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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, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 1-9210
---------------------
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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). 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, 2004
- --------------------------------------- ---------------------------------
Common stock $.20 par value 394,721,639 shares
OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONTENTS
PAGE
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets --
September 30, 2004 and December 31, 2003 2
Consolidated Condensed Statements of Operations --
Three and nine months ended September 30, 2004 and 2003 4
Consolidated Condensed Statements of Cash Flows --
Nine months ended September 30, 2004 and 2003 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
Item 4. Controls and Procedures 24
PART II OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 6. Exhibits and Reports on Form 8-K 26
1
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
SEPTEMBER 30, 2004 AND DECEMBER 31, 2003
(Amounts in millions)
2004 2003
================================================================================ ========== ==========
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 998 $ 683
Receivables, net 2,178 1,154
Inventories 499 510
Prepaid expenses and other 130 127
---------- ----------
Total current assets 3,805 2,474
LONG-TERM RECEIVABLES, net 252 264
INVESTMENTS IN UNCONSOLIDATED ENTITIES 1,544 1,155
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation, depletion and amortization of $8,391 at
September 30, 2004 and $7,467 at December 31, 2003 14,452 14,005
OTHER ASSETS 323 270
---------- ----------
$ 20,376 $ 18,168
================================================================================ ========== ==========
The accompanying notes are an integral part of these financial statements.
2
OCCIDENTAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
SEPTEMBER 30, 2004 and December 31, 2003
(Amounts in millions)
2004 2003
================================================================================ ========== ==========
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt and capital lease liabilities $ 23 $ 23
Accounts payable 1,417 909
Accrued liabilities 1,043 978
Domestic and foreign income taxes 383 163
Trust preferred securities -- 453
---------- ----------
Total current liabilities 2,866 2,526
---------- ----------
LONG-TERM DEBT, net of current maturities and unamortized discount 3,809 3,993
---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred and other domestic and foreign income taxes 1,114 1,001
Other 2,466 2,407
---------- ----------
3,580 3,408
---------- ----------
MINORITY INTEREST 343 312
---------- ----------
STOCKHOLDERS' EQUITY
Common stock, at par value 79 77
Additional paid-in capital 4,559 4,272
Retained earnings 5,032 3,530
Accumulated other comprehensive income 108 50
---------- ----------
9,778 7,929
---------- ----------
$ 20,376 $ 18,168
================================================================================ ========== ==========
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, 2004 AND 2003
(Amounts in millions, except per-share amounts)
Three Months Ended Nine Months Ended
September 30 September 30
------------------------- -------------------------
2004 2003 2004 2003
================================================================= ========== ========== ========== ==========
REVENUES
Net sales $ 3,033 $ 2,319 $ 8,363 $ 6,956
Interest, dividends and other income 34 21 75 72
Gains on disposition of assets, net -- 9 1 31
---------- ---------- ---------- ----------
3,067 2,349 8,439 7,059
COSTS AND OTHER DEDUCTIONS
Cost of sales 1,490 1,282 4,363 3,844
Selling, general and administrative and other
operating expenses 243 216 708 653
Environmental remediation -- -- -- 13
Exploration expense 37 37 131 94
Interest and debt expense, net 65 72 198 262
---------- ---------- ---------- ----------
1,835 1,607 5,400 4,866
---------- ---------- ---------- ----------
Income before taxes and other items 1,232 742 3,039 2,193
Provision for domestic and foreign income and
other taxes 494 300 1,238 923
Minority interest 23 11 59 49
(Income) loss from equity investments (43) (15) (84) 8
---------- ---------- ---------- ----------
Income from continuing operations 758 446 1,826 1,213
Cumulative effect of changes in accounting principles, net -- -- -- (68)
---------- ---------- ---------- ----------
NET INCOME $ 758 $ 446 $ 1,826 $ 1,145
========== ========== ========== ==========
BASIC EARNINGS PER COMMON SHARE
Income from continuing operations $ 1.91 $ 1.16 $ 4.63 $ 3.17
Cumulative effect of changes in accounting principles, net -- -- -- (.18)
---------- ---------- ---------- ----------
Basic earnings per common share $ 1.91 $ 1.16 $ 4.63 $ 2.99
========== ========== ========== ==========
DILUTED EARNINGS PER COMMON SHARE
Income from continuing operations $ 1.88 $ 1.14 $ 4.57 $ 3.14
Cumulative effect of changes in accounting principles, net -- -- -- (.18)
---------- ---------- ---------- ----------
Diluted earnings per common share $ 1.88 $ 1.14 $ 4.57 $ 2.96
========== ========== ========== ==========
DIVIDENDS PER COMMON SHARE $ .275 $ .260 $ .825 $ .780
========== ========== ========== ==========
BASIC SHARES 396.3 385.5 394.1 382.6
========== ========== ========== ==========
DILUTED SHARES 403.3 391.1 399.8 387.0
================================================================= ========== ========== ========== ==========
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, 2004 AND 2003
(Amounts in millions)
2004 2003
================================================================================ ========== ==========
CASH FLOW FROM OPERATING ACTIVITIES
Income from continuing operations $ 1,826 $ 1,213
Adjustments to reconcile income to net cash provided by
operating activities:
Depreciation, depletion and amortization of assets 972 866
Deferred income tax provision 83 112
Other noncash charges to income 271 186
Gains on disposition of assets, net (1) (31)
(Income) loss from equity investments (84) 8
Dry hole and impairment expense 86 50
Changes in operating assets and liabilities (307) (13)
Other operating, net (135) (129)
---------- ----------
Net cash provided by operating activities 2,711 2,262
---------- ----------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures (1,271) (1,151)
Sale of businesses and disposal of property, plant and equipment, net 7 67
Purchase of businesses, net (173) (262)
Equity investments and other, net (206) (108)
---------- ----------
Net cash used by investing activities (1,643) (1,454)
---------- ----------
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from long-term debt 17 298
Redemption (2004) / Repurchase (2003) of trust preferred securities (466) (1)
Payments of long-term debt and capital lease liabilities (183) (596)
Proceeds from issuance of common stock 5 8
Cash dividends paid (316) (292)
Stock options exercised 191 159
Other financing, net (1) (1)
---------- ----------
Net cash used by financing activities (753) (425)
---------- ----------
Increase in cash and cash equivalents 315 383
Cash and cash equivalents--beginning of period 683 146
---------- ----------
Cash and cash equivalents--end of period $ 998 $ 529
================================================================================ ========== ==========
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, 2004
1. General
In these unaudited consolidated condensed financial statements,
"Occidental" means Occidental Petroleum Corporation (OPC), and/or one or
more entities where it owns a majority voting interest. Certain information
and disclosures normally included in notes to consolidated financial
statements have been condensed or omitted pursuant to the Securities and
Exchange Commission's rules and regulations, but resultant disclosures are
in accordance with accounting principles generally accepted in the United
States of America as they apply to interim reporting. The consolidated
condensed financial statements should be read in conjunction with the
consolidated financial statements and the notes to those financial
statements in Occidental's Annual Report on Form 10-K for the year ended
December 31, 2003 (2003 Form 10-K).
In the opinion of Occidental's management, the accompanying consolidated
condensed financial statements contain all adjustments (consisting only of
normal recurring adjustments) necessary to fairly present Occidental's
consolidated financial position as of September 30, 2004, the consolidated
statements of operations for the three and nine months then ended and the
consolidated statements of cash flows for the nine months then ended. The
income and cash flows for the period ended September 30, 2004, are not
necessarily indicative of the income or cash flows to be expected for the
full year.
