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 March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from_____ to_____
Commission File Number 1-16619
KERR-McGEE CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware 73-1612389
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
Kerr-McGee Center, Oklahoma City, Oklahoma 73125
(Address of Principal Executive Offices and Zip Code)
Registrant's telephone number, including area code (405) 270-1313
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----
Number of shares of common stock, $1.00 par value, outstanding as of April 30,
2003: 100,851,109.
KERR-McGEE CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements PAGE
----
Consolidated Statement of Operations for the
Three Months Ended March 31, 2003 and 2002 1
Consolidated Balance Sheet at March 31, 2003
and December 31, 2002 2
Consolidated Statement of Cash Flows for the
Three Months Ended March 31, 2003 and 2002 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 25
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 30
Item 4. Controls and Procedures 31
Forward-Looking Information 31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 32
Item 6. Exhibits and Reports on Form 8-K 32
SIGNATURE 33
CERTIFICATIONS 34
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
KERR-McGEE CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
Three Months Ended
March 31,
------------------
(Millions of dollars, except per-share amounts) 2003 2002
- -------------------------------------------------------------------------------
Sales $1,127.2 $798.5
-------- ------
Costs and Expenses
Costs and operating expenses 412.0 349.9
Selling, general and administrative expenses 70.9 55.5
Shipping and handling expenses 32.0 29.1
Depreciation and depletion 189.6 212.3
Accretion expense 6.2 -
Asset impairments, net of gains on disposal of
assets held for sale (.1) -
Exploration, including dry holes and
amortization of undeveloped leases 140.5 31.9
Taxes, other than income taxes 25.4 26.4
Provision for environmental remediation and
restoration, net of reimbursements 17.3 2.4
Interest and debt expense 65.0 70.7
-------- ------
Total Costs and Expenses 958.8 778.2
-------- ------
168.4 20.3
Other Income (Expense) 1.7 (23.8)
-------- -------
Income (Loss) before Income Taxes 170.1 (3.5)
Benefit (Provision) for Income Taxes (65.9) 1.8
-------- ------
Income (Loss) from Continuing Operations 104.2 (1.7)
Income from Discontinued Operations (net of
income tax provision of nil and $4.5 for the
first quarter of 2003 and 2002, respectively) .4 7.2
Cumulative Effect of Change in Accounting Principle
(net of benefit for income taxes of $18.2) (34.7) -
-------- ------
Net Income $ 69.9 $ 5.5
======== ======
Income (Loss) per Common Share
Basic -
Continuing operations $ 1.04 $ (.02)
Discontinued operations - .07
Cumulative effect of change in accounting
principle (.34) -
-------- ------
Total $ .70 $ .05
======== ======
Diluted -
Continuing operations $ .99 $ (.02)
Discontinued operations - .07
Cumulative effect of change in accounting
principle (.31) -
-------- ------
Total $ .68 $ .05
======== ======
Dividends Declared per Common Share $ .45 $ .45
======== ======
The accompanying notes are an integral part of this statement.
KERR-McGEE CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
March 31, December 31,
(Millions of dollars) 2003 2002
- -------------------------------------------------------------------------------
ASSETS
- ------
Current Assets
Cash $ 80.7 $ 89.9
Accounts receivable 656.4 607.8
Inventories 423.1 402.4
Deposits, prepaid expenses and other assets 107.1 132.8
Current assets associated with properties held
for disposal 12.4 57.2
--------- ---------
Total Current Assets 1,279.7 1,290.1
--------- ---------
Property, Plant and Equipment 14,156.7 13,722.8
Less reserves for depreciation, depletion
and amortization (7,012.8) (6,687.2)
--------- ---------
7,143.9 7,035.6
--------- ---------
Investments and Other Assets 1,087.9 1,035.2
Goodwill 356.2 355.9
Long-Term Assets Associated with Properties Held
for Disposal 24.4 192.0
--------- ---------
Total Assets $ 9,892.1 $ 9,908.8
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities
Accounts payable $ 708.8 $ 785.1
Long-term debt due within one year 104.8 105.8
Other current liabilities 681.6 716.8
Current liabilities associated with properties
held for disposal 20.0 2.1
--------- ---------
Total Current Liabilities 1,515.2 1,609.8
--------- ---------
Long-Term Debt 3,649.9 3,798.1
--------- ---------
Deferred Income Taxes 1,126.2 1,145.1
Other Deferred Credits and Reserves 1,037.3 803.7
Long-Term Liabilities Associated with Properties
Held for Disposal - 16.1
--------- ---------
2,163.5 1,964.9
--------- ---------
Stockholders' Equity
Common stock, par value $1 - 300,000,000 shares
authorized, 100,871,504 shares issued at 3-31-03
and 100,391,054 shares issued at 12-31-02 100.9 100.4
Capital in excess of par value 1,707.4 1,687.3
Preferred stock purchase rights 1.0 1.0
Retained earnings 912.0 885.7
Accumulated other comprehensive loss (63.9) (62.3)
Common shares in treasury, at cost - 19,845 shares
at 3-31-03 and 7,299 at 12-31-02 (1.0) (.4)
Deferred compensation (92.9) (75.7)
--------- ---------
Total Stockholders' Equity 2,563.5 2,536.0
--------- ---------
Total Liabilities and Stockholders' Equity $ 9,892.1 $ 9,908.8
========= =========
The "successful efforts" method of accounting for oil and gas exploration and
production activities has been followed in preparing this balance sheet.
The accompanying notes are an integral part of this statement.
KERR-McGEE CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31,
-------------------
(Millions of dollars) 2003 2002
- -------------------------------------------------------------------------------
Operating Activities
- --------------------
Net income $ 69.9 $ 5.5
Adjustments to reconcile net income to net cash
provided by operating activities -
Depreciation, depletion and amortization 206.7 221.9
Accretion expense 6.2 -
Asset impairments, net of gains on disposal of
assets held for sale 6.0 -
Dry hole costs 104.6 2.7
Deferred income taxes 32.1 (27.8)
Provision for environmental remediation and
restoration, net of reimbursements 17.3 2.4
(Gain) loss on sale and retirement of assets (1.5) 2.4
Cumulative effect of change in accounting principle 34.7 -
Noncash items affecting net income 29.7 31.6
Other net cash provided by (used in) operating
activities (184.0) 34.8
------- ---------
Net Cash Provided by Operating Activities 321.7 273.5
------- ---------
Investing Activities
- --------------------
Capital expenditures (201.4) (344.2)
Dry hole costs (104.6) (2.7)
Proceeds from sales of assets 185.4 3.3
Other investing activities (10.0) (11.8)
------- ---------
Net Cash Used in Investing Activities (130.6) (355.4)
------- ---------
Financing Activities
- --------------------
Issuance of long-term debt 31.5 1,209.3
Repayment of long-term debt (184.0) (1,047.9)
Issuance of common stock - 1.6
Dividends paid (45.2) (45.1)
Other financing activities (.4) -
------- ---------
Net Cash Provided by (Used in) Financing
Activities (198.1) 117.9
------- ---------
Effects of Exchange Rate Changes on Cash and
Cash Equivalents (2.2) 1.0
------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents (9.2) 37.0
Cash and Cash Equivalents at Beginning of Period 89.9 91.3
------- ---------
Cash and Cash Equivalents at End of Period $ 80.7 $ 128.3
======= =========
The accompanying notes are an integral part of this statement.
KERR-McGEE CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
A. Basis of Presentation and Accounting Policies
Basis of Presentation
---------------------
The condensed financial statements included herein have been prepared by
the company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission and, in the opinion of management,
include all adjustments, consisting only of normal recurring accruals,
necessary to present fairly the resulting operations for the indicated
periods. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States have been condensed or omitted
pursuant to such rules and regulations. Although the company believes that
the disclosures are adequate to make the information presented not
misleading, it is suggested that these condensed financial statements be
read in conjunction with the financial statements and the notes thereto
included in the company's latest annual report on Form 10-K. Presentation
of the 2002 amounts has been changed to be consistent with the presentation
of the oil and gas operations in Indonesia as discontinued (see Note C).
Business Segments
-----------------
The company has three reportable segments: oil and gas exploration and
production, production and marketing of titanium dioxide pigment (chemicals
- pigment), and production and marketing of other chemicals (chemicals -
other). Other chemicals include the company's electrolytic manufacturing
and marketing operations and forest products treatment business.
Change in Accounting Principle - Asset Retirement Obligations
-------------------------------------------------------------
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (FAS) No. 143, "Accounting for
Asset Retirement Obligations." FAS 143 requires that an asset retirement
obligation (ARO) associated with the retirement of a tangible long-lived
asset be recognized as a liability in the period in which it is incurred
(as defined by the standard), with an offsetting increase in the carrying
amount of the associated asset. The cost of the tangible asset, including
the initially recognized ARO, is depreciated such that the cost of the ARO
is recognized over the useful life of the asset. The ARO is recorded at
fair value, and accretion expense will be recognized over time as the
discounted liability is accreted to its expected settlement value. The fair
value of the ARO is measured using expected future cash outflows discounted
at the company's credit-adjusted risk-free interest rate.
The company adopted FAS 143 on January 1, 2003, which resulted in an
increase in net property of $127.5 million, an increase in abandonment
liabilities of $180.4 million and a decrease in deferred income tax
liabilities of $18.2 million. The net impact of these changes resulted in
an after-tax charge to earnings of $34.7 million to recognize the
cumulative effect of retroactively applying the new accounting standard. In
accordance with the provisions of FAS 143, Kerr-McGee accrues an
abandonment liability associated with its oil and gas wells and platforms
when those assets are placed in service, rather than its past practice of
accruing the expected abandonment costs on a unit-of-production basis over
the productive life of the associated oil and gas field. No market risk
premium has been included in the company's calculation of the ARO for oil
and gas wells and platforms since no reliable estimate can be made by the
company. In connection with the change in accounting principle, abandonment
expense of $9.3 million for the first quarter of 2002 has been reclassified
from Costs and operating expenses to Depreciation and depletion in the
Consolidated Statement of Operations to be consistent with the 2003
presentation. Additionally in January 2003, the company announced its plan
to close the synthetic rutile plant in Mobile, Alabama, by the end of 2003.
Since the plant has a determinate closure date, the company has also
accrued an abandonment liability associated with its plans to decommission
the Mobile facility.
A summary of the changes in the asset retirement obligation during the
first quarter of 2003 is included in the table below.
(Millions of dollars)
---------------------------------------------------------------------------
January 1, 2003 $395.6
Obligations incurred 6.5
Accretion expense 6.2
Abandonment expenditures (3.4)
Abandonment obligations settled through property divestitures (12.0)
------
March 31, 2003 $392.9
======
Pro forma net income for the three months ended March 31, 2002, would have
been $3.5 million, with basic and diluted earnings per share of $.03 if the
provisions of FAS 143 had been applied as of January 1, 2002, compared with
net income for the three months ended March 31, 2003, of $104.6 million
before the cumulative effect of change in accounting principle with basic
and diluted earnings per share of $1.04 and $.99, respectively.
Employee Stock Option Plans
---------------------------
In December 2002, the FASB issued FAS 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," an amendment to FAS 123,
"Accounting for Stock-Based Compensation." FAS 148 provides alternative
methods of transition for companies choosing to voluntarily adopt the
fair-value based methodology of FAS 123 and amends the disclosure
provisions of FAS 123 and Accounting Principles Board Opinion (APB) No. 28,
"Interim Financial Reporting," to require pro forma disclosures in interim
financial statements of net income, stock-based compensation expense and
earnings per share as if a fair-value based method had been used. The
amended disclosure requirements of FAS 148 were effective for the company's
first quarter of 2003.
The company accounts for its stock option plans under the intrinsic-value
method permitted by APB No. 25, "Accounting for Stock Issued to Employees."
