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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, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 1-9210
---------------------
OCCIDENTAL PETROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-4035997
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10889 WILSHIRE BOULEVARD
LOS ANGELES, CALIFORNIA 90024
(Address of principal executive offices) (Zip Code)
(310) 208-8800
(Registrant's telephone number, including area code)
---------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at September 30, 2002
- --------------------------------- ---------------------------------------
Common stock $.20 par value 376,950,570 shares
OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONTENTS
PAGE
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets--
September 30, 2002 and December 31, 2001 2
Consolidated Condensed Statements of Operations--
Three and nine months ended September 30, 2002 and 2001 4
Consolidated Condensed Statements of Cash Flows--
Nine months ended September 30, 2002 and 2001 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
Item 4. Controls and Procedures 23
PART II OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 26
CERTIFICATIONS 27
EXHIBIT INDEX 29
1
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
SEPTEMBER 30, 2002 AND DECEMBER 31, 2001
(Amounts in millions)
2002 2001
=========================================================================== ========== ==========
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 298 $ 198
Receivables, net 910 661
Inventories 471 414
Prepaid expenses and other 148 153
Assets held for sale 47 131
---------- ----------
Total current assets 1,874 1,557
LONG-TERM RECEIVABLES, net 263 2,185
INVESTMENTS IN UNCONSOLIDATED ENTITIES 989 993
PROPERTY, PLANT AND EQUIPMENT, at cost, net of
accumulated depreciation, depletion and amortization of $6,200
at September 30, 2002 and $5,653 at December 31, 2001 12,871 12,791
OTHER ASSETS 342 324
---------- ----------
$ 16,339 $ 17,850
=========================================================================== ========== ==========
The accompanying notes are an integral part of these financial statements.
2
OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
SEPTEMBER 30, 2002 AND DECEMBER 31, 2001
(Amounts in millions)
2002 2001
=========================================================================== ========== ==========
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Notes payable $ -- $ 54
Accounts payable 808 715
Accrued liabilities 1,293 1,080
Liabilities held for sale 17 18
Domestic and foreign income taxes 182 27
---------- ----------
Total current liabilities 2,300 1,894
---------- ----------
LONG-TERM DEBT, net of unamortized discount 4,141 4,065
---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred and other domestic and foreign income taxes 968 1,103
Obligation under natural gas delivery commitment -- 145
Other 2,193 2,322
---------- ----------
3,161 3,570
---------- ----------
MINORITY INTEREST 260 2,224
---------- ----------
OCCIDENTAL OBLIGATED MANDATORILY REDEEMABLE
TRUST PREFERRED SECURITIES OF A SUBSIDIARY
TRUST HOLDING SOLELY SUBORDINATED NOTES OF
OCCIDENTAL 456 463
---------- ----------
STOCKHOLDERS' EQUITY
Common stock, at par value 75 75
Additional paid-in capital 3,939 3,857
Retained earnings 2,079 1,788
Accumulated other comprehensive income (72) (86)
---------- ----------
6,021 5,634
---------- ----------
$ 16,339 $ 17,850
=========================================================================== ========== ==========
The accompanying notes are an integral part of these financial statements.
3
OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(Amounts in millions, except per-share amounts)
Three Months Ended Nine Months Ended
September 30 September 30
------------------------ ------------------------
2002 2001 2002 2001
=============================================================== ========== ========== ========== ==========
REVENUES
Net sales $ 1,963 $ 1,983 $ 5,353 $ 6,718
Interest, dividends and other income 21 61 72 195
Gains (losses) on disposition of assets, net (231) (5) (232) 8
Income (loss) on equity investments 25 (28) (1) (63)
---------- ---------- ---------- ----------
1,778 2,011 5,192 6,858
---------- ---------- ---------- ----------
COSTS AND OTHER DEDUCTIONS
Cost of sales 1,125 1,119 3,237 3,584
Selling, general and administrative and other
operating expenses 207 157 519 525
Exploration expense 29 91 115 130
Environmental remediation 8 -- 8 49
Minority interest 22 41 63 117
Interest and debt expense, net 79 91 231 313
---------- ---------- ---------- ----------
1,470 1,499 4,173 4,718
---------- ---------- ---------- ----------
Income before taxes 308 512 1,019 2,140
Provision (benefit) for domestic and foreign income and
other taxes (168) 69 179 714
---------- ---------- ---------- ----------
Income from continuing operations 476 443 840 1,426
Discontinued operations, net (74) 1 (78) 2
Extraordinary loss, net -- -- -- (3)
Cumulative effect of changes in accounting principles, net -- -- (95) (24)
---------- ---------- ---------- ----------
NET INCOME AND EARNINGS APPLICABLE TO
COMMON STOCK $ 402 $ 444 $ 667 $ 1,401
========== ========== ========== ==========
BASIC EARNINGS PER COMMON SHARE
Income from continuing operations $ 1.26 $ 1.19 $ 2.23 $ 3.83
Discontinued operations, net (.19) -- (.21) .01
Extraordinary loss, net -- -- -- (.01)
Cumulative effect of changes in accounting principles, net -- -- (.25) (.06)
---------- ---------- ---------- ----------
Basic earnings per common share $ 1.07 $ 1.19 $ 1.77 $ 3.77
========== ========== ========== ==========
DILUTED EARNINGS PER COMMON SHARE
Income from continuing operations $ 1.25 $ 1.18 $ 2.22 $ 3.81
Discontinued operations, net (.19) -- (.21) .01
Extraordinary loss, net -- -- -- (.01)
Cumulative effect of changes in accounting principles, net -- -- (.25) (.06)
---------- ---------- ---------- ----------
Diluted earnings per common share $ 1.06 $ 1.18 $ 1.76 $ 3.75
========== ========== ========== ==========
DIVIDENDS PER COMMON SHARE $ .25 $ .25 $ .75 $ .75
========== ========== ========== ==========
WEIGHTED AVERAGE BASIC COMMON SHARES 377.1 373.5 376.0 371.9
========== ========== ========== ==========
DILUTIVE SHARES 380.4 375.7 378.8 373.8
=============================================================== ========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
4
OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(Amounts in millions)
2002 2001
===================================================================================== ========== ==========
CASH FLOW FROM OPERATING ACTIVITIES
Income from continuing operations $ 840 $ 1,426
Adjustments to reconcile income to net cash provided by
operating activities:
Depreciation, depletion and amortization of assets 759 722
Deferred income tax benefit (265) (97)
Other noncash charges to income 86 58
Losses (gains) on disposition of assets, net 232 (8)
Loss on equity investments 1 63
Dry hole and impairment expense 50 72
Changes in operating assets and liabilities (26) 78
Other operating, net (141) (109)
---------- ----------
Operating cash flow from continuing operations 1,536 2,205
Operating cash flow from discontinued operations (6) 7
---------- ----------
Net cash provided by operating activities 1,530 2,212
---------- ----------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures (840) (908)
Sale of businesses and disposal of property, plant and equipment, net 12 847
Purchases of businesses, net (98) (38)
Equity investments and other, net 32 (83)
---------- ----------
Investing cash flow from continuing operations (894) (182)
Investing cash flow from discontinued operations (4) (5)
---------- ----------
Net cash used by investing activities (898) (187)
---------- ----------
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from long-term debt -- 42
Repurchase of trust preferred securities (7) (7)
Purchases for natural gas delivery commitment (95) (90)
Buyout of natural gas delivery commitment (179) --
Payments on long-term debt and non-recourse debt and capital lease liabilities (29) (1,303)
Proceeds from issuance of common stock 14 12
Cash dividends paid (281) (278)
Stock options exercised 47 70
Other financing, net (2) 1
---------- ----------
Net cash used by financing activities (532) (1,553)
---------- ----------
Increase in cash and cash equivalents 100 472
Cash and cash equivalents--beginning of period 198 97
---------- ----------
Cash and cash equivalents--end of period $ 298 $ 569
===================================================================================== ========== ==========
The accompanying notes are an integral part of these financial statements.
5
OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 2002
1. General
The accompanying unaudited consolidated condensed financial statements have
been prepared by Occidental Petroleum Corporation (Occidental) pursuant to
the rules and regulations of the Securities and Exchange Commission.
Certain information and disclosures normally included in notes to
consolidated financial statements have been condensed or omitted pursuant
to such rules and regulations, but resultant disclosures are in accordance
with generally accepted accounting principles as they apply to interim
reporting. The consolidated condensed financial statements should be read
in conjunction with the consolidated financial statements and the notes
thereto in Occidental's Annual Report on Form 10-K for the year ended
December 31, 2001, as amended by Amendment No. 1 on Form 10-K/A, filed July
19, 2002 (2001 Form 10-K). Amendment No. 1 was filed subsequent to a
re-audit of the consolidated financial statements for the fiscal years
ended December 31, 2001, 2000 and 1999, which was performed at Occidental's
request. There were no changes in the balance sheet, net income, cash flow
or earnings per share as a result of the re-audit.
In the opinion of Occidental's management, the accompanying consolidated
condensed financial statements contain all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly Occidental's
consolidated financial position as of September 30, 2002, and the
consolidated results of operations for the three and nine months then ended
and the consolidated cash flows for the nine months then ended. The results
of operations and cash flows for the periods ended September 30, 2002 are
not necessarily indicative of the results of operations or cash flows
expected for the full year.
Certain financial statements and notes for the prior year have been changed
to conform to the 2002 presentation.
Refer to Note 1 to the consolidated financial statements in the 2001 Form
10-K for a summary of significant accounting policies.