Certain financial statements and notes for the prior year have been changed
to conform to the 2004 presentation.
Refer to Note 1 to the consolidated financial statements in the 2003 Form
10-K for a summary of significant accounting policies.
2. Asset Acquisitions and Other Transactions
In the third quarter of 2004, Occidental redeemed all of its 6.5 percent
senior notes which reduced long-term debt by approximately $157 million.
This resulted in an after-tax charge of $2 million.
In the second quarter of 2004, Occidental discontinued, for the present
time, the sale of an interest in its outstanding accounts receivable
balance which had the effect of increasing receivables by approximately
$360 million. There was no gain or loss associated with this transaction.
In April 2004, Occidental agreed with the government of Colombia to extend
the term of its contract for the Cano Limon field. The contract was
extended to the economic life of the field, which Occidental will continue
to operate.
In January 2004, Occidental acquired a 1,300-mile oil pipeline and
gathering system located in the Permian Basin for approximately $143
million in cash (including a $5 million deposit in 2003).
In January 2004, Occidental redeemed all of its outstanding 8.16 percent
Trust Preferred Redeemable Securities (trust preferred securities) at par
plus accrued interest which resulted in a decrease in current liabilities
of approximately $453 million. This resulted in an after-tax charge of $7
million.
6
3. Accounting Changes
In December 2003, the Financial Accounting Standards Board (FASB) revised
Interpretation No. (FIN) 46, "Consolidation of Variable Interest Entities"
to exempt certain entities from its requirements and to clarify certain
issues arising during the initial implementation of FIN 46. Occidental
adopted the revised FIN 46 in the first quarter of 2004 and it did not have
a material effect on its financial statements when adopted.
In June 2001, FASB issued Statement of Financial Accounting Standards
(SFAS) No. 142, "Goodwill and Other Intangible Assets," which states in
paragraph 8(b) that the accounting specified in SFAS No. 19, "Financial
Accounting and Reporting by Oil and Gas Producing Companies" is not
affected by SFAS No. 142. A question has arisen about whether the balance
sheet classification and disclosure requirements for oil and gas mineral
and drilling rights are included in this exception and, if they are not
included, whether these rights should be classified as intangible assets.
In September 2004, FASB issued FASB Staff Position (FSP) FAS 142-2,
"Application of FASB Statement No. 142, Goodwill and Other Intangible
Assets, to Oil- and Gas-Producing Entities" which states that the scope
exception does include the classification and disclosure of mineral and
drilling rights. Therefore, Occidental will continue to classify all of its
mineral and drilling rights within property, plant and equipment. When
Occidental adopts the provisions of this pronouncement in the fourth
quarter of 2004, it will have no effect on its results of operations or
financial position.
In May 2004, FASB issued FSP FAS 106-2, "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003," which specifies the accounting and disclosure
requirements for the prescription drug benefits that are available under
this new plan. Occidental adopted the provisions of this pronouncement in
the second quarter of 2004. See Note 12 for more information.
4. Comprehensive Income
The following table presents Occidental's comprehensive income items (in
millions):
Periods Ended September 30
-------------------------------------------------------
Three Months Nine Months
------------------------- -------------------------
2004 2003 2004 2003
================================================== ========== ========== ========== ==========
Net income $ 758 $ 446 $ 1,826 $ 1,145
Other comprehensive income items
Foreign currency translation adjustments 6 3 (4) 27
Derivative activity (13) 11 (12) 6
Unrealized gains (losses) on securities 6 9 74 8
Minimum pension liability adjustment -- -- -- (4)
---------- ---------- ---------- ----------
Other comprehensive income (loss), net of tax (1) 23 58 37
Comprehensive income $ 757 $ 469 $ 1,884 $ 1,182
========== ========== ========== ==========
5. Supplemental Cash Flow Information
During the nine months ended September 30, 2004 and 2003, cash payments
(net of refunds) for federal, foreign and state income taxes totaled
approximately $582 million and $323 million, respectively. Interest paid
(net of interest capitalized) totaled approximately $187 million and $276
million (including a $61 million debt repayment fee) for the nine months
ended September 30, 2004 and 2003, respectively.
7
6. Inventories
A portion of inventories is valued under the LIFO method. The valuation of
LIFO inventory for interim periods is based on management's estimates of
year-end inventory levels and costs. Inventories consist of the following
(in millions):
September 30, December 31,
Balance at 2004 2003
============================== ==================== ====================
Raw materials $ 57 $ 46
Materials and supplies 160 143
Finished goods 303 342
---------- ----------
520 531
LIFO adjustment (21) (21)
---------- ----------
Total $ 499 $ 510
========== ==========
7. Asset Retirement Obligations
In accordance with SFAS No. 143, the following table summarizes the
activity of the asset retirement obligations of which $4 million is
included in accrued liabilities in both 2004 and 2003 and the remaining
balance in both years is included in deferred credits and other liabilities
- other (in millions):
Nine Months Ended September 30 2004 2003
============================================================ ==================== ====================
Balance at beginning of year $ 167 $ 155
Liabilities incurred in the period 9 --
Liabilities settled in the period (7) (2)
Accretion expense 9 3
Acquisitions and other 16 1
Revisions to estimated cash flows (2) (1)
-------------------- --------------------
Ending balance at September 30 $ 192 $ 156
============================================================ ==================== ====================
8. Environmental Expenditures
Occidental's operations in the United States are subject to stringent
federal, state and local laws and regulations relating to improving or
maintaining environmental quality. Foreign operations also are subject to
environmental-protection laws. The laws that require or address
environmental remediation may apply to past waste disposal practices and
releases regardless of fault, legality of the original activities or
current ownership or control of sites. OPC or certain of its subsidiaries
are currently participating in environmental assessments and cleanups at
federal Superfund sites and other sites subject to the Comprehensive
Environmental Response, Compensation, and Liability Act (CERCLA), sites
subject to equivalent state laws and other remediation sites, including
Occidental facilities and previously-owned sites.
8
The following table presents Occidental's environmental remediation
reserves at September 30, 2004, which are included in accrued liabilities
($76 million) and deferred credits and other liabilities - other ($261
million). The reserves are grouped by three categories of environmental
remediation sites ($ amounts in millions):
# of Sites Reserve
=================================== =============== ===============
CERCLA & Equivalent Sites 124 $ 219
Active Facilities 14 69
Closed or Sold Facilities 40 49
--------------- ---------------
Total 178 $ 337
=================================== =============== ===============
In determining the environmental remediation reserves and reasonably
possible range of loss, Occidental refers to currently available
information, including relevant past experience, available technology,
regulations in effect, the timing of remediation and cost-sharing
arrangements. Occidental expects that it will continue to incur additional
liabilities beyond those recorded for environmental remediation at these
and other sites. The range of reasonably possible loss for existing
environmental remediation matters could be up to $400 million beyond the
amount accrued.