Accordingly, no stock-based employee compensation cost is reflected in net
income for the issuance of stock options under the company's plans, since
all options were fixed-price options with an exercise price equal to the
market value of the underlying common stock on the date of grant.
The following table illustrates the effect on net income and earnings per
share had the company applied the fair-value recognition provisions of FAS
123 to stock-based employee compensation.
Three Months Ended
March 31,
(Millions of dollars, ------------------
except per share amounts) 2003 2002
--------------------------------------------------------------------------
Net income as reported $69.9 $ 5.5
Less stock-based compensation expense
determined using a fair-value method for
all awards, net of taxes (4.0) (3.3)
----- -----
Pro forma net income $65.9 $ 2.2
===== =====
Net income per share -
Basic -
As reported $ .70 $.05
Pro forma .66 .02
Diluted -
As reported .68 .05
Pro forma .64 .02
B. Derivatives
The company is exposed to risk from fluctuations in crude oil and natural
gas prices, foreign currency exchange rates, and interest rates. To reduce
the impact of these risks on earnings and to increase the predictability of
its cash flow, from time to time the company enters into certain derivative
contracts, primarily swaps and collars for a portion of its oil and gas
production, forward contracts to buy and sell foreign currencies, and
interest rate swaps.
The company accounts for all its derivative financial instruments in
accordance with FAS 133, "Accounting for Derivative Instruments and Hedging
Activities." Derivative financial instruments are recorded as assets or
liabilities in the Consolidated Balance Sheet, measured at fair value. When
available, quoted market prices are used in determining fair value;
however, if quoted market prices are not available, the company estimates
fair value using either quoted market prices of financial instruments with
similar characteristics or other valuation techniques.
Changes in the fair value of instruments that are designated as cash flow
hedges and that qualify for hedge accounting under the provisions of FAS
133 are recorded in accumulated other comprehensive income (loss). These
hedging gains or losses will be recognized in earnings in the periods
during which the hedged forecasted transactions affect earnings. The
ineffective portion of the change in fair value of such hedges, if any, is
included in current earnings. Instruments that do not meet the criteria for
hedge accounting and those designated as fair-value hedges under FAS 133
are recorded at fair value with gains or losses reported currently in
earnings.
Effective August 1, 2001, the company purchased 100% of the outstanding
shares of common stock of HS Resources. At the time of the purchase, HS
Resources (now Kerr-McGee Rocky Mountain Corp.) and its marketing
subsidiary (now Kerr-McGee Energy Services Corp.) were parties to a number
of derivative contracts for purchases and sales of gas, basis differences
and energy-related contracts. Prior to 2002, the company had treated all of
these derivatives as speculative and marked to market through income each
month the change in derivative fair values. In May 2002, the company
designated the remaining portion of the HS Resources gas basis swaps that
settled in 2002 and all that settle in 2003 as hedges. Additionally, in
March 2002, the company began hedging a portion of its 2002 oil and natural
gas production with fixed-price swaps to increase the predictability of its
cash flow and support additional capital expenditures. During the fourth
quarter of 2002, the company expanded the hedging program to cover a
portion of the estimated 2003 crude oil and natural gas production by
adding fixed-price swaps, basis swaps and costless collars. The hedging
program was extended further during the first quarter of 2003 with the
addition of fixed-price swaps covering fourth-quarter 2003 production. At
March 31, 2003, the outstanding commodity-related derivatives accounted for
as hedges had a net liability fair value of $131.6 million, of which $10.6
million was recorded in current assets and $142.2 million was recorded in
current liabilities. At December 31, 2002, the outstanding
commodity-related derivatives accounted for as hedges had a net liability
fair value of $83.4 million, of which $27.1 million was recorded in current
assets and $110.5 million was recorded in current liabilities. The fair
value of these derivative instruments was determined based on prices
actively quoted, generally NYMEX and Dated Brent prices as of the balance
sheet dates. The company had after-tax deferred losses of $75.6 million and
$50.3 million in accumulated other comprehensive loss associated with these
contracts at March 31, 2003 and December 31, 2002, respectively. The
company expects to reclassify the entire amount of these losses into
earnings during the next 12 months, assuming no further changes in
fair-market value of the contracts. During the first quarter of 2003, the
company realized pre-tax losses on contract settlements of $32.8 million on
domestic oil hedging, $28.5 million on North Sea oil hedging and $55.4
million on domestic natural gas hedging. No losses were realized for
contract settlements during the first quarter of 2002, as settlements did
not begin to occur until the 2002 second quarter. The losses offset the
prices realized on the physical sale of crude oil and natural gas. Losses
for hedge ineffectiveness are recognized as a reduction to Sales in the
Consolidated Statement of Operations and totaled $3.6 million in the 2003
first quarter and $.1 million in the 2002 first quarter.
As discussed in the company's 2002 Form 10-K, the company is also party to
other commodity contracts (fixed-price natural gas physical and derivative
contracts) that have not been designated as cash flow hedges. These
commodity contracts are recorded in the balance sheet at fair value, with
any changes in fair value recorded through earnings. At March 31, 2003, the
fair value of these contracts was $26.3 million. Of this amount, $15.6
million was recorded in current assets, $17.5 million in Investments and
Other Assets, $6.2 million in current liabilities, and $.6 million in
deferred credits. At December 31, 2002, the fair value of these contracts
was $29.1 million. Of this amount, $30.7 million was recorded in current
assets, $22.4 million in Investments and Other Assets, $23.3 million in
current liabilities, and $.7 million in deferred credits. The net loss
associated with the derivative contracts was $13.3 million for the three
months ended March 31, 2003, of which $10.8 million was included in Sales
in the Consolidated Statement of Operations and $2.5 million was included
in Other Income. The net loss associated with the derivative contracts was
$24.9 million for the three months ended March 31, 2002, of which $9.2
million was included in Sales in the Consolidated Statement of Operations
and $15.7 million was included in Other Income.
From time to time, the company enters into forward contracts to buy and
sell foreign currencies. Certain of these contracts (purchases of
Australian dollars and British pound sterling) 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.
At March 31, 2003, the outstanding foreign exchange derivative contracts
accounted for as hedges had a net asset fair value of $6.6 million, of
which $4.5 million was recorded in current assets and $2.1 million was
recorded in Investments and Other Assets. Changes in the fair value of
these contracts are recorded in accumulated other comprehensive loss and
will be recognized in earnings in the periods during which the hedged
forecasted transactions affect earnings (i.e., when the forward contracts
close in the case of a hedge of operating costs and when the hedged assets
are depreciated in the case of a hedge of capital expenditures). At March
31, 2003, the company had an after-tax deferred gain of $2.5 million in
accumulated other comprehensive loss related to these contracts. In the
first quarter of 2003, the company reclassified $1.3 million of gains on
forward contracts from accumulated other comprehensive loss to operating
expenses in the statement of operations. Of the existing net gains at March
31, 2003, approximately $1.6 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 first quarter, and no
ineffectiveness was recognized.
The company has entered into other forward contracts to sell foreign
currencies, which will be collected as a result of pigment sales
denominated in foreign currencies, primarily European currencies. These
contracts have not been designated as hedges even though they do protect
the company from changes in foreign currency rate changes. The estimated
fair value of these contracts was not material at March 31, 2003. Selected
pigment receivables have been sold in an asset securitization program at
their equivalent U.S. dollar value at the date the receivables were sold.
However, the company retains the risk of foreign currency rate changes
between the date of sale and collection of the receivables.
The company issued 5 1/2% notes exchangeable for common stock (DECS) in
August 1999, allowing each holder to receive between .85 and 1.0 share of
Devon stock or the equivalent amount of cash at maturity in August 2004.
Embedded options in the DECS provide Kerr-McGee a floor price on Devon's
common stock of $33.19 per share (the put option). The company also retains
the right to 15% of the shares if Devon's stock price is greater than
$39.16 per share (the DECS holders have a call option on 85% of the
shares). Using the Black-Scholes valuation model, the company recognizes in
Other Income on a monthly basis any gains or losses of the put and call
options. At March 31, 2003, the fair values of the embedded put and call
options were nil and $82.8 million, respectively. On December 31, 2002, the
fair values of the embedded put and call options were nil and $66.6
million, respectively. During the first quarters of 2003 and 2002, the
company recorded losses of $16.2 million and $74.3 million, respectively,
in Other Income for the changes in the fair values of the put and call
options. As discussed above, the fluctuation in the value of the put and
call derivative financial instruments will generally offset the increase or
decrease in the market value of 85% of the Devon stock owned by the
company. The remaining 15% of the Devon shares is accounted for as
available-for-sale securities in accordance with FAS 115, "Accounting for
Certain Investments in Debt and Equity Securities," with changes in market
value recorded in accumulated other comprehensive income.
In connection with the issuance of $350 million of 5.375% notes due April
15, 2005, the company entered into an interest rate swap agreement in April
2002. The terms of the agreement effectively change the interest the
company will pay on the debt until maturity from the fixed rate to a
variable rate of LIBOR plus .875%. The company considers the swap to be a
hedge against the change in fair value of the debt as a result of interest
rate changes. The estimated fair value of the interest rate swap was $26.1
and $20.6 million at March 31, 2003 and December 31, 2002, respectively.
The company recognized a $2.7 million reduction in interest expense in the
2003 first quarter from the swap arrangement.
C. Discontinued Operations, Asset Impairments and Asset Disposals
In August 2001, the FASB issued FAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." FAS 144 supersedes FAS 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of," and the portion of Accounting Principles Board Opinion No. 30
that deals with disposal of a business segment. The new standard resolves
significant implementation issues related to FAS 121 and establishes a
single accounting model for long-lived assets to be disposed of by sale.
The company adopted FAS 144 as of January 1, 2002, and, in accordance with
the standard, has classified certain asset disposal groups whose operations
and cash flows can be clearly distinguished from the rest of the company as
discontinued operations.
During the first quarter of 2002, the company approved a plan to dispose of
its exploration and production operations in Kazakhstan and of its interest
in the Bayu-Undan project in the East Timor Sea offshore Australia. 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. These divestiture decisions were made as part of the company's
strategic plan to rationalize noncore oil and gas properties. The results
of these operations have been reported separately as discontinued
operations in the company's Consolidated Statement of Operations.
Sales of the company's interests in the Bayu-Undan project and the Sumatra
operations were completed during the second quarter of 2002. On March 31,
2003, the company completed the sale of its Kazakhstan operations to Shell
Kazakhstan Development (Shell) for $168.6 million in cash. The net proceeds
received by the company were used to reduce outstanding debt. In connection
with the sale, the company has recorded an $18.4 million settlement
liability due to Shell for the net cash flow of the Kazakhstan operations
from the effective date of the transaction to the closing date. The amount
of the settlement liability is subject to review by Shell and is expected
to be paid during the second quarter of 2003.
Revenues applicable to the discontinued operations totaled $5.6 million and
$15.2 million for the three months ended March 31, 2003 and 2002,
respectively. Pretax income for the discontinued operations totaled $.4
million (including impairment losses of $6.1 million) and $11.7 million for
the three months ended March 31, 2003 and 2002, respectively.
As part of the company's plan to divest noncore properties discussed above,
certain exploration and production segment assets were identified for
disposal and are classified as held for sale. During the first quarter of
2003, the company recorded pretax asset impairment charges totaling $8.8
million related to assets held for sale. The impairment charge included
$5.1 million related to various Gulf of Mexico shelf properties, $2.4
million related to a U.K. North Sea property and $1.3 million for certain
U.S. onshore properties. The impairment losses reflect the difference
between the estimated sales prices for the individual properties or group
of properties, less the costs to sell, and the carrying amount of the net
assets.
