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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 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 1-16619
KERR-McGEE CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware 73-1612389
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
Kerr-McGee Center, Oklahoma City, Oklahoma 73125
(Address of Principal Executive Offices and Zip Code)
Registrant's telephone number, including area code (405) 270-1313
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---
Number of shares of common stock, $1.00 par value, outstanding as of
September 30, 2002: 100,377,804.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
KERR-McGEE CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
(Millions of dollars, except per-share amounts) 2002 2001 2002 2001
------------ ------------ ------------ -------------
Sales $ 984.4 $ 863.7 $ 2,714.9 $ 2,825.2
------------ ------------ ------------ -------------
Costs and Expenses
Costs and operating expenses 412.3 330.1 1,156.2 932.9
Selling, general and administrative expenses 61.0 57.9 238.1 161.5
Shipping and handling expenses 32.1 29.2 86.3 84.6
Depreciation and depletion 184.6 179.6 575.4 502.5
Asset impairment 24.0 47.3 181.5 60.5
Exploration, including dry holes and
amortization of undeveloped leases 70.2 45.5 148.9 137.4
Taxes, other than income taxes 28.8 25.6 83.4 88.4
Provision for environmental remediation and restoration,
net of recoveries (20.0) 78.4 70.4 82.1
Interest and debt expense 68.4 47.7 207.7 129.5
------------ ------------ ------------ -------------
Total Costs and Expenses 861.4 841.3 2,747.9 2,179.4
------------ ------------ ------------ -------------
123.0 22.4 (33.0) 645.8
Other Income (Expense) (14.1) 2.8 (52.0) 197.7
------------ ------------ ------------ -------------
Income (Loss) before Income Taxes 108.9 25.2 (85.0) 843.5
Provision for Income Taxes (195.7) (7.9) (181.2) (311.0)
------------ ------------ ------------ -------------
Income (Loss) from Continuing Operations (86.8) 17.3 (266.2) 532.5
Income from Discontinued Operations (net of income tax provision
(benefit) of $ .7 and $6.7 for the third quarter of 2002 and
2001, respectively, and $(23.8) and $17.5 for the first nine
months of 2002 and 2001, respectively) .4 9.0 127.3 23.8
Cumulative Effect of Change in Accounting Principle
(net of benefit for income taxes of $10.8) - - - (20.3)
------------ ------------ ------------ -------------
Net Income (Loss) $ (86.4) $ 26.3 $ (138.9) $ 536.0
============ ============ ============ =============
Income (Loss) per Common Share
Basic -
Continuing operations $ (.86) $ .18 $ (2.65) $ 5.54
Discontinued operations - .09 1.27 .25
Cumulative effect of change in accounting principle - - - (.21)
------------ ------------ ------------ -------------
Total $ (.86) $ .27 $ (1.38) $ 5.58
============ ============ ============ =============
Diluted -
Continuing operations $ (.86) $ .18 $ (2.65) $ 5.17
Discontinued operations - .09 1.27 .22
Cumulative effect of change in accounting principle - - - (.19)
------------ ------------ ------------ -------------
Total $ (.86) $ .27 $ (1.38) $ 5.20
============ ============ ============ =============
Dividends Declared per Common Share $ .45 $ .45 $ 1.35 $ 1.35
============ ============ ============ =============
The accompanying notes are an integral part of this statement.
KERR-McGEE CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
September 30, December 31,
(Millions of dollars) 2002 2001
--------------- --------------
ASSETS
- ------
Current Assets
Cash $ 142.3 $ 91.3
Accounts receivable 563.3 421.0
Inventories 369.1 428.7
Deposits, prepaid expenses and other assets 113.0 351.1
Current assets associated with properties held for disposal 73.1 75.4
--------------- --------------
Total Current Assets 1,260.8 1,367.5
--------------- --------------
Property, Plant and Equipment 13,565.0 13,402.7
Less reserves for depreciation, depletion and amortization (6,033.9) (6,024.8)
--------------- --------------
7,531.1 7,377.9
--------------- --------------
Investments and Other Assets 1,012.8 784.1
Goodwill 355.4 354.8
Long-term Assets Associated with Properties Held for Disposal 670.0 1,076.6
--------------- --------------
Total Assets $ 10,830.1 $ 10,960.9
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities
Accounts payable $ 624.3 $ 619.5
Short-term borrowings .2 8.4
Long-term debt due within one year 5.8 26.4
Other current liabilities 634.1 475.5
Current liabilities associated with properties held for disposal 47.4 45.5
--------------- --------------
Total Current Liabilities 1,311.8 1,175.3
--------------- --------------
Long-Term Debt 4,260.3 4,539.4
--------------- --------------
Deferred Income Taxes 1,342.0 1,387.3
Other Deferred Credits and Reserves 784.5 645.9
Long-Term Liabilities Associated with Properties Held for Disposal 226.6 38.9
--------------- --------------
2,353.1 2,072.1
--------------- --------------
Stockholders' Equity
Common stock, par value $1 - 300,000,000 shares
authorized, 100,385,103 shares issued at 9-30-02
and 100,186,350 shares issued at 12-31-01 100.4 100.2
Capital in excess of par value 1,687.3 1,676.6
Preferred stock purchase rights 1.0 1.0
Retained earnings 1,268.5 1,542.6
Accumulated other comprehensive loss (82.2) (64.2)
Common shares in treasury, at cost - 7,299 shares
at 9-30-02 and 1,020 at 12-31-01 (.4) (.1)
Deferred compensation (69.7) (82.0)
--------------- --------------
Total Stockholders' Equity 2,904.9 3,174.1
--------------- --------------
Total Liabilities and Stockholders' Equity $ 10,830.1 $ 10,960.9
=============== ==============
The "successful efforts" method of accounting for oil and gas exploration and
production activities has been followed in preparing this balance sheet.
The accompanying notes are an integral part of this statement.
KERR-McGEE CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
(Millions of dollars) 2002 2001
------------- -------------
Operating Activities
- --------------------
Net income (loss) $ (138.9) $ 536.0
Adjustments to reconcile net income or loss to net cash
provided by operating activities -
Depreciation, depletion and amortization 630.1 549.7
Asset impairment 207.6 60.5
Dry hole costs 48.8 43.6
Deferred income taxes 126.3 147.1
Provision for environmental remediation and
restoration, net of recoveries 80.0 82.1
Gain on exploration and production divestitures (108.6) -
(Gain) loss on sale and retirement of assets 2.7 (3.6)
Noncash items affecting net income or loss 116.8 (151.8)
Other net cash provided by (used in) operating activities 77.7 (49.7)
------------- -------------
Net Cash Provided by Operating Activities 1,042.5 1,213.9
------------- -------------
Investing Activities
- --------------------
Capital expenditures (886.2) (1,349.2)
Dry hole expense (48.8) (43.6)
Proceeds from exploration and production divestitures 412.0 -
Acquisitions (23.8) (980.8)
Other investing activities 8.8 (47.3)
------------- -------------
Net Cash Used in Investing Activities (538.0) (2,420.9)
------------- -------------
Financing Activities
- --------------------
Issuance of long-term debt 783.0 1,703.0
Repayment of long-term debt (1,092.4) (416.2)
Decrease in short-term borrowings (8.2) (3.3)
Issuance of common stock 5.4 31.8
Dividends paid (135.4) (127.9)
------------- -------------
Net Cash Provided by (Used in) Financing Activities (447.6) 1,187.4
------------- -------------
Effects of Exchange Rate Changes on Cash and Cash Equivalents (5.9) (2.9)
------------- -------------
Net Increase (Decrease) in Cash and Cash Equivalents 51.0 (22.5)
Cash and Cash Equivalents at Beginning of Period 91.3 144.0
------------- -------------
Cash and Cash Equivalents at End of Period $ 142.3 $ 121.5
============= =============
The accompanying notes are an integral part of this statement.
KERR-McGEE CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
A. Basis of Presentation
The condensed financial statements included herein have been prepared by
the company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission and, in the opinion of management,
include all adjustments, consisting only of normal recurring accruals,
necessary to present fairly the resulting operations for the indicated
periods. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed
or omitted pursuant to such rules and regulations. Although the company
believes that the disclosures are adequate to make the information
presented not misleading, it is suggested that these condensed financial
statements be read in conjunction with the financial statements and the
notes thereto included in the company's latest annual report on Form
10-K. Presentation of the 2001 amounts has been changed to be consistent
with the presentation of the oil and gas operations in Kazakhstan,
Indonesia and Australia as discontinued in 2002 (see note D).
On August 1, 2001, the company completed the acquisition of all the
outstanding shares of common stock of HS Resources, Inc., an independent
oil and gas exploration and production company. To accomplish the
acquisition, the company organized and formed a new holding company,
Kerr-McGee Holdco, which later changed its name to Kerr-McGee
Corporation. All the outstanding shares of the former Kerr-McGee
Corporation were cancelled, and the same number of shares were issued by
the new holding company. The former Kerr-McGee Corporation was renamed
Kerr-McGee Operating Corporation and is now a wholly owned subsidiary of
the holding company, along with Kerr-McGee Rocky Mountain Corporation
(formerly HS Resources).
B. Derivatives
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities"
(FAS 133). The statement as amended requires recording all derivative
instruments as assets or liabilities, measured at fair value. Kerr-McGee
adopted this standard on January 1, 2001, by recording the fair value of
all the foreign currency forward purchase and sales contracts, and by
separating and recording the fair value of the options associated with
the company's debt exchangeable for stock of Devon Energy Corporation
(Devon) presently owned by the company. In adopting the standard, the
company recognized a net expense of $20.3 million in the 2001 first
quarter as a cumulative effect of the accounting change. Also, in
accordance with FAS 133, the company chose to reclassify 85% of the
Devon shares owned to "trading" from the "available for sale" category
of investments. On January 1, 2001, the company recognized after-tax
income totaling $117.9 million for the unrealized appreciation on the
Devon shares reclassified to trading. The portion of the stock
investment now classified as "trading" is marked-to-market through
income each month.
In March 2002, the company hedged a portion of its oil and gas
production for the period April through December 2002 to increase the
predictability of its cash flows and support additional capital
projects. Excluding the Denver-Julesburg Basin production, the hedges
outstanding at September 30, 2002, cover approximately 61% of the
expected remaining 2002 oil production (57% of the total worldwide
expected remaining 2002 oil production) and approximately 47% of
expected remaining 2002 U.S. gas production (34% of the total U.S.
expected remaining 2002 gas production). These positions have been
designated and qualify as cash flow hedges of a portion of 2002
production.
The production hedging transactions are in the form of fixed price
swaps. The hedges cover 30,000 barrels of oil per day of domestic oil
production at an average price of $24.09 per barrel and 60,000 barrels
of oil per day of North Sea oil production at an average price of $23.17
per barrel. The company also entered into price swaps covering 250,000
MMBtu per day of domestic natural gas production at an average price of
$3.10 per MMBtu. The price swaps will be settled using the closing
prices on the New York Mercantile Exchange (NYMEX) for domestic light
sweet crude and natural gas, and the International Petroleum Exchange
(IPE) for Brent crude.
The following table sets forth the company's outstanding oil and natural
gas hedging contracts executed in 2002 and their fair value at September
30, 2002.
