.4 $(63.1) $(207.7) $17.7 $(71.4)
======= ==== ====== ======= ===== ======
Three Months Ended Six Months Ended
June 30, 2003 June 30, 2003
-------------------------------- ----------------------------------
Costs and Other Costs and Other
Revenues Expenses Expense Revenues Expenses Expense
-------------------------------- ----------------------------------
Hedge Activity:
Oil and gas commodity derivatives $(49.9) $ - $ - $(166.6) $ - $ -
Foreign currency contracts - 3.7 - - 5.0 -
Interest rate swaps - 2.8 - - 5.5 -
------ ----- ------ ------- ----- ------
Total hedging contracts (49.9) 6.5 - (166.6) 10.5 -
------ ----- ------ ------- ----- ------
Nonhedge Activity:
Oil and gas commodity derivatives - - (.7) - - (4.1)
Gas marketing-related derivatives 1.1 - (3.4) (9.7) - (2.4)
DECS call option - - (41.9) - - (58.1)
Other - - (.2) - - (.3)
------ ----- ------ ------- ----- ------
Total nonhedge contracts 1.1 - (46.2) (9.7) - (64.9)
------ ----- ------ ------- ----- ------
Total derivative contracts $(48.8) $ 6.5 $(46.2) $(176.3) $10.5 $(64.9)
====== ===== ====== ======= ===== ======
The company periodically enters into financial derivative instruments that
generally fix the commodity prices to be received for a portion of its oil
and gas production in the future. The fair value of these derivative
instruments was determined based on prices actively quoted, generally NYMEX
and Dated Brent prices. For derivative instruments qualifying as cash flow
hedges, gains and losses are deferred in accumulated other comprehensive
income and reclassified into earnings when the associated hedged production
occurs. The company expects to reclassify deferred losses of $227.2 million
into earnings during the next 12 months (assuming no further changes in the
fair market value of the related contracts). Losses for hedge
ineffectiveness are recognized as a reduction to revenues in the
Consolidated Statement of Income and were not material for the three and
six month periods ending June 30, 2004 and 2003.
Between March 31, 2004 and April 6, 2004, Kerr-McGee entered into
additional financial derivative instruments in the form of fixed-price
swaps and costless collars relating to specified quantities of projected
2004-2006 production that was not already hedged. Certain crude oil and
natural gas swaps covering the period from August to December 2004 were
characterized initially as "nonhedge" derivatives in the second quarter of
2004, since Kerr-McGee's U.S. production (excluding Westport volumes) was
either already hedged or, in the case of Rocky Mountain production, the
company did not have sufficient basis swaps in place to ensure that the
hedges would be highly effective. Consequently, Kerr-McGee recognized
mark-to-market losses of $9.8 million in earnings during the second quarter
associated with these derivatives. In July 2004, after the Westport merger
closed and with sufficient oil and gas production now available, these
swaps were designated as hedges and, as such, future realized gains and
losses will be reflected in earnings when the hedged production is sold.
In connection with the merger, Kerr-McGee recognized a $195.7 million net
liability associated with Westport's existing commodity derivatives at the
merger date (June 25, 2004). Some of these derivative instruments were
designated as hedges in July 2004 in connection with the re-designation of
Kerr-McGee's acquisition-related derivatives described above, while others
do not qualify for hedge accounting treatment. As a result, Kerr-McGee
recognized a mark-to-market gain of $15.2 million in earnings during the
second quarter since the value of the net derivative liability had
decreased to $180.5 million by June 30, 2004.
Westport's derivatives in place at the merger date consisted of fixed-price
oil and gas swaps, natural gas basis swaps, and costless and three-way
collars. The fixed-price oil and gas swaps and natural gas basis swaps
qualify for hedge accounting and were designated as hedges in July 2004.
Accordingly, future realized gains and losses on those derivative
instruments will be reflected in earnings when the hedged production is
sold. However, the costless and three-way collars - each of which is in a
net liability position - do not qualify for hedge accounting treatment
under existing accounting standards because they represent "net written
options" at the merger date. As a result, even though these collars
effectively reduce commodity price risk for the combined company's
production, Kerr-McGee will continue to recognize mark-to-market gains and
losses in future earnings until the collars mature rather than defer such
amounts in accumulated other comprehensive income. The net derivative
liability associated with costless and three-way collars at June 30, 2004
was $71.1 million.
In addition to the company's hedging program, Kerr-McGee Rocky Mountain
Corp. holds certain gas basis swaps settling between 2004 and 2008. Through
December 2003, the company treated these gas basis swaps as nonhedge
derivatives, and changes in fair value were recognized in earnings. The
company has designated those swaps settling in 2004 and 2005 as hedges
since the basis swaps have now been coupled with natural gas fixed-price
swaps, while the remainder settling between 2006 and 2008 will continue to
be treated as nonhedge derivatives.
The company's marketing subsidiary, Kerr-McGee Energy Services Corporation
(KMES) markets natural gas (including equity gas) in the Denver area.
Contracts for the physical delivery of gas at fixed prices have not been
designated as hedges and are marked-to-market through earnings. KMES has
entered into natural gas swaps and basis swaps that offset its fixed-price
risk on physical contracts and lock in the margins associated with the
physical sale. The gains or losses on these derivative contracts, which
also are marked-to-market through earnings, substantially offset the gains
and losses from the fixed-price physical contracts.