Shown below is additional detail regarding reserves for CERCLA or
CERCLA-equivalent proceedings in which OPC or certain of its subsidiaries
were involved at September 30, 2004 ($ amounts in millions):
Description # of Sites Reserve
=================================== =============== ===============
Minimal/No Exposure(a) 103 $ 6
Reserves between $1-10 MM 15 64
Reserves over $10 MM 6 149
--------------- ---------------
Total 124 $ 219
=================================== =============== ===============
(a) Includes 27 sites for which Maxus Energy Corporation has retained the
liability and indemnified Occidental, 7 sites where Occidental has
denied liability without challenge, 57 sites where Occidental's
reserves are less than $50,000 each, and 12 sites where reserves are
between $50,000 and $1 million each.
Refer to Note 8 to the consolidated financial statements in the 2003 Form
10-K for additional information regarding Occidental's environmental
expenditures.
9. Lawsuits, Claims, Commitments, Contingencies and Related Matters
OPC and certain of its subsidiaries have been named in a substantial number
of lawsuits, claims and other legal proceedings. These actions seek, among
other things, compensation for alleged personal injury, breach of contract,
property damage, punitive damages, civil penalties or other losses; or
injunctive or declaratory relief. OPC and certain of its subsidiaries also
have been named in proceedings under CERCLA and other federal, state, local
and foreign environmental laws. These environmental proceedings seek
funding or performance of remediation and, in some cases, compensation for
alleged property damage, punitive damages and civil penalties; however,
Occidental is usually one of many companies in these proceedings and has to
date been successful in sharing response costs with other financially sound
companies. With respect to all such lawsuits, claims and proceedings,
including environmental proceedings, Occidental accrues reserves when it is
probable a liability has been incurred and the amount of loss can be
reasonably estimated.
During the course of its operations, Occidental is subject to audit by tax
authorities for varying periods in various federal, state, local and
foreign tax jurisdictions. Taxable years prior to 1997 are closed for U.S.
federal income tax purposes. Taxable years 1997 through 2002 are in various
stages of audit by
9
the Internal Revenue Service. Disputes arise during the course of such
audits as to facts and matters of law.
Occidental has guarantees outstanding at September 30, 2004 which encompass
performance bonds, letters of credit, indemnities, commitments and other
forms of guarantees provided by Occidental to third parties, mainly to
provide assurance that Occidental and/or its subsidiaries and affiliates
will meet their various obligations (guarantees). At September 30, 2004,
the notional amount of these guarantees was approximately $450 million. Of
this amount, $365 million relates to Occidental's guarantee of equity
investees' debt and other commitments. The remaining $85 million relates to
various indemnities and guarantees provided to third parties. The amount of
these guarantees recorded on the consolidated balance sheet was immaterial.
It is impossible at this time to determine the ultimate liabilities that
OPC and its subsidiaries may incur resulting from any lawsuits, claims and
proceedings, audits, commitments, contingencies and related matters. If
these matters were to be ultimately resolved unfavorably at amounts
substantially exceeding Occidental's reserves, an outcome not currently
anticipated, it is possible that such outcome could have a material adverse
effect upon Occidental's consolidated financial position or results of
operations. However, after taking into account reserves, management does
not expect the ultimate resolution of any of these matters to have a
material adverse effect upon Occidental's consolidated financial position
or results of operations.
10. Income Taxes
The provision for taxes based on income for the 2004 and 2003 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 first nine months of 2004 includes a
$20 million credit from settlement of a tax issue with the Internal Revenue
Service. There have been continuing tax audit settlement discussions on
other issues. Based on these discussions, the Company believes that it is
reasonably possible there may be favorable settlements that would have a
positive and material effect on Occidental's results of operations and its
financial condition. These settlements could occur in 2004, or later.
The third quarter and nine month periods of 2004 reflected lower U.S.
income tax rates than the comparable 2003 periods due to the crediting of
foreign income taxes.
10
11. Stock-Based Compensation
Occidental accounts for stock options using the intrinsic value method
under Accounting Principles Board Opinion (APB) No. 25 and related
interpretations. Under this accounting method, Occidental did not record
any compensation expense related to its stock option plans. The following
table presents pro-forma information as if Occidental had adopted the
provisions of SFAS No. 123 at January 1, 2002 (in millions, except
per-share amounts):
Periods Ended September 30
-------------------------------------------------------
Three Months Nine Months
------------------------- -------------------------
2004 2003 2004 2003
================================================== ========== ========== ========== ==========
Net income $ 758 $ 446 $ 1,826 $ 1,145
Add: Stock-based compensation included in net
income, net of tax, under APB No. 25 14 9 31 25
Deduct: Stock-based compensation, net of tax,
determined under SFAS No. 123 fair value
method (17) (14) (43) (39)
---------- ---------- ---------- ----------
Pro-forma net income $ 755 $ 441 $ 1,814 $ 1,131
================================================== ========== ========== ========== ==========
Earnings per share:
Basic - as reported $ 1.91 $ 1.16 $ 4.63 $ 2.99
Basic - pro forma 1.91 1.15 4.60 2.96
Diluted - as reported $ 1.88 $ 1.14 $ 4.57 $ 2.96
Diluted - pro forma 1.87 1.13 4.54 2.92
-------------------------------------------------- ---------- ---------- ---------- ----------
12. Retirement Plans and Postretirement Benefits
Occidental has various defined contribution and defined benefit retirement
plans for its salaried, domestic union and nonunion hourly, and certain
foreign national employees.
11
The following tables set forth the components of the net periodic benefit
costs for Occidental's defined benefit pension and postretirement benefit
plans as of September 30 (in millions):
Three Months Ended September 30, 2004 2003
----------------------------------- ------------------------------ ------------------------------
Pension Postretirement Pension Postretirement
Net Periodic Benefit Cost Benefit Benefit Benefit Benefit
=================================== ========== =============== ========== ===============
Service cost $ 3 $ 2 $ 3 $ 2
Interest cost 6 9 6 8
Expected return on plan assets (7) -- (5) --
Recognized actuarial loss -- 3 1 2
---------- --------------- ---------- ---------------
Total $ 2 $ 14 $ 5 $ 12
=================================== ========== =============== ========== ===============
Nine Months Ended September 30, 2004 2003
----------------------------------- ------------------------------ ------------------------------
Pension Postretirement Pension Postretirement
Net Periodic Benefit Cost Benefit Benefit Benefit Benefit
=================================== ========== =============== ========== ===============
Service cost $ 10 $ 6 $ 9 $ 6
Interest cost 18 25 18 25
Expected return on plan assets (18) -- (15) --
Amortization of prior service cost 1 -- -- --
Recognized actuarial loss 2 8 3 6
---------- --------------- ---------- ---------------
Total $ 13 $ 39 $ 15 $ 37
=================================== ========== =============== ========== ===============
On December 8, 2003, President Bush signed into law a bill that expands
Medicare, primarily adding a prescription drug benefit for
Medicare-eligible retirees starting in 2006. Occidental intends to review
its retirees' health care plans in light of the new Medicare provisions,
which may change Occidental's obligations under the plan. At this time,
Occidental is unable to determine the impact of the new Medicare provisions
due to the lack of final regulations for determining the actuarial
equivalency of its benefits compared to the new Medicare benefits.
Therefore, the retiree medical obligations and costs reported do not
reflect the impact of this legislation in accordance with FSP No. FAS
106-2. When the regulations are clarified and Occidental is able to
determine the impact of these provisions, it will adopt the requirements of
this standard.
Occidental funded approximately $4.6 million to its domestic defined
benefit pension plans for the nine months ended September 30, 2004 and it
expects to contribute a total of $6.3 million during 2004. All of the
contributions are expected to be in the form of cash.