Pretax impairment losses totaling $5.1 million were also recognized in the
2003 first quarter for certain assets used in operations that are not
considered held for sale. Of the total impairment charge, $3.2 million
related to mature company-operated properties where expected future cash
flows were less than the carrying values of the related assets and $1.9
million related to nonoperated royalty interests where cash flows were no
longer sufficient to cover depreciation and depletion expense on the
company's investment.
The company recognized a net gain on disposal of assets held for sale of
$14.0 million during the first quarter of 2003, which is netted with total
asset impairment charges of $13.9 million in the Consolidated Statement of
Operations. No gain or loss on assets held for sale was recognized in the
first quarter of 2002. The company expects to complete the divestiture of
its other remaining assets identified as being held for sale in the third
quarter of 2003. The assets and liabilities of discontinued operations and
other assets held for sale have been classified as Assets/Liabilities
Associated with Properties Held for Disposal in the Consolidated Balance
Sheet.
D. Cash Flow Information
Net cash provided by operating activities reflects cash payments for income
taxes and interest as follows:
Three Months Ended
March 31,
------------------
(Millions of dollars) 2003 2002
--------------------------------------------------------------------------
Income tax payments $ 60.0 $ 12.2
Less refunds received (14.7) (159.8)
------- -------
Net income tax payments (refunds) $ 45.3 $(147.6)
======= =======
Interest payments $ 79.2 $ 86.0
======= =======
Noncash items affecting net income included in the reconciliation of net
income to net cash provided by operating activities include the following:
Three Months Ended
March 31,
------------------
(Millions of dollars) 2003 2002
--------------------------------------------------------------------------
Unrealized gain on trading securities $ (19.6) $ (81.2)
Increase in fair value of embedded options
in the DECS 16.2 74.3
Unrealized loss on derivative financial instruments 2.4 17.5
All other (1) 30.7 21.0
------- -------
Total $ 29.7 $ 31.6
======= =======
Other net cash provided by (used in) operating activities in the
Consolidated Statement of Cash Flows consists of the following:
Three Months Ended
March 31,
------------------
(Millions of dollars) 2003 2002
--------------------------------------------------------------------------
Increase (decrease) due to changes in working
capital accounts $(165.9) $ 68.6
Environmental expenditures (9.5) (31.6)
All other (1) (8.6) (2.2)
------- -------
Total $(184.0) $ 34.8
======= =======
(1) No other individual item is material to total cash flows from
operations.
E. Comprehensive Income and Financial Instruments
Comprehensive income was $68.3 million in the first quarter of 2003,
compared with a comprehensive loss of $59.7 million in the first quarter of
2002.
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 March 31, 2003 or
December 31, 2002. At March 31, 2003 and December 31, 2002,
available-for-sale securities for which fair value can be determined were
as follows:
March 31, 2003 December 31, 2002
------------------------------- -------------------------------
Gross Gross
Unrealized Unrealized
Fair Holding Fair Holding
(Millions of dollars) Value Cost Gain Value Cost Gain
------------------------------------------------------------------------------------------------------------
Equity securities $73.2 $31.9 $13.3 (1) $69.7 $31.9 $9.8 (1)
U.S. government obligations -
Maturing within one year 2.3 2.3 - 2.4 2.4 -
Maturing between one year
and four years 1.7 1.7 - 1.6 1.6 -
----- ----
Total $13.3 $9.8
===== ====
(1) These amounts include $28 million of gross unrealized hedging losses on
15% of the exchangeable debt at the time of adoption of FAS 133.
F. Equity Affiliates
Investments in equity affiliates totaled $123.0 million at March 31, 2003,
and $122.9 million at December 31, 2002. Equity loss related to the
investments is included in Other Income in the Consolidated Statement of
Operations and totaled $6.1 million and $11.1 million for the three months
ended March 31, 2003 and 2002, respectively.
G. Restructuring Provisions and Exit Activities
During the first quarter of 2003, the company's chemical - pigment
operating unit provided $16.5 million for costs associated with the closure
of its synthetic rutile plant in Mobile, Alabama. Included in the $16.5
million were $14.1 million recorded as a cumulative effect of change in
accounting principle related to the recognition of an asset retirement
obligation and $2.4 million for the accrual of severance benefits to be
paid upon closing the facility, which is included in costs and operating
expenses in the Consolidated Statement of Operations. The provision for
severance benefits is included in the restructuring reserve balance below
(see Note A for a discussion of the asset retirement obligation). The $2.4
million provision for severance benefits remains in the restructuring
accrual at March 31, 2003, and represents the costs associated with
severance earned by employees during the first quarter of 2003. A total of
135 employees will be terminated in connection with this plant closure,
which is expected to occur by year-end 2003. Additionally, the company has
recognized $3.7 million in accelerated depreciation on the plant assets and
$1.3 million for cleanup and decommissioning costs associated with the
plant.
During 2002, the company's chemical - other operating unit provided $16.5
for costs associated with its plans to exit the forest products business,
of which $.7 million was recorded during the first quarter of 2002. During
the first quarter of 2003, the company provided an additional $1.6 million
for severance benefits associated with exiting the forest products
business. These costs are reflected in costs and operating expenses in the
Consolidated Statement of Operations. Of the total provision of $18.1
million, $1.6 million has been paid through the 2003 first quarter and
$16.5 million remained in the accrual at March 31, 2003. In connection with
the plant closures, 252 employees will be terminated, of which 46 were
terminated as of March 31, 2003.
In 2001, the company's chemical - pigment operating unit provided $31.8
million related to the closure of a plant in Antwerp, Belgium. Of this
total accrual, $25.1 million has been paid through the 2003 first quarter
and $9.1 million remained in the accrual at March 31, 2003. As a result of
this plant closure, 121 employees will ultimately be terminated, of which
120 were terminated as of March 31, 2003.
Also in 2001, the company's chemical - other operating unit provided $11.9
million for the discontinuation of manganese metal production at its
Hamilton, Mississippi, facility. Of the total provision, $10.5 million has
been paid through the 2003 first quarter and $1.4 million remained in the
accrual at March 31, 2003, for pond closure costs.
The provisions, payments, adjustments and reserve balances for the
three-month period ended March 31, 2003, are included in the table below.
Dismantlement
and
(Millions of dollars) Total Severance Closure
---------------------------------------------------------------------------
December 31, 2002 $26.6 $3.8 $22.8
Provisions 4.0 4.0 -
Payments (1.6) (1.0) (.6)
Adjustments (1) .4 .1 .3
----- ---- -----
March 31, 2003 $29.4 $6.9 $22.5
===== ==== =====
(1) Foreign-currency translation adjustments related to Antwerp, Belgium,
accrual.
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
periods ended March 31, 2003 and 2002.
For the Three Months Ended March 31,
--------------------------------------------------------------------------------
2003 2002
------------------------------------ ------------------------------------
Income from Loss from
(In millions, except Continuing Per-Share Continuing Per-Share
per-share amounts) Operations Shares Income Operations Shares Loss
--------------------------------------------------------------------------------------------------------------
Basic EPS $104.2 100.1 $1.04 $(1.7) 100.2 $(.02)
===== =====
Effect of dilutive securities:
5 1/4% convertible
debentures 5.3 9.8 - -
Restricted stock - .7 - -
Stock options - - - -
------ ----- ------ -----
Diluted EPS $109.5 110.6 $.99 $(1.7) 100.2 $(.02)
====== ===== ==== ===== ===== =====
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 program is currently being renegotiated. Under the existing
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 $156.8 million and $134.2 million of its pigment
receivables during the first quarter of 2003 and 2002, respectively. The
sale of the receivables resulted in pretax losses of $1.1 million during
both the first quarter of 2003 and 2002. 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 $110.1 million at March
31, 2003, and $110.6 million at December 31, 2002.
J. Condensed Consolidating Financial Information
In connection with the acquisition of HS Resources in 2001, a holding
company structure was implemented. The company formed a new holding
company, Kerr-McGee Holdco, which then changed its name to Kerr-McGee
Corporation. The former Kerr-McGee Corporation's name was changed to
Kerr-McGee Operating Corporation. At the end of 2002, another
reorganization took place whereby among other changes, Kerr-McGee Operating
Corporation distributed its investment in certain subsidiaries (primarily
the oil and gas operating subsidiaries) to a newly formed intermediate
holding company, Kerr-McGee Worldwide Corporation. Kerr-McGee Operating
Corporation formed a new subsidiary, Kerr-McGee Chemical Worldwide LLC, and
merged into it.
On October 3, 2001, Kerr-McGee Corporation issued $1.5 billion of long-term
notes in a public offering. The notes are general, unsecured obligations of
the company and rank in parity with all of the company's other unsecured
and unsubordinated indebtedness. Kerr-McGee Chemical Worldwide LLC
(formerly Kerr-McGee Operating Corporation, which was previously the
original Kerr-McGee Corporation) and Kerr-McGee Rocky Mountain Corporation
have guaranteed the notes. Additionally, Kerr-McGee Corporation has
guaranteed all indebtedness of its subsidiaries, including the indebtedness
assumed in the purchase of HS Resources. As a result of these guarantee
arrangements, the company is required to present condensed consolidating
financial information. The top holding company is Kerr-McGee Corporation.
The guarantor subsidiaries include Kerr-McGee Chemical Worldwide LLC at
March 31, 2003 and December 31, 2002, and its predecessor, Kerr-McGee
Operating Corporation, at March 31, 2002, along with Kerr-McGee Rocky
Mountain Corporation in 2003 and 2002.
The following tables present condensed consolidating financial information
for (a) Kerr-McGee Corporation, the parent company, (b) the guarantor
subsidiaries, and (c) the non-guarantor subsidiaries on a consolidated
basis.