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 flows related to pigment sales, operating costs,
capital expenditures and raw material purchases. These forward contracts
generally have durations of less than three years. Changes in the fair
value of these contracts are recorded in accumulated other comprehensive
loss and will be recognized in earnings in the periods during which the
hedged forecasted transactions affect earnings (i.e., when the forward
contracts close in the case of a hedge of sales revenues or operating
costs, when the hedged assets are depreciated in the case of a hedge of
capital expenditures and when finished inventory is sold in the case of a
hedged raw material purchase). The company expects to reclassify net gains
of approximately $7.9 million into earnings during the next 12 months,
assuming no further changes in the fair value of the contracts. No hedges
were discontinued during the first six months of 2004, and no
ineffectiveness was recognized.
In connection with the issuance of $350 million 5.375% notes due April 15,
2005, the company entered into an interest rate swap arrangement 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%. During February 2004, the company
reviewed the composition of its outstanding debt and entered into
additional interest rate swaps, converting an aggregate of $566 million in
fixed-rate debt to variable-rate debt. Under the interest rate swaps, $150
million of 6.625% notes due October 15, 2007, will pay a variable rate of
LIBOR plus 3.35%; $109 million of 8.125% notes due October 15, 2005, will
pay a variable rate of LIBOR plus 5.86%; and $307 million of 5.875% notes
due September 15, 2006, will pay a variable rate of LIBOR plus 3.1%. The
company considers these swaps to be a hedge against the change in fair
value of the related debt as a result of interest rate changes. Any gain or
loss on the swaps is offset by a comparable gain or loss resulting from
recording changes in the fair value of the related debt. The critical terms
of the swaps match the terms of the debt; therefore, the swaps are
considered highly effective and no hedge ineffectiveness has been
recognized.
The company issued 5 1/2% notes exchangeable for common stock (DECS) in
August 1999, which allowed each holder to receive between .85 and 1.0 share
of Devon common stock or, at the company's option, an equivalent amount of
cash at maturity in August 2004. Embedded options in the DECS provided the
company a floor price on Devon's common stock of $33.19 per share (the put
option). The company also had the right to retain up to 15% of the shares
if Devon's stock price was greater than $39.16 per share (the DECS holders
had an embedded call option on 85% of the shares). Using the Black-Scholes
valuation model, the company recognized any gains or losses resulting from
changes in the fair value of the put and call options in other income. The
fluctuation in the value of the put and call derivative financial
instruments generally offset the increase or decease in the market value of
the Devon stock classified as trading, which is also recognized in other
income. The company recognized gains of $66.2 million and $43.7 million in
the three month periods ending June 30, 2004 and 2003, respectively,
related to the changes in market value of the Devon stock. In the
corresponding six month periods, the company recognized gains on
revaluation of the Devon stock of $73.7 million and $63.3 million,
respectively. The DECS and the derivative liability associated with the
call option are classified as current liabilities in the Consolidated
Balance Sheet as of June 30, 2004 and December 31, 2003. The DECS were
settled on August 2, 2004, with the distribution of shares of Devon common
stock.
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. The company is collection agent and 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.
The company has entered into other forward contracts to sell foreign
currencies that will be collected as a result of pigment sales denominated
in foreign currencies. These contracts have not been designated as hedges
even though they do protect the company from changes in foreign currency
rates.
D. Discontinued Operations and Asset Impairments
On March 31, 2003, the company completed the sale of its Kazakhstan
operations for $168.6 million in cash, recognizing a loss on sale of $6.1
million in results from discontinued operations during the first quarter of
2003. In connection with this sale, the company recorded an $18.6 million
settlement liability for the net cash flow of the Kazakhstan operations
from the effective date of the transaction to the closing date. The
settlement liability was paid during the third quarter of 2003. The net
proceeds received by the company were used to reduce outstanding debt.
Impairment losses totaling $14.3 million and $5.1 million were recognized
during the first six months of 2004 and 2003, respectively, for certain
assets used in operations that are not considered held for sale. The 2004
impairments related primarily to a U.S. Gulf of Mexico field that
experienced premature water breakthrough and ceased production sooner than
expected.
The company continues to review its options with respect to its 100%-owned
Leadon field and, particularly, the associated floating production, storage
and offloading (FPSO) facility. Management presently intends to continue
operating and producing the field until such time as the operating cash
flow generated by the field does not support continued production or until
a higher value option is identified. Given the significant value associated
with the FPSO relative to the size of the entire project, the company will
continue to pursue a long-term solution that achieves maximum value for
Leadon - which may include disposing of the field, monetizing the FPSO by
selling it as a development option for a third-party discovery, or
redeployment in other company operations. As of June 30, 2004, the carrying
value of the Leadon field assets totaled $358 million. Given the
uncertainty concerning possible outcomes, it is reasonably possible that
the company's estimate of future cash flows from the Leadon field and
associated fair value could change in the near term due to, among other
things, (i) unfavorable changes in commodity prices or operating costs,
(ii) a production profile that declines more rapidly than currently
anticipated, and/or (iii) unsuccessful results of marketing activities or
failure to locate a strategic buyer (or suitable redeployment opportunity).
Accordingly, management anticipates that the Leadon field will be subject
to periodic impairment review until such time as the field is abandoned or
sold. If future cash flows or fair value decrease from that presently
estimated, an additional write-down of the Leadon field could occur in the
future.