2. Acquisitions, Dispositions and Commitments
On June 2, 2002, Occidental signed a binding agreement with the United Arab
Emirates (UAE) Offsets Group to acquire a 24.5 percent interest in the
Dolphin Project and Dolphin Energy Limited (DEL) for $310 million, plus a
payment of $12 million to account for historical costs through May 31,
2002. DEL is a company that also includes the UAE Offsets Group (51 percent
interest) and TotalFinaElf (24.5 percent interest). The total payment,
which is expected to be made in the fourth quarter, has been accrued and
the amount has been allocated, on a preliminary basis, primarily to
investment in unconsolidated entities. Occidental will also be responsible
for its 24.5 percent share of costs on an ongoing basis. The Dolphin
participants will collaborate on the $3.5 billion Dolphin Project, which
consists of two parts: (1) a development and production sharing agreement
with Qatar to develop and produce natural gas and condensate in Qatar's
North Field; and (2) the rights for DEL to build, own and operate a
260-mile-long, 48-inch export pipeline to transport 2 billion cubic feet
per day of dry natural gas from Qatar to markets in the UAE for a period of
25 years. Construction on the upstream production and processing facilities
and the pipeline is expected to begin in 2003 and production is currently
scheduled to begin in early 2006. The partners anticipate securing project
financing. Because operations have not commenced, Occidental has not
recorded any revenue or expense for this project and no oil and gas
reserves have been recognized.
In January 2002, Occidental and Lyondell Chemical Company (Lyondell)
agreed, in principle, for Occidental to sell its 29.5-percent share of
Equistar to Lyondell and to purchase an equity interest of approximately 21
percent in Lyondell. Occidental entered into this transaction to reduce its
direct exposure to petrochemicals volatility, yet maintain a presence and
preserve, through its Lyondell investment, an economic upside when the
petrochemicals industry recovers. In connection with the agreement in
principle, Occidental wrote down its
6
investment in the Equistar partnership to fair value by recording a $240
million after-tax charge as of December 2001. After the writedown, the net
book value of Occidental's investment in Equistar at December 31, 2001,
after considering tax effects, approximated the fair value of the Lyondell
shares Occidental expected to receive, less transaction costs. Occidental
recorded an after-tax gain of $164 million in the third quarter of 2002 as
a result of closing these transactions. Occidental's initial carrying value
in the Lyondell investment was $489 million which represented the fair
value of Lyondell's shares at August 22, 2002.
In connection with the acquisition of Altura Energy Ltd. in April 2000, the
sellers retained a preferred limited partnership interest of approximately
$2.0 billion, which was recorded as minority interest. Altura also loaned
approximately $2.0 billion to affiliates of the sellers, evidenced by two
notes recorded as long-term receivables. The partnership exercised an
option in May 2002 to redeem the sellers' remaining partnership interests
in exchange for the outstanding balance on the two notes. Both minority
interest and long-term receivables were reduced by $2.0 billion to reflect
this transaction on the balance sheet.
3. Asset Write-downs and Discontinued Operations
The results for the third quarter 2002 included pre-tax chemical asset
write-downs of $25 million for a PVC dispersion resin plant and $12 million
for production assets at a chlor-alkali facility. The fair value of these
assets, which are classified as held for use, was determined by internal
valuation methodologies. The write-downs were the result of continued
depressed market conditions and regulatory requirements. In addition,
Occidental recorded impairment charges of $30 million, after-tax, for the
pending sale of its chromium business at Castle Hayne, N.C. and $39 million
for the write-down of its Brazilian calendering operations in Rio de
Janeiro, both of which are classified as discontinued operations. The fair
value of these assets, which are classified as held for sale, was
determined by reference to the expected sales proceeds from interested
third party buyers.
4. Accounting Changes
In July 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities." SFAS No. 146 requires
that a liability be recognized for exit and disposal costs only when the
liability has been incurred and when it can be measured at fair value. The
statement is effective for exit and disposal activities that are initiated
after December 31, 2002. Occidental does not expect that the adoption of
SFAS No. 146 will have a material impact on its financial statements.
In June 2002, the Emerging Issues Task Force (EITF) issued EITF issue No.
02-3, "Accounting for Contracts Involved in Energy Trading and Risk
Management Activities," which states that gains and losses on energy
trading contracts (whether realized or unrealized) should be shown net in
the income statement. In October 2002, the EITF clarified that all
energy-trading contracts, including those contracts that are also
derivatives under SFAS 133, should be shown net. Occidental implemented
this EITF in the third quarter of 2002 and all comparative financial
statements have been reclassified to conform to the current presentation.
There was no change in gross margins, net income, cash flow or earnings per
share for any period as a result of adopting this requirement. However, net
sales and cost of sales were reduced by equal and offsetting amounts to
reflect the adoption of this requirement. For the nine months ended
September 30, 2002, net sales and costs of sales were both reduced by
approximately $2.2 billion to conform to this requirement. For the three
and nine months ended September 30, 2001, net sales and costs of sales were
reduced by approximately $1.3 billion and $4.8 billion, respectively, to
conform to the current presentation.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." In addition to amending or rescinding other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions, SFAS
No. 145 precludes companies from recording gains and losses from the
extinguishment of debt as an extraordinary item. Occidental must implement
SFAS No. 145 in the first quarter of 2003 and all comparative financial
statements will be reclassified to conform to the 2003 presentation.
7
The anticipated effect of the statement includes the reclassification of an
extraordinary loss to net income from continuing operations of $3 million
($0.01 per share) in the nine months ended September 30, 2001. There will
be no effect on net income or basic earnings per common share.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets and broadens the presentation of discontinued operations
for long-lived assets. The provisions of this statement are effective for
financial statements issued for fiscal years beginning after December 15,
2001. Occidental adopted this statement in the first quarter of 2002 and it
did not have an impact on the financial statements when adopted.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. Occidental's
current policy for dismantlement, restoration and reclamation costs is to
accrue the estimated future abandonment and removal costs of offshore
production platforms, net of salvage value, over their operating lives. For
onshore oil and gas production, Occidental estimates that the salvage value
of the oil and gas properties generally will approximate the dismantlement,
restoration and reclamation costs or that the net cost will not be
material; therefore, no accrual is recorded. Occidental makes capital
renewal expenditures for its chemical plants on a continual basis while an
asset is in operation. Retirement obligations are provided for when a
decision is made to dispose of a property or when operations have been
curtailed on other than a temporary basis. Under SFAS No. 143, which is
required to be adopted in the first quarter of 2003, companies are required
to recognize the fair value of a liability for an asset retirement
obligation in the period in which the liability is incurred if there is a
legal obligation to dismantle the asset and reclaim or remediate the
property at the end of the useful life. Legal reviews of contracts and
statutory retirement obligations are ongoing. If it is determined that a
legal obligation exists, the cost of asset retirement obligations will be
estimated, and the fair value of the obligations will be recorded, when
SFAS No. 143 is adopted.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 changes the accounting and reporting requirements for
acquired goodwill and intangible assets. The provisions of this statement
must be applied starting with fiscal years beginning after December 15,
2001. At December 31, 2001, the balance sheet included approximately $108
million of goodwill and intangible assets with annual amortization expense
of approximately $6 million recorded in each of the years' income
statements for the three-year period ended December 31, 2001. As a result,
elimination of goodwill amortization would not have had a material impact
on net income or earnings per share of any of the years presented and, as a
result, the transitional disclosures of adjusted net income excluding
goodwill amortization described by SFAS No. 142 have not been presented.
Upon implementation of SFAS No. 142 in the first quarter of 2002, three
separate specialty chemical businesses were identified as separate
reporting units and tested for goodwill impairment. All three of these
businesses are components of the chemical segment and were the only
reporting units having any goodwill on the balance sheet. The fair value of
each of the three reporting units was determined through third party
appraisals. The appraisals determined fair value to be the price that the
assets could be sold for in a current transaction between willing parties.
As a result of the impairment testing, Occidental recorded a "cumulative
effect of changes in accounting principles" after-tax reduction in net
income of approximately $95 million due to the impairment of all the
goodwill attributed to these reporting units. Occidental now has no
remaining goodwill on its financial statements.
8
5. Comprehensive Income
The following table presents Occidental's comprehensive income items (in
millions):
Periods Ended September 30
---------------------------------------------
Three Months Nine Months
--------------------- ---------------------
2002 2001 2002 2001
================================================== ========= ========= ========= =========
Net income $ 402 $ 444 $ 667 $ 1,401
Other comprehensive income items
Foreign currency translation adjustments 12 (9) -- (21)
Derivative activity (9) (3) (18) 6
Cumulative effect of change in
accounting principles -- -- -- (27)
Unrealized gains (losses) on securities (50) -- 32 2
--------- --------- --------- ---------
Other comprehensive (loss) income, net of tax (47) (12) 14 (40)
--------- --------- --------- ---------
Comprehensive income $ 355 $ 432 $ 681 $ 1,361
========= ========= ========= =========
6. Supplemental Cash Flow Information
During the nine months ended September 30, 2002 and 2001, net cash
(refunds) payments for federal, foreign and state income taxes totaled
approximately $(3) million and $326 million, respectively. Interest paid
(net of interest capitalized) totaled approximately $212 million and $312
million for the nine months ended September 30, 2002 and 2001,
respectively.
7. Inventories
Oil & Gas Segment
-----------------
Materials and supplies are valued at the lower of average cost or market.
Inventories are reviewed periodically (at least annually) for obsolescence.