Kerr-McGee Corporation and Subsidiaries
Condensed Consolidating Statement of Operations
For the Three Months Ended March 31, 2003
Kerr-McGee Guarantor Non-Guarantor
(Millions of dollars) Corporation Subsidiaries Subsidiaries Eliminations Consolidated
- ---------------------------------------------------------------------------------------------------------------------------------
Sales $ - $153.8 $975.5 $ (2.1) $1,127.2
------ ------ ------ ------- --------
Costs and Expenses
Costs and operating expenses - 71.5 343.1 (2.6) 412.0
Selling, general and administrative expenses - 7.1 63.8 - 70.9
Shipping and handling expenses - 2.6 29.4 - 32.0
Depreciation and depletion - 29.9 159.7 - 189.6
Accretion expense - .6 5.6 - 6.2
Asset impairments, net of gains on disposal of
assets held for sale - - (.1) - (.1)
Exploration, including dry holes and
amortization of undeveloped leases - 3.9 136.6 - 140.5
Taxes, other than income taxes .1 5.5 19.8 - 25.4
Provision for environmental remediation
and restoration, net of reimbursements - 5.1 12.2 - 17.3
Interest and debt expense 28.9 8.3 72.9 (45.1) 65.0
------ ------ ------ ------- --------
Total Costs and Expenses 29.0 134.5 843.0 (47.7) 958.8
------ ------ ------ ------- --------
(29.0) 19.3 132.5 45.6 168.4
Other Income 146.6 .6 29.9 (175.4) 1.7
------ ------ ------ ------- --------
Income before Income Taxes 117.6 19.9 162.4 (129.8) 170.1
Provision for Income Taxes (47.7) (4.2) (61.2) 47.2 (65.9)
------ ------ ------ ------- --------
Income from Continuing Operations 69.9 15.7 101.2 (82.6) 104.2
Income (Loss) from Discontinued Operations,
net of tax - 12.0 (11.6) - .4
Cumulative Effect of Change in Accounting
Principle, net of tax - (1.3) (33.4) - (34.7)
------ ------ ------ ------- --------
Net Income $ 69.9 $ 26.4 $ 56.2 $ (82.6) $ 69.9
====== ====== ====== ======= ========
Kerr-McGee Corporation and Subsidiaries
Condensed Consolidating Statement of Operations
For the Three Months Ended March 31, 2002
Kerr-McGee Guarantor Non-Guarantor
(Millions of dollars) Corporation Subsidiaries Subsidiaries Eliminations Consolidated
- ---------------------------------------------------------------------------------------------------------------------------------
Sales $ - $ 79.1 $719.4 $ - $ 798.5
------ ------ ------ -------- --------
Costs and Expenses
Costs and operating expenses - 26.7 323.2 - 349.9
Selling, general and administrative expenses - .7 54.8 - 55.5
Shipping and handling expenses - 3.0 26.1 - 29.1
Depreciation and depletion - 30.8 181.5 - 212.3
Exploration, including dry holes and
amortization of undeveloped leases - 2.0 29.9 - 31.9
Taxes, other than income taxes .1 4.8 21.5 - 26.4
Provision for environmental remediation
and restoration, net of reimbursements - - 2.4 - 2.4
Interest and debt expense 27.0 8.8 83.9 (49.0) 70.7
------ ------ ------ -------- --------
Total Costs and Expenses 27.1 76.8 723.3 (49.0) 778.2
------ ------ ------ -------- --------
(27.1) 2.3 (3.9) 49.0 20.3
Other Income (Expense) 35.3 (31.0) 23.2 (51.3) (23.8)
------ ------ ------ -------- --------
Income (Loss) before Income Taxes 8.2 (28.7) 19.3 (2.3) (3.5)
Benefit (Provision) for Income Taxes (2.7) 6.1 (7.5) 5.9 1.8
------ ------ ------ -------- --------
Income (Loss) from Continuing Operations 5.5 (22.6) 11.8 3.6 (1.7)
Income from Discontinued Operations,
net of tax - - 7.2 - 7.2
------ ------ ------ -------- --------
Net Income (Loss) $ 5.5 $(22.6) $ 19.0 $ 3.6 $ 5.5
====== ====== ====== ======== ========
Kerr-McGee Corporation and Subsidiaries
Condensed Consolidating Balance Sheet
March 31, 2003
Kerr-McGee Guarantor Non-Guarantor
(Millions of dollars) Corporation Subsidiaries Subsidiaries Eliminations Consolidated
- ---------------------------------------------------------------------------------------------------------------------------------
ASSETS
------
Current Assets
Cash $ 2.9 $ - $ 77.8 $ - $ 80.7
Intercompany receivables 881.3 (299.7) 1,519.1 (2,100.7) -
Accounts receivable (0.3) 95.4 561.3 - 656.4
Inventories - 6.6 416.5 - 423.1
Deposits, prepaid expenses and other assets - 26.2 80.9 - 107.1
Current assets associated with properties
held for disposal - - 12.4 - 12.4
-------- -------- -------- --------- --------
Total Current Assets 883.9 (171.5) 2,668.0 (2,100.7) 1,279.7
-------- -------- -------- --------- --------
Property, Plant and Equipment, net - 1,988.2 5,155.7 - 7,143.9
Investments and Other Assets 11.4 130.0 1,026.0 (79.5) 1,087.9
Goodwill - 346.8 9.4 - 356.2
Long-term Assets Associated with Properties
Held for Disposal - - 19.5 4.9 24.4
Investments in and Advances to Subsidiaries 3,773.9 675.3 (174.3) (4,274.9) -
-------- -------- -------- --------- --------
Total Assets $4,669.2 $2,968.8 $8,704.3 $(6,450.2) $9,892.1
======== ======== ======== ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities
Accounts payable $ 45.4 $ 67.8 $ 595.6 $ - $ 708.8
Intercompany borrowings 63.5 538.6 1,498.1 (2,100.2) -
Long-term debt due within one year - - 104.8 - 104.8
Other current liabilities 2.4 170.6 508.6 - 681.6
Current liabilities associated with
properties held for disposal - - 20.0 - 20.0
-------- -------- -------- --------- --------
Total Current Liabilities 111.3 777.0 2,727.1 (2,100.2) 1,515.2
-------- -------- -------- --------- --------
Long-Term Debt 1,847.2 - 1,802.7 - 3,649.9
Other Deferred Credits and Reserves - 739.2 1,419.9 4.4 2,163.5
Investments by and Advances from Parent - - 490.9 (490.9) -
Stockholders' Equity 2,710.7 1,452.6 2,263.7 (3,863.5) 2,563.5
-------- -------- -------- --------- --------
Total Liabilities and Stockholders' Equity $4,669.2 $2,968.8 $8,704.3 $(6,450.2) $9,892.1
======== ======== ======== ========= ========
Kerr-McGee Corporation and Subsidiaries
Condensed Consolidating Balance Sheet
December 31, 2002
Kerr-McGee Guarantor Non-Guarantor
(Millions of dollars) Corporation Subsidiaries Subsidiaries Eliminations Consolidated
- ---------------------------------------------------------------------------------------------------------------------------------
ASSETS
------
Current Assets
Cash $ 2.5 $ - $ 87.4 $ - $ 89.9
Intercompany receivables 956.6 46.6 1,641.2 (2,644.4) -
Accounts receivable - 73.5 534.3 - 607.8
Inventories - 6.5 395.9 - 402.4
Deposits, prepaid expenses and other assets - 59.6 75.0 (1.8) 132.8
Current assets associated with properties
held for disposal - - 57.2 - 57.2
-------- -------- -------- --------- --------
Total Current Assets 959.1 186.2 2,791.0 (2,646.2) 1,290.1
-------- -------- -------- --------- --------
Property, Plant and Equipment, net - 1,956.1 5,079.5 - 7,035.6
Investments and Other Assets 11.8 117.9 985.7 (80.2) 1,035.2
Goodwill - 346.8 9.1 - 355.9
Long-term Assets Associated with Properties
Held for Disposal - - 187.1 4.9 192.0
Investments in and Advances to Subsidiaries 3,673.0 694.9 80.1 (4,448.0) -
-------- -------- -------- --------- --------
Total Assets $4,643.9 $3,301.9 $9,132.5 $(7,169.5) $9,908.8
======== ======== ======== ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities
Accounts payable $ 45.2 $ 78.1 $ 661.8 $ - $ 785.1
Intercompany borrowings 68.5 842.2 1,732.1 (2,642.8) -
Long-term debt due within one year - - 105.8 - 105.8
Other current liabilities 17.8 195.0 478.2 25.8 716.8
Current liabilities associated with
properties held for disposal - - 2.1 - 2.1
-------- -------- -------- --------- --------
Total Current Liabilities 131.5 1,115.3 2,980.0 (2,617.0) 1,609.8
-------- -------- -------- --------- --------
Long-Term Debt 1,847.2 - 1,950.9 - 3,798.1
Other Deferred Credits and Reserves - 675.4 1,297.4 (24.0) 1,948.8
Long-term Liabilities Associated with
Properties Held for Disposal - - 16.1 - 16.1
Investments by and Advances from Parent - - 728.7 (728.7) -
Stockholders' Equity 2,665.2 1,511.2 2,159.4 (3,799.8) 2,536.0
-------- -------- -------- --------- --------
Total Liabilities and Stockholders' Equity $4,643.9 $3,301.9 $9,132.5 $(7,169.5) $9,908.8
======== ======== ======== ========= ========
Kerr-McGee Corporation and Subsidiaries
Condensed Consolidating Statement of Cash Flows
For the Three Months Ended March 31, 2003
Kerr-McGee Guarantor Non-Guarantor
(Millions of dollars) Corporation Subsidiaries Subsidiaries Eliminations Consolidated
- ---------------------------------------------------------------------------------------------------------------------------------
Operating Activities
- --------------------
Net income $ 69.9 $ 26.4 $ 56.2 $ (82.6) $ 69.9
Adjustments to reconcile net income to net cash
provided by (used in) operating activities-
Depreciation, depletion and amortization - 30.3 176.4 - 206.7
Accretion expense - .6 5.6 - 6.2
Asset impairments, net of gains on
disposal of assets held for sale - - 6.0 - 6.0
Equity in earnings of subsidiaries (76.5) 19.8 - 56.7 -
Dry hole costs - - 104.6 - 104.6
Deferred income taxes - 23.7 8.4 - 32.1
Provision for environmental remediation
and restoration, net of reimbursements - 5.1 12.2 - 17.3
(Gain) loss on sale and retirement of
assets - (12.0) 10.5 - (1.5)
Cumulative effect of change in accounting
principle - 1.3 33.4 - 34.7
Noncash items affecting net income .4 15.1 14.2 - 29.7
Other net cash used in operating activities (29.8) (69.5) (84.7) - (184.0)
-------- -------- -------- --------- --------
Net Cash Provided by (Used in)
Operating Activities (36.0) 40.8 342.8 (25.9) 321.7
-------- -------- -------- --------- --------
Investing Activities
- --------------------
Capital expenditures - (31.7) (169.7) - (201.4)
Dry hole costs - - (104.6) - (104.6)
Proceeds from sales of assets - - 185.4 - 185.4
Other investing activities - - (10.0) - (10.0)
-------- -------- -------- --------- --------
Net Cash Used in Investing Activities - (31.7) (98.9) - (130.6)
-------- -------- -------- --------- --------
Financing Activities
- --------------------
Issuance of long-term debt - - 31.5 - 31.5
Repayment of long-term debt - - (184.0) - (184.0)
Increase (decrease) in intercompany
notes payable 81.4 (9.1) (72.3) - -
Dividends paid (45.2) - (26.3) 26.3 (45.2)
Other financing activities .2 - (.2) (.4) (.4)
-------- -------- -------- --------- --------
Net Cash Provided by (Used in)
Financing Activities 36.4 (9.1) (251.3) 25.9 (198.1)
-------- -------- -------- --------- --------
Effects of Exchange Rate Changes on Cash
and Cash Equivalents - - (2.2) - (2.2)
-------- -------- -------- --------- --------
Net Increase (Decrease) in Cash and Cash
Equivalents .4 - (9.6) - (9.2)
Cash and Cash Equivalents at Beginning of
Period 2.5 - 87.4 - 89.9
-------- -------- -------- --------- --------
Cash and Cash Equivalents at End of Period $ 2.9 $ - $ 77.8 $ - $ 80.7
======== ======== ======== ========= ========
Kerr-McGee Corporation and Subsidiaries
Condensed Consolidating Statement of Cash Flows
For the Three Months Ended March 31, 2002
Kerr-McGee Guarantor Non-Guarantor
(Millions of dollars) Corporation Subsidiaries Subsidiaries Eliminations Consolidated
- ---------------------------------------------------------------------------------------------------------------------------------
Operating Activities
- --------------------
Net income (loss) $ 5.5 $ (22.6) $ 19.0 $ 3.6 $ 5.5
Adjustments to reconcile net income or loss
to net cash provided by (used in) operating
activities -
Depreciation, depletion and amortization - 31.0 190.9 - 221.9
Equity in earnings of subsidiaries (11.6) 15.2 - (3.6) -
Dry hole costs - - 2.7 - 2.7
Deferred income taxes (3.3) (8.2) (16.3) - (27.8)
Provision for environmental remediation
and restoration, net of reimbursements - - 2.4 - 2.4
Gain on sale and retirement of assets - - 2.4 - 2.4
Noncash items affecting net income or loss - 20.2 11.4 - 31.6
Other net cash provided by (used in)
operating activities (27.6) 7.9 54.5 - 34.8
-------- -------- -------- --------- --------
Net Cash Provided by (Used in)
Operating Activities (37.0) 43.5 267.0 - 273.5
-------- -------- -------- --------- --------
Investing Activities
- --------------------
Capital expenditures - (33.6) (310.6) - (344.2)
Dry hole costs - - (2.7) - (2.7)
Proceeds from sales of assets - - 3.3 - 3.3
Other investing activities - 2.9 (14.7) - (11.8)
-------- -------- -------- --------- --------
Net Cash Used in Investing Activities - (30.7) (324.7) - (355.4)
-------- -------- -------- --------- --------
Financing Activities
- --------------------
Issuance of long-term debt - - 1,209.3 - 1,209.3
Repayment of long-term debt - - (1,047.9) - (1,047.9)
Increase (decrease) in intercompany
notes payable 80.4 (13.9) (66.5) - -
Issuance of common stock 1.7 - (0.1) - 1.6
Dividends paid (45.1) - - - (45.1)
-------- -------- -------- --------- --------
Net Cash Provided by (Used in)
Financing Activities 37.0 (13.9) 94.8 - 117.9
-------- -------- -------- --------- --------
Effects of Exchange Rate Changes on Cash
and Cash Equivalents - - 1.0 - 1.0
-------- -------- -------- --------- --------
Net Increase (Decrease) in Cash and Cash
Equivalents - (1.1) 38.1 - 37.0
Cash and Cash Equivalents at Beginning of
Period - 1.1 90.2 - 91.3
-------- -------- -------- --------- --------
Cash and Cash Equivalents at End of Period $ - $ - $ 128.3 $ - $ 128.3
======== ======== ======== ========= ========
K. Contingencies
West Chicago, Illinois
In 1973, the company's chemical affiliate (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
surrounding areas. The original processing facility is regulated by the
State of Illinois (the State), and four vicinity areas are designated as
Superfund sites on the National Priority List (NPL).