Capitalized costs associated with exploratory wells may be charged to
earnings in a future period if management determines that commercial
quantities of hydrocarbons have not been discovered. At June 30, 2004, the
company had capitalized costs of approximately $184 million associated with
such ongoing exploration activities, primarily in the deepwater Gulf of
Mexico, Brazil, Alaska and China.
In January 2004, the company announced the temporary idling of one line of
its sulfate-process titanium dioxide pigment production facilities at the
Savannah manufacturing plant, which is one of two sulfate-process trains
operated by the company worldwide. The line was temporarily idled because
of soft demand for sulfate-process titanium dioxide pigment. The sulfate
line has remained idle, as the market conditions have not sufficiently
improved. In addition, unanticipated cost issues associated with
underperforming plant and equipment discovered after the company acquired
the plant in 2000 have increased the cost profile of the plant from that
initially anticipated. The company is currently performing market analyses
and evaluating plant reconfiguration to explore means of best improving
operating results, while also evaluating its strategic options with respect
to the Savannah sulfate operations. During the second quarter, the company
operated its new high-productivity oxidation line for chloride at the
Savannah facility, which produced improved ore yields. The company is
evaluating the performance of this new oxidation line and expects to have a
better understanding of how the Savannah site might be reconfigured to
exploit its capabilities by the latter part of 2004. The possible
reconfiguration of the Savannah site, if any, as well as any decisions
regarding strategic options related to the sulfate operations, could
include redeployment of certain assets, idling of certain assets and
reduction of the future useful life of certain assets, resulting in the
acceleration of depreciation expense and the recognition of other charges.
E. Cash Flow Information
Net cash provided by operating activities reflects cash payments for income
taxes and interest as follows:
Six Months Ended
June 30,
------------------------
(Millions of dollars) 2004 2003
---------------------------------------------------------------------------
Income tax payments $ 89.5 $ 64.9
Less refunds received (3.3) (14.8)
------ ------
Net income tax payments $ 86.2 $ 50.1
====== ======
Interest payments $135.9 $119.0
====== ======
Noncash items affecting net income included in the reconciliation of net
income to net cash provided by operating activities include the following:
Six Months Ended
June 30,
---------------------
(Millions of dollars) 2004 2003
--------------------------------------------------------------------------
Incentive compensation provisions $ 34.4 $ 18.5
Increase in fair value of trading securities (1) (73.7) (63.3)
Increase in fair value of embedded options in
the DECS (1) 71.9 58.1
Net losses on equity method investments 14.7 12.8
Net periodic postretirement expense 13.4 11.2
Net periodic pension credit for qualified plan (10.6) (6.0)
Litigation reserve provisions - 6.5
All other (2) 19.9 31.4
------ ------
Total $ 70.0 $ 69.2
====== ======
Other net cash used in operating activities in the Consolidated Statement
of Cash Flows consists of the following:
Six Months Ended
June 30,
---------------------
(Millions of dollars) 2004 2003
--------------------------------------------------------------------------
Decrease due to changes in working capital accounts $(130.3) $ (83.7)
Environmental expenditures (44.1) (36.4)
All other (2) (36.8) (24.6)
------- -------
Total $(211.2) $(144.7)
======= =======
Information about noncash investing and financing activities not reflected
in the Consolidated Statement of Cash Flows follows:
Six Months Ended
June 30,
------------------
(Millions of dollars) 2004 2003
--------------------------------------------------------------------------
Noncash investing activities
Increase in property, plant and equipment (3) $3,462.0 $ -
Increase in fair value of trading securities (1) 73.7 63.3
Decrease in property related to Gunnison operating
lease agreement (4) (82.6) -
Increase in intangible assets (3) 46.2 -
Noncash financing activities
Issuance of common stock and stock options (3) 2,447.9 -
Long-term debt assumed (3) 1,045.5 -
Reduction in debt related to Gunnison operating
lease agreement (4) (75.3) -
Increase in fair value of embedded options in
the DECS (1) 71.9 58.1
(1) See Note C for a discussion of the accounting for the DECS.
(2) No other individual item is material to total cash flows from
operations.
(3) Noncash transaction related to Westport merger, see Note B.
(4) See Note H for a discussion of the Gunnison Synthetic Trust.
F. Comprehensive Income and Financial Instruments
Comprehensive income for the three and six months ended June 30, 2004 and
2003, is as follows:
Three Months Six Months
Ended Ended
June 30, June 30,
------------------ -------------------
(Millions of dollars) 2004 2003 2004 2003
----------------------------------------------------------------------------------------------------
Net income $110.6 $69.6 $ 262.8 $139.5
Unrealized gains on securities - 5.1 - 7.4
Reclassification of unrealized gains on available
for-sale securities included in net income - - (5.4) -
Change in fair value of cash flow hedges (93.5) 1.9 (184.4) (13.7)
Foreign currency translation adjustment (3.0) 17.1 (10.0) 28.0
Other - - 0.3 0.8
------ ----- ------- ------
Comprehensive income $ 14.1 $93.7 $ 63.3 $162.0
====== ===== ======= ======
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 June 30, 2004 or
December 31, 2003. At June 30, 2004 and December 31, 2003,
available-for-sale securities for which fair value could be determined were
as follows:
June 30, 2004 December 31, 2003
------------------------------- --------------------------------
Gross Gross
Unrealized Unrealized
Fair Holding Fair Holding
(Millions of dollars) Value Cost Gain Value Cost Gain
-------------------------------------------------------------------------------------------------------------
Equity securities $ - $ - $ - $26.8 $9.8 $8.3(1)
U.S. government obligations 3.8 3.8 - 3.9 3.9 -
--- ----
Total $ - $8.3
=== ====
(1) This amount includes $8.6 million of gross unrealized hedging losses on
15% of the exchangeable debt at the time of adoption of FAS 133.