U.S. Natural Gas
North Sea Oil Hedging U.S. Oil Hedging Hedging
(Millions of ----------------------------- ---------------------------- -----------------------------
dollars) Notional Liability Notional Liability Notional Liability
Volumes Fair Volumes Fair Volumes Fair
2002 (Bbls) Value (Bbls) Value (MMBtu) Value
--------------- --------------- ------------ -------------- ----------- -------------- -------------
October 1,860,000 $(10.4) 930,000 $ (5.9) 7,750,000 $ (4.6)
November 1,800,000 (10.0) 900,000 (5.7) 7,500,000 (7.8)
December 1,860,000 (10.2) 930,000 (5.7) 7,750,000 (9.4)
--------------- ------------ -------------- ----------- -------------- -------------
Total 5,520,000 $(30.6) 2,760,000 $(17.3) 23,000,000 $(21.8)
=============== ============ ============== =========== ============== =============
The changes in fair value of these contracts are recorded in accumulated
other comprehensive loss to the extent the hedges are effective. The
amounts in accumulated other comprehensive loss, $69.1 million loss at
September 30, 2002, will be recognized in earnings when the contracts
are settled under the terms of the swap agreements. The company expects
to reclassify all of the existing net losses (assuming no further
changes in fair market value of the contracts) at September 30, 2002,
into earnings during the next quarter. Losses from the 2002 hedging
program totaling $33 million and $58.2 million were recognized in the
2002 third quarter and in the first nine months of 2002, respectively.
These losses offset the prices realized on the physical sale of the
crude oil and natural gas. The losses for hedge ineffectiveness
recognized in other income were $1 million in the 2002 third quarter and
$1.2 million for the nine months.
In May 2002, the company began accounting for certain of its previously
existing derivative instruments as hedges against fluctuating commodity
prices for its Denver-Julesburg Basin natural gas production. The
company has in place through October 2002 natural gas fixed-price swaps
totaling 110,000 MMBtu per day at an average price of $2.82 per MMBtu.
The fixed-price swaps cover approximately 19% of the expected remaining
2002 gas production from the Denver-Julesburg Basin (5% of the total
U.S. expected remaining 2002 gas production) and will be settled using
the closing price on NYMEX. In connection with these fixed price swaps,
the company also entered into natural gas basis swaps covering 75,000
MMBtu per day through October 2002. The fixed price and basis swaps had
a net asset fair value of $.1 million at September 30, 2002, and the
company had deferred gains totaling $2.7 million in accumulated other
comprehensive income associated with these contracts. The company
expects to reclassify the entire amount of these gains (assuming no
further changes in fair market value of the contracts) into earnings by
the end of October 2002. During the 2002 third quarter, a $14 million
gain was recognized related to contracts that settled during the period,
and for the first nine months of 2002, a $17.6 million gain was
recognized. These gains offset the prices realized on the physical sale
of the natural gas. The amount of the hedge ineffectiveness in the 2002
third quarter and nine months was immaterial.
As discussed in the company's 2001 Form 10-K, the company is also party
to other commodity contracts that have not been accounted for as hedges
and are recorded at their fair market value on the balance sheet and
marked-to-market through income each month. The net fair market value of
these commodity-related derivatives was a $37.8 million asset at
September 30, 2002. The net gain associated with these derivatives
totaled $1.6 million in the third quarter of 2002 and a net loss of
$25.6 million in the first nine months of 2002.
From time to time, the company enters into forward contracts to buy and
sell foreign currencies. Certain of these contracts (purchases of
Australian dollars and British pound sterling) have been designated and
have qualified as cash flow hedges of the company's anticipated future
cash flow needs for a portion of its capital expenditures and operating
costs. These forward contracts generally have durations of less than
three years. The resulting changes in fair value of these contracts are
recorded in accumulated other comprehensive loss. The estimated fair
value of these contracts at September 30, 2002, was recorded as a $5.9
million liability. The $9.3 million loss in accumulated other
comprehensive loss at September 30, 2002, will be recognized in earnings
in the periods during which the hedged forecasted transactions affect
earnings (i.e., when the forward contracts close in the case of a hedge
of operating costs and when the hedged assets are depreciated in the
case of a hedge of capital expenditures). In the third quarter and nine
months of 2002, the company reclassified $1.4 million and $3.8 million,
respectively, of losses on forward contracts from accumulated other
comprehensive loss to operating expenses in the income statement. Of the
existing net losses at September 30, 2002, approximately $3.8 million
will be reclassified into earnings during the next 12 months, assuming
no further changes in fair value of the contracts. No hedges were
discontinued during the third quarter, and since forward exchange rates
are used to measure the derivative values and the forward contracts have
not been closed early, ineffectiveness was not material.
The company has entered into other forward contracts to sell foreign
currencies, which will be collected as a result of pigment sales
denominated in foreign currencies, primarily European currencies. These
contracts have not been designated as hedges even though they do protect
the company from changes in foreign currency rate changes. The estimated
fair value of these contracts was immaterial. Almost all of the pigment
receivables have been sold in an asset securitization program at their
equivalent U.S. dollar value at the date the receivables were sold.
However, the company retains the risk of foreign currency rate changes
between the date of sale and collection of the receivables.
In connection with the issuance of $350 million of 5.375% notes due
April 15, 2005, the company entered into an interest rate swap agreement
in April 2002. The terms of the agreement effectively change the
interest the company will pay on the debt until maturity from the fixed
rate to a variable rate of LIBOR plus 87.5 basis points. The company
considers the swap to be a hedge against the change in fair value of the
debt as a result of interest rate changes. The estimated fair value of
the interest rate swap was recorded as an asset of $25.1 million at
September 30, 2002. The company recognized a $2.1 million interest
expense reduction in the 2002 third quarter and $3.9 million in the
first nine months of 2002 from the swap arrangement.
During October 2002, the company began adding to its existing oil and
gas hedging positions and expects to continue its oil and gas hedging
program in 2003. See Item 3. Quantitative and Qualitative Disclosures
about Market Risk.
C. Goodwill and Intangible Assets
In June 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (FAS) No. 141, "Business
Combinations," and FAS 142, "Goodwill and Other Intangible Assets." FAS
141 requires all business combinations initiated after September 30,
2001, to be accounted for under the purchase method. The company adopted
FAS 141 for its acquisition of HS Resources. The company adopted FAS 142
on January 1, 2002, for all goodwill and other intangible assets. This
statement changes the accounting for goodwill and intangible assets that
have indefinite useful lives from an amortization method to an
impairment approach. The nonamortization provisions of this standard
were immediately applicable for any goodwill acquired after June 30,
2001. The company has completed its 2002 impairment test for goodwill
and indefinite lived intangibles, with no impairment being indicated.
The acquired intangible assets and goodwill of the company as of
September 30, 2002, were as follows:
Gross
Carrying Accumulated
(Millions of dollars) Amount Amortization
--------- ------------
Amortized intangible assets:
Proprietary seismic library (10-year life) and other $ 2.1 $ .2
Marketing intangible assets (5-year life) 16.9 3.6
--------- ------------
Total $ 19.0 $3.8
========= ============
Carrying
Amount
---------
Unamortized intangible assets:
Intellectual properties associated
with pigment manufacturing processes $ 52.1
Goodwill $ 355.4
Amortization of purchased intangibles for each of the next five years is
estimated to be $5.1 million in 2003, $3.4 million in 2004, $3.4 million
in 2005, $.9 million in 2006 and $.4 million in 2007. Of the goodwill
recorded on the balance sheet of the company at September 30, 2002,
$346.8 million relates to the exploration and production segment, and
$8.6 million relates to the chemical pigment segment. For the first nine
months of 2002, the chemical pigment segment goodwill increased $.8
million as a result of foreign currency translation gains.
The following table presents net income (loss) for each period exclusive
of amortization expense recognized in such periods related to
intangibles and goodwill, which are no longer amortized.
Three Months Ended Nine Months Ended
September 30, September 30,
(Millions of dollars) 2002 2001 2002 2001
------- ------ ------- ------
Reported net income (loss) $(86.4) $26.3 $(138.9) $536.0
Add back intangible amortization,
net of tax - 1.3 - 2.5
------ ----- ------- ------
Adjusted net income (loss) $(86.4) $27.6 $(138.9) $538.5
====== ===== ======= ======
Diluted earnings per share for the third quarter of 2001 would have been
1 cent per share higher or 28 cents, and for the first nine months of
2001 would have been 2 cents per share higher, or $5.22, if the new
standard had been applied in 2001.
D. Discontinued Operations and Asset Impairments
In August 2001, the Financial Accounting Standards Board issued FAS 144,
"Accounting for Impairment or Disposal of Long-Lived Assets." FAS 144
supersedes FAS 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of," and the portion of the
Accounting Principles Board Opinion No. 30 that deals with the disposal
of a business segment. The company adopted the statement on January 1,
2002.
During the second quarter of 2002, the company approved a plan to
dispose of its exploration and production interest in the Jabung block
of Sumatra, Indonesia. During the first quarter of 2002, the company
approved a plan to dispose of its exploration and production operations
in Kazakhstan and of its interest in the Bayu-Undan project in the East
Timor Sea offshore Australia. The results of these operations have been
reported separately as discontinued operations in the company's
Consolidated Statement of Operations for both 2002 and 2001. On June 13,
2002, the company completed the sale of its interest in the Jabung block
in Sumatra for $170.7 million in cash with $11 million contingent
purchase price pending government approval of the LPG project. The sale
resulted in a pretax gain of $72.5 million (excluding the contingent
purchase). On May 3, 2002, the company completed the sale of its
interest in the Bayu-Undan project for $132.3 million in cash. The sale
resulted in a pretax gain of $34.8 million. The net proceeds received by
the company were used to reduce outstanding debt.
Revenues applicable to the discontinued operations totaled $4.6 million
and $19.8 million for the three months ended September 30, 2002 and
2001, respectively, and $29.8 million and $55.3 million for the nine
months ended September 30, 2002 and 2001, respectively.
As part of the company's strategic plan to divest non-core oil and gas
properties, certain U.S., North Sea, Kazakhstan and Ecuador oil and gas
assets held for disposal were evaluated and deemed impaired during the
2002 second and third quarters. The impairment losses reflect the
difference between the estimated sales prices for the individual
properties or group of properties, less the cost to sell, and the
carrying amount of the net assets. The amount of the impairment loss
associated with the U.S., North Sea and Ecuador assets held for sale
totaled $36.8 million in the 2002 third quarter and $183.4 million for
the first nine months of 2002. These amounts are reported as asset
impairment in the Consolidated Statement of Operations. Also during the
2002 third quarter, the company reversed a portion of the impairment
loss recognized in the 2002 second quarter as a result of higher
estimates for sales prices on certain U.S. onshore properties than
originally estimated. A total of $30.1 million was reversed from the
previous quarter's impairment charge and was reflected in asset
impairment in the Consolidated Statement of Operations. The impairment
associated with the disposal of the Kazakhstan assets is reported as
part of discontinued operations, which includes an asset impairment loss
of $1.4 million in the 2002 third quarter and $26.1 million in the first
nine months of 2002.
Impairment provisions have also been made for a Gulf of Mexico field and
a northwest North Sea field that the company does not currently plan to
dispose of since the current estimate of future cash flows from the
properties were less than the carrying value of the assets. Impairment
losses to write down these two properties to fair value totaled $17.3
million in the 2002 third quarter and $28.2 million during the first
nine months of 2002 and are reported as asset impairments in the
Consolidated Statements of Operations.
The assets and liabilities of all the discontinued operations and other
assets being held for sale have been reclassified as Assets/Liabilities
Associated with Properties Held for Disposal in the Consolidated Balance
Sheet.