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 agreement requires Chemical to excavate contaminated soil and
ship it to a licensed disposal facility, monitor and, if necessary,
remediate groundwater and restore the property. The State indicated
approval of the agreement and issued license amendments authorizing the
work. Chemical expects most of the work to be completed by the end of 2003,
leaving principally surface restoration and groundwater monitoring and/or
remediation for subsequent years. Surface restoration is expected to be
completed in 2004. The long-term scope, duration and cost of groundwater
monitoring and/or remediation are uncertain because it is not possible to
reliably predict how groundwater conditions will be affected by the ongoing
work.
Vicinity Areas - The Environmental Protection Agency (EPA) has listed four
areas in the vicinity of the closed West Chicago facility on the NPL and
has designated Chemical as a Potentially Responsible Party (PRP) 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
required Chemical to conduct removal actions to excavate contaminated soil
and ship the soil to a licensed disposal facility. Chemical has
substantially completed the work required by the two orders.
The other two NPL sites, known as Kress Creek and the Sewage Treatment
Plant, are contiguous and involve low levels of insoluble thorium residues,
principally in streambanks and streambed sediments, virtually all within a
floodway. Chemical has conducted a thorough characterization of the two
sites and has reached conceptual agreement with local governmental
authorities on a cleanup plan, which is currently being reviewed by EPA.
The cleanup plan will require excavation of contaminated soils and stream
sediments, shipment of excavated materials to a licensed disposal facility
and restoration of affected areas. The agreement is conditioned upon the
resolution of certain matters, including agreements regarding potential
natural resource damages and government response costs, and is expected to
be incorporated in a consent decree that will address the outstanding
issues. The consent decree must be approved by EPA, the State, local
communities and Chemical and then entered by a federal court. It is
expected that the necessary parties will approve the terms of a consent
decree in 2003 and, subject to court approval which is not expected before
2004, the work will take about four years to complete.
Financial Reserves - As of March 31, 2003, the company had remaining
reserves of $101 million for costs related to West Chicago. Although actual
costs may exceed current estimates, the amount of any increases cannot be
reasonably estimated at this time. The amount of the reserve is not reduced
by reimbursements expected from the federal government under Title X of the
Energy Policy Act of 1992 (Title X) (discussed below).
Government Reimbursement - Pursuant to Title X, the U.S. Department of
Energy (DOE) is obligated to reimburse Chemical for certain decommissioning
and cleanup costs incurred in connection with the West Chicago sites in
recognition of the fact that about 55% of the facility's production was
dedicated to U.S. government contracts. The amount authorized for
reimbursement under Title X is $365 million plus inflation adjustments.
That amount is expected to cover the government's full share of West
Chicago cleanup costs. Through March 31, 2003, Chemical had been reimbursed
approximately $156 million under Title X. In April 2003, Chemical received
additional reimbursements totaling about $15 million, bringing the total
reimbursement received to date to about $171 million.
Reimbursements under Title X are provided by congressional appropriations.
Historically, congressional appropriations have lagged Chemical's cleanup
expenditures. As of March 31, 2003, the government's share of costs
incurred by Chemical but not yet reimbursed by the DOE totaled
approximately $113 million, which amount was reduced to $98 million in
April 2003 following receipt of the additional reimbursements totaling $15
million. The company believes receipt of the remaining arrearage in due
course following additional congressional appropriations is probable and
has reflected the arrearage as a receivable in the financial statements.
The company will recognize recovery of the government's share of future
remediation costs for the West Chicago sites as Chemical incurs the costs.
Henderson, Nevada
In 1998, Chemical decided to exit the ammonium perchlorate business. At
that time, Chemical curtailed operations and began preparation for the
shutdown of the associated production facilities in Henderson, Nevada, that
produced ammonium perchlorate and other related products. Manufacture of
perchlorate compounds began at Henderson in 1945 in facilities owned by the
U.S. government. Production expanded significantly in 1953 with completion
of a plant for manufacture of ammonium perchlorate. The U.S. Navy paid for
construction of this plant and took title to it in 1953. The Navy continued
to own the ammonium perchlorate plant as well as other associated
production equipment at Henderson until 1962, when the plant was purchased
by a predecessor of Chemical. The ammonium perchlorate produced at the
Henderson facility was used primarily in federal government defense and
space programs. Perchlorate has been detected in nearby Lake Mead and the
Colorado River.
Chemical decided to exit the business in 1998 and began decommissioning the
facility 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 both interim and long-term remedial
measures to capture and remove perchlorate from groundwater.
In 1999, Chemical initiated the interim measures required by the consent
orders. Chemical subsequently developed and installed a long-term
remediation system based on new technology, but startup difficulties
prevented successful commissioning of the long-term system. In April 2003,
Chemical determined that these startup difficulties could not be overcome
and initiated steps to install an alternate long-term remediation system
using a different technology. The interim system was enhanced and will be
utilized until the successful commissioning of the alternate system. The
scope and duration of groundwater remediation will be driven in the long
term by drinking water standards, which to date have not been formally
established by state or federal regulatory authorities. EPA and other
federal and state agencies currently are evaluating the health and
environmental risks associated with perchlorate as part of the process for
ultimately setting a drinking water standard. The resolution of these
issues could materially affect the scope, duration and cost of the
long-term groundwater remediation that Chemical is required to perform.
Financial Reserves - A provision was taken in the first quarter of 2003 in
the amount of $32 million for the construction and operation of the
alternate long-term remediation system and the continued operation of the
interim system during the construction and startup period for the long-term
system. As a result of this provision, the company's remaining reserves for
Henderson totaled $46 million as of March 31, 2003. As noted above, the
long-term scope, duration and cost of groundwater remediation are uncertain
and, therefore, additional costs may be incurred in the future. However,
the amount of any additions cannot be reasonably estimated at this time.
Government Litigation - In 2000, Chemical initiated litigation against the
United States seeking contribution for response costs. The suit, Kerr-McGee
Chemical LLC v. United States of America, is pending in U.S. District Court
for the District of Columbia. The government owned the plant in the early
years of its operation and was the largest consumer of products produced at
the plant. The litigation is in the early stages of discovery. Although the
outcome of the litigation is uncertain, Chemical believes it is likely to
recover a portion of its costs from the government. The amount and timing
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.
Insurance - In 2001, Chemical purchased a 10-year, $100 million
environmental cost cap insurance policy for groundwater remediation at
Henderson. The insurance policy provides coverage only after Chemical
exhausts a self-insured retention of approximately $61 million and covers
only those costs incurred to achieve a cleanup level specified in the
policy. As noted above, federal and state agencies have not established a
drinking water standard and, therefore, it is possible that Chemical may be
required to achieve a cleanup level more stringent than that covered by the
policy. If so, the amount recoverable under the policy could be affected.
Through March 31, 2003, Chemical has incurred expenditures of about $40
million that it believes can be applied to the self-insured retention.
Additionally the company believes that about $21 million of the $46 million
reserve remaining at March 31, 2003, will be creditable against and exhaust
the self-insured retention and believes it is probable that about $21
million will be recovered under the policy. Chemical has therefore recorded
a receivable in the amount of $21 million in its financial statements
reflecting the recovery that is expected under the policy.
Milwaukee, Wisconsin
In 1976, Chemical closed a wood-treatment facility it had operated in
Milwaukee, Wisconsin. Operations at the facility prior to its closure had
resulted in the contamination of soil and groundwater at and around the
site with creosote and other substances used in the wood-treatment process.
In 1984, EPA designated the Milwaukee wood-treatment facility as a
Superfund site under the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980 (CERCLA), listed the site on the
NPL and named Chemical a PRP. Chemical executed a consent decree in 1991
that required it to perform soil and groundwater remediation at and below
the former wood-treatment area and to address a tributary creek of the
Menominee River that had become contaminated as a result of the
wood-treatment operations. Actual remedial activities were deferred until
after the decree was finally entered in 1996 by a federal court in
Milwaukee.
Groundwater treatment, using a pump-and-treat system, was initiated in 1996
to remediate groundwater contamination below and in the vicinity of the
former wood-treatment area. It is not possible to reliably predict how
groundwater conditions will be affected by the ongoing soil remediation and
groundwater treatment; therefore, it is not known how long groundwater
treatment will continue. Soil cleanup of the former wood-treatment area
began in 2000 and was completed in 2002. Also in 2002, terms for addressing
the tributary creek were agreed upon with EPA, after which Chemical began
the implementation of a remedy to reroute the creek and to remediate
associated sediment and stream bank soils. It is expected that the soil and
sediment remediation will take about four more years.
As of March 31, 2003, the company had remaining reserves of $12 million for
the costs of the remediation work described above. Although actual costs
may exceed current estimates, the amount of any increases cannot be
reasonably estimated at this time.
Cushing, Oklahoma
In 1972, an affiliate of the company closed a petroleum refinery it had
operated near Cushing, Oklahoma. Prior to closing the refinery, the
affiliate also had produced uranium and thorium fuel and metal at the site
pursuant to licenses issued by the Atomic Energy Commission (AEC). The
uranium and thorium operations commenced in 1962 and were shut down in
1966, at which time the affiliate decommissioned and cleaned up the portion
of the facility related to uranium and thorium operations to applicable
standards. The refinery also was cleaned up to applicable standards at the
time of closing.
Subsequent regulatory changes required more extensive remediation at the
site. In 1990, the affiliate entered into a consent agreement with the
State of Oklahoma to investigate the site and take appropriate remedial
actions related to petroleum refining and uranium and thorium residuals.
Remediation of hydrocarbon contamination is being performed under a plan
approved by the Oklahoma Department of Environmental Quality. Soil
remediation to address hydrocarbon contamination is expected to continue
for about four more years. The scope of any groundwater remediation that
may be required is not known. Additionally, in 1993, the affiliate received
a decommissioning license from the Nuclear Regulatory Commission (NRC), the
successor to AEC's licensing authority, to perform certain cleanup of
uranium and thorium residuals. To avoid anticipated future increases in
disposal costs, much of the uranium and thorium residuals were cleaned up
and disposed in 2002 after obtaining NRC approvals to conduct soil removal
without first completing the site characterization, work that is necessary
for identifying the scope of required cleanup activities. Because
excavation preceded characterization, contamination that had not been
previously identified was encountered and removed during the expedited
excavation and disposal work. Characterization and verification work is
ongoing to confirm whether the work undertaken in 2002 adequately addressed
the contaminated areas. Additional excavation may be required in the
future, depending on the results of the characterization and verification
work.