The equity securities represent the company's investment in Devon Energy
Corporation common stock. During January 2004, the company sold its
remaining Devon shares classified as available for sale for a pretax gain
of $9 million. Proceeds from the January sales totaled $27.4 million. The
cost of the shares sold and the amount of the gain reclassified from
accumulated other comprehensive income were determined using the average
cost of the shares held. The company also received proceeds of $11.5
million in January 2004 related to sales of Devon shares in December 2003,
with a 2004 settlement date.
G. Equity Affiliates
Investments in equity affiliates totaled $118.6 million at June 30, 2004,
and $123.1 million at December 31, 2003. Pretax equity loss related to the
investments is included in other income in the Consolidated Statement of
Income and totaled $6.4 million and $6.7 million for the three months ended
June 30, 2004 and 2003, respectively. For the first six months of 2004, the
loss in equity affiliates totaled $14.7 million, compared with $12.8
million for the same 2003 period.
H. Debt
As of June 30, 2004, long-term debt due within one year consisted of the
following:
June 30,
(Millions of dollars) 2004
---------------------------------------------------------------------------
5.375% Notes due April 15, 2005 $350.0
5.5% Exchangeable Notes (DECS) due August 2, 2004, net
of unamortized discount of $.6 million 329.7
8.375% Notes due July 15, 2004 145.0
Guaranteed Debt of Employee Stock Ownership Plan 9.61% Notes
due in installments through January 2, 2005 3.0
------
Total $827.7
======
Subsequent to June 30, 2004, the company used available cash to fund the
July 15, 2004 maturity of its 8.375% Notes. In addition, the company's 5.5%
Exchangeable Notes were settled on August 2, 2004, with the distribution of
shares of Devon common stock. See Note C for additional information
regarding the DECS.
As discussed in Note B, the company completed its acquisition of Westport
on June 25, 2004. In connection with the merger, Kerr-McGee assumed the
following Westport debt:
(Millions of dollars) Fair Value
---------------------------------------------------------------------------
8.25% Notes due 2011 (face value $700 million) $ 800.5
Revolving credit facility 245.0
--------
Total $1,045.5
========
On June 25, 2004, after completion of the merger, Kerr-McGee paid down all
outstanding borrowings under the Westport revolving credit facility.
Consequently, there were no borrowings outstanding under this credit
facility at June 30, 2004. However, letters of credit totaling $160 million
associated with Westport's derivatives were backed by the credit facility
and remained outstanding as of June 30, 2004. During July, these letters of
credit were cancelled and the Westport revolving credit facility was
terminated on July 13, 2004.
During June 2004, Kerr-McGee purchased Westport 8.25% Notes with an
aggregate principal amount of $14.5 million ($16.1 million fair value). The
fair value of the purchased notes is reflected as a reduction of long-term
debt assumed in the merger in the Consolidated Balance Sheet. On July 1,
2004, Kerr-McGee issued a notice of redemption for the 8.25% Westport notes
and the notes were redeemed on July 31, 2004 at an aggregate redemption
price of $785.5 million. The redemption price consisted of the face value
of $700 million, less the amount previously purchased by Kerr-McGee of
$14.5 million, plus a make-whole premium of $100 million.
On July 1, 2004, Kerr-McGee issued $650 million of 6.95% notes due July 1,
2024, with interest payable semi-annually. The notes were issued at 99.2%,
resulting in a discount of $5 million which will be recognized as
additional interest expense over the term of the notes. The proceeds from
this debt issuance, together with proceeds from borrowings under the
company's revolving credit facilities, were used to redeem the 8.25%
Westport notes discussed above.
During 2001, the company entered into a leasing arrangement with Kerr-McGee
Gunnison Trust (Gunnison Synthetic Trust) for the construction of the
company's share of a platform to be used in the development of the Gunnison
field, in which the company has a 50% working interest. Under the terms of
the agreement, the company financed its share of construction costs for the
platform under a synthetic lease credit facility between the trust and
groups of financial institutions for up to $157 million, with the company
making lease payments sufficient to pay interest at varying rates on the
notes. Construction of the platform was completed in December 2003, with
the company's share of construction costs totaling $149 million. On
December 31, 2003, $65.6 million of the synthetic lease facility was
converted to a leveraged lease structure, whereby the company leases an
interest in the platform under an operating lease agreement from a separate
business trust.
Both the Gunnison Synthetic Trust and the new operating lease trust are
considered variable interest entities under the provisions of FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities - an
Interpretation of ARB No. 51." As such, the company is required to analyze
its relationship with each trust to determine whether the company is the
primary beneficiary and, if so, required to consolidate the trusts. Based
on the analyses performed, the company is not the primary beneficiary of
the operating lease trust; however, the company was considered the primary
beneficiary of the Gunnison Synthetic Trust. Accordingly, the remaining
assets and liabilities of the Gunnison Synthetic Trust were reflected in
the company's Consolidated Balance Sheet at December 31, 2003, which
included $82.6 million in property, plant and equipment, $3.8 million in
accrued liabilities, $75.3 million in long-term debt, and $3.5 million in
minority interest. On January 15, 2004, the remaining $82.6 million of the
synthetic lease facility was converted to a leveraged lease structure, and
the related lessor trust is not subject to consolidation. As a result, the
associated property and debt are not reflected in the company's
Consolidated Balance Sheet at June 30, 2004.