Oil and gas product inventories, which typically represent the last few
days of production at the end of each period with the exception of the
natural gas storage program, are valued at the lower of cost or market.
Trading inventory is valued at market.
Chemical Segment
----------------
In countries where allowable, Occidental values its inventories using the
last-in, first-out (LIFO) method as it better matches current costs and
current revenue. Accordingly, Occidental accounts for domestic inventories
in its chemical business, other than materials and supplies, on the LIFO
method. For other countries, Occidental uses the first-in, first-out (FIFO)
method (if the costs of goods are specifically identifiable) or the
average-cost method (if the costs of goods are not specifically
identifiable). Materials and supplies are accounted for using a weighted
average cost method.
9
The valuation of LIFO inventory for interim periods is based on
management's estimates of year-end inventory levels and costs. Inventories
consist of the following (in millions):
Balance at September 30, 2002 December 31, 2001
======================== ================== ==================
Raw materials $ 44 $ 53
Materials and supplies 133 119
Work in process 1 --
Finished goods 292 252
-------- --------
470 424
LIFO adjustment 1 (10)
-------- --------
Total $ 471 $ 414
======== ========
8. Derivative Activities
Occidental's market-risk exposures relate primarily to commodity prices,
and, to a lesser extent, interest rates and foreign currency exchange
rates. Occidental's oil and gas segment results are sensitive mainly to
fluctuations in crude oil and natural gas prices. Occidental may
periodically use different types of derivative instruments to achieve the
best prices for oil and gas and to reduce its exposure to price volatility,
thus mitigating fluctuations in commodity-related cash flows. Usually,
Occidental does not hedge against fluctuations in long-term oil and gas
prices. Overall, Occidental's use of derivatives in commodity hedging
activity remains at a relatively low dollar level. Changes in a derivative
instrument's fair value must be recognized in earnings unless specific
hedge accounting criteria are met. Changes in the fair value of derivative
instruments that meet specific cash-flow hedge accounting criteria are
reported in other comprehensive income (OCI). The gains and losses on
cash-flow hedge transactions that are reported in OCI are reclassified to
earnings in the periods in which earnings are affected by the variability
of the hedged item's cash flows. Mark-to-market gains and losses from
derivatives that qualify for fair-value hedge accounting are recorded in
earnings throughout the life of the hedge and are generally offset by the
change in fair value of the hedged item. The ineffective portions of all
hedges are recognized in current period earnings.
For the three and nine months ended September 30, 2002, the results of
operations included a net pre-tax loss of $4 million and $175 thousand,
respectively, related to derivative mark-to-market adjustments. For the
three and nine months ended September 30, 2001, the results of operations
included a net pre-tax gain of $1 million and $41 million, respectively,
related to derivative mark-to-market adjustments. The amount of interest
expense recorded in the income statement was lower by approximately $11
million and $32 million for the three and nine months ended September 30,
2002, respectively, to reflect net pre-tax gains from fair-value hedges.
Net interest expense was lower by $0.8 million for the three and nine
months ended September 30, 2001 to reflect net pre-tax gains from
fair-value hedges. During both the three and nine months ended September
30, 2002, a $8 million after-tax loss was reclassified from OCI to income
resulting from the expiration of cash-flow hedges. During the three and
nine months ended September 30, 2001, a $4 million after-tax loss and a $4
million after-tax gain, respectively, were reclassified from OCI to income
resulting from the expiration of cash-flow hedges. During the three and
nine months ended September 30, 2002, net unrealized after-tax losses of
$17 million and $27 million, respectively, were recorded to OCI relating to
changes in current cash-flow hedges. During the three and nine months ended
September 30, 2001, net unrealized after-tax gains of $1 million and $2
million, respectively, were recorded to OCI relating to changes in current
cash-flow hedges. During the next twelve months, Occidental expects that
$14 million of net derivative after-tax losses included in OCI, based on
their valuation at September 30, 2002, will be reclassified into earnings.
Hedge ineffectiveness did not have a significant impact on earnings for the
three and nine months ended September 30, 2002 and 2001.
9. Lawsuits, Claims, Commitments, Contingencies and Related Matters
Occidental and certain of its subsidiaries have been named as defendants or
as potentially responsible parties in a substantial number of lawsuits,
claims and proceedings. They have also been named as potentially
responsible parties in governmental proceedings under the Comprehensive
Environmental Response, Compensation and
10
Liability Act and similar state acts. These governmental proceedings seek
funding, remediation and, in some cases, compensation for alleged property
damage, punitive damages and civil penalties aggregating substantial
amounts. Occidental is usually one of many companies in these proceedings
and has to date been successful in sharing response costs with other
financially sound companies. Occidental has accrued reserves at the most
likely cost to be incurred in those proceedings where it is probable that
Occidental will incur remediation costs that can be reasonably estimated.
During the course of its operations, Occidental is subject to audit by
taxing authorities for varying periods in various tax jurisdictions.
Occidental has certain other commitments under contracts, guarantees and
joint ventures, and certain other contingent liabilities.
It is impossible at this time to determine the ultimate liabilities that
Occidental and its subsidiaries may incur resulting from the foregoing
lawsuits, claims and proceedings, audits, commitments, contingencies and
related matters. Several of these matters may involve substantial amounts,
and if these were to be ultimately resolved unfavorably to the full amount
of their maximum potential exposure, an event not currently anticipated, it
is possible that such event could have a material adverse effect upon
Occidental's consolidated financial position or results of operations.
However, in management's opinion, after taking into account reserves, it is
unlikely that any of the foregoing matters will have a material adverse
effect upon Occidental's consolidated financial position or results of
operations.
10. Income Taxes
The provision for taxes based on income for the 2002 and 2001 interim
periods was computed in accordance with Interpretation No. 18 of Accounting
Principles Board Opinion No. 28 on reporting taxes for interim periods and
was based on projections of total year pre-tax income excluding significant
unusual items.
The provision for income taxes for the three months and nine months ended
September 30, 2002 reflected the tax benefit resulting from the sale of the
Equistar equity investment. The provision for income taxes for the three
months and nine months ended September 30, 2001 reflected the tax effects
of the loss on the sale of the entity that owns pipelines in Texas that are
leased to a former subsidiary and the gain recognized on the sale of the
Tangguh LNG interest, net of the effects of foreign tax credits. The
provision for taxes for the nine months ended September 30, 2001, included
an after-tax benefit of $45 million (pre-federal tax benefit of $70
million) related to a settlement of a state tax issue.
11. Investments in Unconsolidated Entities
At September 30, 2002, Occidental's equity investments consisted primarily
of a 21 percent interest in Lyondell, acquired in August 2002 (See Note 2),
and interests in various partnerships and joint ventures. The following
table presents Occidental's proportionate interest in the summarized
financial information of its equity method investments (in millions):
Periods Ended September 30
---------------------------------------------------
Three Months Nine Months
----------------------- -----------------------
2002(1) 2001 2002(2) 2001
========= ========= ========= =========
Revenues $ 501 $ 512 $ 1,490 $ 1,790
Costs and expenses 476 540 1,491 1,853
--------- --------- --------- ---------
Net income $ 25 $ (28) $ (1) $ (63)
=================================================================================
(1) Includes the QTD August 2002 results of Equistar and the
September 2002 results of Lyondell.
(2) Includes the YTD August 2002 results of Equistar and the
September 2002 results of Lyondell.
In December 2001, Occidental recorded an impairment of its Equistar
investment. See Note 2 for further information. In January 2002, Equistar
recorded a $1.1 billion cumulative effect of a change in accounting
11
principles to reflect the impairment of its entire balance of goodwill.
Occidental did not reflect this write-down in its investment in Equistar
because (1) Occidental had, in effect, already recorded this write-down in
December 2001, (2) Occidental's carrying value in January 2002 was
realizable based on the estimated value of the pending sale (as discussed
in Note 2) and (3) there was no significant difference between Occidental's
carrying value of its Equistar investment and the underlying equity in net
assets of Equistar subsequent to both Occidental's and Equistar's
write-downs.
At September 30, 2002, investments in unconsolidated entities also included
an interest in Premcor, Inc., which became a publicly-traded company in
April 2002. In accordance with the provisions of SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities," this investment is
being accounted for as an available-for-sale security and was adjusted to
fair value with an unrealized gain (loss) of $(50) million and $32 million,
net of tax, recorded to OCI in stockholders' equity for the three and nine
months ended September 30, 2002.
12. Industry Segments
The following table presents Occidental's interim industry segment
disclosures (in millions):
Oil and Gas Chemical Corporate Total
==================================== ============= ============= ============= =============
Nine months ended September 30, 2002
Net sales $ 3,347 $ 2,006 $ -- $ 5,353
============= ============= ============= =============
Pretax operating profit (loss) $ 1,556 $ (180) $ (357) (a) $ 1,019
Income taxes (339) 397 (237) (b) (179)
Discontinued operations, net -- -- (78) (78)
Extraordinary (loss), net -- -- -- --
Cumulative effect of changes in
accounting principles, net -- -- (95) (95)
------------- ------------- ------------- -------------
Net income (loss) $ 1,217 (c) $ 217 (d) $ (767) $ 667
==================================== ============= ============= ============= =============
Nine months ended September 30, 2001
Net sales $ 4,310 $ 2,408 $ -- $ 6,718
============= ============= ============= =============
Pretax operating profit (loss) $ 3,069 $ (10)(f) $ (919)(a)(g) $ 2,140
Income taxes (390) 24 (348)(b)(h) (714)
Discontinued operations, net -- -- 2 2
Extraordinary loss, net -- -- (3) (3)
Cumulative effect of changes in
accounting principles, net -- -- (24) (24)
------------- ------------- ------------- -------------
Net income (loss) $ 2,679 (e) $ 14 $ (1,292)(i) $ 1,401
==================================== ============= ============= ============= =============
(a) Includes unallocated net interest expense, administration expense and
other items.