E. Income Tax and Interest Payments
Net cash provided by operating activities reflects cash payments for
income taxes and interest as follows:
Nine Months Ended
September 30,
(Millions of dollars) 2002 2001
------- ------
Income tax payments $ 69.3 $344.3
Less refunds received (264.3) (19.0)
------- ------
Net income tax payments (refunds) $(195.0) $325.3
======= ======
Interest payments $ 217.0 $130.2
======= ======
F. Financial Instruments and Comprehensive Income
The third-quarter 2002 comprehensive loss was $120.6 million, compared
with comprehensive income of $30.6 million in the prior-year third
quarter. For the first nine months ended September 30, 2002,
comprehensive loss was $156.9 million, compared with comprehensive
income of $476.5 million in the same 2001 period.
The company has certain investments that are considered to be available
for sale. These financial instruments are carried in the Consolidated
Balance Sheet at fair value, which is based on quoted market prices. The
company had no securities classified as held to maturity at September
30, 2002, or December 31, 2001. At September 30, 2002, and December 31,
2001, available-for-sale securities for which fair value can be
determined were as follows:
September 30, 2002 December 31, 2001
----------------------------- -------------------------------
Gross Gross
Unrealized Unrealized
Fair Holding Fair Holding
(Millions of dollars) Value Cost Gain Value Cost Loss
----- ---- ---------- ----- ---- ----------
Equity securities $73.3 $31.9 $13.4 (1) $58.7 $31.9 $(1.2) (1)
U.S. government obligations -
Maturing within one year - - - 2.9 2.9 -
Maturing between one year
and four years 1.5 1.5 - 1.7 1.7 -
----- -----
Total $13.4 $(1.2)
===== =====
(1) These amounts include $28 million of gross unrealized hedging losses
on 15% of the exchangeable debt at the time of adoption of FAS 133.
G. Equity Affiliates
Investments in equity affiliates totaled $120.1 million at September 30,
2002, and $101 million at December 31, 2001. Equity loss related to the
investments is included in Other Income in the Consolidated Statement of
Operations and totaled $4.8 million and $2.6 million for the three
months ended September 30, 2002 and 2001, respectively. For the first
nine months of 2002, the equity loss totaled $20.5 million, compared
with a loss of $3.6 million for the same 2001 period.
H. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share (EPS) from continuing operations for the three-month
and nine-month periods ended September 30, 2002 and 2001.
For the Three Months Ended September 30,
---------------------------------------------------------------------------------
2002 2001
------------------------------------- ------------------------------------
Loss Income
from from
(In millions, except Continuing Per-Share Continuing Per-Share
per-share amounts) Operations Shares Loss Operations Shares Income
---------- ------ --------- ---------- ------ ---------
Basic EPS $(86.8) 100.4 $(.86) $17.3 98.5 $.18
===== ====
Effect of Dilutive Securities:
5 1/4% convertible debentures - - - -
Stock options - - - -
------ ------ ----- ------
Diluted EPS $(86.8) 100.4 $(.86) $17.3 98.5 $.18
====== ====== ===== ===== ====== ====
For the Nine Months Ended September 30,
---------------------------------------------------------------------------------
2002 2001
------------------------------------- ------------------------------------
Loss Income
from from
(In millions, except Continuing Per-Share Continuing Per-Share
per-share amounts) Operations Shares Loss Operations Shares Income
---------- ------ --------- ---------- ------ ---------
Basic EPS $(266.2) 100.3 $(2.65) $532.5 96.1 $5.54
====== =====
Effect of Dilutive Securities:
5 1/4% convertible debentures - - 16.0 9.8
Stock options - - - .2
------- ------ ------ ------ ----- -----
Diluted EPS $(266.2) 100.3 $(2.65) $548.5 106.1 $5.17
======= ====== ====== ====== ===== =====
I. Accounts Receivable Sales
In December 2000, the company began an accounts receivable monetization
program for its pigment business through the sale of selected accounts
receivable with a three-year, credit-insurance-backed asset
securitization program. The company retained servicing responsibilities
and subordinated interests and will receive a servicing fee of 1.07% of
the receivables sold for the period of time outstanding, generally 60 to
120 days. No recourse obligations were recorded since the company has
very limited obligations for any recourse actions on the sold
receivables. The collection of the receivables is insured, and only
receivables that qualify for credit insurance can be sold. A portion of
the insurance is reinsured by the company's captive insurance company.
However, the company believes that the risk of insurance loss is very
low since its bad-debt experience has historically been insignificant.
The company also received preference stock in the special-purpose entity
equal to 3.5% of the receivables sold. The preference stock is
essentially a retained deposit to provide further credit enhancements,
if needed, but otherwise recoverable by the company at the end of the
program.
The company sold $199.2 million and $152.6 million of its pigment
receivables during the third quarter of 2002 and 2001, respectively. The
sale of the receivables resulted in pretax losses of $1.2 million and
$2.3 million during the third quarter of 2002 and 2001, respectively.
During the first nine months of 2002 and 2001, the company sold $485.1
million and $460.5 million, respectively, of its pigment receivables.
The sale of the receivables resulted in pretax losses of $3.5 million
and $6.9 million during the first nine months of 2002 and 2001,
respectively. The losses were equal to the difference in the book value
of the receivables sold and the total of cash and the fair value of the
deposit retained by the special-purpose entity. The outstanding balance
on receivables sold totaled $114.3 million at September 30, 2002, and
$96.1 million at December 31, 2001.
J. Income Taxes
The reported amount of income tax expense attributable to loss from
continuing operations for the first nine months of 2002 differs from the
amount that would be computed using the U.S. Federal income tax rate.
The primary reasons for the difference and related tax effects are as
follow:
Income
(Millions of dollars) Tax
Expense
-------
U.S. statutory rate - 35% $ 29.8
U.K. tax rate change (146.4)
Reversal of deferred tax asset associated
with U.K. properties held for sale (51.6)
U.K. petroleum revenue tax (19.5)
All other 6.5
-------
$ 181.2
=======
On July 24, 2002, the United Kingdom government made certain changes to
its existing tax laws. Under one of these changes, companies will pay a
supplementary corporate tax charge of 10% on profits from their U.K. oil
and gas production. This is in addition to the current 30% corporate tax
on these profits. The U.K. government has also accelerated tax
depreciation for capital investments in U.K. upstream activities.
Finally, the U.K. government, subject to consultation, intends to
abolish North Sea royalty. It is anticipated that royalty will not be
abolished until after 2002. The catch-up adjustment for the tax rate
changes increased the company's 2002 third-quarter provision for
deferred income taxes by $137.6 million and the current provision on
operations for the first two quarters of 2002 by $8.8 million.
K. Condensed Consolidating Financial Information
In connection with the acquisition of HS Resources, a holding company
structure was implemented (see Note A. for a discussion of the new
organization).
On October 3, 2001, Kerr-McGee Corporation issued $1.5 billion of
long-term notes in a public offering. The notes are general, unsecured
obligations of the company and rank on parity with all of the company's
other unsecured and unsubordinated indebtedness. Kerr-McGee Operating
Corporation and Kerr-McGee Rocky Mountain Corporation have guaranteed
the notes. Additionally, Kerr-McGee Corporation has guaranteed all
indebtedness of its subsidiaries, including the indebtedness assumed in
the purchase of HS Resources. As a result of these guarantee
arrangements, the company is required to present condensed consolidating
financial information.
The following condensed consolidating financial information presents the
statement of operations for the third quarter and first nine months of
2002 and 2001, the balance sheet as of September 30, 2002, and December
31, 2001, and the statement of cash flows for the first nine months of
2002 and 2001, for (a) Kerr-McGee Corporation, the holding company, (b)
the guarantor subsidiaries, and (c) the non-guarantor subsidiaries on a
consolidated basis.
Kerr-McGee Corporation and Subsidiaries
Condensed Consolidating Statement of Operations
For the Three Months Ended September 30, 2002
Kerr-McGee Guarantor Non-Guarantor
(Millions of dollars) Corporation Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------------- -------------- ------------- -------------
Sales $ - $ 80.6 $1,008.1 $(104.3) $ 984.4
-------------- ------------- -------------- ------------- -------------
Costs and Expenses
Costs and operating expenses - 27.2 489.8 (104.7) 412.3
Selling, general and administrative
expenses - 17.3 43.7 - 61.0
Shipping and handling expenses - 1.3 30.8 - 32.1
Depreciation and depletion - 30.2 154.4 - 184.6
Asset impairment - - 24.0 - 24.0
Exploration, including dry holes and
amortization of undeveloped leases - 2.2 68.0 - 70.2
Taxes, other than income taxes .1 4.8 23.9 - 28.8
Provision for environmental remediation
and restoration, net of recoveries - (25.8) 5.8 - (20.0)
Interest and debt expense 29.0 64.4 25.1 (50.1) 68.4
-------------- ------------- -------------- ------------- -------------
Total Costs and Expenses 29.1 121.6 865.5 (154.8) 861.4
-------------- ------------- -------------- ------------- -------------
(29.1) (41.0) 142.6 50.5 123.0
Other Income (Expense) (1.2) 159.0 (4.1) (167.8) (14.1)
-------------- ------------- -------------- ------------- -------------
Income (Loss) before Income Taxes (30.3) 118.0 138.5 (117.3) 108.9
Benefit (Provision) for Income Taxes 9.9 (199.7) (205.6) 199.7 (195.7)
-------------- ------------- -------------- ------------- -------------
Income (Loss) from Continuing Operations (20.4) (81.7) (67.1) 82.4 (86.8)
Income from Discontinued Operations,
net of tax - - .4 - .4
-------------- ------------- -------------- ------------- -------------
Net Income (Loss) $ (20.4) $ (81.7) $ (66.7) $ 82.4 $ (86.4)
============== ============= ============== ============= =============
Kerr-McGee Corporation and Subsidiaries
Condensed Consolidating Statement of Operations
For the Three Months Ended September 30, 2001
Kerr-McGee Guarantor Non-Guarantor
(Millions of dollars) Corporation Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------------- -------------- ------------- -------------
Sales $ - $ (2.2) $ 931.3 $ (65.4) $ 863.7
-------------- ------------- -------------- ------------- -------------
Costs and Expenses
Costs and operating expenses - 1.2 394.5 (65.6) 330.1
Selling, general and administrative
expenses - 14.4 43.6 (.1) 57.9
Shipping and handling expenses - - 29.2 - 29.2
Depreciation and depletion - 2.1 177.5 - 179.6
Asset impairment - - 47.3 - 47.3
Exploration, including dry holes and
amortization of undeveloped leases - - 45.5 - 45.5
Taxes, other than income taxes - .9 24.7 - 25.6
Provision for environmental remediation
and restoration - 78.4 - - 78.4
Interest and debt expense 6.6 50.0 33.8 (42.7) 47.7
-------------- ------------- -------------- ------------- -------------
Total Costs and Expenses 6.6 147.0 796.1 (108.4) 841.3
-------------- ------------- -------------- ------------- -------------
(6.6) (149.2) 135.2 43.0 22.4
Other Income (Expense) (125.6) 172.5 45.8 (89.9) 2.8
-------------- ------------- -------------- ------------- -------------
Income (Loss) before Income Taxes (132.2) 23.3 181.0 (46.9) 25.2
Benefit (Provision) for Income Taxes 38.5 (17.7) (46.4) 17.7 (7.9)
-------------- ------------- -------------- ------------- -------------
Income (Loss) from Continuing Operations (93.7) 5.6 134.6 (29.2) 17.3
Income from Discontinued Operations,