As of March 31, 2003, the company had remaining reserves of $20 million for
the costs of the ongoing remediation and decommissioning work described
above. Although actual costs may exceed current estimates, the amount of
any increases cannot be reasonably estimated at this time.
New Jersey Wood-Treatment Site
In 1999, EPA notified Chemical and its parent company that they were
potentially responsible parties at a former wood-treatment site in New
Jersey that has been listed by EPA as a Superfund site. At that time, the
company knew little about the site as neither Chemical nor its parent had
ever owned or operated the site. A predecessor of Chemical had been the
sole stockholder of a company that owned and operated the site. The company
that owned the site already had been dissolved and the site had been sold
to a third party before Chemical became affiliated with the former
stockholder in 1964. EPA has preliminarily estimated that cleanup costs may
reach $120 million or more.
There are substantial uncertainties about Chemical's 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 Chemical and its parent that they are potentially
responsible parties. The EPA notification may be based on a successor
liability theory premised on the 1964 transaction pursuant to which
Chemical became affiliated with the former stockholder of the company that
had owned and operated the site. Based on available historical records, it
is uncertain whether and, if so, under what terms, the former stockholder
assumed liabilities of the dissolved company. Moreover, as noted above, the
site had been sold to a third party and the company that owned and operated
the site had been dissolved before Chemical became affiliated with that
company's stockholder. In addition, there appear to be other potentially
responsible parties, though it is not known whether the other parties have
received notification from EPA. EPA has not ordered Chemical or its parent
to perform work at the site and is instead performing the work itself. The
company has not recorded a reserve for the site as it is not possible to
reliably estimate whatever liability Chemical or its parent may have for
the cleanup because of the aforementioned uncertainties and the existence
of other potentially responsible parties.
Forest Products Litigation
Primary Lawsuits - Between 1999 and 2001, Kerr-McGee Chemical LLC
(Chemical) and its parent company were named in 22 lawsuits in three states
(Mississippi, Louisiana and Pennsylvania) in connection with present and
former forest products operations located in those states. 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.
Seven of the 22 cases were filed in Mississippi and relate to Chemical's
Columbus, Mississippi, wood-treatment plant. Two of the Mississippi cases
are pending in the U.S. District Court for the Northern District: Andrews
v. Kerr-McGee (filed September 8, 1999) and Bachelder v. Kerr-McGee (filed
March 7, 2001). Three of the Mississippi cases are pending in the Circuit
Court of Lowndes County: Spirit of Prayer v. Kerr-McGee (filed March 16,
2000), Burgin v. Kerr-McGee (filed March 6, 2001) and Maranatha Faith
Center v. Kerr-McGee (filed February 18, 2000). Two of the Mississippi
cases are pending in Circuit Court of Hinds County: Jamison v. Kerr-McGee
(filed February 18, 2000) and Cockrell v. Kerr-McGee (filed March 6, 2001).
Seven of the 22 cases were filed in Louisiana and relate to a former
wood-treatment plant that was located in Bossier City, Louisiana. One of
the Louisiana cases is pending in the U.S. District Court for the Western
District: Shirlean Taylor, et al. v. Kerr-McGee (filed June 15, 2000). Five
of the Louisiana cases are pending in the U.S. District Court for the
Western District, subject to remand to 26th District Court of Bossier
Parish, and all were filed on October 25, 2001: Brenda Sue Adams, et al. v.
Kerr-McGee; J.C. Adams, et al. v. Kerr-McGee; Linda Paul Anderson, et al.
v. Kerr-McGee; Shirley Marie Austin, et al. v. Kerr-McGee; and Ronald
Donald Bailey, et al. v. Kerr-McGee. One of the Louisiana cases is pending
in the 26th District Court of Bossier Parish: T. J. Allen, et al. v.
Kerr-McGee (filed October 25, 2001).
Eight of the 22 cases were filed in the Court of Common Pleas, Luzerne
County, Pennsylvania, and relate to a closed wood-treatment plant in Avoca,
Pennsylvania. Five of the Pennsylvania cases were filed on October 23,
2001: Mary Beth Marriggi, et al. v. Kerr-McGee; Delores Kubasko, et al. v.
Kerr-McGee; Barbara Fromet, et al. v. Kerr-McGee; Ann Culp, et al. v. Kerr
McGee; and Robert Battista, et al. v. Kerr-McGee. Three of the Pennsylvania
cases were filed on November 15, 2001: Stacey Berkoski, et al. v.
Kerr-McGee; Kenneth Battista, et al. v. Kerr-McGee; and James Butcher, et
al. v. Kerr-McGee.
The parties have executed agreements to settle five of the seven
Mississippi cases and all seven of the Louisiana cases. The settlement
agreements require Chemical to pay up to $56 million for the benefit of
about 9,400 identified claimants who are eligible under the agreements and
who sign releases. Of that potential maximum of $56 million, approximately
$49 million had been paid as of March 31, 2003. In addition, the agreements
require Chemical to pay up to an additional $11 million from any recovery
in certain insurance litigation that Chemical and its parent filed against
their insurance carriers (see below). The agreements also contemplated two
class-action settlement funds - one in Mississippi and one in Louisiana -
for the benefit of a class of residents who did not sign individual
releases and who did not choose to opt out of the class settlements. The
parties moved forward with the class settlement in Mississippi but agreed
not to pursue a class-action settlement in Louisiana. Chemical may be
required to pay up to a maximum of $7.5 million to the Mississippi
class-action settlement fund. The precise amount of Chemical's obligations
under the agreements depends on the number of plaintiffs who sign and
deliver valid individual releases, the number of the Mississippi class
members who submit proof of claim forms and the number of class members who
opt out of the class. Further payments pursuant to the settlements of the
nonclass-action cases are subject to a number of conditions, including the
signing and delivery of releases by named plaintiffs and court approval of
various matters such as minors' settlements. The class-action settlement
agreement, including certification of the settlement class and approval of
the class settlement, requires court approval. On February 21, 2003, the
federal court in Mississippi approved the Mississippi class settlement.
Subsequently, two members of the class filed a notice appealing the order
approving the class settlement.
Although the settlement agreements are expected to resolve all of the
Louisiana lawsuits and substantially all of the Columbus, Mississippi,
lawsuits described above, the settlements will not resolve the claims of
plaintiffs who do not sign releases, the claims of any class members who
opt out of the class settlement or any claims by class members that may
arise in the future for currently unmanifested personal injuries. The
settlements also do not cover the Maranatha Faith Center v. Kerr-McGee or
the Jamison v. Kerr-McGee cases which, together, involve 27 plaintiffs who
allege property damage and/or personal injury arising out of the Columbus,
Mississippi, operations or the eight cases in Pennsylvania, which involve
55 named plaintiffs and an undetermined number of allegedly similarly
situated persons. The company is vigorously defending the two remaining
Mississippi lawsuits and the Pennsylvania cases, pending any settlement of
those cases.
The implementation of the settlements is progressing. Of approximately
6,100 identified claimants in Columbus, Mississippi, approximately 5,300
claimants have delivered releases. Of approximately 3,300 identified
claimants in Louisiana, approximately 3,000 claimants have delivered
releases. Through March 31, 2003, Chemical had paid approximately $49
million pursuant to the settlement agreements to Mississippi and Louisiana
plaintiffs who signed releases. No payments will be made to the Mississippi
class settlement fund unless and until the court has certified the class
and approved the class settlement.
Insurance Litigation - In 2001, Chemical and its parent company filed suit
against insurance carriers in the Superior Court of Somerset County, New
Jersey. The suit, Kerr-McGee Corporation and Kerr-McGee Chemical LLC v.
Hartford Accident & Indemnity Company and Liberty Mutual Insurance Company,
is to recover losses associated with certain environmental litigation,
agency proceedings and the Pennsylvania forest products litigation
described above. Chemical and its parent believe that they have valid
claims against their insurers; however, the prospects for recovery are
uncertain and the litigation is in its early stages. Further, a portion of
any recovery will be paid to the plaintiffs in the forest products
litigation as a part of the settlement agreements described above.
Accordingly, the company has not recorded a receivable or otherwise
reflected in its financial statements any potential recovery from the
insurance litigation.
Financial Reserves - The company previously established a $70 million
reserve in connection with the forest products litigation. The reserve
included the estimated amounts owed under the settlements described above
and an estimated amount for the remaining two Mississippi cases and the
eight Pennsylvania cases. As noted above, through March 31, 2003, Chemical
had paid approximately $49 million pursuant to the settlement agreements.
As of March 31, 2003, the company's remaining reserves for the forest
products litigation totaled $21 million. The company believes the reserve
adequately provides for the potential liability associated with these
matters; however, 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.
Follow-on Litigation - A class-action settlement sometimes results in the
filing of additional lawsuits alleging facts and causes of action
substantially similar to those alleged in the case(s) covered by the
settlement. In addition, in the fall of 2002, the Mississippi legislature
enacted a tort reform law that became effective for lawsuits filed on or
after January 1, 2003. Among other things, the new law limits punitive
damages and makes other changes intended to help ensure fairness in the
Mississippi civil justice system. The tort reform law resulted in numerous
lawsuits being filed in Mississippi immediately before the effective date
of the new law. On December 31, 2002, approximately 245 lawsuits were filed
against Chemical and its affiliates on behalf of approximately 4,598
claimants in connection with Chemical's Columbus, Mississippi, operations.
All of the lawsuits were filed in the Circuit Court of Lowndes County,
Mississippi, Case Nos. 2002-0302 CV1 through 2002-0543 CV1; 2002-0549 CV1;
2002-0550 CV1; 2002-0294 CV1 and 2002-0278 CV1. Chemical and its affiliates
believe the lawsuits are without substantial merit and intend to vigorously
defend the lawsuits. The company has not provided a reserve for the
lawsuits because it cannot reasonably determine the probability of a loss,
and the amount of loss, if any, cannot be reasonably estimated.
Hattiesburg Litigation - On December 31, 2002, a lawsuit was filed against
Chemical in the Circuit Court of Forest County, Mississippi. The lawsuit,
Betty Bolton et al. v. Kerr-McGee Chemical Corporation, names approximately
975 plaintiffs and relates to a former wood-treatment plant located in
Hattiesburg, Mississippi. The lawsuit seeks recovery on legal theories
substantially similar to those advanced in the forest products litigation
described above.
There are substantial uncertainties about Chemical's responsibility for
operations at the former facility. A predecessor of Chemical had been the
sole stockholder of a company that owned and operated the facility. The
company that had operated the facility already had been dissolved and its
leasehold interest in the site had been sold to a third party before
Chemical became affiliated with the former stockholder in 1964. Based on
available historical records, it is uncertain whether and, if so, under
what terms, the former stockholder assumed liabilities of the dissolved
company. However, Chemical is currently discussing the possibility of a
settlement with the plaintiffs. The company has not provided a reserve for
the litigation because it cannot reasonably determine the probability of a
loss, and the amount of a loss, if any, cannot be reasonably estimated.
Other Matters
The company and/or its affiliates 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's affiliates and/or their predecessors, and include claims for
personal injuries and property damages. Current and former operations of
the company's affiliates also involve management of regulated materials and
are subject to various environmental laws and regulations. These laws and
regulations will obligate the company's affiliates to clean up 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's affiliates operate.