Refer to Note 13 to the consolidated financial statements in the 2003 Form
10-K for additional information regarding Occidental's retirement plans and
postretirement benefits.
12
13. 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, 2004
Net sales $ 5,509 $ 2,767 $ 87 $ 8,363
============= ============= ============= =============
Pretax operating profit (loss) $ 3,125 (a) $ 279 $ (340)(b) $ 3,064
Income taxes (558) (7) (673)(c) (1,238)
------------- ------------- ------------- -------------
Net income (loss) $ 2,567 $ 272 $ (1,013)(d) $ 1,826
======================================== ============= ============= ============= =============
Nine months ended
September 30, 2003
Net sales $ 4,473 $ 2,368 $ 115 $ 6,956
============= ============= ============= =============
Pretax operating profit (loss) $ 2,436 $ 147 $ (447)(b) $ 2,136
Income taxes (412) (8) (503)(c) (923)
Cumulative effect of changes in
accounting principles, net -- -- (68) (68)
------------- ------------- ------------- -------------
Net income (loss) $ 2,024 $ 139 $ (1,018)(e) $ 1,145
======================================== ============= ============= ============= =============
(a) Includes pre-tax interest income of $12 million from loans made to an
equity investee.
(b) Includes unallocated net interest expense, administration expense and
other items.
(c) Includes unallocated income taxes. The 2004 amount includes a $20
million credit from a tax settlement.
(d) Includes a trust preferred securities redemption pre-tax charge of $11
million ($7 million net of tax).
(e) Includes a $61 million pre-tax interest charge ($40 million net of
tax) to repay a $450 million 6.4 percent senior note issue that had
ten years of remaining life, but was subject to remarketing on April
1, 2003.
14. Subsequent Event
In October 2004, Occidental announced that its indirect subsidiary, Basic
Chemical Company, LLC, agreed to purchase three chemical manufacturing
facilities from Vulcan Materials Company for $214 million in cash, subject
to adjustment for changes in net working capital. In addition, the
purchaser may become obligated to make contingent payments based upon the
future performance of these businesses, and will assume specified
obligations. This transaction, which is subject to regulatory approval, is
expected to close in 2005.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CONSOLIDATED RESULTS OF OPERATIONS
Occidental (as defined in Note 1 to the consolidated condensed financial
statements) reported net income for the first nine months of 2004 of $1.8
billion, on net sales of $8.4 billion, compared with net income of $1.1 billion,
on net sales of $7.0 billion, for the same period of 2003. Basic earnings per
common share were $4.63 for the first nine months of 2004, compared with basic
earnings per common share of $2.99 for the same period of 2003. Occidental's net
income for the third quarter of 2004 was $758 million, on net sales of $3.0
billion, compared with net income of $446 million, on net sales of $2.3 billion,
for the same period of 2003. Basic earnings per common share were $1.91 for the
third quarter of 2004, compared with $1.16 for the same period of 2003.
Net income for the three and nine months ended September 30, 2004, compared with
the same periods in 2003, reflected higher worldwide crude oil and natural gas
prices and higher crude oil volumes partially offset by higher operating costs.
Additionally, net income in both periods of 2004, compared to the same periods
in 2003, increased due to higher chemical prices and volumes, partially offset
by higher feedstock and energy costs.
SELECTED INCOME STATEMENT ITEMS
The increase in net sales of $714 million and $1.4 billion for the three and
nine months ended September 30, 2004, compared with the same periods in 2003,
primarily reflected higher crude oil, natural gas and chemical prices, higher
crude oil production and higher chemical volumes, partially offset by lower
domestic natural gas production. For the nine months ended September 30, 2003,
the gains on disposition of assets, net account included a pre-tax gain of $22
million on the sale of the remaining interests in a former subsidiary holding
assets in the Gulf of Mexico.
The increase in cost of sales of $208 million and $519 million for the three and
nine months ended September 30, 2004, compared with the same periods in 2003,
primarily reflected higher oil and gas production costs, higher energy and raw
material costs, higher crude oil sales volumes and higher DD&A expense. The
increase of $27 million and $55 million in selling, general, administrative and
other operating expenses for the three and nine months ended September 30, 2004,
compared to the same periods in 2003, primarily reflected increases in various
oil and gas costs, including higher production-related taxes, energy
price-driven costs and other operating costs. The increase in exploration
expense of $37 million for the nine months ended September 30, 2004, compared
with the same period in 2003, primarily reflected higher lease impairment
charges. The $64 million decrease in interest and debt expense, net for the nine
months ended September 30, 2004, compared to the same period in 2003, primarily
reflected a 2003 pre-tax debt repayment charge of $61 million. The increase in
income from equity investments of $28 million and $92 million for the three and
nine months ended September 30, 2004, compared to the same periods in 2003, was
primarily attributable to improved results from the Lyondell equity investment
and higher income from a Russian oil and gas affiliate.
ANALYSIS OF FINANCIAL POSITION
The increase in receivables, net, of $1.0 billion at September 30, 2004,
compared with December 31, 2003, was primarily due to higher sales prices and
the discontinuation, for the present time, of the sale of an interest in
Occidental's outstanding accounts receivable balance totaling $360 million. The
increase in investments in unconsolidated entities of $389 million at September
30, 2004, compared with December 31, 2003, was primarily due to a $208 million
advance to the Elk Hills Power LLC (EHP) equity investment which EHP used to
repay a portion of its debt and a fair value adjustment on the Premcor Inc.
available-for-sale investment which is recorded in other comprehensive income.
14
The increase in accounts payable of $508 million at September 30, 2004, compared
with December 31, 2003, was primarily due to higher sales prices and volumes for
oil and gas in marketing and trading operations. The increase in domestic and
foreign income taxes payable of $220 million at September 30, 2004, compared
with December 31, 2003, was primarily due to an increase in current taxes
payable due to higher income in 2004. In January 2004, Occidental redeemed all
of its outstanding 8.16 percent Trust Preferred Redeemable Securities (trust
preferred securities) which reduced the trust preferred securities liability
account to zero.
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
------------------------- -------------------------
2004 2003 2004 2003
============================================================ ========== ========== ========== ==========
SEGMENT NET SALES
Oil and Gas $ 2,033 $ 1,480 $ 5,509 $ 4,473
Chemical 973 793 2,767 2,368
Other 27 46 87 115
---------- ---------- ---------- ----------
NET SALES $ 3,033 $ 2,319 $ 8,363 $ 6,956
========== ========== ========== ==========
SEGMENT EARNINGS
Oil and Gas $ 1,003 $ 660 $ 2,567 $ 2,024
Chemical 137 61 272 139
---------- ---------- ---------- ----------
1,140 721 2,839 2,163
UNALLOCATED CORPORATE ITEMS
Interest expense, net - debt and trust preferred
distributions (a) (59) (71) (187) (270)
Income taxes (b) (274) (160) (673) (505)
Other (49) (44) (153) (175)
---------- ---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS 758 446 1,826 1,213
Cumulative effect of changes in accounting
principles, net -- -- -- (68)
---------- ---------- ---------- ----------
NET INCOME $ 758 $ 446 $ 1,826 $ 1,145
============================================================ ========== ========== ========== ==========
(a) The third quarter 2004 includes a $2 million pre-tax interest charge to
purchase in the open market and retire $19 million of Occidental's senior
notes and a $3 million pre-tax interest charge to redeem all the $157
million outstanding 6.5 percent senior notes which were due in 2005. The
nine months 2004 also includes an $11 million pre-tax interest charge to
redeem all the outstanding 8.16 percent trust preferred securities on
January 20, 2004. The nine months 2003 includes a $61 million pre-tax
interest charge to repay a $450 million 6.4 percent senior notes issue that
had ten years of remaining life, but was subject to re-marketing on April
1, 2003.