net of tax - - 9.0 - 9.0
-------------- ------------- -------------- ------------- -------------
Net Income (Loss) $ (93.7) $ 5.6 $ 143.6 $ (29.2) $ 26.3
============== ============= ============== ============= =============
Kerr-McGee Corporation and Subsidiaries
Condensed Consolidating Statement of Operations
For the Nine Months Ended September 30, 2002
Kerr-McGee Guarantor Non-Guarantor
(Millions of dollars) Corporation Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------------- -------------- ------------- -------------
Sales $ - $ 235.5 $2,732.8 $(253.4) $2,714.9
-------------- ------------- -------------- ------------- -------------
Costs and Expenses
Costs and operating expenses - 76.9 1,333.7 (254.4) 1,156.2
Selling, general and administrative
expenses - 118.0 120.1 - 238.1
Shipping and handling expenses - 3.9 82.4 - 86.3
Depreciation and depletion - 94.3 481.1 - 575.4
Asset impairment - 3.1 178.4 - 181.5
Exploration, including dry holes and
amortization of undeveloped leases - 7.4 141.5 - 148.9
Taxes, other than income taxes .1 14.6 68.7 - 83.4
Provision for environmental remediation
and restoration, net of recoveries - 48.0 22.4 - 70.4
Interest and debt expense 84.1 193.2 81.5 (151.1) 207.7
-------------- ------------- -------------- ------------- -------------
Total Costs and Expenses 84.2 559.4 2,509.8 (405.5) 2,747.9
-------------- ------------- -------------- ------------- -------------
(84.2) (323.9) 223.0 152.1 (33.0)
Other Income (Expense) (245.7) 368.3 21.1 (195.7) (52.0)
-------------- ------------- -------------- ------------- -------------
Income (Loss) before Income Taxes (329.9) 44.4 244.1 (43.6) (85.0)
Benefit (Provision) for Income Taxes 117.6 (167.0) (298.8) 167.0 (181.2)
-------------- ------------- -------------- ------------- -------------
Income (Loss) from Continuing Operations (212.3) (122.6) (54.7) 123.4 (266.2)
Income from Discontinued Operations,
net of tax - - 127.3 - 127.3
-------------- ------------- -------------- ------------- -------------
Net Income (Loss) $(212.3) $(122.6) $ 72.6 $ 123.4 $ (138.9)
============== ============= ============== ============= =============
Kerr-McGee Corporation and Subsidiaries
Condensed Consolidating Statement of Operations
For the Nine Months Ended September 30, 2001
Kerr-McGee Guarantor Non-Guarantor
(Millions of dollars) Corporation Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------------- -------------- ------------- -------------
Sales $ - $ (6.4) $3,105.2 $(273.6) $2,825.2
-------------- ------------- -------------- ------------- -------------
Costs and Expenses
Costs and operating expenses - 3.3 1204.0 (274.4) 932.9
Selling, general and administrative
expenses - 41.8 119.7 - 161.5
Shipping and handling expenses - - 84.6 - 84.6
Depreciation and depletion - 6.2 496.3 - 502.5
Asset impairment - - 60.5 - 60.5
Exploration, including dry holes and
amortization of undeveloped leases - .1 137.3 - 137.4
Taxes, other than income taxes - 4.3 84.1 - 88.4
Provision for environmental remediation
and restoration, net of recoveries - 82.1 - - 82.1
Interest and debt expense 6.6 148.9 104.9 (130.9) 129.5
-------------- ------------- -------------- ------------- -------------
Total Costs and Expenses 6.6 286.7 2,291.4 (405.3) 2,179.4
-------------- ------------- -------------- ------------- -------------
(6.6) (293.1) 813.8 131.7 645.8
Other Income (Expense) (125.6) 1,161.0 132.0 (969.7) 197.7
-------------- ------------- -------------- ------------- -------------
Income (Loss) before Income Taxes (132.2) 867.9 945.8 (838.0) 843.5
Benefit (Provision) for Income Taxes (3.0) (332.2) (308.0) 332.2 (311.0)
-------------- ------------- -------------- ------------- -------------
Income (Loss) from Continuing Operations (135.2) 535.7 637.8 (505.8) 532.5
Income from Discontinued Operations,
net of tax - - 23.8 - 23.8
Cumulative Effect of Change in Accounting
Principle, net of tax - (21.0) .7 - (20.3)
-------------- ------------- -------------- ------------- -------------
Net Income (Loss) $(135.2) $ 514.7 $ 662.3 $(505.8) $ 536.0
============== ============= ============== ============= =============
Kerr-McGee Corporation and Subsidiaries
Condensed Consolidating Balance Sheet
September 30, 2002
Kerr-McGee Guarantor Non-Guarantor
(Millions of dollars) Corporation Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------- -------------- ------------- -------------
ASSETS
------
Current Assets
Cash $ - $ 2.2 $ 140.1 $ - $ 142.3
Intercompany receivables 911.1 165.1 1,432.2 (2,508.4) -
Notes and accounts receivable - 60.6 502.7 - 563.3
Inventories - 7.2 361.9 - 369.1
Deposits, prepaid expenses and other assets - 55.7 59.1 (1.8) 113.0
Current assets associated with properties
held for disposal - - 73.1 - 73.1
------------ ------------- ------------- --------------- -------------
Total Current Assets 911.1 290.8 2,569.1 (2,510.2) 1,260.8
Property, Plant and Equipment, net - 2,011.9 5,519.2 - 7,531.1
Investments and Other Assets 12.2 835.3 244.7 (79.4) 1,012.8
Goodwill - 346.8 8.6 - 355.4
Long-term Assets Associated with Properties
Held for Disposal - 1.5 668.5 - 670.0
Investments in and Advances to Subsidiaries 1,388.1 4,254.0 2,003.4 (7,645.5) -
------------ ------------- ------------- --------------- -------------
Total Assets $2,311.4 $7,740.3 $11,013.5 $(10,235.1) $10,830.1
============ ============= ============= =============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities
Accounts payable $ 45.2 $ 64.9 $ 514.2 $ - $ 624.3
Short-term borrowings - .2 - - .2
Intercompany borrowings - 1,399.4 1,064.9 (2,464.3) -
Long-term debt due within one year - 5.8 - - 5.8
Other current liabilities (2.3) (204.3) 842.5 (1.8) 634.1
Current liabilities associated with
properties held for disposal - - 47.4 - 47.4
------------ ------------- ------------- --------------- -------------
Total Current Liabilities 42.9 1,266.0 2,469.0 (2,466.1) 1,311.8
Long-Term Debt 1,847.1 1,980.1 433.1 - 4,260.3
Deferred Credits and Reserves - 1,207.7 919.8 (1.0) 2,126.5
Long-term Liabilities Associated with
Properties Held for Disposal - - 226.6 - 226.6
Investments by and Advances from Parent - - 808.1 (808.1) -
Stockholders' Equity 421.4 3,286.5 6,156.9 (6,959.9) 2,904.9
------------ ------------- ------------- --------------- -------------
Total Liabilities and Stockholders'
Equity $2,311.4 $7,740.3 $11,013.5 $(10,235.1) $10,830.1
============ ============= ============= =============== =============
Kerr-McGee Corporation and Subsidiaries
Condensed Consolidating Balance Sheet
December 31, 2001
Kerr-McGee Guarantor Non-Guarantor
(Millions of dollars) Corporation Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------- -------------- ------------- -------------
ASSETS
------
Current Assets
Cash $ - $ 3.5 $ 87.8 $ - $ 91.3
Intercompany receivables 1,001.1 (524.0) 1,866.3 (2,343.4) -
Notes and accounts receivable - 41.5 379.5 - 421.0
Inventories - 4.1 424.6 - 428.7
Deposits, prepaid expenses and other assets - 49.4 78.8 222.9 351.1
Current assets associated with properties
held for disposal - - 75.4 - 75.4
------------ ------------- ------------- --------------- -------------
Total Current Assets 1,001.1 (425.5) 2,912.4 (2,120.5) 1,367.5
------------ ------------- ------------- --------------- -------------
Property, Plant and Equipment, net - 2,067.3 5,310.6 - 7,377.9
Investments and Other Assets 12.0 641.3 190.4 (59.6) 784.1
Goodwill - 347.1 7.7 - 354.8
Long-term Assets Associated with Properties
Held for Disposal - 5.8 1,070.8 - 1,076.6
Investments in and Advances to Subsidiaries 2,322.4 5,042.5 1,709.1 (9,074.0) -
------------ ------------- ------------- --------------- -------------
Total Assets $3,335.5 $7,678.5 $11,201.0 $(11,254.1) $10,960.9
============ ============= ============= =============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities
Accounts payable $ 45.1 $ 94.9 $ 479.5 $ - $ 619.5
Short-term borrowings - 0.3 8.1 - 8.4
Intercompany borrowings - 1,316.3 1,026.9 (2,343.2) -
Long-term debt due within one year - 23.2 3.2 - 26.4
Other current liabilities 34.0 (185.7) 392.5 234.7 475.5
Current liabilities associated with
properties held for disposal - - 45.5 - 45.5
------------ ------------- ------------- --------------- -------------
Total Current Liabilities 79.1 1,249.0 1,955.7 (2,108.5) 1,175.3
Long-Term Debt 1,497.0 2,016.4 1,026.0 - 4,539.4
Deferred Credits and Reserves - 952.9 1,070.4 9.9 2,033.2
Long-term Liabilities Associated with
Properties Held for Disposal - - 38.9 - 38.9
Investments by and Advances from Parent - 35.6 954.7 (990.3) -
Stockholders' Equity 1,759.4 3,424.6 6,155.3 (8,165.2) 3,174.1
------------ ------------- ------------- --------------- -------------
Total Liabilities and Stockholders'
Equity $3,335.5 $7,678.5 $11,201.0 $(11,254.1) $10,960.9
============ ============= ============= =============== =============
Kerr-McGee Corporation and Subsidiaries
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2002
Kerr-McGee Guarantor Non-Guarantor
(Millions of dollars) Corporation Subsidiaries Subsidiaries Eliminations Consolidated
------------- -------------- --------------- ------------- ------------
Operating Activities
- --------------------
Net income (loss) $(212.3) $(122.6) $ 72.6 $ 123.4 $(138.9)
Adjustments to reconcile net income or loss to
net cash provided by operating activities -
Depreciation, depletion and amortization - 96.3 533.8 - 630.1
Asset impairment - - 207.6 - 207.6
Equity in earnings of subsidiaries 194.7 (72.3) - (122.4) -
Dry hole costs - .1 48.7 - 48.8
Deferred income taxes - 12.8 113.5 - 126.3
Provision for environmental remediation
and restoration, net of recoveries - 57.6 22.4 - 80.0
(Gain) loss on sale and retirement of assets - .1 (106.0) - (105.9)
Noncash items affecting net income or loss .2 44.0 72.6 - 116.8
Other net cash provided by (used in)
operating activities (36.5) 51.1 63.0 .1 77.7
-------------- ------------- --------------- ------------- ------------
Net Cash Provided by (Used in)
Operating Activities (53.9) 67.1 1,028.2 1.1 1,042.5
-------------- ------------- --------------- ------------- ------------
Investing Activities
- --------------------
Capital expenditures - (142.1) (744.1) - (886.2)
Dry hole expense - (.1) (48.7) - (48.8)
Proceeds from exploration and production
divestitures - 2.5 409.5 - 412.0
Acquisitions - - (23.8) - (23.8)
Other investing activities - 31.4 (22.6) - 8.8
-------------- ------------- --------------- ------------- ------------
Net Cash Used in Investing
Activities - (108.3) (429.7) - (538.0)
-------------- ------------- --------------- ------------- ------------
Financing Activities
- --------------------
Issuance of long-term debt 350.0 - 433.0 - 783.0
Repayment of long-term debt - (63.2) (1,029.2) - (1,092.4)
Decrease in short-term borrowings - - (8.2) - (8.2)
Increase (decrease) in intercompany
notes payable (165.7) 103.1 63.7 (1.1) -
Issuance of common stock 5.0 - .4 - 5.4
Dividends paid (135.4) - - - (135.4)
-------------- ------------- --------------- ------------- ------------
Net Cash Provided by (Used in)
Financing Activities 53.9 39.9 (540.3) (1.1) (447.6)
-------------- ------------- --------------- ------------- ------------
Effects of Exchange Rate Changes on Cash
and Cash Equivalents - - (5.9) - (5.9)
-------------- ------------- --------------- ------------- ------------
Net Increase (Decrease) in Cash and Cash
Equivalents - (1.3) 52.3 - 51.0
Cash and Cash Equivalents at Beginning of
Period - 3.5 87.8 - 91.3
-------------- ------------- --------------- ------------- ------------
Cash and Cash Equivalents at End of Period $ - $ 2.2 $ 140.1 $ - $ 142.3
============== ============= =============== ============= ============
Kerr-McGee Corporation and Subsidiaries
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2001
Kerr-McGee Guarantor Non-Guarantor
(Millions of dollars) Corporation Subsidiaries Subsidiaries Eliminations Consolidated
------------- -------------- --------------- ------------- ------------
Operating Activities
- --------------------
Net income (loss) $(131.3) $ 517.0 $ 508.2 $(357.9) $ 536.0
Adjustments to reconcile net income or loss to
net cash provided by operating activities -