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, among other reasons:
o some sites are in the early stages of investigation, and other sites
may be identified in the future;
o 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;
o 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 respective shares of responsibility
for cleanup costs;
o environmental laws and regulations are continually changing, and
court proceedings are inherently uncertain;
o 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;
o unanticipated construction problems and weather conditions can
hinder the completion of environmental remediation;
o the inability to implement a planned engineering design or use
planned technologies and excavation methods may require revisions to
the design of remediation measures, which delay remediation and
increase costs; and
o the identification of additional areas or volumes of contamination
and changes in costs of labor, equipment and technology generate
corresponding changes in environmental remediation costs.
As of March 31, 2003, the company had reserves totaling $281 million for
cleaning up and remediating environmental sites, reflecting the reasonably
estimable costs for addressing these sites. This includes $101 million for
the West Chicago sites, $46 million for the Henderson, Nevada, site, and
$44 million for forest products sites. Cumulative expenditures at all
environmental sites through March 31, 2003, total $1.038 billion (before
considering government reimbursements). Additionally, as of March 31, 2003,
the company had litigation reserves totaling approximately $59 million for
the reasonably estimable losses associated with litigation. This includes
$21 million for the forest products litigation described above. 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 liabilities at
sites now under review, though the company cannot now reliably estimate the
amount of future additions to the reserves.
L. Business Segments
Following is a summary of sales and operating profit for each of the
company's business segments for the first quarter of 2003 and 2002.
Three Months Ended
March 31,
------------------
(Millions of dollars) 2003 2002
--------------------------------------------------------------------------
Sales
Exploration and production $ 823.5 $ 534.6
Chemicals - Pigment 253.3 216.5
Chemicals - Other 50.3 47.4
-------- -------
1,127.1 798.5
All other .1 -
-------- -------
Total Sales $1,127.2 $ 798.5
======== =======
Operating Profit (Loss)
Exploration and production $ 272.2 $ 118.7
Chemicals - Pigment 7.4 (11.5)
Chemicals - Other (10.0) 3.6
-------- -------
Total Operating Profit 269.6 110.8
Other Expense (99.5) (114.3)
-------- -------
Income (Loss) from Continuing Operations
before Income Taxes 170.1 (3.5)
Benefit (Provision) for Income Taxes (65.9) 1.8
-------- -------
Income (Loss) from Continuing Operations 104.2 (1.7)
Discontinued Operations, Net of Income
Taxes .4 7.2
Cumulative Effect of Change in Accounting
Principle, Net of Income Taxes (34.7) -
-------- -------
Net Income $ 69.9 $ 5.5
======== =======
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Comparison of 2003 Results with 2002 Results
First-quarter 2003 income from continuing operations totaled $104.2
million, compared with a loss of $1.7 million for the same 2002 period. Net
income for the 2003 first quarter was $69.9 million, compared with 2002
first-quarter net income of $5.5 million.
First-quarter 2003 operating profit was $269.6 million, compared with
first-quarter 2002 operating profit of $110.8 million, for an increase of
$158.8 million between periods. Higher operating profit from both the
exploration and production and chemical - pigment operating units resulted
primarily from higher realized sales prices for both operations, partially
offset by higher dry hole costs. The combined increase in operating profit
of $172.4 million for the exploration and production and pigment operations
was partially offset by a $13.6 million decrease in operating profit from
the chemical - other operating unit. These variances are discussed in more
detail in the segment discussion that follows.
The first-quarter 2003 other expense totaled $99.5 million, compared with
expense of $114.3 million in the same 2002 period. The decrease is due in
part to an increase of $9.7 million in income from trading securities and
nonoperating derivative financial instruments, combined with lower interest
expense net of interest income of $6.2 million, lower losses from equity
affiliates of $5.0 million, lower losses on asset disposals of $3.6 million
and an increase in foreign currency transaction gains of $2.3 million,
partially offset by higher corporate legal and environmental costs of $9.7
million and higher general administration costs of $5.8 million. Lower
average outstanding debt balances during the first quarter of 2003 as
compared with the prior year resulted in the $6.2 million decrease in net
interest expense between periods. The losses from equity affiliates in 2003
and 2002 are primarily due to losses from AVESTOR, a joint venture formed
in 2001 to produce a revolutionary lithium-metal-polymer battery.
The income tax expense for the first quarter of 2003 was $65.9 million,
compared with an income tax benefit of $1.8 million in the same 2002
period. The change was primarily due to the company generating income in
the 2003 first quarter versus a loss in the comparable 2002 period.
Additionally, on July 24, 2002, the United Kingdom government made certain
changes to its existing tax laws. Under one of these changes, companies are
required to pay a supplementary corporate tax charge of 10% on profits from
their U.K. oil and gas production in addition to the previously required
30% corporate tax on these profits. The impact of this rate change
increased the company's first-quarter 2003 provision for income taxes by
$11.2 million. The U.K. government also accelerated tax depreciation for
capital investments in U.K. upstream activities and abolished North Sea
royalty effective January 1, 2003, neither of which is expected to have a
material effect on the company's earnings.
Segment Operations
Exploration and Production -
Operating profit for the first quarter of 2003 was $272.2 million, compared
with $118.7 million for the same 2002 period. The increase in operating
profit was primarily due to higher average realized crude oil and natural
gas sales prices and lower production costs, partially offset by lower
crude oil sales volumes and higher exploration expense resulting primarily
from an increase in dry hole costs. Realized crude oil and natural gas
sales prices (including the effects of hedging) increased 42% and 86%,
respectively, over 2002 levels.
Tight crude oil and natural gas supplies and fear of the impact of war in
Iraq caused oil and gas prices to increase dramatically over prior-year
levels. However, production output level adjustments were made by OPEC
before the war in Iraq to prevent a possible shortage in crude oil supply.
The result of these output increases combined with the short duration of
the war have led to a potential over-supply of crude oil, causing prices to
begin to decline from the first-quarter 2003 levels. As a result, OPEC has
announced additional plans to adjust its output levels in an effort to
stabilize oil prices around the $25-per-barrel mark. In contrast, the U.S.
natural gas sector continues to experience tight market conditions and
strong prices as storage levels reached historically low levels during the
2003 first quarter.
Total revenues increased $288.9 million, from $534.6 million for the 2002
first quarter to $823.5 for the same 2003 period. The increase resulted
from higher oil and gas prices of $269.6 million, higher natural gas sales
volumes of $8.3 million and an increase in other operating revenues of
$70.8 million, partially offset by lower crude oil sales volumes of $59.8
million. The increase in other operating revenues is primarily a result of
increased sales of third party oil and gas in the Rocky Mountain region and
the U.K. The decrease in crude oil sales volumes occurred in Ecuador, the
U.S. onshore and U.K. North Sea regions and is primarily due to the
divestiture of high-cost properties in 2002 and the 2003 first quarter,
partially offset by higher oil sales in the Gulf of Mexico.
Operating costs totaled $551.3 million for the first quarter of 2003 and
$415.9 million for the first quarter of 2002, for an increase of $135.4
million between periods. The increase resulted primarily from higher
exploration expense of $108.6 million and higher product, gas-gathering and
pipeline costs of $67.3 million, offset by lower oil and gas production
costs of $20.4 million and lower depreciation and depletion of $28.9
million. Of the total increase in exploration expense, $101.9 million was
attributable to higher dry hole costs. The $67.3 million increase in
product, gas-gathering and pipeline costs is directly correlated to the
$70.8 million increase in other operating revenues discussed above, and
resulted primarily from higher product costs for natural gas marketing
activities combined with higher volumes. The decreases in production costs
and depreciation and depletion expense resulted from lower production
volumes between periods. The decrease in production costs also reflects
improvement in the company's cost structure resulting from the divestiture
of certain high-cost properties over the past year. These property
divestitures were the primary cause for the drop in crude oil production
volumes from 204,800 barrels per day in the 2002 first quarter to 165,400
barrels per day in the 2003 first quarter. Higher crude oil production
volumes from new projects in the Gulf of Mexico partially offset the
decrease between periods.
The following table shows the company's average crude oil and natural gas
sales prices and volumes for the first quarter of 2003 and 2002.
Three Months Ended
March 31,
------------------
2003 2002
--------------------------------------------------------------------------
Crude oil and condensate sales (thousands of bbls/day)
Domestic
Offshore 59.7 53.3
Onshore 21.3 29.1
North Sea 81.7 111.1
Other international 4.3 8.8
------ ------
Total continuing operations 167.0 202.3
Discontinued operations 2.4 9.1
------ ------
Total 169.4 211.4
====== ======
Average crude oil sales price (per barrel) (a)
Domestic
Offshore $26.29 $18.22
Onshore 27.57 18.32
North Sea 27.09 19.60
Other international 31.12 16.93
Average for continuing operations 26.97 18.94
Discontinued operations $24.47 $18.23
Natural gas sold (MMcf/day)
Domestic
Offshore 286 244
Onshore 369 383
North Sea 106 101
------ ------
Total 761 728
====== ======
Average natural gas sales price (per Mcf) (a)
Domestic
Offshore $5.38 $2.48
Onshore 4.59 2.48
North Sea 3.35 2.83
Average $4.71 $2.53
(a) The effects of the company's hedging program during the first quarter
of 2003 are included in the average sales prices shown above and
reduced the average crude oil and condensate sales prices from
continuing operations by $4.08 per barrel, and the average natural gas
sales prices by $.81 per Mcf.
The company continues to review its options with respect to the Leadon
field, which was impaired to fair market value during the fourth quarter of
2002 due to field performance issues. The company's options include sale of
the field, tieback of wells to other fixed infrastructure in the area
(allowing the company to monetize the Leadon floating facility by marketing
it as a development option for another discovery) or continued production
from the field until existing wells are fully depleted; however, a
long-term solution has not yet been determined.
Chemicals - Pigment
Operating profit for the first quarter of 2003 was $7.4 million on revenues
of $253.3 million, improving from an operating loss of $11.5 million on
revenues of $216.5 million for the same 2002 period. Total revenues
increased $36.8 million, or 17%, between periods, of which $27.4 million
was due to higher average sales prices and $9.4 million resulted from
higher sales volumes as compared with the prior year. The higher average
sales prices were driven by strengthening customer demand, which supported
price increases for pigment products throughout 2002 and into 2003. Pigment
sales volumes increased 6,300 tonnes in the 2003 first quarter compared
with the prior-year quarter.
The $18.9 million increase in operating profit in the 2003 first quarter
was primarily due to higher sales prices and volumes, which together
increased operating profit by $21.4 million between periods. Lower average
product costs during the 2003 first quarter also increased operating profit
by $6.7 million over the prior year. These improvements were partially
offset by a $7.4 million provision for the closure of the company's
synthetic rutile plant in Mobile, Alabama.
In January 2003, Kerr-McGee announced its plans to close the Mobile,
Alabama, facility by year-end 2003, as part of the company's continuous
effort to enhance operating profitability. The Mobile plant processes and
supplies a portion of the feedstock for the company's titanium dioxide
pigment plants in the United States; however, through Kerr-McGee's ongoing
supply chain initiatives, feedstock can now be purchased more economically
than it can be manufactured at the Mobile plant. As a result of these
steps, the company anticipates significant savings.
Chemicals - Other
Operating loss in the 2003 first quarter was $10.0 million on revenues of
$50.3 million, compared with operating profit of $3.6 million on revenues
of $47.4 million in the same 2002 period. The decrease in operating profit
was primarily due to a net environmental provision of $11.0 million in the
first quarter of 2003 for remediation of ammonium perchlorate related to
the company's Henderson, Nevada, operations (see Note K).
Financial Condition
At March 31, 2003, the company's net working capital position was a
negative $235.5 million, compared with a positive $87.4 million at March
31, 2002, and a negative $319.7 million at December 31, 2002. The current
ratio was .8 to 1 at both March 31, 2003 and December 31, 2002, compared
with 1.1 to 1 at March 31, 2002. The negative working capital at both
December 31, 2002 and March 31, 2003, 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 March 31, 2003, compared with 60% at both December 31, 2002 and
March 31, 2002. The decrease from December 31, 2002, resulted primarily
from reduced debt balances combined with an increase in stockholders'
equity for the period. The company had unused lines of credit and revolving
credit facilities of $1.399 billion at March 31, 2003. Of this amount, $870
million can be used to support commercial paper borrowings of Kerr-McGee
Credit LLC and $490 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 totals $1.2
billion, which can be issued based on market conditions.