(b) Includes unallocated income taxes.
(c) Includes an after-tax gain of $7 million related to the sale of
additional interests in Gulf of Mexico assets.
(d) Includes an after-tax gain of $164 million related to the sale of the
Equistar investment and a pre-tax charge of $51 million for severance
and asset write-downs.
(e) Includes an after-tax gain of $399 million related to the sale of an
interest in the Tangguh LNG project and an after-tax gain of $7 million
related to the sale of additional interests in Gulf of Mexico assets.
(f) Includes a pre-tax charge of $26 million related to severance and plant
shut-down costs.
(g) Includes a pre-tax charge of $49 million related to environmental
remediation costs and a pre-tax insurance dividend of $6 million.
(h) Includes an after-tax benefit of $45 million (pre-federal tax benefit of
$70 million) related to a settlement of a state tax issue.
(i) Includes an after-tax loss of $272 million on the sale of the entity
that owns pipelines in Texas that are leased to a former subsidiary.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CONSOLIDATED RESULTS OF OPERATIONS
Occidental Petroleum Corporation (Occidental) reported net income for the first
nine months of 2002 of $667 million, on net sales of $5.4 billion, compared with
net income of $1.4 billion, on net sales of $6.7 billion, for the same period of
2001. Occidental's net income for the third quarter of 2002 was $402 million
compared with net income of $444 million for the third quarter of 2001, with net
sales of $2.0 billion for both periods. Basic earnings per common share were
$1.77 for the first nine months of 2002, compared with $3.77 for the same period
of 2001. Basic earnings per common share were $1.07 for the third quarter of
2002, compared with $1.19 for the same period of 2001.
Net income for the three and nine months ended September 30, 2002 included an
after-tax gain of $164 million on the sale of the Equistar investment, a pre-tax
charge of $37 million for chemical asset write-downs, an after-tax charge of $74
million for discontinued operations and an after-tax gain of $7 million on the
sale of additional interests in the Gulf of Mexico (GOM) assets. Net income for
the nine months ended September 30, 2002 also included a $95 million after-tax
cumulative effect of a change in accounting principles and a pre-tax charge of
$14 million for chemical severance costs. Net income for the three and nine
months ended September 30, 2001 included an after-tax gain of $399 million on
the sale of Occidental's interest in the Indonesian Tangguh LNG project and an
after-tax loss of $272 million on the sale of an entity that owned pipelines.
Net income for the nine months ended September 30, 2001 also included a pre-tax
charge of $26 million for chemical severance and plant shutdown costs, a pre-tax
gain of $70 million from a settlement of a state tax issue, a pre-tax charge of
$49 million for environmental remediation, a $24 million after-tax cumulative
effect of a change in accounting principles, an after-tax gain of $7 million on
the sale of additional interests in the GOM assets and a $6 million pre-tax
insurance dividend. Additionally, net income for the three months ended
September 30, 2002, compared with the same period in 2001, reflected higher
worldwide crude oil and chemical prices, lower exploration expense and income
from the investment in Equistar (compared to a loss in the prior period),
partially offset by lower natural gas prices. Net income for the nine months
ended September 30, 2002, compared with the same period in 2001, reflected lower
worldwide crude oil, natural gas and chemical prices, partially offset by higher
crude oil volumes, lower exploration expense and lower raw material and
feedstock costs.
There was no significant change in net sales for the three months ended
September 30, 2002, compared with the same period in 2001, because the effect of
higher worldwide crude oil prices was mostly offset by lower natural gas prices.
The decrease in net sales for the nine months ended September 30, 2002, compared
with the same period in 2001, primarily reflected lower worldwide crude oil,
natural gas and chemical prices and lower natural gas and chemical volumes,
partially offset by higher crude oil volumes. Interest, dividends and other
income for the three months ended September 30, 2001 included $24 million of
interest income on notes receivable from the Altura partners. Interest,
dividends and other income for the nine months ended September 30, 2002 included
interest income on notes receivable from the Altura partners of $22 million,
compared to $85 million for the same period in 2001. The notes receivable from
the Altura partners were paid in April 2002. See "Acquisitions, Dispositions and
Commitments" below for more information. Gains (losses) on disposition of assets
for the three months and nine months ended September 30, 2002 included the
pre-tax loss on the sale of the Equistar equity investment. Gains (losses) on
disposition of assets for the three months and nine months ended September 30,
2001, included the pre-tax gain on the sale of the interest in the Tangguh LNG
project and the pre-tax loss on the sale of an interest in the subsidiary that
leased a pipeline to Occidental's former MidCon subsidiary. The increase in
income from equity investments for the three and nine months ended September 30,
2002, compared with the same periods in 2001, primarily resulted from improved
results from the Equistar and OxyMar equity investments.
In the third quarter 2002, Occidental adopted Emerging Issues Task Force Issue
(EITF) No. 02-3, which prescribed significant changes in how revenue from energy
trading is recorded. Occidental has two major types of oil and gas revenues: (1)
revenues from its equity production; and (2) revenues from the sale of oil and
gas produced by other companies, but purchased and resold by Occidental,
referred to as revenue from trading activities. Both types of sales involve
physical deliveries and have been historically recorded on a gross basis in
accordance with generally accepted accounting principles. With the adoption of
EITF Issue No. 02-3 (see "Accounting Changes" below for further information) in
the third quarter 2002, Occidental now reflects the revenue from trading
activities on a net basis.
13
There was no change in gross margins, net income, cash flow or earnings per
share for any period as a result of adopting this requirement. However, net
sales and cost of sales were reduced by equal and offsetting amounts to reflect
the adoption of this requirement. Occidental has not engaged in any of the
round-trip trading activities that were the focus of the FERC's energy-industry
investigatory activity earlier this year. For the nine months ended September
30, 2002, net sales and cost of sales were reduced by approximately $2.2 billion
to conform to this requirement. For the three and nine months ended September
30, 2001, net sales and costs of sales were reduced by approximately $1.3
billion and $4.8 billion, respectively, to conform to the current presentation.
Exploration expense for the nine months ended September 30, 2002 included the
write-off of leases in the San Joaquin Valley. Exploration expense for the three
and nine months ended September 30, 2001, included a $66 million write-off of
the Gibraltar well in Colombia. The decrease in minority interest of $19 million
and $54 million for the three and nine months ended September 30, 2002,
respectively, compared with the same periods in 2001, primarily resulted from
redeeming the remaining minority interests held by BP plc and Royal Dutch/Shell
in the Altura partnership. The decrease in interest and debt expense, net of $12
million and $82 million for the three and nine months ended September 30, 2002,
respectively, compared to the same periods in 2001, was primarily due to lower
outstanding debt and lower interest rates. The provision for income taxes for
the three months and nine months ended September 30, 2002 reflected the tax
benefit resulting from the sale of the Equistar equity investment. The tax
provision included in the three months and nine months ended September 30, 2001
reflected the tax effects of the loss on the sale of the entity that owns
pipelines in Texas that were leased to a former subsidiary and the gain
recognized on the sale of the Tangguh LNG interest net of foreign tax credits.
The provision for income taxes for the nine months ended September 30, 2001 also
included a $45 million after-tax benefit ($70 million pre-federal tax benefit)
for the settlement of a state tax issue.
SEGMENT OPERATIONS
The following table sets forth the sales and earnings of each operating segment
and corporate items (in millions):
Periods Ended September 30
---------------------------------------------------
Three Months Nine Months
----------------------- -----------------------
2002 2001 2002 2001
=============================================== ========= ========= ========= =========
SEGMENT NET SALES
Oil and Gas $ 1,224 $ 1,251 $ 3,347 $ 4,310
Chemical 739 732 2,006 2,408
--------- --------- --------- ---------
NET SALES $ 1,963 $ 1,983 $ 5,353 $ 6,718
========= ========= ========= =========
SEGMENT EARNINGS
Oil and Gas $ 490 $ 927 $ 1,217 $ 2,679
Chemical 214 38 217 14
--------- --------- --------- ---------
704 965 1,434 2,693
UNALLOCATED CORPORATE ITEMS
Interest expense, net (73) (60) (195) (207)
Income taxes (105) (128) (250) (550)
Trust preferred distributions & other (12) (13) (35) (43)
Other (38) (321) (114) (467)
--------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS 476 443 840 1,426
Discontinued operations, net (74) 1 (78) 2
Extraordinary loss, net -- -- -- (3)
Cumulative effect of changes in accounting
principles, net -- -- (95) (24)
--------- --------- --------- ---------
NET INCOME $ 402 $ 444 $ 667 $ 1,401
=============================================== ========= ========= ========= =========
14
SIGNIFICANT ITEMS AFFECTING EARNINGS
Occidental's results of operations often include significant items affecting
earnings that vary widely and unpredictably in nature and amount. Therefore,
management uses a measure called "core earnings", which excludes those items.
This non-GAAP measure is not meant to disassociate those items from management's
performance, but rather is meant to provide useful information to investors
interested in comparing Occidental's earnings performance between periods. Core
earnings is not considered to be an alternative to operating income in
accordance with generally accepted accounting principles.