Depreciation, depletion and amortization - 6.2 543.5 - 549.7
Asset impairment - - 60.5 - 60.5
Equity in earnings of subsidiaries 124.7 (483.3) - 358.6 -
Dry hole costs - - 43.6 - 43.6
Deferred income taxes - 327.1 (180.0) - 147.1
Provision for environmental remediation
and restoration, net of recoveries - 82.1 - - 82.1
Gain on sale and retirement of assets - (3.6) - - (3.6)
Noncash items affecting net income or loss - (164.5) 12.7 - (151.8)
Other net cash provided by (used in)
operating activities 6.6 (49.9) (5.7) (.7) (49.7)
-------------- ------------- --------------- ------------- ------------
Net Cash Provided by Operating
Activities - 231.1 982.8 - 1,213.9
-------------- ------------- --------------- ------------- ------------
Investing Activities
- --------------------
Capital expenditures - (7.3) (1,341.9) - (1,349.2)
Dry hole expense - - (43.6) - (43.6)
Acquisitions (956.9) - (23.9) - (980.8)
Other investing activities - 6.0 (53.3) - (47.3)
-------------- ------------- --------------- ------------- ------------
Net Cash Used in Investing
Activities (956.9) (1.3) (1,462.7) - (2,420.9)
-------------- ------------- --------------- ------------- ------------
Financing Activities
- --------------------
Issuance of long-term debt 900.0 200.0 603.0 - 1,703.0
Repayment of long-term debt - (342.0) (74.2) - (416.2)
Decrease in short-term borrowings - - (3.3) - (3.3)
Increase (decrease) in intercompany
notes payable 56.9 8.2 (65.1) - -
Issuance of common stock - 31.8 - - 31.8
Dividends paid - (127.9) - - (127.9)
-------------- ------------- --------------- ------------- ------------
Net Cash Provided by (Used in)
Financing Activities 956.9 (229.9) 460.4 - 1,187.4
-------------- ------------- --------------- ------------- ------------
Effects of Exchange Rate Changes on Cash
and Cash Equivalents - - (2.9) - (2.9)
-------------- ------------- --------------- ------------- ------------
Net Decrease in Cash and Cash
Equivalents - (.1) (22.4) - (22.5)
Cash and Cash Equivalents at Beginning of
Period - 2.6 141.4 - 144.0
-------------- ------------- --------------- ------------- ------------
Cash and Cash Equivalents at End of Period $ - $ 2.5 $ 119.0 $ - $ 121.5
============== ============= =============== ============= ============
L. Contingencies
West Chicago, Illinois
In 1973, a wholly owned subsidiary, Kerr-McGee Chemical Corporation, now
Kerr-McGee Chemical LLC (Chemical), closed a facility in West Chicago,
Illinois, that processed thorium ores for the federal government and for
certain commercial purposes. Historical operations had resulted in
low-level radioactive contamination at the facility and in the
surrounding areas. In 1979, Chemical filed a plan with the Nuclear
Regulatory Commission (NRC) to decommission the facility. In 1990, the
NRC transferred jurisdiction over the facility to the State of Illinois
(the State). Following is the current status of various matters
associated with this former operation.
Closed Facility - In 1994, Chemical, the City of West Chicago (the City)
and the State reached agreement on the initial phase of the
decommissioning plan for the closed West Chicago facility, and Chemical
began shipping material from the site to a licensed permanent disposal
facility. In February 1997, Chemical executed an agreement with the City
covering the terms and conditions for completing the final phase of
decommissioning work. The State indicated approval of the agreement and
issued license amendments authorizing the work. Chemical expects most of
the work to be completed within the next two years, leaving principally
only groundwater remediation and/or monitoring for subsequent years.
Vicinity Areas - The U.S. Environmental Protection Agency (EPA) has
listed four areas in the vicinity of the closed West Chicago facility on
the National Priority List (NPL) promulgated by EPA under authority of
the Comprehensive Environmental Response, Compensation, and Liability
Act of 1980 (CERCLA) and has designated Chemical as a potentially
responsible party in these four areas. The EPA issued unilateral
administrative orders for two of the areas (known as the residential
areas and Reed-Keppler Park), which require Chemical to conduct removal
actions to excavate contaminated soils and ship the soils elsewhere for
disposal. Without waiving any of its rights or defenses, Chemical is
conducting the work required by the two orders. Pursuant to approvals
granted by the State, soils excavated from these properties are returned
to the former facility where they are processed for shipment to a
permanent disposal facility. Chemical has completed the required
excavation and restoration work at the park site. Work at the
residential sites is expected to be substantially completed by the end
of 2002.
The other two NPL sites known as the Sewage Treatment Plant and Kress
Creek involve low levels of insoluble thorium residues in riverbanks and
bottom sediments, virtually all within a floodway. Contaminated areas
are dedicated mostly to recreational uses and are part of existing park
lands and a forest preserve. Chemical has substantially completed a
thorough characterization of these two sites, and now has reached
conceptual agreement with local governmental authorities on a cleanup
plan. The cleanup plan currently is being reviewed by EPA. It is
expected that EPA will approve the plan in 2003 and that the work will
take about four years to complete. The agreement is subject to the
resolution of certain matters, including agreements regarding potential
natural resource damages and government oversight costs, and is expected
to be incorporated in a consent decree that will address the outstanding
issues. The consent decree must be approved by the EPA and the State,
and then entered by a federal court. During the third quarter of 2002,
the company added $84 million to its reserves for West Chicago in
connection with the cleanup agreement. The $84 million reserve reflects
the company's estimate of the costs to implement and complete the
agreement, and is not reduced for the government's share under Title X
(discussed below).
Government Reimbursement - Pursuant to Title X of the Energy Policy Act
of 1992 (Title X), the U.S. Department of Energy (DOE) is obligated to
reimburse Chemical for certain decommissioning and cleanup costs in
recognition of the fact that about 55% of the facility's production was
dedicated to United States government contracts. Title X was amended in
the third quarter of 2002 to increase the amount authorized for
reimbursement to $365 million plus inflation adjustments. The amount
authorized for reimbursement under Title X is expected to cover the
government's full share of West Chicago cleanup costs. Through September
30, 2002, Chemical has been reimbursed approximately $156 million under
Title X.
Reimbursements under Title X are provided by congressional
appropriations. Historically, congressional appropriations have lagged
Chemical's cleanup expenditures. At September 30, 2002, the government's
share of costs incurred by Chemical but not yet reimbursed by the DOE
totaled approximately $103 million. As a result of the increased
authorizations, this arrearage has been reflected as a receivable in the
company's September 30, 2002, financial statements. The company believes
receipt of the remaining $103 million in due course following additional
congressional appropriations is probable. The company will recognize
recovery of the government's share of future remediation costs on the
West Chicago sites as the company incurs the costs.
Henderson, Nevada
In 1998, the company's Chemical subsidiary closed certain production
facilities in Henderson, Nevada, that produced ammonium perchlorate and
other related products. The ammonium perchlorate plant was built in
1953, and was owned by the United States Navy which contracted for
operations until 1962, when it was purchased by a predecessor of
Chemical. The ammonium perchlorate was used primarily in federal
government defense and space programs.
At the time of closure, Chemical began decommissioning and remediating
associated perchlorate contamination, including surface impoundments and
groundwater. In 1999 and 2001, Chemical entered into consent orders with
the Nevada Department of Environmental Protection that require Chemical
to implement a long-term remedial system for groundwater treatment. The
long-term groundwater remediation system is based on new technology, and
start-up difficulties have been encountered. Chemical currently is
evaluating possible solutions as well as possible alternative
technologies.
Decommissioning and remediation costs are estimated to total about $97
million, of which about $76 million has been spent through September 30,
2002. At September 30, 2002, the company's environmental reserves
included $21 million for Henderson, which is principally for groundwater
remediation. Because of the uncertainties associated with the new
technology, it is reasonably possible that additions to the reserve may
be required in the future, but the amount of any additions cannot be
estimated at this time. However, any additional provision for
groundwater remediation is not expected to exceed about $7 million, the
amount the company believes is necessary to exhaust the self retention
Chemical has remaining on a 10-year $100 million insurance policy that
caps the company's exposure for cost overruns associated with
groundwater remediation. The amount of additional costs in excess of
current reserves that is necessary to exhaust the self-retention could
be greater, however, as application of the insurance policy to various
components of groundwater remediation costs is a matter currently under
discussion with the insurance carrier.
In 2000, Chemical initiated litigation against the United States Navy
seeking contribution for remediation costs (Kerr-McGee Chemical LLC v.
United States, No. 1:00CV01285 EGS (D.D.C.)). The litigation is in the
early stages of discovery. Although the outcome of the litigation is
uncertain, the company believes Chemical is likely to recover a portion
of its costs from the government. The amount of any recovery cannot be
estimated at this time and, accordingly, the company has not recorded a
receivable or otherwise reflected in the financial statements any
potential recovery from the government.
Forest Products
Chemical operates a forest products business that treats railroad ties
with wood preservatives. Chemical currently operates wood treatment
plants in five states and has formerly owned wood-treating plants in
other states. Wood preservatives and other substances used in the
wood-treatment process are or may be present at some of these sites and
require cleanup. Costs associated with the cleanup activities are
accrued when losses are probable and costs are reasonably estimable.
New Jersey site - The U.S. EPA notified the company and Chemical on July
6, 1999, they were potentially responsible parties at a former wood
treatment site in New Jersey that has been listed by the EPA as a
Superfund site. At that time, the company and Chemical knew little about
the site since neither the company nor Chemical had owned or operated
the site. The site had been owned and operated by a predecessor, which
had sold the site to a third party before Chemical became affiliated
with the predecessor in 1964. EPA has preliminarily estimated that
cleanup costs may reach $120 million or more.
There are substantial uncertainties about Chemical's connection to and
responsibility for the site, and Chemical is evaluating possible
defenses to any claim by EPA for response costs. EPA has not articulated
the factual and legal basis on which EPA notified the company and
Chemical that they are potentially responsible parties. The company
assumes the EPA notification is based on a successor liability theory
premised on an acquisition made in 1964. However, as noted above, before
the 1964 transaction, the site had been sold to a third party and the
subsidiary that owned and operated the site had been dissolved. The
company believes that Chemical should not be responsible for the
liabilities of the predecessor's dissolved subsidiaries.