I. 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
six-month periods ended June 30, 2004 and 2003.
For the Three Months Ended June 30,
------------------------------------------------------------------------------
2004 2003
-------------------------------------- -------------------------------------
Income from Income from
(In millions, except Continuing Per-Share Continuing Per-Share
per-share amounts) Operations Shares Income Operations Shares Income
--------------------------------------------------------------------------------------------------------------
Basic EPS $110.6 103.6 $1.07 $69.8 100.1 $.70
===== ====
Effect of dilutive securities:
5 1/4% convertible
debentures 5.3 9.8 5.3 9.8
Restricted stock - 1.1 - .7
Stock options - .3 - .1
------ ----- ----- -----
Diluted EPS $115.9 114.8 $1.01 $75.1 110.7 $.68
====== ===== ===== ===== ===== ====
For the Six Months Ended June 30,
------------------------------------------------------------------------------
2004 2003
-------------------------------------- -------------------------------------
Income from Income from
(In millions, except Continuing Per-Share Continuing Per-Share
per-share amounts) Operations Shares Income Operations Shares Income
--------------------------------------------------------------------------------------------------------------
Basic EPS $262.8 102.0 $2.58 $174.0 100.1 $1.73
===== =====
Effect of dilutive securities:
5 1/4% convertible
debentures 10.7 9.8 10.7 9.8
Restricted stock - 1.0 - .7
Stock options - .3 - -
------ ----- ------ -----
Diluted EPS $273.5 113.1 $2.42 $184.7 110.6 $1.67
====== ===== ===== ====== ===== =====
J. 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 company is
currently in the process of renewing the program and expects to have the
renewal completed during the third quarter of 2004. The maximum
availability under the program is $165 million. 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 $304 million and $155.7 million of its pigment receivables
during the second quarter of 2004 and 2003, respectively and $540.9 million
and $312.5 million during the first six months of 2004 and 2003,
respectively. Losses, though not material, are recorded on the receivable
sales 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 $165 million at both June 30, 2004 and
December 31, 2003.
K. Work Force Reduction, Restructuring Provisions and Exit Activities
In connection with the Westport merger, the company recognized liabilities
of $18.9 million associated with severance and relocation costs for certain
former Westport employees. Terminations of 23 employees occurred on June
25, 2004, and 44 employees remaining for transitional purposes will be
terminated no later than June 25, 2005.
In September 2003, the company announced a program to reduce its U.S.
nonbargaining work force through both voluntary retirements and involuntary
terminations. As a result of the program, the company's eligible U.S.
nonbargaining work force was reduced by approximately 9%, or 271 employees.
Qualifying employees terminated under this program became eligible for
enhanced benefits under the company's pension and postretirement plans,
along with severance payments. The program was substantially completed by
the end of 2003, with certain retiring employees staying into the first
half of 2004 for transition purposes. In connection with the work force
reduction, the company recognized a pretax charge of $56.4 million during
the latter half of 2003, of which $34.2 million was for curtailment and
special termination benefits associated with the company's retirement plans
and $22.2 million was for severance-related costs. The remaining provision
for severance-related costs is included in the restructuring reserve table
below. Of the $22.2 million severance-related provision, $18.6 million has
been paid through the second quarter of 2004, with $3.6 million remaining
in the accrual at June 30, 2004.
During 2003, the company's chemical - pigment operating unit provided $60.8
million pretax for costs associated with the closure of its synthetic
rutile plant in Mobile, Alabama. Included in the $60.8 million were $14.1
million for the cumulative effect of change in accounting principle related
to the recognition of an asset retirement obligation, $15.2 million for
accelerated depreciation, $14.9 million for other shut-down related costs,
$10.5 million for severance benefits and $6.1 million for benefit plan
curtailment costs. The provision for severance benefits is included in the
restructuring reserve table below (see Note N for a discussion of the asset
retirement obligation). Of the total $10.5 million severance accrual, $8.6
million has been paid through the second quarter of 2004. Approximately 135
employees will ultimately be terminated in connection with this plant
closure, of which 117 had been terminated as of June 30, 2004.
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. The company provided an additional $5.1 million in 2003 for
severance benefits associated with exiting the forest products business, of
which $3.6 million was recorded during the first six months of 2003. During
the first six months of 2004, the company provided an additional $1.2
million for dismantlement and closure costs. These costs are reflected in
costs and operating expenses in the Consolidated Statement of Income.
Included in the total provision of $22.8 million were $16.7 million for
dismantlement and closure costs, and $6.1 million for severance costs. Of
the total provision, $14 million has been paid through the 2004 second
quarter and $8.2 million remained in the accrual at June 30, 2004. In
connection with the plant closures, 252 employees will be terminated, of
which 202 had been terminated as of June 30, 2004.
In 2001, the company's chemical - pigment operating unit provided $31.8
million pretax related to the closure of a plant in Antwerp, Belgium. Of
this total accrual, $27.1 million had been paid through the 2004 second
quarter and $4.4 million remained in the accrual at June 30, 2004. As a
result of this plant closure, 121 employees were terminated.