The following table sets forth the core earnings and significant items affecting
earnings for each operating segment and corporate:
Periods Ended September 30
---------------------------------------------------
Three Months Nine Months
----------------------- -----------------------
(in millions) 2002 2001 2002 2001
=========================================================== ========= ========= ========= =========
OIL AND GAS
Segment Earnings $ 490 $ 927 $ 1,217 $ 2,679
Less: Significant items affecting earnings
Gain on sale of additional interests in Gulf
Of Mexico assets * 7 -- 7 7
Gain on sale of interest in the Indonesian
Tangguh LNG project * -- 399 -- 399
--------- --------- --------- ---------
Segment Core Earnings 483 528 1,210 2,273
--------- --------- --------- ---------
CHEMICAL
Segment Earnings 214 38 217 14
Less: Significant items affecting earnings
Gain on sale of Equistar investment * 164 -- 164 --
Severance, plant shutdown costs and asset write-downs (37) -- (51) (26)
--------- --------- --------- ---------
Segment Core Earnings 87 38 104 40
--------- --------- --------- ---------
CORPORATE
Segment Earnings (Loss) (302) (521) (767) (1,292)
Less: Significant items affecting earnings
Loss on sale of pipeline-owning entity * -- (272) -- (272)
Settlement of state tax issue -- -- -- 70
Environmental remediation -- -- -- (49)
Insurance dividend -- -- -- 6
Changes in accounting principles, net * -- -- (95) (24)
Discontinued operations, net * (74) 1 (78) 2
Extraordinary loss on debt redemption, net * -- -- -- (3)
Tax effect of pre-tax adjustments 13 -- 18 --
--------- --------- --------- ---------
Segment Core Earnings (Loss) (241) (250) (612) (1,022)
--------- --------- --------- ---------
TOTAL CORE EARNINGS $ 329 $ 316 $ 702 $ 1,291
=========================================================== ========= ========= ========= =========
* These amounts are shown after tax.
15
OIL AND GAS SEGMENT
Periods Ended September 30
---------------------------------------------------
Three Months Nine Months
----------------------- -----------------------
Summary of Operating Statistics 2002 2001 2002 2001
=========================================================== ========= ========= ========= =========
NET PRODUCTION PER DAY:
CRUDE OIL AND NATURAL GAS LIQUIDS (MBL)
United States 230 215 231 211
Latin America 46 48 47 32
Eastern Hemisphere 120 121 130 120
NATURAL GAS (MMCF)
United States 564 602 574 613
Eastern Hemisphere 74 50 58 49
BARRELS OF OIL EQUIVALENT - (MBOE) 502 493 513 473
- ----------------------------------------------------------- --------- --------- --------- ---------
AVERAGE SALES PRICE:
CRUDE OIL ($/BBL)
United States $ 25.75 $ 23.03 $ 22.81 $ 23.48
Latin America $ 25.35 $ 21.14 $ 22.21 $ 21.40
Eastern Hemisphere $ 24.59 $ 22.60 $ 21.61 $ 22.66
NATURAL GAS ($/MCF)
United States $ 2.94 $ 4.49 $ 2.74 $ 7.71
Eastern Hemisphere $ 1.95 $ 2.16 $ 2.14 $ 2.25
=========================================================== ========= ========= ========= =========
Oil and gas earnings for the third quarter of 2002 were $490 million, compared
with $927 million for the same period of 2001. Oil and gas core earnings were
$483 million for the third quarter of 2002, compared with $528 million for the
same period of 2001. Oil and gas earnings for the first nine months of 2002 were
$1.2 billion, compared with $2.7 billion for the same period of 2001. Oil and
gas core earnings were $1.2 billion for the first nine months of 2002, compared
with $2.3 billion for the first nine months of 2001. The decrease in core
earnings for the three months ended September 30, 2002, compared with the same
period in 2001, primarily reflected lower natural gas prices, partially offset
by higher worldwide crude oil prices and lower exploration expenses. The
decrease in core earnings for the nine months ended September 30, 2002, compared
with the same period in 2001, primarily reflected lower worldwide crude oil and
natural gas prices, partially offset by higher crude oil volumes and lower
exploration expense.
The decrease in net sales of $27 million for the three months ended September
30, 2002, compared with the same period in 2001, primarily reflected lower
natural gas prices, partially offset by higher crude oil prices. The decrease in
net sales of $963 million for the nine months ended September 30, 2002, compared
with the same period in 2001, primarily reflected lower crude oil and natural
gas prices and lower natural gas volumes, partially offset by higher crude oil
volumes.
Occidental's sensitivity to changes in oil and gas prices is similar to prior
quarters. A $1.00 per million BTUs swing in NYMEX gas prices will have an
approximately $54 million impact on quarterly segment earnings, and a $1.00 per
barrel change in oil prices will impact quarterly earnings by approximately $28
million.
For the first nine months of 2002, production volumes increased approximately 8
percent to 513,000 barrels of oil equivalent (BOE) per day compared with 473,000
BOE per day for the same period in 2001. Occidental expects fourth quarter 2002
oil and gas production to remain at approximately the same level as third
quarter 2002 production. Occidental expects 2003 production to increase to an
average of 525,000 BOE per day due to the expected startup of Horn Mountain in
the deepwater Gulf of Mexico at the end of 2002 and the expected startup of the
Eden Yuturi field in Ecuador in the second half of 2003.
16
CHEMICAL SEGMENT
Periods Ended September 30
---------------------------------------------------
Three Months Nine Months
----------------------- -----------------------
Summary of Operating Statistics 2002 2001 2002 2001
=========================================================== ========= ========= ========= =========
MAJOR PRODUCT VOLUMES
Chlorine (M Tons) 685 720 2,121 2,211
Caustic Soda (M Tons) 716 760 2,033 2,179
Ethylene Dichloride (M Tons) 94 208 386 584
PVC Resins (MM Lbs.) 1,022 1,015 3,215 3,128
MAJOR PRODUCT PRICE INDEX (BASE 1987-1990 = 1.0)
Chlorine 1.37 0.68 0.83 0.78
Caustic 0.61 1.36 0.72 1.37
Ethylene Dichloride 1.30 0.43 1.02 0.66
PVC Resins 0.88 0.65 0.70 0.71
=========================================================== ========= ========= ========= =========
Chemical earnings for the third quarter of 2002 were $214 million, compared with
$38 million for the same period of 2001. Chemical core earnings were $87 million
for the third quarter of 2002, compared with $38 million for the same period of
2001. Chemical earnings for the first nine months of 2002 were $217 million,
compared with $14 million for the same period of 2001. Chemical core earnings
were $104 million for the first nine months of 2002, compared with $40 million
for the first nine months of 2001. The increase in core earnings for the three
months ended September 30, 2002, compared with the same period in 2001, is
primarily due to higher prices for polyvinyl chloride resins (PVC), ethylene
dichloride (EDC) and chlorine and income from the Equistar and OxyMar equity
investments compared with a loss in the prior period, partially offset by lower
caustic soda prices. The increase in core earnings for the nine months ended
September 30, 2002, compared with the same period in 2001, is primarily the
result of lower raw material and feedstock costs, higher prices for EDC and
improved results from the Equistar equity investment, partially offset by lower
sales prices for caustic soda and PVC.
The increase in net sales of $7 million for the three months ended September 30,
2002, compared with the same period in 2001, primarily reflected higher sales
prices for PVC, EDC and chlorine, partially offset by lower prices for caustic
soda and lower sales volumes. The decrease in net sales of $402 million for the
nine months ended September 30, 2002, compared with the same period in 2001,
primarily reflected lower sales prices for caustic soda and PVC and lower sales
volumes, partially offset by higher sales prices for EDC.
In the third quarter 2002, Occidental closed the sale of its interest in
Equistar in exchange for an equity interest in Lyondell Chemical Company and
recorded an after-tax gain of $164 million. Occidental entered into this
transaction to reduce its direct exposure to petrochemicals volatility.
Occidental's chloro-vinyls business conditions differ substantially from those
that prevail in the petrochemical industry; while there has been significant
expansion of capacity in the petrochemical industry, current capacity has
declined in the chloro-vinyls chain due to the closure and temporary idling of a
number of chlor-alkali facilities. These factors have contributed to stronger
prices and margins in the vinyls chain while margin improvement for caustic soda
has lagged due to a slowdown in the industrial sector.
CORPORATE AND OTHER
Segment earnings include credits/(charges) in lieu of U.S. federal income taxes.
In the first nine months of 2002 and 2001, segment earnings benefited by $401
million and $1 million, respectively, from credits allocated. This included
(charges) credits of $(2) million and $403 million at oil and gas and chemical,
respectively, in the first nine months of 2002 and $(37) million and $38 million
at oil and gas and chemical, respectively, for the first nine months of 2001.
The 2002 amount in chemicals includes a credit for the tax effects of the sale
of the Equistar investment.
17
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Occidental's net cash provided by operating activities was $1.5 billion for the
first nine months of 2002, compared with net cash provided of $2.2 billion for
the same period of 2001. The decrease in the 2002 amount of approximately $682
million is primarily attributable to lower core earnings.
Occidental's net cash used by investing activities was $898 million for the
first nine months of 2002, compared with net cash used of $187 million for the
same period of 2001. The 2001 amount includes the pre-tax proceeds from the sale
of the interest in the Tangguh LNG project and the sale of an interest in the
subsidiary that leased a pipeline to Occidental's former MidCon subsidiary.
Capital expenditures for the first nine months of 2002 were $840 million,
including $742 million in oil and gas. Capital expenditures for the first nine
months of 2001 were $908 million, including $800 million in oil and gas.