The CERCLA statute does not expressly provide for successor liability,
and the company believes that the application of the doctrine of
corporate successor liability in this instance would violate due
process. In addition, there appear to be other potentially responsible
parties though the other parties may not have received notification by
the EPA. EPA has not ordered the company to perform work at the site and
is instead performing the work itself. The company has not provided a
reserve for the site as it is not possible to reliably estimate whatever
liability the company or Chemical may have for the cleanup because of
the aforementioned uncertainties and the existence of other potentially
responsible parties.
Litigation - The company and Chemical have been named in 22 lawsuits in
three states (Mississippi, Louisiana and Pennsylvania) in connection
with present and former forest products operations. The lawsuits seek
recovery under a variety of common law and statutory legal theories for
personal injuries and property damages allegedly caused by exposure to
and/or release of creosote and other substances used in the
wood-treatment process. Some of the lawsuits are filed on behalf of
specifically named individual plaintiffs, while others purport to be
filed on behalf of classes of allegedly similarly situated plaintiffs.
Lead lawyers for the plaintiffs claim that in the aggregate about 10,000
persons are involved or otherwise represented as plaintiffs in these
cases.
During the third quarter of 2002, the company and Chemical executed
settlement agreements to settle five of seven cases pending in
connection with Chemical's Columbus, Mississippi, operations. The
agreements require payments by Chemical of up to $44 million for the
benefit of about 5,500 individually-named plaintiffs who are eligible
under the agreements to sign releases. In addition, the agreements
require Chemical to pay up to an additional $6 million from any recovery
in certain insurance litigation that the company and Chemical filed
against their insurance carriers. The insurance litigation is discussed
below. The agreements also include a class action settlement fund for
the benefit of a class of residents who do not sign individual releases
and who do not choose to opt out of the class settlement. The agreements
require payments by Chemical totaling a minimum of $3.25 million and a
maximum of $7.5 million for the benefit of the class. The precise amount
of Chemical's obligations under the agreements depends on the number of
class members who submit proof of claim forms. Although, the settlement
agreements are expected to resolve substantially all of the Columbus,
Mississippi, claims, the settlements will not resolve the claims of any
class members who may opt out of the class settlement nor claims by
class members arising in the future for currently unmanifested personal
injuries. The settlements also do not cover two cases known as Maranatha
Faith Center v. Kerr-McGee and Jamison v. Kerr-McGee, which involve 27
plaintiffs who allege property damage and/or personal injury arising out
of the Columbus, Mississippi, operations. Chemical is
vigorously defending the two remaining lawsuits.
The implementation of the Mississippi settlements is progressing as
expected. Individually-named plaintiffs have delivered approximately
5,000 releases pursuant to the agreements, and the parties currently are
in the process of evaluating the releases and addressing exceptions to
the agreed upon form and otherwise ensuring the legal sufficiency of the
releases. At September 30, 2002, Chemical already has paid about $34
million of the $44 million maximum required under the agreements. No
payments will be made to the class settlement fund unless and until the
court has certified the class and approved the settlement.
Also during the third quarter of 2002, the company and Chemical executed
settlement agreements to settle all seven cases pending in Louisiana.
The agreements require payment by Chemical of up to $12 million for the
benefit of about 3,300 individually-named plaintiffs who sign releases.
In addition, the agreements require Chemical to pay up to an additional
$5 million from any recovery in the insurance litigation mentioned
above. The agreements also include a class action settlement fund for
the benefit of a class of residents who do not sign individual releases
and who do not choose to opt out of the class settlement. The agreements
require payments by Chemical totaling a minimum of $1 million and a
maximum of $2.5 million for the benefit of the class. The precise amount
of Chemical's obligations under the Louisiana agreements will depend on
the number of plaintiffs who sign and deliver individual releases and
the number of class members who submit proof of claims forms. The
agreements are expected to resolve substantially all of the claims in
the Louisiana litigation, though they will not resolve the claims of any
class members who may opt out of the class.
The implementation of the Louisiana settlements is progressing as
expected. Individually-named plaintiffs have delivered approximately
2,600 releases pursuant to the agreements. The parties currently are in
the process of evaluating the releases and addressing exceptions to the
agreed upon form and otherwise ensuring the legal sufficiency of the
releases. At September 30, 2002, Chemical had not yet paid any portion
of the $12 million maximum required under the agreements. On October 1,
2002, Chemical paid $.5 million pursuant to the settlements, and
Chemical expects to pay an as-yet undetermined portion of the remainder
by year end. No payments will be made to the class settlement fund
unless and until the court has certified the class and approved the
settlement, which is not expected to occur until sometime in 2003.
The Mississippi and Louisiana settlements are subject to a number of
conditions, including the signing and delivery of releases by named
plaintiffs and court approval of various matters. Portions of the
settlement agreements, including certification of the settlement class
and approval of the class settlement, require court approval. Although
court approval is not certain, the company and Chemical expect to obtain
court approval in due course. It is expected that some class members may
opt out of the settlements and pursue individual claims. It is not
expected that the number of potential class members who opt out will be
large numbers or that the claims they may pursue will result in
additional losses that are material in amount. The company is continuing
to vigorously defend eight cases in Pennsylvania and the two remaining
cases in Mississippi, pending any settlement of these remaining cases.
Insurance Litigation - The company and Chemical filed suit against its
insurance carriers to recover losses associated with the forest products
litigation. The company believes that it has valid claims against its
insurers; however, the prospects for recovery are uncertain and the
litigation is in its very early stages. Accordingly, the company has not
recorded a receivable or otherwise reflected in its financial statements
any potential recovery form the insurance litigation.
Financial Reserves - The company previously established a $70 million
reserve in connection with the forest products litigation. Through
September 30, 2002, Chemical had paid approximately $34 million pursuant
to the settlement agreements (and through November 7, 2002, had paid on
additional $4 million). At September 30, 2002, the company's remaining
reserves for the forest products litigation totaled $36 million. The
company believes the reserve is adequate to cover the potential
liability associated with these matters. However, although the company
believes that the likelihood of a material increase in the reserve is
remote, there is no assurance that the company will not be required to
adjust the reserve in the future in light of the inherent uncertainties
associated with litigation.
Other Matters
The company and/or its subsidiaries are parties to a number of legal and
administrative proceedings involving environmental and/or other matters
pending in various courts or agencies. These include proceedings
associated with facilities currently or previously owned, operated or
used by the company, its subsidiaries, and/or their predecessors, and
include claims for personal injuries and property damages. The company's
current and former operations also involve management of regulated
materials and are subject to various environmental laws and regulations.
These laws and regulations will obligate the company and/or its
subsidiaries to cleanup various sites at which petroleum and other
hydrocarbons, chemicals, low-level radioactive substances and/or other
materials have been disposed of or released. Some of these sites have
been designated Superfund sites by EPA pursuant to CERCLA. Similar
environmental regulations exist in foreign countries in which the
company and/or its subsidiaries operate. Environmental regulations in
the North Sea are particularly stringent.
The company provides for costs related to contingencies when a loss is
probable and the amount is reasonably estimable. It is not possible for
the company to reliably estimate the amount and timing of all future
expenditures related to environmental and legal matters and other
contingencies because:
* some sites are in the early stages of investigation, and other
sites may be identified in the future;
* cleanup requirements are difficult to predict at sites where
remedial investigations have not been completed or final decisions
have not been made regarding cleanup requirements, technologies or
other factors that bear on cleanup costs;
* environmental laws frequently impose joint and several liability
on all potentially responsible parties, and it can be difficult to
determine the number and financial condition of other potentially
responsible parties and their share of responsibility for cleanup
costs;
* environmental laws and regulations are continually changing, and
court proceedings are inherently uncertain;
* some legal matters are in the early stages of investigation or
proceeding or their outcomes otherwise may be difficult to
predict, and other legal matters may be identified in the future;
* revisions to the remedial design;
* unanticipated construction problems;
* identification of additional areas or volumes of contamination;
* inability to implement a planned engineering design or use planned
technologies and excavation methods;
* changes in costs of labor, equipment and/or technology; and
* weather conditions.
At September 30, 2002, the company had reserves totaling $289 million
for cleaning up and remediating environmental sites, reflecting the
reasonably estimable costs for addressing these sites. This includes
$119 million for the West Chicago sites, $21 million for Henderson,
Nevada, and $37 million for forest products sites. Cumulative
expenditures at all environmental sites through September 30, 2002,
total $1.005 billion (before considering government reimbursements).
Additionally, at September 30, 2002, the company had litigation reserves
totaling approximately $82 million for the reasonably estimable losses
associated with litigation. This includes $36 million for the forest
products litigation described above and $16 million for a litigation
settlement negotiated in 1999 involving a former forest products
operation located in Hattiesburg, Mississippi, for which payment is
expected to be made in the fourth quarter of 2002. Management believes,
after consultation with general counsel, that currently the company has
reserved adequately for the reasonably estimable costs of environmental
matters and other contingencies. However, additions to the reserves may
be required as additional information is obtained that enables the
company to better estimate its liabilities, including liability at sites
now under review, though the company cannot now reliably estimate the
amount of future additions to the reserves.
M. Business Segments
Following is a summary of sales and operating profit for each of the
company's business segments for the third quarter and first nine months
of 2002 and 2001.
Three Months Ended Nine Months Ended
September 30, September 30,
(Millions of dollars) 2002 2001(a) 2002 2001(a)
------------- ------------- -------------- ----------
Sales
Exploration and production $ 664.6 $ 581.8 $ 1,813.8 $1,953.2
Chemicals - Pigment 266.8 234.4 748.1 727.6
Chemicals - Other 53.0 47.5 152.9 144.2
------------- ------------- ------------- ----------
984.4 863.7 2,714.8 2,825.0
All other - - .1 .2
------------- ------------- ------------- ----------
Total Sales $ 984.4 $ 863.7 $ 2,714.9 $2,825.2
============= ============= ============= ==========
Operating Profit
Exploration and production $ 170.7 $ 158.8 $ 333.4 $ 861.8
Chemicals - Pigment 18.9 3.5 20.7 65.8
Chemicals - Other (7.7) 3.0 (5.2) (16.5)
------------- ------------- ------------- ----------
Total Operating Profit 181.9 165.3 348.9 911.1
Other Expense (b) (73.0) (140.1) (433.9) (67.6)
------------- ------------- ------------- ----------
Income (Loss) from Continuing Operations
before Income Taxes 108.9 25.2 (85.0) 843.5
Provision for Income Taxes (195.7) (7.9) (181.2) (311.0)
------------- ------------- ------------- ----------
Income (Loss) from Continuing Operations (86.8) 17.3 (266.2) 532.5
Discontinued Operations, Net of Income
Taxes .4 9.0 127.3 23.8
Cumulative Effect of Change in Accounting
Principle, Net of Income Taxes - - - (20.3)
------------- ------------- ------------- ----------
Net Income (Loss) $ (86.4) $ 26.3 $ (138.9) $ 536.0
============= ============= ============= ==========
(a) Includes operating results of HS Resources beginning August 1, 2001.
(b) The 2002 third quarter and nine months include pretax charges of $92.8
million and $183.2 million, respectively, for environmental provisions and
$2 million and $72 million, respectively, for litigation provisions.