The provisions, payments, adjustments and restructuring reserve balances
for the six-month period ended June 30, 2004, are included in the table
below.
Dismantlement
Personnel and
(Millions of dollars) Total Costs Closure
--------------------------------------------------------------------------
December 31, 2003 $ 39.1 $ 26.5 $12.6
Westport severance/relocation 18.9 18.9 -
Provisions 1.2 - 1.2
Payments (21.2) (16.7) (4.5)
Adjustments - (.3) .3
------ ------ -----
June 30, 2004 $ 38.0 $ 28.4 $ 9.6
====== ====== =====
L. Condensed Consolidating Financial Information
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 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 and Kerr-McGee Rocky Mountain
Corporation.
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 Subsidiary Companies
Condensed Consolidating Statement of Income
For the Three Months Ended June 30, 2004
Non-
Kerr-McGee Guarantor Guarantor
(Millions of dollars) Corporation Subsidiaries Subsidiaries Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------
Revenues $ - $215.6 $881.5 $ - $1,097.1
------ ------ ------ ------- --------
Costs and Expenses
Costs and operating expenses - 109.2 324.0 (.6) 432.6
Selling, general and administrative expenses .7 .6 78.8 - 80.1
Shipping and handling expenses - 1.9 36.5 - 38.4
Depreciation and depletion - 30.2 160.8 - 191.0
Accretion expense - .6 6.2 - 6.8
Impairments on assets held for use - - 1.1 - 1.1
Loss associated with assets held for sale - .1 3.8 - 3.9
Exploration, including dry holes and
amortization of undeveloped leases - 2.9 62.6 - 65.5
Taxes, other than income taxes .1 9.1 19.4 - 28.6
Provision for environmental remediation
and restoration, net of reimbursements - 7.1 .3 - 7.4
Interest and debt expense 26.6 8.9 70.0 (49.8) 55.7
------ ------ ------ ------- --------
Total Costs and Expenses 27.4 170.6 763.5 (50.4) 911.1
------ ------ ------ ------- --------
(27.4) 45.0 118.0 50.4 186.0
Other Income (Expense) 206.4 16.4 20.2 (250.0) (7.0)
------ ------ ------ ------- --------
Income before Income Taxes 179.0 61.4 138.2 (199.6) 179.0
Provision for Income Taxes (68.4) (22.4) (54.0) 76.4 (68.4)
------ ----- ------ ------- --------
Net Income $110.6 $ 39.0 $ 84.2 $(123.2) $ 110.6
====== ====== ====== ======= ========
Kerr-McGee Corporation and Subsidiary Companies
Condensed Consolidating Statement of Income
For the Three Months Ended June 30, 2003
Non-
Kerr-McGee Guarantor Guarantor
(Millions of dollars) Corporation Subsidiaries Subsidiaries Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------
Revenues $ - $169.3 $887.6 $ (4.3) $1,052.6
------ ------ ------ ------- --------
Costs and Expenses
Costs and operating expenses - 82.1 361.6 (4.6) 439.1
Selling, general and administrative expenses - 3.0 76.1 - 79.1
Shipping and handling expenses - 2.1 32.9 - 35.0
Depreciation and depletion - 30.4 162.6 - 193.0
Accretion expense - .6 5.7 - 6.3
Loss (gain) associated with assets held for sale - 1.7 (2.2) - (.5)
Exploration, including dry holes and
amortization of undeveloped leases - 2.9 63.7 - 66.6
Taxes, other than income taxes .1 3.2 17.7 - 21.0
Provision for environmental remediation
and restoration, net of reimbursements - .7 1.2 - 1.9
Interest and debt expense 28.8 8.3 70.0 (43.7) 63.4
------ ------ ------ ------- --------
Total Costs and Expenses 28.9 135.0 789.3 (48.3) 904.9
------ ------ ------ ------- --------
(28.9) 34.3 98.3 44.0 147.7
Other Income (Expense) 149.7 (25.8) 14.7 (165.5) (26.9)
------ ------ ------ ------- --------
Income from Continuing Operations
before Income Taxes 120.8 8.5 113.0 (121.5) 120.8
Benefit (Provision) for Income Taxes (51.2) 1.4 (45.9) 44.7 (51.0)
------ ------ ------ ------- --------
Income from Continuing Operations 69.6 9.9 67.1 (76.8) 69.8
Income (Loss) from Discontinued Operations,
net of tax - .4 (.6) - (.2)
------ ------ ------ ------- --------
Net Income $ 69.6 $ 10.3 $ 66.5 $ (76.8) $ 69.6
====== ====== ====== ======= ========
Kerr-McGee Corporation and Subsidiary Companies
Condensed Consolidating Statement of Income
For the Six Months Ended June 30, 2004
Non-
Kerr-McGee Guarantor Guarantor
(Millions of dollars) Corporation Subsidiaries Subsidiaries Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------
Revenues $ - $426.5 $1,786.9 $ - $2,213.4
------- ------ -------- ------- --------
Costs and Expenses
Costs and operating expenses - 218.9 617.7 (1.0) 835.6
Selling, general and administrative expenses .7 .7 162.3 - 163.7
Shipping and handling expenses - 3.6 72.5 - 76.1