Occidental's financing activities used net cash of $532 million in the first
nine months of 2002, compared with cash used of $1.6 billion for the same period
of 2001. The 2002 amount includes $179 million for the net buyout of the natural
gas delivery commitment. The 2001 amount primarily reflects debt payments of
$1.3 billion from free cash flow and from proceeds of asset sales.
Occidental has reclassified approximately $650 million of maturities due in the
next 12 months to long-term debt based on its ability to refinance this debt on
a long-term basis utilizing its committed credit lines. Of this amount, $450
million are notes due in 2013, subject to remarketing at a specified 10 year
Treasury yield in 2003. As current market levels are below the specified yield,
remarketing or refinancing is likely. Available but unused lines of committed
bank credit totaled approximately $2.1 billion at September 30, 2002 and
December 31, 2001 (before consideration of the $650 million of current
maturities mentioned above).
Occidental currently expects to spend approximately $1.2 billion on its 2002
capital spending program with about $1.1 billion for oil and gas, excluding the
purchase price for the Dolphin project, which is discussed below. Occidental
expects to have sufficient cash in 2002 from operations, and from proceeds from
existing credit facilities, as necessary, to fund its operating needs, capital
expenditure requirements (including the Dolphin project), dividend payments and
mandatory debt repayments.
ACQUISITIONS, DISPOSITIONS AND COMMITMENTS
On June 2, 2002, Occidental signed a binding agreement with the United Arab
Emirates (UAE) Offsets Group to acquire a 24.5 percent interest in the Dolphin
Project and Dolphin Energy Limited (DEL) for $310 million, plus a payment of $12
million to account for historical costs through May 31, 2002. DEL is a company
that also includes the UAE Offsets Group (51 percent interest) and TotalFinaElf
(24.5 percent interest). The total payment, which is expected to be made in the
fourth quarter, has been accrued and the amount has been allocated, on a
preliminary basis, primarily to investment in unconsolidated entities.
Occidental will also be responsible for its 24.5 percent share of costs on an
ongoing basis. The Dolphin participants will collaborate on the $3.5 billion
Dolphin Project, which consists of two parts: (1) a development and production
sharing agreement with Qatar to develop and produce natural gas and condensate
in Qatar's North Field; and (2) the rights for DEL to build, own and operate a
260-mile-long, 48-inch export pipeline to transport 2 billion cubic feet per day
of dry natural gas from Qatar to markets in the UAE for a period of 25 years.
Construction on the upstream production and processing facilities and the
pipeline is expected to begin in 2003 and production is currently scheduled to
begin in early 2006. The partners anticipate securing project financing. Because
operations have not commenced, Occidental has not recorded any revenue or
expense for this project and no oil and gas reserves have been recognized.
In January 2002, Occidental and Lyondell Chemical Company (Lyondell) agreed, in
principle, for Occidental to sell its 29.5-percent share of Equistar to Lyondell
and to purchase an equity interest of approximately 21 percent in Lyondell.
Occidental entered into this transaction to reduce its direct exposure to
petrochemicals volatility, yet maintain a presence and preserve, through its
Lyondell investment, an economic upside when the petrochemicals industry
recovers. In connection with the agreement in principle, Occidental wrote down
its investment in the Equistar partnership to fair value by recording a $240
million after-tax charge as of December 2001. After the write-
18
down, the net book value of Occidental's investment in Equistar at December 31,
2001, after considering tax effects, approximated the fair value of the Lyondell
shares Occidental expected to receive, less transaction costs. Occidental
recorded an after-tax gain of $164 million in the third quarter of 2002 as a
result of closing these transactions. Occidental's initial carrying value in the
Lyondell investment was $489 million which represented the fair value of
Lyondell's shares at August 22, 2002.
As described in the preceding paragraph, in December 2001, Occidental recorded
an impairment of its Equistar investment. In January 2002, Equistar recorded a
$1.1 billion cumulative effect of a change in accounting principles to reflect
the impairment of its entire balance of goodwill. Occidental did not reflect
this write-down in its investment in Equistar because (1) Occidental had, in
effect, already recorded this write-down as of December 2001, (2) Occidental's
carrying value in January 2002 was realizable based on the estimated value of
the pending sale (as discussed above) and (3) there was no significant
difference between Occidental's carrying value of its Equistar investment and
the underlying equity in net assets of Equistar subsequent to both Occidental's
and Equistar's write-downs.
In connection with the acquisition of Altura Energy Ltd. in April 2000, the
sellers retained a preferred limited partnership interest of approximately $2.0
billion, which was recorded as minority interest. Altura also loaned
approximately $2.0 billion to affiliates of the sellers, evidenced by two notes
recorded as long-term receivables. The partnership exercised an option in May
2002 to redeem the sellers' remaining partnership interests in exchange for the
outstanding balance on the two notes. Both minority interest and long-term
receivables were reduced by $2.0 billion to reflect this transaction on the
balance sheet.
DERIVATIVE ACTIVITIES
Occidental's market-risk exposures relate primarily to commodity prices, and, to
a lesser extent, interest rates and foreign currency exchange rates.
Occidental's results are sensitive mainly to fluctuations in crude oil and
natural gas prices. Occidental may periodically use different types of
derivative instruments to achieve the best prices for oil and gas and to reduce
its exposure to price volatility, thus mitigating fluctuations in
commodity-related cash flows. Usually, Occidental does not hedge against
fluctuations in long-term oil and gas prices. Overall, Occidental's use of
derivatives in commodity hedging activity remains at a relatively low dollar
level. Changes in a derivative instrument's fair value must be recognized in
earnings unless specific hedge accounting criteria are met. Changes in the fair
value of derivative instruments that meet specific cash-flow hedge accounting
criteria are reported in other comprehensive income (OCI). The gains and losses
on cash-flow hedge transactions that are reported in OCI are reclassified to
earnings in the periods in which earnings are affected by the variability of the
hedged item's cash flows. Mark-to-market gains and losses from derivatives that
qualify for fair-value hedge accounting are recorded in earnings throughout the
life of the hedge and are generally offset by the change in fair value of the
hedged item. The ineffective portions of all hedges are recognized in current
period earnings.
For the three and nine months ended September 30, 2002, the results of
operations included a net pre-tax loss of $4 million and $175 thousand,
respectively, related to derivative mark-to-market adjustments. For the three
and nine months ended September 30, 2001, the results of operations included a
net pre-tax gain of $1 million and $41 million, respectively, related to
derivative mark-to-market adjustments. The amount of interest expense recorded
in the income statement was lower by approximately $11 million and $32 million
for the three and nine months ended September 30, 2002, respectively, to reflect
net pre-tax gains from fair-value hedges. Net interest expense was lower by $0.8
million for the three and nine months ended September 30, 2001 to reflect net
pre-tax gains from fair-value hedges. During both the three and nine months
ended September 30, 2002, a $8 million after-tax loss was reclassified from OCI
to income resulting from the expiration of cash-flow hedges. During the three
and nine months ended September 30, 2001, a $4 million after-tax loss and a $4
million after-tax gain, respectively, were reclassified from OCI to income
resulting from the expiration of cash-flow hedges. During the three and nine
months ended September 30, 2002, net unrealized after-tax losses of $17 million
and $27 million, respectively, were recorded to OCI relating to changes in
current cash-flow hedges. During the three and nine months ended September 30,
2001, net unrealized after-tax gains of $1 million and $2 million, respectively,
were recorded to OCI relating to changes in current cash-flow hedges. During the
next twelve months, Occidental expects that $14 million of net derivative
after-tax losses included in OCI, based on their valuation at September 30,
2002, will be reclassified into earnings. Hedge
19
ineffectiveness did not have a significant impact on earnings for the three and
nine months ended September 30, 2002 and 2001.
LAWSUITS, CLAIMS, COMMITMENTS, CONTINGENCIES AND RELATED MATTERS
Occidental and certain of its subsidiaries have been named as defendants or as
potentially responsible parties in a substantial number of lawsuits, claims and
proceedings. They have also been named as potentially responsible parties in
governmental proceedings under the Comprehensive Environmental Response,
Compensation and Liability Act (CERCLA) and similar state acts. These
governmental proceedings seek funding, remediation and, in some cases,
compensation for alleged property damage, punitive damages and civil penalties
aggregating substantial amounts. Occidental is usually one of many companies in
these proceedings and has to date been successful in sharing response costs with
other financially sound companies. Occidental has accrued reserves at the most
likely cost to be incurred in those proceedings where it is probable that
Occidental will incur remediation costs that can be reasonably estimated.
During the course of its operations, Occidental is subject to audit by taxing
authorities for varying periods in various tax jurisdictions. Occidental has
certain other commitments under contracts, guarantees and joint ventures, and
certain other contingent liabilities.
It is impossible at this time to determine the ultimate liabilities that
Occidental and its subsidiaries may incur resulting from the foregoing lawsuits,
claims and proceedings, audits, commitments, contingencies and related matters.
Several of these matters may involve substantial amounts, and if these were to
be ultimately resolved unfavorably to the full amount of their maximum potential
exposure, an event not currently anticipated, it is possible that such event
could have a material adverse effect upon Occidental's consolidated financial
position or results of operations. However, in management's opinion, after
taking into account reserves, it is unlikely that any of the foregoing matters
will have a material adverse effect upon Occidental's consolidated financial
position or results of operations.