(b) The nine months 2004 includes a $20 million credit related to a first
quarter settlement of an issue with the Internal Revenue Service. The nine
months 2004 also reflects a lower U.S. income tax rate resulting from the
crediting of foreign income taxes.
SIGNIFICANT ITEMS AFFECTING EARNINGS
Occidental's results of operations often include the effects of significant
transactions and events affecting earnings that vary widely and unpredictably in
nature, timing and amount. Therefore, management uses a measure called "core
earnings," which excludes those items. This non-GAAP measure is not meant to
15
disassociate those items from management's performance, but rather is meant to
provide useful information to investors interested in comparing Occidental's
earnings performance between periods. Reported earnings are considered
representative of management's performance over the long term. Core earnings is
not considered to be an alternative to operating income in accordance with
generally accepted accounting principles.
The following table sets forth the core earnings and significant items affecting
earnings for each operating segment and corporate for the three months ended
September 30, 2004 and 2003:
Three Months Ended September 30
-------------------------------------------------------
Basic Basic
(in millions, except per-share amounts) 2004 EPS 2003 EPS
================================================== ========== ========== ========== ==========
TOTAL REPORTED EARNINGS $ 758 $ 1.91 $ 446 $ 1.16
========== ========== ========== ==========
OIL AND GAS
- -----------
Segment Earnings $ 1,003 $ 660
No significant items affecting earnings -- --
---------- ----------
Segment Core Earnings 1,003 660
---------- ----------
CHEMICAL
- --------
Segment Earnings 137 61
No significant items affecting earnings -- --
---------- ----------
Segment Core Earnings 137 61
---------- ----------
CORPORATE
- ---------
Results (382) (275)
No significant items affecting earnings -- --
---------- ----------
TOTAL CORE EARNINGS $ 758 $ 1.91 $ 446 $ 1.16
================================================== ========== ========== ========== ==========
16
The following table sets forth the core earnings and significant items affecting
earnings for each operating segment and corporate for the nine months ended
September 30, 2004 and 2003:
Nine Months Ended September 30
-------------------------------------------------------
Basic Basic
(in millions, except per-share amounts) 2004 EPS 2003 EPS
================================================== ========== ========== ========== ==========
TOTAL REPORTED EARNINGS $ 1,826 $ 4.63 $ 1,145 $ 2.99
========== ========== ========== ==========
OIL AND GAS
- -----------
Segment Earnings $ 2,567 $ 2,024
No significant items affecting earnings -- --
---------- ----------
Segment Core Earnings 2,567 2,024
---------- ----------
CHEMICAL
- --------
Segment Earnings 272 139
No significant items affecting earnings -- --
---------- ----------
Segment Core Earnings 272 139
---------- ----------
CORPORATE
- ---------
Results (1,013) (1,018)
Less:
Trust preferred securities redemption (11) --
Settlement of tax issue 20 --
Debt repayment charge -- (61)
Tax effect of pre-tax adjustments 4 21
Changes in accounting principles, net * -- (68)
---------- ----------
TOTAL CORE EARNINGS $ 1,813 $ 4.60 $ 1,253 $ 3.27
================================================== ========== ========== ========== ==========
*These amounts are shown after tax.
17
WORLDWIDE EFFECTIVE TAX RATE
The following table sets forth the calculation of the worldwide effective tax
rate for reported income and core earnings:
Periods Ended September 30
-------------------------------------------------------
Three Months Nine Months
------------------------- -------------------------
(in millions) 2004 2003 2004 2003
================================================== ========== ========== ========== ==========
REPORTED INCOME
Oil and Gas(a) $ 1,221 $ 799 $ 3,125 $ 2,436
Chemical 139 63 279 147
Corporate and other (108) (116) (340) (447)
---------- ---------- ---------- ----------
Pre-tax income 1,252 746 3,064 2,136
Income tax expense
Federal and State 277 163 681 517
Foreign (included in segments) (a) 217 137 557 406
---------- ---------- ---------- ----------
Total 494 300 1,238 923
---------- ---------- ---------- ----------
Income from continuing operations $ 758 $ 446 $ 1,826 $ 1,213
========== ========== ========== ==========
Worldwide effective tax rate 39% 40% 40% 43%
========== ========== ========== ==========
CORE INCOME
Oil and Gas $ 1,221 $ 799 $ 3,125 $ 2,436
Chemical 139 63 279 147
Corporate and other (108) (116) (329) (386)
---------- ---------- ---------- ----------
Pre-tax income 1,252 746 3,075 2,197
Income tax expense
Federal and State 277 163 705 537
Foreign (included in segments) (a) 217 137 557 407
---------- ---------- ---------- ----------
Total 494 300 1,262 944
---------- ---------- ---------- ----------
Income from continuing operations $ 758 $ 446 $ 1,813 $ 1,253
========== ========== ========== ==========
Worldwide effective tax rate 39% 40% 41% 43%
================================================== ========== ========== ========== ==========
(a) Revenues, pre-tax income and income tax expense include taxes owed by
Occidental but paid by governmental entities on its behalf. Oil and gas
revenues and pre-tax income includes such revenue amounts by period, as
follows: third quarter 2004 - $149, third quarter 2003 - $104, first nine
months 2004 - $382, first nine months 2003 - $295.
Occidental's third quarter 2004 worldwide effective tax rate was 39 percent. The
third quarter 2004 reflected a lower U.S. income tax rate resulting from the
crediting of foreign income taxes. Prior to the second quarter 2004, foreign
income taxes were deducted in determining U.S. taxable income. An annual tax
election permits a taxpayer to claim a credit or deduction for foreign income
taxes, whichever is more beneficial. Occidental expects to continue its election
to credit foreign income taxes in future years. Occidental expects the tax rate
for the rest of the year to be approximately 40 percent.
18
OIL AND GAS SEGMENT
Periods Ended September 30
-------------------------------------------------------
Three Months Nine Months
------------------------- -------------------------
Summary of Operating Statistics 2004 2003 2004 2003
================================================== ========== ========== ========== ==========
NET PRODUCTION PER DAY:
CRUDE OIL AND NATURAL GAS LIQUIDS (MBL)
United States 251 259 257 252
Latin America 87 58 83 55
Middle East 86 91 90 95
Other Eastern Hemisphere 7 10 8 10
NATURAL GAS (MMCF)
United States 488 534 509 535
Middle East 88 -- 52 --
Other Eastern Hemisphere 73 71 74 74
BARRELS OF OIL EQUIVALENT (MBOE)
Consolidated subsidiaries 539 519 544 514
Other interests 24 27 25 27
---------- ---------- ---------- ----------
Worldwide production 563 546 569 541
- -------------------------------------------------- ---------- ---------- ---------- ----------
AVERAGE SALES PRICE:
CRUDE OIL ($/BBL)
United States 40.29 28.24 36.07 28.83
Latin America 36.07 25.84 32.00 27.29
Middle East 37.76 27.14 34.00 27.59
Other Eastern Hemisphere 35.44 25.61 32.13 26.49
NATURAL GAS ($/MCF)
United States 5.87 5.00 5.25 4.93
Middle East 0.97 -- 0.97 --
Other Eastern Hemisphere 2.30 2.13 2.33 1.98
- -------------------------------------------------- ---------- ---------- ---------- ----------
Oil and gas segment and core earnings for the nine months ended September 30,
2004, were $2.6 billion, compared with $2.0 billion for the same period of 2003.