Depreciation and depletion - 60.2 321.1 - 381.3
Accretion expense - 1.3 12.1 - 13.4
Impairments on assets held for use - .9 13.4 - 14.3
Loss associated with assets held for sale - .1 7.2 - 7.3
Exploration, including dry holes and
amortization of undeveloped leases - 6.5 109.6 - 116.1
Taxes, other than income taxes .1 17.4 39.5 - 57.0
Provision for environmental remediation
and restoration, net of reimbursements - 6.3 .3 - 6.6
Interest and debt expense 54.1 18.1 139.3 (98.8) 112.7
------- ------ -------- ------- --------
Total Costs and Expenses 54.9 334.0 1,495.0 (99.8) 1,784.1
------- ------ -------- ------- --------
(54.9) 92.5 291.9 99.8 429.3
Other Income (Expense) 476.9 9.8 49.3 (543.3) (7.3)
------- ------ -------- ------- --------
Income before Income Taxes 422.0 102.3 341.2 (443.5) 422.0
Provision for Income Taxes (159.2) (36.8) (131.6) 168.4 (159.2)
------- ------ -------- ------- --------
Net Income $ 262.8 $ 65.5 $ 209.6 $(275.1) $ 262.8
======= ====== ======== ======= ========
Kerr-McGee Corporation and Subsidiary Companies
Condensed Consolidating Statement of Income
For the Six Months Ended June 30, 2003
Non-
Kerr-McGee Guarantor Guarantor
(Millions of dollars) Corporation Subsidiaries Subsidiaries Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------
Revenues $ - $323.1 $1,835.5 $ (6.4) $2,152.2
------ ------ -------- ------- --------
Costs and Expenses
Costs and operating expenses - 153.6 677.1 (7.2) 823.5
Selling, general and administrative expenses - 10.1 139.9 - 150.0
Shipping and handling expenses - 4.7 62.3 - 67.0
Depreciation and depletion - 60.3 322.3 - 382.6
Accretion expense - 1.2 11.3 - 12.5
Impairments on assets held for use - - 5.1 - 5.1
Loss (gain) associated with assets held for sale - 1.6 (7.3) - (5.7)
Exploration, including dry holes and
amortization of undeveloped leases - 6.8 200.3 - 207.1
Taxes, other than income taxes .2 8.7 37.5 - 46.4
Provision for environmental remediation
and restoration, net of reimbursements - 5.8 13.4 - 19.2
Interest and debt expense 57.7 16.7 142.8 (88.8) 128.4
------ ------ -------- ------- --------
Total Costs and Expenses 57.9 269.5 1,604.7 (96.0) 1,836.1
------ ------ -------- ------- --------
(57.9) 53.6 230.8 89.6 316.1
Other Income (Expense) 296.3 (25.2) 44.6 (340.9) (25.2)
------ ------ -------- ------- --------
Income from Continuing Operations
before Income Taxes 238.4 28.4 275.4 (251.3) 290.9
Provision for Income Taxes (98.9) (2.8) (107.1) 91.9 (116.9)
------ ------ -------- ------- --------
Income from Continuing Operations 139.5 25.6 168.3 (159.4) 174.0
Income (Loss) from Discontinued Operations,
net of tax - 12.4 (12.2) - .2
Cumulative Effect of Change in Accounting
Principle, net of tax - (1.3) (33.4) - (34.7)
------ ------ -------- ------- --------
Net Income $139.5 $ 36.7 $ 122.7 $(159.4) $ 139.5
====== ====== ======== ======= ========
Kerr-McGee Corporation and Subsidiary Companies
Condensed Consolidating Balance Sheet
June 30, 2004
Non-
Kerr-McGee Guarantor Guarantor
(Millions of dollars) Corporation Subsidiaries Subsidiaries Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------
ASSETS
- ------
Current Assets
Cash $ 1.8 $ - $ 102.9 $ - $ 104.7
Intercompany receivables .1 - 49.8 (49.9) -
Accounts receivable - 116.1 601.2 - 717.3
Inventories - 3.4 401.3 - 404.7
Deposits, prepaid expenses and other assets 16.3 19.7 682.9 (16.3) 702.6
Deferred income taxes .2 21.1 185.1 206.4
-------- -------- --------- --------- ---------
Total Current Assets 18.4 160.3 2,023.2 (66.2) 2,135.7
Property, Plant and Equipment - Net - 1,968.6 8,847.1 - 10,815.7
Investments in Subsidiaries 5,907.0 732.1 - (6,639.1) -
Investments and Other Assets 11.6 73.4 647.9 (79.6) 653.3
Goodwill - 346.3 850.6 - 1,196.9
Long-term Assets Associated with Properties
Held for Disposal - - 1.3 - 1.3
-------- -------- --------- --------- ---------
Total Assets $5,937.0 $3,280.7 $12,370.1 $(6,784.9) $14,802.9
======== ======== ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities
Intercompany borrowings $ 59.3 $ 772.3 $ 760.6 $(1,592.2) $ -
Accounts payable 45.6 44.9 386.7 - 477.2
Long-term debt due within one year 350.0 - 477.7 - 827.7
Other current liabilities 23.4 200.1 1,476.4 (3.0) 1,696.9
-------- -------- --------- --------- ---------
Total Current Liabilities 478.3 1,017.3 3,101.4 (1,595.2) 3,001.8
Long-Term Debt 1,479.4 - 2,064.7 (16.1) 3,528.0
Other Liabilities and Deferred Credits 8.9 677.1 2,510.8 (1.0) 3,195.8
Long-Term Liabilities Associated with
Properties Held for Disposal - - .5 - .5