ENVIRONMENTAL MATTERS
Occidental's operations in the United States are subject to stringent federal,
state and local laws and regulations relating to improving or maintaining the
quality of the environment. Foreign operations also are subject to varied
environmental protection laws. Costs associated with environmental compliance
have increased over time and may continue to rise in the future. Environmental
expenditures related to current operations are factored into the overall
business planning process. These expenditures are considered an integral part of
production in manufacturing quality products responsive to market demand.
The laws that require or address environmental remediation may apply
retroactively to previous waste disposal practices. Also, in many cases, the
laws apply regardless of fault, legality of the original activities or ownership
or control of sites. Occidental is currently participating in environmental
assessments and cleanups under these laws at federal CERCLA sites, comparable
state sites and other remediation sites, including Occidental facilities and
previously owned sites. Also, Occidental and certain of its subsidiaries have
been involved in a substantial number of governmental and private proceedings
involving historical practices at various sites including, in some instances,
having been named as defendants and/or as PRPs under the federal CERCLA law.
These proceedings seek funding and/or remediation and, in some cases,
compensation for alleged personal injury or property damage, punitive damages
and civil penalties, aggregating substantial amounts.
Occidental does not consider the number of CERCLA and similar state sites, at
which it has been notified that it has been identified as being involved, to be
a relevant measure of exposure. Although the liability of a potentially
responsible party may be joint and several, Occidental is usually one of many
companies cited as a PRP at these sites and has, to date, been successful in
sharing cleanup costs with other financially sound companies. Also, many of
these sites are still under investigation by the Environmental Protection Agency
(EPA) or the equivalent state agencies. Prior to actual cleanup, the parties
involved assess site conditions and responsibility and determine the appropriate
remedy. The majority of remediation costs are incurred after the parties obtain
EPA or other equivalent state agency approval to proceed. The ultimate future
cost of remediation of certain of the sites for which Occidental has been
notified that it has been identified as being involved cannot reasonably be
determined at this time.
20
As of September 30, 2002, Occidental had been notified by the EPA or equivalent
state agencies or otherwise had become aware that it had been identified as
being involved at 124 Superfund or comparable state sites. (This number does not
include those sites where Occidental has been successful in resolving its
involvement.) The 124 sites include 34 former Diamond Shamrock Chemical sites as
to which Maxus Energy Corporation has retained all liability. Of the remaining
90 sites, Occidental has denied involvement at 9 sites and has yet to determine
involvement in 19 sites. With respect to the remaining 62 of these sites,
Occidental is in various stages of evaluation, and the extent of liability
retained by Maxus Energy Corporation is disputed at 2 of these sites. For 53 of
these sites, where environmental remediation efforts are probable and the costs
can be reasonably estimated, Occidental has accrued reserves at the most likely
cost to be incurred. The 53 sites include 10 sites as to which present
information indicates that it is probable that Occidental's aggregate exposure
is immaterial. In determining the reserves, Occidental uses the most current
information available, including similar past experiences, available technology,
regulations in effect, the timing of remediation and cost-sharing arrangements.
For the remaining 9 of the 62 sites being evaluated, Occidental does not have
sufficient information to determine a range of liability, but Occidental does
have sufficient information on which to base the opinion expressed above under
the caption "Lawsuits, Claims, Commitments, Contingencies and Related Matters."
ACCOUNTING CHANGES
In July 2002, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires that a
liability be recognized for exit and disposal costs only when the liability has
been incurred and when it can be measured at fair value. The statement is
effective for exit and disposal activities that are initiated after December 31,
2002. Occidental does not expect that the adoption of SFAS No. 146 will have a
material impact on its financial statements.
In June 2002, the Emerging Issues Task Force (EITF) issued EITF issue No. 02-3,
"Accounting for Contracts Involved in Energy Trading and Risk Management
Activities," which states that gains and losses on energy trading contracts
(whether realized or unrealized) should be shown net in the income statement. In
October 2002, the EITF clarified that all energy-trading contracts, including
those contracts that are also derivatives under SFAS 133, should be shown net.
Occidental implemented this EITF in the third quarter of 2002 and all
comparative financial statements have been reclassified to conform to the
current presentation. There was no change in gross margins, net income, cash
flow or earnings per share for any period as a result of adopting this
requirement. However, net sales and cost of sales were reduced by equal and
offsetting amounts to reflect the adoption of this requirement. For the nine
months ended September 30, 2002, net sales and costs of sales were both reduced
by approximately $2.2 billion to conform to this requirement. For the three and
nine months ended September 30, 2001, net sales and costs of sales were reduced
by approximately $1.3 billion and $4.8 billion, respectively, to conform to the
current presentation.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
In addition to amending or rescinding other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions, SFAS No. 145 precludes
companies from recording gains and losses from the extinguishment of debt as an
extraordinary item. Occidental must implement SFAS No. 145 in the first quarter
of 2003 and all comparative financial statements will be reclassified to conform
to the 2003 presentation. The anticipated effect of the statement includes the
reclassification of an extraordinary loss to net income from continuing
operations of $3 million ($0.01 per share) in the nine months ended September
30, 2001. There will be no effect on net income or basic earnings per common
share.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and broadens the
presentation of discontinued operations for long-lived assets. The provisions of
this statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001. Occidental adopted this statement in the
first quarter of 2002 and it did not have an impact on the financial statements
when adopted.
21
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. Occidental's current policy for
dismantlement, restoration and reclamation costs is to accrue the estimated
future abandonment and removal costs of offshore production platforms, net of
salvage value, over their operating lives. For onshore oil and gas production,
Occidental estimates that the salvage value of the oil and gas properties
generally will approximate the dismantlement, restoration and reclamation costs
or that the net cost will not be material; therefore, no accrual is recorded.
Occidental makes capital renewal expenditures for its chemical plants on a
continual basis while an asset is in operation. Retirement obligations are
provided for when a decision is made to dispose of a property or when operations
have been curtailed on other than a temporary basis. Under SFAS No. 143, which
is required to be adopted in the first quarter of 2003, companies are required
to recognize the fair value of a liability for an asset retirement obligation in
the period in which the liability is incurred if there is a legal obligation to
dismantle the asset and reclaim or remediate the property at the end of the
useful life. Legal reviews of contracts and statutory retirement obligations are
ongoing. If it is determined that a legal obligation exists, the cost of asset
retirement obligations will be estimated, and the fair value of the obligations
will be recorded, when SFAS No. 143 is adopted.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 changes the accounting and reporting requirements for
acquired goodwill and intangible assets. The provisions of this statement must
be applied starting with fiscal years beginning after December 15, 2001. At
December 31, 2001, the balance sheet included approximately $108 million of
goodwill and intangible assets with annual amortization expense of approximately
$6 million recorded in each of the years' income statements for the three-year
period ended December 31, 2001. As a result, elimination of goodwill
amortization would not have had a material impact on net income or earnings per
share of any of the years presented and, as a result, the transitional
disclosures of adjusted net income excluding goodwill amortization described by
SFAS No. 142 have not been presented. Upon implementation of SFAS No. 142 in the
first quarter of 2002, three separate specialty chemical businesses were
identified as separate reporting units and tested for goodwill impairment. All
three of these businesses are components of the chemical segment and were the
only reporting units having any goodwill on the balance sheet. The fair value of
each of the three reporting units was determined through third party appraisals.
The appraisals determined fair value to be the price that the assets could be
sold for in a current transaction between willing parties. As a result of the
impairment testing, Occidental recorded a "cumulative effect of changes in
accounting principles" after-tax reduction in net income of approximately $95
million due to the impairment of all the goodwill attributed to these reporting
units. Occidental now has no remaining goodwill on its financial statements.
SEC REVIEW
In late 2001, the Securities and Exchange Commission (SEC) announced a new
initiative to significantly expand its review of SEC filings made by all Fortune
500 companies. Recently, Occidental received comments from the SEC staff
regarding its 2001 Annual Report on Form 10-K and quarterly reports on Form 10-Q
for the periods ended March 31, 2002 and June 30, 2002. The comments principally
request supplemental information and propose additional disclosure and, in some
cases, revisions of these filings. Occidental is in the process of responding to
the staff's comments and believes that compliance with such comments would not
have a material effect on the accuracy or adequacy of its current filings.
SAFE HARBOR STATEMENT REGARDING OUTLOOK AND FORWARD-LOOKING INFORMATION
Portions of this report contain forward-looking statements and involve risks and
uncertainties that could significantly affect expected results of operations,
liquidity, cash flows and business prospects. Factors that could cause results
to differ materially include, but are not limited to: global commodity pricing
fluctuations; competitive pricing pressures; higher-than-expected costs
including electricity and feedstocks; crude oil and natural gas prices; chemical
prices; potential liability for remedial actions under existing or future
environmental regulations and litigation; potential liability resulting from
pending or future litigation; general domestic and international political
conditions; potential disruption or interruption of Occidental's production or
manufacturing facilities due to accidents, political events or insurgent
activity; potential failure to achieve expected production from existing and
future oil and gas development projects; the supply/demand considerations for
Occidental's products; any general economic recession or slowdown
22
domestically or internationally; regulatory uncertainties; and not successfully
completing, or any material delay of, any development of new fields, expansion,
capital expenditure, efficiency improvement project, acquisition or disposition.