Oil and gas segment and core earnings for the three months ended September 30,
2004, were $1.0 billion, compared with $660 million for the same period of 2003.
The increase in earnings for the three and nine months ended September 30, 2004,
compared with the same periods in 2003, primarily reflected higher worldwide
crude oil and natural gas prices and higher crude oil volumes partially offset
by lower domestic natural gas volumes, higher operating expenses and increased
DD&A rates.
The increase in net sales of $553 million and $1.0 billion for the three and
nine months ended September 30, 2004, compared with the same periods in 2003,
primarily reflected higher crude oil and natural gas prices and higher crude oil
production partially offset by lower domestic natural gas volumes.
The average West Texas Intermediate price in the third quarter of 2004 was
$43.87 per barrel and the New York Mercantile Exchange (NYMEX) natural gas price
for the third quarter of 2004 was $6.26 per million BTU's. In the fourth
quarter, a change of 10 cents per million BTU's in NYMEX gas prices will have a
pre-tax quarterly impact on oil and gas segment earnings of $5 million while a
change of $1.00 per barrel in oil prices will have a pre-tax quarterly impact of
$29 million.
Average worldwide production costs for the first nine months of 2004 were $7.14
per barrel of oil equivalent (BOE) compared to the average 2003 production cost
of $6.08 per BOE.
19
Occidental expects fourth quarter 2004 oil and gas production to remain at the
same level as the third quarter 2004 taking into account lower October and early
November production at the Horn Mountain operations due to Hurricane Ivan and
the impact of product price on Occidental's production sharing contracts. In the
current product price range, a $1.00 change in the per barrel price of oil
changes production by approximately one thousand barrels per day. Occidental
expects exploration expense for the fourth quarter 2004 to be approximately $80
million mainly for drilling in Latin America and the Middle East.
CHEMICAL SEGMENT
Periods Ended September 30
-------------------------------------------------------
Three Months Nine Months
------------------------- -------------------------
Summary of Operating Statistics 2004 2003 2004 2003
================================================== ========== ========== ========== ==========
MAJOR PRODUCT VOLUMES (M TONS, EXCEPT PVC
RESINS)
Chlorine 730 681 2,176 2,031
Caustic Soda 795 697 2,346 2,053
Ethylene Dichloride 102 135 324 374
PVC Resins (millions of pounds) 1,044 1,009 3,205 2,944
MAJOR PRODUCT PRICE INDEX (BASE: 1987-1990
AVG PRICE = 1.0)
Chlorine 2.23 1.76 1.94 1.73
Caustic Soda 0.84 0.85 0.72 0.85
Ethylene Dichloride 1.64 1.13 1.48 1.18
PVC Resins 1.13 0.88 1.05 0.91
================================================== ========== ========== ========== ==========
Chemical segment and core earnings were $137 million and $272 million,
respectively, for the three and nine months ended September 30, 2004, compared
with $61 million and $139 million for the same periods of 2003. The increase in
earnings for the three and nine months ended September 30, 2004, compared with
the same periods in 2003, is primarily due to higher prices for chlorine,
ethylene dichloride (EDC), polyvinyl chloride resins (PVC) and vinyl chloride
monomer (VCM) and higher volumes for chlorine, caustic soda and PVC, partially
offset by higher feedstock and energy costs.
The increase in net sales of $180 million and $399 million for the three and
nine months ended September 30, 2004, compared with the same periods in 2003,
primarily reflected higher prices and volumes for chlorine, PVC and VCM and
higher prices for EDC. The sales increase for the nine months ended September
30, 2004 was partially offset by lower caustic soda prices.
Although the demand for chlorine and caustic soda is expected to stay strong in
the near term, Occidental expects fourth quarter feedstock costs to increase. In
addition, the first and fourth quarters are typically the weakest quarters for
the chemical business due to seasonal factors.
CORPORATE AND OTHER
The unallocated corporate items - income taxes account for the nine months ended
September 30, 2004, includes a $20 million credit related to a settlement of a
tax issue with the Internal Revenue Service. There have been continuing tax
audit settlement discussions on other issues. Based on these discussions, the
Company believes that it is reasonably possible there may be favorable
settlements that would have a positive and material effect on Occidental's
results of operations and its financial condition. These settlements could occur
in 2004, or later.
20
LIQUIDITY AND CAPITAL RESOURCES
Occidental's net cash provided by operating activities was approximately $2.7
billion and $2.3 billion for the first nine months of 2004 and 2003,
respectively. The increase of $449 million in the 2004 amount is primarily
attributable to higher earnings. The 2004 amount includes the effect of the
discontinuation, for the present time, of the sale of an interest in
Occidental's outstanding accounts receivable balance which reduced the 2004
operating cash flow by $360 million.
Occidental's net cash used by investing activities was $1.6 billion and $1.5
billion for the first nine months of 2004 and 2003, respectively. The 2004
amount includes a $208 million advance to the Elk Hills Power LLC (EHP) equity
investment which EHP used to repay a portion of its debt. The 2004 amount also
includes the purchase of a pipeline and gathering system in the Permian Basin.
The 2003 amount includes the purchase of Permian assets, advances to equity
investees, purchases of other equity investee debt and the purchase of
additional stock of a cost-method investee.
Capital expenditures for the first nine months of 2004 were $1.3 billion,
including $1.2 billion in the oil and gas segment. Capital expenditures for the
first nine months of 2003 were $1.2 billion, including $836 million for the oil
and gas segment and $300 million for the chemical segment. The chemical segment
amount includes $180 million for the purchase of a leased facility in La Porte,
Texas and $44 million related to the exercise of purchase options for certain
leased assets.
Occidental's financing activities used net cash of $753 million and $425 million
in the first nine months of 2004 and 2003, respectively. The 2004 amount
includes $466 million paid to redeem the trust preferred securities in January
2004 and $159 million paid to redeem Occidental's 6.5 percent senior notes. The
2003 amount includes net debt repayments of approximately $298 million.
In July 2004, Dolphin Energy Limited (Dolphin Energy), the operator of the
Dolphin Project, entered into a facility agreement with banks to provide a $1.36
billion bridge loan for the Dolphin Project. The loan has a term of five years
and is a revolver for the first two years. Occidental guaranteed 24.5-percent of
the obligations of Dolphin Energy under the facility agreement. As part of the
financing, a subsidiary of Occidental that is an upstream participant in the
Dolphin Project entered into an on-loan agreement with Dolphin Energy to borrow
up to $245 million from the proceeds of loans under the facility agreement for
its share of upstream costs.
Available but unused lines of committed bank credit totaled approximately $1.5
billion at September 30, 2004 and cash and cash equivalents totaled $998 million
on the September 30, 2004 balance sheet. Bank fees on the committed lines of
credit ranged from 0.110 percent to 0.225 percent. Occidental's primary bank
credit matures on June 18, 2009. None of Occidental's committed bank credits
contain material adverse change (MAC) clauses or debt rating triggers that could
restrict Occidental's ability to borrow under these lines. Occidental's credit
facilities and debt agreements do not contain ratings triggers that could
terminate bank commitments or accelerate debt in the event of a ratings
downgrade.