Partially offsetting these charges is a Department of Energy mill tailings
credit totaling $112.8 million in the 2002 third quarter (see note L). These
amounts are included as corporate provisions since the items relate to
former operations that are not part of the company's current operating
activities. The third quarter and nine months of 2001 include $78.4 million
and $82.1 million, respectively, for environmental provisions, net of
recoveries. The first nine months of 2001 also includes a gain of $181.4
million associated with the reclassification of 85% of the corporate
investment in Devon common stock to "trading" from the "available for sale"
category of investments
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
Comparison of 2002 Results with 2001 Results
Third-quarter 2002 loss from continuing operations totaled $86.8 million,
compared with income of $17.3 million for the same 2001 period. Loss from
continuing operations for the first nine months of 2002 was $266.2 million,
compared with income of $532.5 million for the same 2001 period. The net loss
for the 2002 third quarter was $86.4 million, compared with 2001 third-quarter
net income of $26.3 million. For the first nine months of 2002, the net loss was
$138.9 million, compared with net income of $536 million for the same 2001
period.
Third-quarter 2002 operating profit was $181.9 million, up 10% from $165.3
million in the 2001 quarter. The increase in the 2002 third-quarter operating
profit was primarily due to higher chemical operating profit, lower impairment
of oil and gas assets, partially offset by lower exploration and production
operating profit (excluding effects of asset impairments and environmental
provisions) and higher environmental provisions relating to operating sites.
Operating profit for the first nine months of 2002 totaled $348.9 million,
compared with $911.1 million in the same 2001 period. The 62% decline in
operating profit was primarily due to lower operating results from both
exploration and production and chemical business units, higher impairment of oil
and gas assets, and higher environmental provisions relating to operating sites.
Partially offsetting the decrease were lower chemical asset impairment charges
and the 2001 special charge for termination of manganese metal production at the
company's Hamilton, Miss., electrolytic chemical plant.
The third-quarter 2002 other expense totaled $73 million, compared with $140.1
million in the same 2001 period. During the 2002 third quarter the company
recorded income of $112.8 million relating to the anticipated U.S. Department of
Energy's (DOE) reimbursement for certain decommissioning and cleanup costs
incurred by the company (see note L). Excluding this item, the 2002
third-quarter other expense totaled $185.8 million, compared with $140.1 million
in 2001. This increase was primarily due to higher net interest expense ($21.3
million) resulting from increased debt balances, higher foreign currency
transaction losses ($11.4 million), and higher environmental provisions for
former plant sites ($8.6 million).
Other expense for the first nine months of 2002 was $433.9 million, compared
with $67.6 million for the same 2001 period. Benefiting other expense in the
first nine months of 2002 was the anticipated DOE reimbursement of $112.8
million, and benefiting other expense in the same 2001 period was a pretax
special gain of $181.4 million associated with the reclassification of 85% of
the company's investment in Devon common stock to "trading" from "available for
sale" (see note B). Excluding these special items, the increase in other expense
for the first nine months of 2002 was primarily due to higher net interest
expense ($83.4 million), 2002 litigation provisions ($72 million), higher
environmental provisions ($16.7 million), higher foreign currency transaction
losses ($33.2 million), higher losses on derivative instruments ($30 million)
and higher losses on equity affiliates ($16.9 million).
The income tax expense for the third quarter of 2002 was $195.7 million,
compared with $7.9 million in the same 2001 period. The provision for the 2002
third quarter included $146.4 million tax expense for the effects of the United
Kingdom (U.K.) tax law changes (see note J), and $7.2 million tax expense
associated with net environmental reductions due to the recognition of the
government's portion of cleanup costs incurred at certain sites. The provision
for the 2001 third quarter included $42.4 million tax benefit related to
environmental provisions, asset impairment and costs associated with employee
severance and merger. For the first nine months of 2002, the income tax expense
was $181.2 million, compared with $311 million in 2001. The income tax expense
for the first nine months of 2002 included $146.4 million for the effects of the
U.K. tax law changes as well as a $49.6 tax benefit primarily related to
litigation reserves and environmental provisions. Excluding the tax effect on
these special items, the decrease in the provisions for both 2002 periods is due
to lower income.
SEGMENT OPERATIONS
Exploration and Production -
Operating profit for the third quarter of 2002 was $170.7 million, compared with
$158.8 million for the same 2001 period. The increase in operating profit was
primarily due to higher crude oil and natural gas sales volumes of $52 million,
lower asset impairment of $23.3 million and higher natural gas sales prices of
$8.9 million, partially offset by higher production costs of $34.6 million,
higher exploration expense of $24.7 million, higher depreciation and depletion
expense of $5.1 million and higher environmental provisions of $2.7 million.
Operating profit for the first nine months of 2002 and 2001 was $333.4 million
and $861.8 million, respectively. The decrease in operating profit was primarily
due to lower natural gas and crude oil sales prices of $404 million, higher
asset impairment of $134.2 million, higher depreciation and depletion expense of
$73.9 million, higher production costs of $69.6 million, higher exploration
expense of $11.5 million and higher environmental provisions of $11.3 million,
partially offset by higher natural gas and crude oil sales volumes of $193.3
million. The increase in the 2002 third quarter and nine month production costs
was primarily due to the Nansen, Boomvang and Leadon properties beginning
production in 2002 and the additional costs in 2002 for the Rocky Mountain
properties (formerly HS Resources properties acquired in August 2001).
Depreciation and depletion expense increased during both 2002 periods due to
higher production volumes from the Rocky Mountain properties.
Revenues were $664.6 million and $581.8 million for the three months ended
September 30, 2002 and 2001, respectively, and $1,813.8 million and $1,953.2
million for the first nine months of 2002 and 2001, respectively. The following
table shows the company's average crude oil and natural gas sales prices and
volumes for both the third quarter and first nine months of 2002 and 2001.
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001(a) 2002 2001(a)
------------ ------------ ------------ -------------
Crude oil and condensate sales
(thousands of bbls/day)
Domestic
Offshore 50.5 55.6 52.7 55.8
Onshore 30.1 25.8 29.5 21.4
North Sea 104.9 93.9 104.7 100.9
Other International 8.0 9.1 8.4 9.0
------------ ------------ ------------ -------------
Total continuing operations 193.5 184.4 195.3 187.1
Discontinued operations 2.3 9.3 5.6 8.4
------------ ------------ ------------ -------------
Total 195.8 193.7 200.9 195.5
============ ============ ============ =============
Average crude oil sales price (per barrel) (b)
Domestic
Offshore $22.95 $22.32 $21.11 $23.39
Onshore 23.04 23.24 21.01 24.98
North Sea 23.68 24.22 21.96 25.17
Other International 23.57 22.16 21.37 22.08
Average for continuing operations 23.38 23.41 21.56 24.47
Discontinued operations $20.89 $23.13 $19.62 $24.09
Natural gas sold (MMcf/day)
Domestic
Offshore 305 273 267 284
Onshore 389 323 384 217
North Sea 95 58 98 63
------------ ------------ ------------ -------------
Total 789 654 749 564
============ ============ ============ =============
Average natural gas sales price (per Mcf) (b)
Domestic
Offshore $3.20 $2.97 $3.02 $4.95
Onshore 2.70 2.79 2.73 4.27
North Sea 1.85 1.37 2.17 2.27
Average $2.79 $2.74 $2.76 $4.39
(a) Includes operating results of HS Resources beginning August 1, 2001.
(b) The effects of the 2002 hedging program decreased the average crude
oil sales prices from continuing operations by $1.75 and $.93 per barrel
during the third quarter and nine months of 2002, respectively, and
increased the average natural gas sales prices by $.17 and $.04 per Mcf
during the third quarter and nine months of 2002, respectively.
During the 2002 second quarter, the company announced that the Leadon field in
the North Sea was operating at lower volumes than initially projected.
Commissioning of the production facilities, mechanical malfunctions, drilling
problems and reserve performance have all contributed to the lower than expected
results. During the third quarter the company was evaluating possible solutions
for addressing the primary performance issues. Once these activities are
completed, the production performance and the value of the field will be
re-evaluated. The Leadon field in the North Sea achieved first oil in November
2001. The company's investment in the Leadon field totals $881.8 million.
Chemicals - Pigment
Third-quarter 2002 operating profit was $18.9 million on revenues of $266.8
million, compared with operating profit of $3.5 million on revenues of $234.4
million for the same 2001 period. For the first nine months of 2002 and 2001,
operating profit was $20.7 million and $65.8 million, respectively, on revenues
of $748.1 million and $727.6 million, respectively. Revenues increased in the
third quarter due to higher sales volumes of $44.2 million, partially offset by
lower pigment sales prices of $11.9 million. Pigment sales volumes increased
26,200 tonnes in the 2002 third quarter, compared with the same 2001 period. The
increase in operating profit in the 2002 third quarter was primarily due to
higher revenues, partially offset by higher costs of sales of $23.6 million.
Revenues increased in the first nine months due to higher sales volumes of
$114.1 million, partially offset by lower sales prices of $93.6 million. Pigment
sales volumes increased 62,700 tonnes in the first nine months of 2002, compared
with the same 2001 period. The decline in operating profit for the first nine
months of 2002 was primarily due to higher costs of sales of $76.3 million,
partially offset by higher revenues.
Chemicals - Other
Operating loss in the 2002 third quarter was $7.7 million on revenues of $53
million, compared with operating profit of $3 million on revenues of $47.5
million in the same 2001 period. The decrease in operating profit was primarily
due to 2002 environmental provisions, partially offset by higher results from
forest products operations. Operating loss for the first nine months of 2002 was
$5.2 million on revenues of $152.9 million, compared with an operating loss of
$16.5 million on revenues of $144.2 million in the same 2001 period. The
improved 2002 results were primarily due to a 2001 charge of $24.9 million for
the termination of manganese metal production, partially offset by 2002
environmental provisions of $16.9 million and improved results from forest
products operations.
Financial Condition
At September 30, 2002, the company's net working capital position was a negative
$51 million, compared with a negative $22.4 million at September 30, 2001, and a
positive $192.2 million at December 31, 2001. The current ratio was 1.0 to 1 at
both September 30, 2002 and 2001, compared with 1.2 to 1 at December 31, 2001.
The negative working capital at both September 30, 2002 and 2001, was not
indicative of a lack of liquidity as the company maintains sufficient current
assets to settle current liabilities when due. Additionally, the company has
sufficient unused lines of credit and revolving credit facilities, as discussed
below. Current asset balances are minimized as one way to finance capital
expenditures and lower borrowing costs.
The company's percentage of net debt (debt less cash) to capitalization was 59%
at September 30, 2002, compared with 59% at December 31, 2001, and 54% at
September 30, 2001. The increase from September 30, 2001, resulted primarily
from higher debt balances and lower equity due to the net loss and dividends
paid in 2002. The company had unused lines of credit and revolving credit
facilities of $1,471.1 million at September 30, 2002. Of this amount, $870
million can be used to support commercial paper borrowings of Kerr-McGee Credit
LLC and $435 million can be used to support European commercial paper borrowings
of Kerr-McGee (G.B.) PLC, Kerr-McGee Chemical GmbH, Kerr-McGee Pigments
(Holland) B.V. and Kerr-McGee International ApS. Currently the size of the
company's commercial paper program is up to a total of $1.2 billion which can be
issued based on market conditions.
Operating activities provided net cash of $1,042.5 million in the first nine
months of 2002. The cash provided by operating activities and proceeds from
exploration and production divestitures in the first nine months of 2002 was
sufficient to pay the company's capital expenditures of $886.2 million, repay
the net reduction in long-term debt of $309.4 million and pay dividends of
$135.4 million.