As of December 31, 2002, the company's senior unsecured debt was rated BBB
by Standard & Poor's and Fitch and the equivalent by Moody's. During May
2003, Moody's downgraded the company's senior unsecured debt from Baa2 to
Baa3 and downgraded the company's commercial paper from Prime-2 to Prime-3.
As a result of the Moody's downgrade, the company's borrowing costs may
increase, and the company may experience a different mix of investor
interest in its debt and/or amounts they are individually willing to
invest. The company believes that it has the ability to provide for its
operational needs and its long- and short-term capital programs through its
operating cash flow (partially protected by the company's hedging program),
borrowing capacity and ability to raise capital. Should operating cash flow
decline, the company may reduce its capital expenditures program, borrow
under its commercial paper program and/or consider selective long-term
borrowings or equity issuances. Kerr-McGee's commercial paper programs are
backed by the revolving credit facilities currently in place.
The company issued 5 1/2% notes exchangeable for common stock (DECS) in
August 1999, which allow each holder to receive between .85 and 1.0 share
of Devon common stock or, at the company's option, an equivalent amount of
cash at maturity in August 2004. Embedded options in the DECS provide the
company a floor price on Devon's common stock of $33.19 per share (the put
option). The company also retains the right to 15% of the shares if Devon's
stock price is greater than $39.16 per share (the DECS holders have a call
option on 85% of the shares). Using the Black-Scholes valuation model, the
company recognizes in Other Income (Loss) any gains or losses resulting
from changes in the fair value of the put and call options. At March 31,
2002, the fair values of the embedded put and call options were nil and
$82.8 million, respectively. On December 31, 2002, the fair values of the
embedded put and call options were nil and $66.6 million respectively.
During the first quarters of 2003 and 2002, the company recorded losses of
$16.2 million and $74.3 million, respectively, in Other Income for the
changes in the fair values of the put and call options. The fluctuation in
the value of the put and call derivative financial instruments will
generally offset the increase or decease in the market value of 85% of the
Devon stock owned by the company. The fair value of the 8.4 million shares
of Devon classified as trading securities was $406.8 million at March 31,
2003, and $387.2 million at December 31, 2002. During the first quarters of
2003 and 2002, the company recorded unrealized gains of $19.6 million and
$81.2 million, respectively, in Other Income for the changes in fair value
of the Devon shares classified as trading. The remaining 15% of the Devon
shares are accounted for as available-for-sale securities in accordance
with FAS 115, "Accounting for Certain Investments in Debt and Equity
Securities," with changes in market value recorded in accumulated other
comprehensive income. The fair value of the Devon shares classified as
available for sale was $73.2 million at March 31, 2003, and $69.7 million
at December 31, 2002.
Operating activities provided net cash of $321.7 million in the first three
months of 2003. Cash provided by operating activities and proceeds of
$185.4 million from exploration and production divestitures were sufficient
to fund the company's net reduction in long-term debt of $149.2 million,
capital expenditures of $201.4 million, and dividends of $45.2 million
during the first quarter of 2003.
Capital expenditures for the first three months of 2003, excluding dry hole
costs, totaled $201.4 million, compared with $344.2 million for the
comparable prior-year period. This decrease is largely due to higher
capital expenditures in the U.K. North Sea region during the 2002 first
quarter related primarily to the Leadon, Tullich and Maclure fields.
Exploration and production expenditures, principally in the Gulf of Mexico
and onshore United States, were 91% of the 2003 total expenditures.
Chemical - pigment expenditures were 8% of the 2003 total, while chemical -
other and corporate incurred the remaining 1% of the first-quarter 2003
expenditures. Management anticipates that the cash requirements for the
next several years can be provided through internally generated funds and
selective borrowings.
New Accounting Standards
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (FAS) No. 143, "Accounting for
Asset Retirement Obligations." FAS 143 requires that an asset retirement
obligation (ARO) associated with the retirement of a tangible long-lived
asset be recognized as a liability in the period in which it is incurred
(as defined by the standard), with an offsetting increase in the carrying
amount of the associated asset. The cost of the tangible asset, including
the initially recognized ARO, is depreciated such that the cost of the ARO
is recognized over the useful life of the asset. The ARO is recorded at
fair value, and accretion expense will be recognized over time as the
discounted liability is accreted to its expected settlement value. The fair
value of the ARO is measured using expected future cash outflows discounted
at the company's credit-adjusted risk-free interest rate.
The company adopted FAS 143 on January 1, 2003, which resulted in an
increase in net property of $127.5 million, an increase in abandonment
liabilities of $180.4 million and a decrease in deferred income tax
liabilities of $18.2 million. The net impact of these changes resulted in
an after-tax charge to earnings of $34.7 million to recognize the
cumulative effect of retroactively applying the new accounting principle.
In accordance with the provisions of FAS 143, Kerr-McGee accrues an
abandonment liability associated with its oil and gas wells and platforms
when those assets are placed in service, rather than its past practice of
accruing the expected abandonment costs on a unit-of-production basis over
the productive life of the associated oil and gas field. No market risk
premium has been included in the company's calculation of the ARO for oil
and gas wells and platforms since no reliable estimate can be made by the
company. In connection with the change in accounting principle, abandonment
expense of $9.3 million for the first quarter of 2002 has been reclassified
from Costs and operating expenses to Depreciation and depletion in the
Consolidated Statement of Operations to be consistent with the 2003
presentation. Additionally in January 2003, the company announced its plan
to close the synthetic rutile plant in Mobile, Alabama, by the end of 2003.
Since the plant has a determinate closure date, the company has also
accrued an abandonment liability associated with its plans to decommission
the Mobile facility.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Beginning in March 2002 and continuing through January 2003, the company
entered into hedging contracts for a portion of its oil and natural gas
production. The commodity hedging program was initiated to increase the
predictability of the company's cash flows and support additional capital
projects since hedging contracts fix the commodity prices to be received in
the future. At March 31, 2003, the company had outstanding contracts to
hedge a total of 12.3 million barrels of North Sea crude oil production,
9.6 million barrels of domestic crude oil production and 103.1 million
MMBtu of domestic natural gas production for the period from April through
December 2003. The net liability fair value of the hedge contracts
outstanding at March 31, 2003, was $11.1 million for North Sea crude oil,
$19.9 million for domestic crude oil and $100.6 million for domestic
natural gas.
At March 31, 2003, the following commodity-related derivative contracts
were outstanding:
Daily Average
Contract Type (1) Period Volume Price
---------------------------------------------------------------------------
Natural Gas MMBtu $/MMBtu
----------- ----- -------
Fixed-price swaps (NYMEX) 2003 310,000 $4.00
Costless collars (NYMEX) 2003 65,000 $3.50-$5.26
Basis swaps (CIG) 2003 64,580 $0.36
Crude Oil Bbl $/Bbl
--------- --- -----
Fixed-price swaps (WTI) Q2 - 2003 35,000 $26.02
Q3 - 2003 34,500 $25.99
Q4 - 2003 35,000 $26.01
Fixed-price swaps (Brent) Q2 - 2003 44,500 $25.01
Q3 - 2003 44,500 $24.99
Q4 - 2003 45,000 $25.04
(1) These contracts may be subject to margin calls above certain limits
established with individual counterparty institutions.
Periodically, 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 operating and capital expenditure
requirements. These contracts generally have durations of less than three
years. The resulting changes in fair value of these contracts are recorded
in accumulated other comprehensive income.
Following are the notional amounts at the contract exchange rates,
weighted-average contractual exchange rates and estimated contract values
for open contracts at March 31, 2003 to purchase (sell) foreign currencies.
Contract values are based on the estimated forward exchange rates in effect
at quarter-end. All amounts are U.S. dollar equivalents.
Estimated
(Millions of dollars, Notional Weighted-Average Contract
except average contract rates) Amount Contract Rate Value
--------------------------------------------------------------------------------------------------------------
Open contracts at March 31, 2003 -
Maturing in 2003 -
British pound sterling $107.5 1.5448 $108.5
Australian dollar 46.9 .5598 49.6
Euro (6.6) 1.0721 (6.6)
British pound sterling (.4) 1.6027 (.4)
New Zealand dollar (.4) .5343 (.4)
Maturing in 2004 -
Australian dollar 37.7 .5366 40.5
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 alerting them in a timely manner 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 the company's internal
controls or in other factors that could significantly affect these controls
subsequent to the date of their evaluation.
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, the
financial resources of competitors, changes in laws and regulations, the
ability to respond to challenges in international markets, including
changes in currency exchange rates, political or economic conditions, trade
and regulatory matters, general economic conditions, and other factors and
risks identified in the Risk Factors section of the company's Annual Report
on Form 10-K and other 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) For a discussion of legal proceedings and contingencies, reference is
made to Note K to the consolidated financial statements included in
Part I, Item 1. of this Form 10-Q, which is incorporated herein by
reference.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits -
Exhibit No
----------
3.1 Amended and restated Certificate of Incorporation of
Kerr-McGee Corporation, filed as Exhibit 4.1 to the
company's Registration Statement on Form S-4 dated June
28, 2001, and incorporated herein by reference.
3.2 Amended and restated Bylaws of Kerr-McGee Corporation,
filed as Exhibit 3.2 to the company's Annual Report on
Form 10-K for the year ended December 31, 2002, and
incorporated herein by reference.
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 -
The following Current Reports on Form 8-K were filed by the company
during the quarter ended March 31, 2003:
o Current Report dated January 23, 2003, announcing a
conference call to discuss fourth-quarter 2002
financial and operating results and expectations for
the future.
o Current Report dated January 28, 2003, announcing a
conference call to discuss fourth-quarter 2002
financial and operating results and expectations for
the future and certain expectations for oil and natural
gas production volumes for the year 2003.
o Current Report dated January 29, 2003, announcing the
company's fourth-quarter 2002 earnings.
o Current Report dated February 11, 2003, announcing the
availability of a live internet link to the Company's
security analyst meeting, held on Wednesday, February
19, 2003, which included presentations by the company's
senior management team and covered the financial and
operating outlook for 2003.
o Current Report dated February 19, 2003, announcing a
security analyst meeting to discuss the company's
financial and operating outlook for 2003 and certain
expectations for oil and natural gas production volumes
for the year 2003.
o Current Report dated February 24, 2003, announcing a
conference call to discuss first-quarter 2003 financial
and operating activities, and expectations for the
future.
o Current Report dated March 17, 2003, announcing Kenneth
W. Crouch had been elected executive vice president and
David A. Hager had been elected senior vice president,
succeeding Crouch as head of worldwide exploration and
production.
o Current Report dated March 19, 2003, announcing a
conference call to discuss interim first-quarter 2003
financial and operating activities, and expectations
for the future.
o Current Report dated March 25, 2003, announcing a
security analyst meeting to discuss the company's
financial and operating outlook for 2003 and certain
expectations for oil and natural gas production volumes
for the year 2003.
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: May 13, 2003 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 of Kerr-McGee
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the issuer as of, and for, the periods presented in this
quarterly report;
4. The company's other certifying officer 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 officer 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 officer and I have indicated in this
quarterly report whether 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
May 13, 2003
CERTIFICATIONS
I, Robert M. Wohleber, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Kerr-McGee
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the issuer as of, and for, the periods presented in this
quarterly report;
4. The company's other certifying officer 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 officer 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 officer and I have indicated in this
quarterly report whether 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
May 13, 2003