At September 30, 2004, under the most restrictive covenants of certain financing
agreements, Occidental's capacity for additional unsecured borrowing was
approximately $21.0 billion, and the capacity for the payment of cash dividends
and other distributions on, and for acquisitions of, Occidental's capital stock
was approximately $7.7 billion, assuming that such dividends, distributions and
acquisitions were made without incurring additional borrowing.
Occidental currently expects to spend approximately $1.8 billion on its 2004
capital spending program with more than 90 percent in the oil and gas segment.
Although its income and cash flows are largely dependent on oil and gas prices
and production, Occidental believes that cash on hand and cash generated from
operations will be sufficient to fund its operating needs, capital expenditure
requirements, dividend payments and potential acquisitions. If needed,
Occidental could access its existing credit facilities.
21
ENVIRONMENTAL LIABILITIES AND EXPENDITURES
Occidental's operations in the United States are subject to stringent federal,
state and local laws and regulations relating to improving or maintaining
environmental quality. Foreign operations also are subject to
environmental-protection laws. The laws that require or address environmental
remediation may apply retroactively to past waste disposal practices and
releases. In many cases, the laws apply regardless of fault, legality of the
original activities, or current ownership or control of sites. Pursuant to these
laws, Occidental Petroleum Corporation (OPC) or certain of its subsidiaries are
currently participating in environmental assessments and cleanups at federal
Superfund sites and other sites subject to the Comprehensive Environmental
Response, Compensation, and Liability Act (CERCLA), sites subject to equivalent
state laws, and other remediation sites, including Occidental facilities and
previously-owned sites.
The following table presents Occidental's environmental remediation reserves at
September 30, 2004, grouped by three categories of environmental remediation
sites ($ amounts in millions):
# of Sites Reserve
=================================== =============== ===============
CERCLA & Equivalent Sites 124 $ 219
Active Facilities 14 69
Closed or Sold Facilities 40 49
--------------- ---------------
Total 178 $ 337
=================================== =============== ===============
In determining the environmental remediation reserves and reasonably possible
range of loss, Occidental refers to currently available information, including
relevant past experience, available technology, regulations in effect, the
timing of remediation and cost-sharing arrangements. Occidental expects that it
may continue to incur additional liabilities beyond those recorded for
environmental remediation at these and other sites. The range of reasonably
possible loss for existing environmental remediation matters could be up to $400
million beyond the amount accrued.
At September 30, 2004, OPC or certain of its subsidiaries have been named in
CERCLA or state equivalent proceedings, as shown below ($ amounts in millions):
Description # of Sites Reserve
=================================== =============== ===============
Minimal/No Exposure(a) 103 $ 6
Reserves between $1-10 MM 15 64
Reserves over $10 MM 6 149
--------------- ---------------
Total 124 $ 219
=================================== =============== ===============
(a) Includes 27 sites for which Maxus Energy Corporation has retained the
liability and indemnified Occidental, 7 sites where Occidental has
denied liability without challenge, 57 sites where Occidental's
reserves are less than $50,000 each, and 12 sites where reserves are
between $50,000 and $1 million each.
Refer to the "Environmental Expenditures" section of Management's Discussion and
Analysis of Financial Condition and Results of Operations in the 2003 Form 10-K
for additional information regarding Occidental's environmental expenditures.
LAWSUITS, CLAIMS, COMMITMENTS, CONTINGENCIES AND RELATED MATTERS
OPC and certain of its subsidiaries have been named in a substantial number of
lawsuits, claims and other legal proceedings. These actions seek, among other
things, compensation for alleged personal injury, breach of contract, property
damage, punitive damages, civil penalties or other losses; or injunctive or
declaratory relief. OPC and certain of its subsidiaries also have been named in
proceedings under CERCLA and other federal, state, local and foreign
environmental laws. These environmental proceedings seek funding or performance
of remediation and, in some cases, compensation for alleged property
22
damage, punitive damages and civil penalties; however, Occidental is usually one
of many companies in these proceedings and has to date been successful in
sharing response costs with other financially sound companies. With respect to
all such lawsuits, claims and proceedings, including environmental proceedings,
Occidental accrues reserves when it believes it is probable a liability has been
incurred and the amount of loss can be reasonably estimated.
During the course of its operations, Occidental is subject to audit by tax
authorities for varying periods in various federal, state, local and foreign tax
jurisdictions. Taxable years prior to 1997 are closed for U.S. federal income
tax purposes. Taxable years 1997 through 2002 are in various stages of audit by
the Internal Revenue Service. Disputes arise during the course of such audits as
to facts and matters of law.
Occidental has guarantees outstanding at September 30, 2004 which encompass
performance bonds, letters of credit, indemnities, commitments and other forms
of guarantees provided by Occidental to third parties, mainly to provide
assurance that Occidental and/or its subsidiaries and affiliates will meet their
various obligations (guarantees). At September 30, 2004, the notional amount of
these guarantees was approximately $450 million. Of this amount, $365 million
relates to Occidental's guarantee of equity investees' debt and other
commitments. The remaining $85 million relates to various indemnities and
guarantees provided to third parties. The carrying amount of these guarantees on
the consolidated balance sheet was immaterial.
It is impossible at this time to determine the ultimate liabilities that OPC and
its subsidiaries may incur resulting from any lawsuits, claims and proceedings,
audits, commitments, contingencies and related matters. If these matters were to
be ultimately resolved unfavorably at amounts substantially exceeding
Occidental's reserves, an outcome not currently anticipated, it is possible that
such outcome could have a material adverse effect upon Occidental's consolidated
financial position or results of operations. However, after taking into account
reserves, management does not expect the ultimate resolution of any of these
matters to have a material adverse effect upon Occidental's consolidated
financial position or results of operations.
ACCOUNTING CHANGES
In December 2003, the FASB revised FIN 46, "Consolidation of Variable Interest
Entities" to exempt certain entities from its requirements and to clarify
certain issues arising during the initial implementation of FIN 46. Occidental
adopted the revised FIN 46 in the first quarter of 2004 and it did not have a
material effect on its financial statements when adopted.
In June 2001, FASB issued Statement of Financial Accounting Standards (SFAS) No.
142, "Goodwill and Other Intangible Assets," which states in paragraph 8(b) that
the accounting specified in SFAS No. 19, "Financial Accounting and Reporting by
Oil and Gas Producing Companies" is not affected by SFAS No. 142. A question has
arisen about whether the balance sheet classification and disclosure
requirements for oil and gas mineral and drilling rights are included in this
exception and, if they are not included, whether these rights should be
classified as intangible assets. In September 2004, FASB issued FASB Staff
Position (FSP) FAS 142-2, "Application of FASB Statement No. 142, Goodwill and
Other Intangible Assets, to Oil- and Gas-Producing Entities" which states that
the scope exception does include the classification and disclosure of mineral
and drilling rights. Therefore, Occidental will continue to classify all of its
mineral and drilling rights within property, plant and equipment. When
Occidental adopts the provisions of this pronouncement in the fourth quarter of
2004, it will have no effect on its results of operations or financial position.