Capital expenditures for the first nine months of 2002, excluding dry hole costs
and acquisitions, totaled $886.2 million, compared with $1,349.2 million for the
same period last year. This decrease is due to the completion of major projects
(Leadon, Boomvang and Nansen) since September 2001. Exploration and production
expenditures, principally in the Gulf of Mexico and North Sea, were 88% of the
2002 total. Chemical - pigment expenditures were 6% of the 2002 total. Chemical
- - other and corporate incurred the remaining 6% of the expenditures. Management
anticipates that the cash requirements for the next several years can be
provided through internally generated funds and selective borrowings.
Item 3. Quantitative and Quantitative Disclosures about Market Risk.
In March 2002, the company hedged a portion of its oil and natural gas
production for the period April through December 2002 to increase the
predictability of its cash flows and support additional capital projects since
the derivative contracts fix the commodity prices to be received in the future.
At September 30, 2002, the company had outstanding contracts to hedge a total of
5.5 million barrels of North Sea crude production, 2.8 million barrels of
domestic crude oil production and 23 million MMBtu of domestic natural gas
production. The fair value of the hedge contracts outstanding at September 30,
2002, was a liability of $30.6 million for North Sea crude oil, $17.3 million
for domestic crude oil and $21.8 million for domestic natural gas.
During October 2002, the company began adding to its existing oil and gas
hedging positions and expects to continue its oil and gas hedging program into
2003. These hedges will provide greater certainty for cash flows. The company
expects to hedge approximately 50% of its oil and gas production in 2003.
Additionally, the company plans to enter into basis hedges for Rocky Mountain
gas to achieve more predictable net realizations.
Through October 29, 2002, the following contracts have been added:
Volume
Average (MMBtuD)/
Contract Type Period Price (BOPD)
- ------------------------------ ------------------- ------------- ---------
Fixed-price gas swaps Nov. - Dec. 2002 $ 4.32 130
Fixed-price gas swaps 2003 $ 4.08 140
Costless collar-gas 2003 $3.50 - $5.26 55
Fixed-price oil (WTI) 2003 $ 26.03 3,500
Fixed-price oil (Brent) 2003 $ 25.03 6,500
Basis hedges - Rocky Mountain Nov. 02 - March 03 $ .97 20
Item 4. Controls and Procedures.
Within the 90 days prior to the date of this report, an evaluation was carried
out under the supervision and with the participation of the company's
management, including its Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of the company's disclosure
controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the company's disclosure controls and procedures are effective in timely
alerting them to material information relating to the company (including its
consolidated subsidiaries) required to be included in the company's periodic SEC
filings. There were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation.
Critical Accounting Policies
Preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates,
judgments and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, and the disclosure of contingent assets and
liabilities. However, the accounting principles used by the company generally do
not change the company's reported cash flows or liquidity. Generally, accounting
rules do not involve a selection among alternatives, but involve a selection of
the appropriate policies for applying the basic principles. Interpretation of
the existing rules must be done and judgments made on how the specifics of a
given rule apply to the company.
The more significant reporting areas impacted by management's judgments and
estimates are crude oil and natural gas reserve estimation, impairment of
assets, site dismantlement, environmental remediation, litigation and tax
accruals. Management's judgments and estimates in these areas are based on
information available from both internal and external sources, including
engineers, legal counsel, environmental studies and historical experience in
similar matters. Actual amounts could differ from the estimates as additional
information becomes known.
Oil and Gas Reserves
The estimates of oil and gas reserves are prepared by the company's geologists
and engineers. Only proved oil and gas reserves are included in any financial
statement disclosure. The Securities and Exchange Commission has defined proved
reserves as the estimated quantities of crude oil, natural gas and natural gas
liquids which geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs under existing
economic and operating conditions. Even though the company's geologists and
engineers are knowledgeable and follow authoritative guidelines for estimating
reserves, they must make a number of subjective assumptions based on
professional judgments in developing the estimates. Reserve estimates are
updated at least annually and consider recent production levels and other
technical information about each field. Revisions in the estimated reserves may
be necessary due to reservoir performance, new drilling, sales price and cost
changes, technological advances, new geological or geophysical data, or other
economic factors. The company cannot predict the amounts or timing of future
reserve revisions.
Depreciation rates are determined based on these reserve quantity estimates and
the capitalized costs of producing properties. As the estimated reserves are
adjusted, the depreciation expense for a property will change, assuming no
change in production volumes or the costs capitalized. Reserves are the basis
for accumulating the estimated costs for the dismantlement and removal of the
company's oil and gas production and related facilities. Such costs are
presently accumulated over the estimated life of the facilities by use of the
unit-of-production method. Estimated reserves may also be used as the basis for
calculating the expected future cash flows from a property, which are used to
determine whether that property may be impaired. Reserves are also used to
estimate the supplemental disclosure of the standardized measure of discounted
future net cash flows relating to its oil and gas producing activities. Changes
in the estimated reserves are considered changes in estimates for accounting
purposes and are reflected on a prospective basis.
Successful Efforts Method of Accounting
The company has elected to utilize the successful efforts method of accounting
for its oil and gas exploration and development activities. Exploration
expenses, including geological and geophysical costs, rentals and exploratory
dry holes, are charged against income as incurred. Costs of successful wells and
related production equipment and developmental dry holes are capitalized and
amortized by field using the unit-of-production method as oil and gas is
produced. The successful efforts method reflects the inherent volatility in
exploring for and producing oil and gas. The accounting method may yield
significantly different operating results than the full cost method.
Impairment of Assets
All long-lived assets are monitored for potential impairment when circumstances
indicate that the carrying value of the asset may be greater than its future net
cash flows. The evaluations involve a significant amount of judgment since the
results are based on estimated future events, such as inflation rates, future
sales prices for oil, gas or chemicals, future costs to produce these products,
estimates of future oil and gas reserves to be recovered and the timing thereof,
the economic and regulatory climates, and other factors. The need to test a
property for impairment may result from significant declines in sales prices,
unfavorable adjustments to oil and gas reserves, and changes in environmental or
abandonment regulations. Assets held for sale are reviewed for impairment when
the company approves the plan to sell. Estimates of anticipated sales prices are
highly judgmental and subject to material revision in future periods. Because of
the uncertainty inherent in these factors, the company cannot predict when or if
future impairment charges will be recorded.
Environmental Remediation, Litigation and Other Contingency Reserves
Kerr-McGee management makes judgments and estimates in accordance with
applicable accounting rules when it establishes reserves for environmental
remediation, litigation and other contingent matters. Provisions for such
matters are charged to expense when it is probable that a liability has been
incurred and reasonable estimates of the liability can be made. It is not
possible for management to reliably estimate the amount and timing of all future
expenditures related to environmental, legal or other contingent matters because
of continually changing laws and regulations, inherent uncertainties associated
with court and regulatory proceedings as well as cleanup requirements and
related work, the possible existence of other potentially responsible parties,
and the changing political and economic environment. For these reasons, actual
environmental, litigation and other contingency costs can vary significantly
from the company's estimates. For additional information about contingencies,
refer to Note L.
Tax Accruals
The company has operations in several countries around the world and is subject
to income and other similar taxes in these countries. The estimation of the
amounts of income tax to be recorded by the company involves interpretation of
complex tax laws and regulations, evaluation of tax audit findings, and
assessment of how the foreign taxes effect domestic taxes. Although the
company's management believes its tax accruals are adequate, differences may
occur in the future depending on the resolution of pending and new tax matters.
The above description of the company's critical accounting policies is not
intended to be an all-inclusive discussion of the uncertainties considered and
estimates made by management in applying accounting principles and policies.
Results may vary significantly if different policies were used or required and
if new or different information becomes known to management.
Forward-Looking Information
Statements in this quarterly report regarding the company's or management's
intentions, beliefs or expectations, or that otherwise speak to future events,
are "forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Future results and developments discussed in
these statements may be affected by numerous factors and risks, such as the
accuracy of the assumptions that underlie the statements, the success of the oil
and gas exploration and production program, drilling risks, the market value of
Kerr-McGee's products, uncertainties in interpreting engineering data, demand
for consumer products for which Kerr-McGee's businesses supply raw materials,
general economic conditions, and other factors and risks discussed in the
company's SEC filings. Actual results and developments may differ materially
from those expressed in this quarterly report.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
(a) On September 17, 2002 the company made a voluntary disclosure
to the U.S. Department of Commerce that the company had
inadvertently violated Export Administration Regulations by
shipping elemental boron over a four-year period without an export
license. The amount of any monetary fine is uncertain. It is not
possible to determine whether a fine or penalty may be imposed in
connection with this voluntary disclosure, as such matters involve
the exercise of judgment by the responsible administrative agency.
In light of the inadvertent nature of the violations, the fact that
the company maintains corporate compliance programs that
effectively detected the violations, and the fact that Chemical
voluntarily reported the violations to the appropriate
administrative agency, the company believes that the resulting
fines and penalties, if any, should not be significant. Although
the possible fines and penalties are not certain of calculation,
the company believes the likely range of possible fines and
penalties is from zero to $1 million.
(b) For a discussion of contingencies, reference is made to (1) the
Environmental Matters section of Management's Discussion and
Analysis in the 2001 Annual Report to Stockholders, which is
incorporated by reference in Item 7 of the 2001 Form 10-K, (2) note
L to the consolidated financial statements included herein, and (3)
Item 3 of the company's 2001 Annual Report on Form 10-K, all of
which are incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits -
Exhibit No
----------
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K -
On August 19, 2002, the company filed a report on Form 8-K
announcing a conference call to discuss its interim third-quarter
2002 financial and operating activities and expectations for the
future.
SIGNATURE
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.
KERR-McGEE CORPORATION
Date: November 8, 2002 By: /s/ John M. Rauh
---------------- ----------------------------------
John M. Rauh
Vice President and Controller
and Chief Accounting Officer
CERTIFICATIONS
I, Luke R. Corbett, certify that:
1. I have reviewed this quarterly report on Form 10-Q;
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 issuer as of, and for, the
periods presented in this quarterly report;
4. The company'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
company and we have:
i. designed such disclosure controls and procedures to ensure
that material information relating to the company, including
its consolidated subsidiaries, is made known to them by others
within those entities, particularly during the period in which
this quarterly report is being prepared;
ii. evaluated the effectiveness of the company'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
iii. 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 company's other certifying officers and I have disclosed,
based on our most recent evaluation, to the company's auditors and
the audit committee of the company's board of directors (or persons
fulfilling the equivalent function):
i. all significant deficiencies in the design or operation of
internal controls which could adversely affect the company's
ability to record, process, summarize and report financial
data and have identified for the company's auditors any
material weaknesses in internal controls; and
ii. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
company's internal controls; and
6. The company'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.
/s/Luke R. Corbett
-----------------------
Luke R. Corbett
Chief Executive Officer
November 8, 2002
CERTIFICATIONS
I, Robert M. Wohleber, certify that:
1. I have reviewed this quarterly report on Form 10-Q;
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 issuer as of, and for, the
periods presented in this quarterly report;
4. The company'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
company and we have:
i. designed such disclosure controls and procedures to ensure
that material information relating to the company, including
its consolidated subsidiaries, is made known to them by others
within those entities, particularly during the period in which
this quarterly report is being prepared;
ii. evaluated the effectiveness of the company'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
iii. 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 company's other certifying officers and I have disclosed,
based on our most recent evaluation, to the company's auditors and
the audit committee of the company's board of directors (or persons
fulfilling the equivalent function):
i. all significant deficiencies in the design or operation of
internal controls which could adversely affect the company's
ability to record, process, summarize and report financial
data and have identified for the company's auditors any
material weaknesses in internal controls; and
ii. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
company's internal controls; and
6. The company'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.
/s/Robert M. Wohleber
-----------------------
Robert M. Wohleber
Chief Financial Officer
November 8, 2002