Forward-looking statements are generally accompanied by words such as
"estimate", "project", "predict", "will", "anticipate", "plan", "intend",
"believe", "expect" or similar expressions that convey the uncertainty of future
events or outcomes. Occidental expressly disclaims any obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information or otherwise. In light of these risks, uncertainties and
assumptions, the forward-looking events discussed might not occur.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For the period ended September 30, 2002 there were no material changes in the
information provided under Item 305 of Regulation S-K included under the caption
"Derivative Activities" as part of Occidental's Management's Discussion and
Analysis section of Occidental's 2001 Annual Report on Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days before filing this Quarterly Report, Occidental's Chief Executive
Officer and Chief Financial Officer supervised and participated in Occidental's
evaluation of its disclosure controls and procedures. Disclosure controls and
procedures are controls and procedures designed to ensure that information
required to be disclosed in Occidental's periodic reports filed or submitted
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms. Based upon that evaluation, Occidental's Chief
Executive Officer and Chief Financial Officer concluded that Occidental's
disclosure controls and procedures are effective.
There have been no significant changes in Occidental's internal controls or in
other factors that could significantly affect internal controls after the date
Occidental carried out its evaluation.
23
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
GENERAL
This item incorporates by reference the information regarding lawsuits, claims,
commitments, contingencies and related matters in Note 9 to the consolidated
condensed financial statements in Part I of this Form 10-Q.
ENVIRONMENTAL PROCEEDINGS
In April 1998, a civil action was filed on behalf of the United States
Environmental Protection Agency against Occidental Chemical Corporation
(OxyChem) relating to the Centre County Kepone Superfund Site at State College,
Pennsylvania. The lawsuit sought approximately $12 million in penalties and
governmental response costs, a declaratory judgment that OxyChem is a liable
party under the Comprehensive Environmental Response, Compensation, and
Liability Act, and an order requiring OxyChem to carry out the remedy that is
being performed by the site owner. On October 8, 2002, the Court approved a
Consent Decree between OxyChem and the United States. Pursuant to the decree,
OxyChem agreed to pay to the United States and the site owner a total of
$886,000, which included payment of a $21,000 penalty to the United States and
an obligation to carry out a supplemental environmental project with an
estimated cost of $84,000, in exchange for, among other things, a release of all
past and future response costs associated with the site and dismissal of the
United States' lawsuit with prejudice.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Occidental Petroleum Corporation 1987 Stock Option Plan
(as amended through September 12, 2002).
10.2 Occidental Petroleum Corporation 2001 Incentive
Compensation Plan (as amended through September 12,
2002).
10.3 Occidental Petroleum Corporation Deferred Stock Program.
10.4 Form of Incentive Stock Option Agreement under
Occidental Petroleum Corporation 2001 Incentive
Compensation Plan (July 2002 version).
10.5 Form of Nonqualified Stock Option Agreement under
Occidental Petroleum Corporation 2001 Incentive
Compensation Plan (July 2002 version).
10.6 Form of Restricted Common Share Agreement (with
mandatory deferred issuance of shares) under Occidental
Petroleum Corporation 2001 Incentive Compensation Plan.
10.7 Securities Purchase Agreement, dated as of July 8, 2002,
by and between Lyondell Chemical Company and Occidental
Chemical Holding Corporation (incorporated by reference
to Exhibit 10.1 to the Current Report on Form 8-K of
Occidental dated August 22, 2002 (date of earliest event
reported), filed September 6, 2002, File No. 1-9210).
10.8 Stockholders Agreement, dated as of August 22, 2002, by
and among Lyondell Chemical Company and the Stockholders
as defined therein (incorporated by reference to Exhibit
10.2 to the Current Report on Form 8-K of Occidental
dated August 22, 2002 (date of earliest event reported),
filed September 6, 2002, File No. 1-9210).
24
10.9 Warrant for the Purchase of Shares of Common Stock,
issued August 22, 2002 (incorporated by reference to
Exhibit 10.3 to the Current Report on Form 8-K of
Occidental dated August 22, 2002 (date of earliest event
reported), filed September 6, 2002, File No. 1-9210).
10.10 Registration Rights Agreement, dated as of August 22,
2002, by and between Occidental Chemical Holding
Corporation and Lyondell Chemical Company (incorporated
by reference to Exhibit 10.4 to the Current Report on
Form 8-K of Occidental dated August 22, 2002 (date of
earliest event reported), filed September 6, 2002, File
No. 1-9210).
10.11 Occidental Partner Sub Purchase Agreement, dated July 8,
2002, by and among Lyondell Chemical Company, Occidental
Chemical Holding Corporation, Oxy CH Corporation and
Occidental Chemical Corporation (incorporated by
reference to Exhibit 10.5 to the Current Report on Form
8-K of Occidental dated August 22, 2002 (date of
earliest event reported), filed September 6, 2002, File
No. 1-9210).
11 Statement regarding the computation of earnings per
share for the three and nine months ended September 30,
2002 and 2001.
12 Statement regarding the computation of total enterprise
ratios of earnings to fixed charges for the nine months
ended September 30, 2002 and 2001 and the five years
ended December 31, 2001.
(b) Reports on Form 8-K
During the quarter ended September 30, 2002, Occidental filed
the following Current Reports on Form 8-K:
1. Current Report on Form 8-K dated July 22, 2002 (date of
earliest event reported), filed on July 22, 2002, for the
purpose of reporting, under Item 5, Occidental's results
of operations for the second quarter ended June 30, 2002,
and under Item 9, speeches and supplemental investor
information relating to Occidental's second quarter 2002
earnings announcement.
2. Current Report on Form 8-K dated August 9, 2002 (date of
earliest event reported), filed on August 12, 2002, for
the purpose of reporting under Item 9, a certification of
CEO and CFO pursuant to 18 U.S.C. section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
3. Current Report on Form 8-K dated August 22, 2002 (date of
earliest event reported), filed on September 6, 2002, for
the purpose of reporting under Item 5, the completion of
the sale of the entities holding Occidental's 29.5 percent
equity interest in Equistar to Lyondell Chemical Company.
From September 30, 2002 to the date hereof, Occidental filed
the following Current Reports on Form 8-K:
1. Current Report on Form 8-K dated October 21, 2002 (date of
earliest event reported), filed on October 21, 2002, for
the purpose of reporting under Item 5, Occidental's
results of operations for the third quarter ended
September 30, 2002, and under Item 9, speeches and
supplemental investor information relating to Occidental's
third quarter 2002 earnings announcement.
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OCCIDENTAL PETROLEUM CORPORATION
DATE: November 12, 2002 S. P. Dominick, Jr.
----------------------------------------------
S. P. Dominick, Jr.,
Vice President and Controller
(Chief Accounting and Duly Authorized Officer)
26
CERTIFICATIONS
I, Ray R. Irani, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Occidental Petroleum
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
Ray R. Irani
---------------------------------------------
Ray R. Irani
Chief Executive Officer
27
I, Stephen I. Chazen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Occidental Petroleum
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
Stephen I. Chazen
---------------------------------------------
Stephen I. Chazen
Chief Financial Officer
28
EXHIBIT INDEX
EXHIBITS
- --------
10.1 Occidental Petroleum Corporation 1987 Stock Option Plan (as amended
through September 12, 2002).
10.2 Occidental Petroleum Corporation 2001 Incentive Compensation Plan (as
amended through September 12, 2002).
10.3 Occidental Petroleum Corporation Deferred Stock Program.
10.4 Form of Incentive Stock Option Agreement under Occidental Petroleum
Corporation 2001 Incentive Compensation Plan (July 2002 version).
10.5 Form of Nonqualified Stock Option Agreement under Occidental Petroleum
Corporation 2001 Incentive Compensation Plan (July 2002 version).
10.6 Form of Restricted Common Share Agreement (with mandatory deferred
issuance of shares) under Occidental Petroleum Corporation 2001
Incentive Compensation Plan.
10.7 Securities Purchase Agreement, dated as of July 8, 2002, by and
between Lyondell Chemical Company and Occidental Chemical Holding
Corporation (incorporated by reference to Exhibit 10.1 to the Current
Report on Form 8-K of Occidental dated August 22, 2002 (date of
earliest event reported), filed September 6, 2002, File No. 1-9210).
10.8 Stockholders Agreement, dated as of August 22, 2002, by and among
Lyondell Chemical Company and the Stockholders as defined therein
(incorporated by reference to Exhibit 10.2 to the Current Report on
Form 8-K of Occidental dated August 22, 2002 (date of earliest event
reported), filed September 6, 2002, File No. 1-9210).
10.9 Warrant for the Purchase of Shares of Common Stock, issued August 22,
2002 (incorporated by reference to Exhibit 10.3 to the Current Report
on Form 8-K of Occidental dated August 22, 2002 (date of earliest
event reported), filed September 6, 2002, File No. 1-9210).
10.10 Registration Rights Agreement, dated as of August 22, 2002, by and
between Occidental Chemical Holding Corporation and Lyondell Chemical
Company (incorporated by reference to Exhibit 10.4 to the Current
Report on Form 8-K of Occidental dated August 22, 2002 (date of
earliest event reported), filed September 6, 2002, File No. 1-9210).
10.11 Occidental Partner Sub Purchase Agreement, dated July 8, 2002, by and
among Lyondell Chemical Company, Occidental Chemical Holding
Corporation, Oxy CH Corporation and Occidental Chemical Corporation
(incorporated by reference to Exhibit 10.5 to the Current Report on
Form 8-K of Occidental dated August 22, 2002 (date of earliest event
reported), filed September 6, 2002, File No. 1-9210).
11 Statement regarding the computation of earnings per share for the
three and nine months ended September 30, 2002 and 2001.
12 Statement regarding the computation of total enterprise ratios of
earnings to fixed charges for the nine months ended September 30, 2002
and 2001 and the five years ended December 31, 2001.
29