In May 2004, FASB issued FSP FAS 106-2, "Accounting and Disclosure Requirements
Related to the Medicare Prescription Drug, Improvement and Modernization Act of
2003," which specifies the accounting and disclosure requirements for the
prescription drug benefits that are available under this new plan. Occidental
adopted the provisions of this pronouncement in the second quarter of 2004. At
this time, Occidental is unable to determine the impact of the new Medicare
provisions due to the lack of final
23
regulations for determining the actuarial equivalency of its benefits compared
to the new Medicare benefits. Therefore, the retiree medical obligations and
costs reported do not reflect the impact of this legislation in accordance with
FSP No. FAS 106-2. When the regulations are clarified and Occidental is able to
determine the impact of these provisions, it will adopt the requirements of this
standard.
SAFE HARBOR STATEMENT REGARDING OUTLOOK AND FORWARD-LOOKING INFORMATION
Portions of this report contain forward-looking statements and involve risks and
uncertainties that could significantly affect expected results of operations,
liquidity, cash flows and business prospects. Factors that could cause results
to differ materially include, but are not limited to: global commodity pricing
fluctuations; competitive pricing pressures; higher-than-expected costs,
including feedstocks; crude oil and natural gas prices; chemical prices;
potential liability for remedial actions under existing or future environmental
regulations and litigation; potential liability resulting from pending or future
litigation; general domestic and international political conditions; potential
disruption or interruption of Occidental's production or manufacturing
facilities due to accidents, political events or insurgent activity; potential
failure to achieve expected production from existing and future oil and gas
development projects; the supply/demand considerations for Occidental's
products; any general economic recession or slowdown domestically or
internationally; regulatory uncertainties; and not successfully completing, or
any material delay of, any development of new fields, expansion, capital
expenditure, efficiency-improvement project, acquisition or disposition.
Forward-looking statements are generally accompanied by words such as
"estimate", "project", "predict", "will", "anticipate", "plan", "intend",
"believe", "expect" or similar expressions that convey the uncertainty of future
events or outcomes. Occidental 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, 2004, there were no material changes in the
information required to be provided under Item 305 of Regulation S-X included
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations (Incorporating Item 7A) - Derivative Activities" in
Occidental's 2003 Annual Report on Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
Occidental's Chief Executive Officer and Chief Financial Officer supervised and
participated in Occidental's evaluation of its disclosure controls and
procedures as of the end of the period covered by this report. Disclosure
controls and procedures are controls and procedures designed to ensure that
information required to be disclosed in Occidental's periodic reports filed or
submitted under the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. Based upon that
evaluation, Occidental's Chief Executive Officer and Chief Financial Officer
concluded that Occidental's disclosure controls and procedures are effective.
There has been no change in Occidental's internal control over financial
reporting during the period covered by this report that has materially affected,
or is reasonably likely to materially affect, Occidental's internal control over
financial reporting.
24
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 11 to the consolidated
condensed financial statements in Part I of this Form 10-Q.
In September 2004, shortly after Occidental was awarded compensation for value
added tax refunds withheld by Ecuador with respect to Occidental's Block 15
operations in the country, Occidental received formal notification from
Petroecuador, the state oil company of Ecuador, initiating proceedings to
determine if Occidental had violated its Participation Contract for Block 15 or
the Ecuadorian Hydrocarbons Law and whether the alleged violations constitute
grounds for terminating the Participation Contract. The principal allegation
stated in the notice is an assertion that Occidental should have obtained
government approval of a farmout agreement. Occidental believes that it has
complied with all material obligations under the Participation Contract and law
and that any termination of the contract based upon the stated allegations would
be unfounded and would constitute an unlawful expropriation. Occidental is
cooperating with Ecuadorian authorities in the current proceedings and will
continue to strive for an amicable resolution. Block 15 operations represent
approximately eight percent of Occidental's current worldwide production, four
percent of its proved reserves and two percent of its total property, plant and
equipment, net of accumulated depreciation, depletion and amortization.
In April 2004, a number of U.S. companies, including Occidental Chemical
Corporation (OxyChem), were served with seven lawsuits filed in Nicaragua by
approximately two thousand individual plaintiffs. These individuals allege that
they have sustained several billion dollars of personal injury damages as a
result of their alleged exposure to the pesticide DBCP. In the opinion of
management, all of these claims are without merit because, among other things,
the Company believes that OxyChem DBCP was never sold or used in Nicaragua.
Under the applicable Nicaraguan statute, DBCP defendants are required to pay
pre-trial deposits so large as to effectively prohibit defendants from
participating fully in their defense. In two such situations, involving other
defendants, Nicaraguan courts proceeded to enter significant judgments against
the defendants under that statute. OxyChem has filed an answer to these lawsuits
and denied the material allegations without posting such pre-trial deposit. In
the opinion of management, any judgment rendered under the statute would be
unenforceable in the United States. Accordingly, management does not expect the
ultimate resolution of any of these matters to have a material adverse effect
upon Occidental's consolidated financial position or results of operations.
ENVIRONMENTAL PROCEEDINGS
On October 1, 2003, the Environmental Protection Agency (EPA) served OxyChem
with an administrative compliance order and an administrative complaint alleging
certain violations of environmental laws at OxyChem's Pottstown, Pennsylvania
facility. On July 14, 2004, the Regional Judicial Officer for EPA Region III
entered a Consent Agreement and Final Order (CAFO) between OxyChem and EPA.
Pursuant to the CAFO, OxyChem paid the EPA and the U.S. Coast Guard a total of
$150,000 in penalties and agreed to expend not less than $902,000 performing
certain supplemental environmental projects intended to reduce emissions from
the facility.
25
ITEM 6. EXHIBITS
10.1 Occidental Petroleum Corporation 2005 Deferred
Compensation Plan (filed as Exhibit 10.1 to the
Current Report on Form 8-K of Occidental dated
October 14, 2004, filed October 20, 2004, File No.
1-9210).
10.2 Occidental Petroleum Corporation 2005 Deferred
Stock Plan (filed as Exhibit 10.2 to the Current
Report on Form 8-K of Occidental dated October 14,
2004, filed October 20, 2004, File No. 1-9210).
11 Statement regarding the computation of earnings
per share for the three and nine months ended
September 30, 2004 and 2003.
12 Statement regarding the computation of total
enterprise ratios of earnings to fixed charges for
the nine months ended September 30, 2004 and 2003
and the five years ended December 31, 2003.
31.1 Certification of CEO Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of CFO Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certifications of CEO and CFO Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
26
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 2, 2004 S. P. Dominick, Jr.
-----------------------------------------
S. P. Dominick, Jr., Vice President and Controller
(Chief Accounting and Duly Authorized Officer)
27
EXHIBIT INDEX
EXHIBITS
10.1 Occidental Petroleum Corporation 2005 Deferred Compensation Plan
(filed as Exhibit 10.1 to the Current Report on Form 8-K of
Occidental dated October 14, 2004, filed October 20, 2004, File
No. 1-9210).
10.2 Occidental Petroleum Corporation 2005 Deferred Stock Plan (filed
as Exhibit 10.2 to the Current Report on Form 8-K of Occidental
dated October 14, 2004, filed October 20, 2004, File No. 1-9210).
11 Statement regarding the computation of earnings per share for the
three and nine months ended September 30, 2004 and 2003.
12 Statement regarding the computation of total enterprise ratios of
earnings to fixed charges for the nine months ended September 30,
2004 and 2003 and the five years ended December 31, 2003.
31.1 Certification of CEO Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of CFO Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certifications of CEO and CFO Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.