Stockholders' Equity 3,970.4 1,586.3 4,692.7 (5,172.6) 5,076.8
-------- -------- --------- --------- ---------
Total Liabilities and Stockholders' Equity $5,937.0 $3,280.7 $12,370.1 $(6,784.9) $14,802.9
======== ======== ========= ========= =========
Kerr-McGee Corporation and Subsidiary Companies
Condensed Consolidating Balance Sheet
December 31, 2003
Non-
Kerr-McGee Guarantor Guarantor
(Millions of dollars) Corporation Subsidiaries Subsidiaries Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------
ASSETS
- ------
Current Assets
Cash $ 2.2 $ - $ 139.8 $ - $ 142.0
Intercompany receivables 7.0 - 58.8 (65.8) -
Accounts receivable - 125.2 458.1 - 583.3
Inventories - 5.4 388.0 - 393.4
Deposits, prepaid expenses and other assets - 17.9 619.5 - 637.4
Deferred income taxes 1.4 17.7 56.9 - 76.0
Current assets associated with properties
held for disposal - - .4 - .4
-------- -------- -------- --------- ---------
Total Current Assets 10.6 166.2 1,721.5 (65.8) 1,832.5
Property, Plant and Equipment - Net - 1,966.6 5,436.3 - 7,402.9
Investments in Subsidiaries 3,181.6 732.4 - (3,914.0) -
Investments and Other Assets 10.2 104.7 593.6 (79.6) 628.9
Goodwill - 346.4 10.9 - 357.3
Long-term Assets Associated with Properties
Held for Disposal - - 28.3 - 28.3
-------- -------- -------- --------- ---------
Total Assets $3,202.4 $3,316.3 $7,790.6 $(4,059.4) $10,249.9
======== ======== ======== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities
Intercompany borrowings $ 68.6 $ 892.9 $1,088.9 $(2,050.4) $ -
Accounts payable 45.4 38.9 391.2 - 475.5
Long-term debt due within one year - - 574.3 - 574.3
Other current liabilities 36.8 173.2 971.8 - 1,181.8
-------- -------- -------- --------- ---------
Total Current Liabilities 150.8 1,105.0 3,026.2 (2,050.4) 2,231.6
Long-Term Debt 1,829.3 - 1,251.9 - 3,081.2
Other Liabilities and Deferred Credits (4.5) 696.0 1,595.7 (1.9) 2,285.3
Long-Term Liabilities Associated with
Properties Held for Disposal - - 16.0 - 16.0
Stockholders' Equity 1,226.8 1,515.3 1,900.8 (2,007.1) 2,635.8
-------- -------- -------- --------- ---------
Total Liabilities and Stockholders' Equity $3,202.4 $3,316.3 $7,790.6 $(4,059.4) $10,249.9
======== ======== ======== ========= =========
Kerr-McGee Corporation and Subsidiary Companies
Condensed Consolidating Statement of Cash Flows
For the Six Months Ended June 30, 2004
Non-
Kerr-McGee Guarantor Guarantor
(Millions of dollars) Corporation Subsidiaries Subsidiaries Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------
Operating Activities
- --------------------
Net income $ 262.8 $ 65.5 $ 209.6 $(275.1) $ 262.8
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities -
Depreciation, depletion and amortization - 63.8 343.7 - 407.5
Accretion expense - 1.3 12.1 - 13.4
Impairments on assets held for use - .9 13.4 - 14.3
Loss associated with assets held for use - .1 7.2 - 7.3
Dry hole costs - (0.1) 26.2 - 26.1
Deferred income taxes 14.6 7.6 88.4 - 110.6
Equity in (earnings) losses of subsidiaries (272.5) (3.7) - 276.2 -
Provision for environmental remediation
and restoration, net of reimbursements - 6.3 .3 - 6.6
Noncash items affecting net income .1 16.9 53.0 - 70.0
Other net cash used in operating activities (29.9) (5.3) (174.9) (1.1) (211.2)
------- ------ ------- ------- -------
Net Cash Provided by (Used in)
Operating Activities (24.9) 153.3 579.0 - 707.4
------- ------ ------- ------- -------
Investing Activities
- --------------------
Capital expenditures - (66.7) (366.2) - (432.9)
Dry hole costs - .1 (26.2) - (26.1)
Westport acquisition - - 43.0 - 43.0
Proceeds from sales of assets - .2 3.1 - 3.3
Other investing activities (16.1) - 29.0 - 12.9
------- ------ ------- ------- -------
Net Cash Used in Investing Activities (16.1) (66.4) (317.3) - (399.8)
------- ------ ------- ------- -------
Financing Activities
- --------------------
Increase (decrease) in intercompany
notes payable 124.6 (86.9) (37.7) - -
Issuance of long-term debt - - 86.0 - 86.0
Repayment of long-term debt - - (347.0) - (347.0)
Issuance of common stock 7.0 - - - 7.0
Dividends paid (91.0) - - - (91.0)
------- ------ ------- ------- -------
Net Cash Provided by (Used in)
Financing Activities 40.6 (86.9) (298.7) - (345.0)
------- ------ ------- ------- -------
Effects of Exchange Rate Changes on Cash
and Cash Equivalents - - .1 - .1
------- ------ ------- ------- -------
Net Decrease in Cash and Cash Equivalents (.4) - (36.9) - (37.3)
Cash and Cash Equivalents at Beginning of
Period 2.2 - 139.8 - 142.0
------- ------ ------- ------- -------