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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
------ ------
Commission File Number 1-16619
KERR-McGEE CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware 73-1612389
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
Kerr-McGee Center, Oklahoma City, Oklahoma 73125
(Address of Principal Executive Offices and Zip Code)
Registrant's telephone number, including area code (405) 270-1313
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-----
Number of shares of common stock, $1.00 par value, outstanding as of June 30,
2002: 100,375,455.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
KERR-McGEE CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
(Millions of dollars, except per-share amounts) 2002 2001 2002 2001
-------- -------- -------- --------
Sales $ 932.0 $919.3 $1,730.5 $1,961.5
-------- ------ -------- --------
Costs and Expenses
Costs and operating expenses 384.9 297.2 743.9 602.8
Selling, general and administrative expenses 121.6 55.9 177.1 103.6
Shipping and handling expenses 25.1 26.0 54.2 55.4
Depreciation and depletion 187.6 160.9 390.8 322.9
Asset impairment 157.5 - 157.5 13.2
Exploration, including dry holes and
amortization of undeveloped leases 46.8 42.1 78.7 91.9
Taxes, other than income taxes 28.2 29.9 54.6 62.8
Provision for environmental remediation and restoration,
net of reimbursements 88.0 - 90.4 3.7
Interest and debt expense 68.6 37.0 139.3 81.8
-------- ------ -------- --------
Total Costs and Expenses 1,108.3 649.0 1,886.5 1,338.1
-------- ------ -------- --------
(176.3) 270.3 (156.0) 623.4
Other Income (Expense) (14.1) (6.4) (37.9) 194.9
-------- ------ -------- --------
Income (Loss) before Income Taxes (190.4) 263.9 (193.9) 818.3
Benefit (Provision) for Income Taxes 12.7 (97.8) 14.5 (303.1)
-------- ------ -------- --------
Income (Loss) from Continuing Operations (177.7) 166.1 (179.4) 515.2
Income from Discontinued Operations (net of income tax
provision (benefit) of $(29.1) and $6.4 for the second
quarter of 2002 and 2001, respectively, and $(24.5) and
$10.9 for the first six months of 2002 and 2001, respectively) 119.7 8.9 126.9 14.8
Cumulative Effect of Change in Accounting Principle
(net of benefit for income taxes of $10.8) - - - (20.3)
-------- ------ -------- --------
Net Income (Loss) $ (58.0) $175.0 $ (52.5) $ 509.7
======== ====== ======== ========
Net Income (Loss) per Common Share
Basic -
Continuing operations $ (1.77) $ 1.75 $ (1.79) $ 5.43
Discontinued operations 1.19 .09 1.27 .15
Cumulative effect of change in accounting principle - - - (.21)
-------- ------ -------- -------
Total $ (.58) $ 1.84 $ (.52) $ 5.37
======== ====== ========= =======
Diluted -
Continuing operations $ (1.77) $ 1.63 $ (1.79) $ 4.97
Discontinued operations 1.19 .08 1.27 .14
Cumulative effect of change in accounting principle - - - (.19)
-------- ------ -------- -------
Total $ (.58) $ 1.71 $ (.52) $ 4.92
======== ====== ======== =======
Dividends Declared per Common Share $ .45 $ .45 $ .90 $ .90
======== ====== ======== =======
The accompanying notes are an integral part of this statement.
KERR-McGEE CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
June 30, December 31,
(Millions of dollars) 2002 2001
--------- -----------
ASSETS
- ------
Current Assets
Cash $ 143.1 $ 91.3
Accounts receivable 547.3 421.0
Inventories 399.9 428.7
Deposits, prepaid expenses and other assets 122.7 351.1
Current assets associated with properties held for disposal 102.4 75.4
--------- ---------
Total Current Assets 1,315.4 1,367.5
--------- ----------
Property, Plant and Equipment 13,942.8 13,402.7
Less reserves for depreciation, depletion and amortization (6,377.6) (6,024.8)
--------- ---------
7,565.2 7,377.9
--------- ---------
Investments and Other Assets 920.5 784.1
Goodwill 355.7 354.8
Long-term Assets Associated with Properties Held for Disposal 741.1 1,076.6
--------- ---------
Total Assets $10,897.9 $10,960.9
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities
Accounts payable $ 654.9 $ 619.5
Short-term borrowings .2 8.4
Long-term debt due within one year 7.5 26.4
Other current liabilities 695.3 475.5
Current liabilities associated with properties held for disposal 41.9 45.5
--------- ---------
Total Current Liabilities 1,399.8 1,175.3
--------- ---------
Long-Term Debt 4,359.0 4,539.4
--------- ---------
Deferred Income Taxes 1,181.5 1,387.3
Other Deferred Credits and Reserves 734.7 645.9
Long-Term Liabilities Associated with Properties Held for Disposal 159.2 38.9
--------- ---------
2,075.4 2,072.1
--------- ---------
Stockholders' Equity
Common stock, par value $1 - 300,000,000 shares
authorized, 100,383,638 shares issued at 6-30-02
and 100,186,350 shares issued at 12-31-01 100.4 100.2
Capital in excess of par value 1,687.4 1,676.6
Preferred stock purchase rights 1.0 1.0
Retained earnings 1,400.1 1,542.6
Accumulated other comprehensive loss (48.0) (64.2)
Common shares in treasury, at cost - 8,183 shares
at 6-30-02 and 1,020 at 12-31-01 (.5) (.1)
Deferred compensation (76.7) (82.0)
--------- ---------
Total Stockholders' Equity 3,063.7 3,174.1
--------- ---------
Total Liabilities and Stockholders' Equity $10,897.9 $10,960.9
========= =========
The "successful efforts" method of accounting for oil and gas exploration and
production activities has been followed in preparing this balance sheet.
The accompanying notes are an integral part of this statement.
KERR-McGEE CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
(Millions of dollars) 2002 2001
--------- -------
Operating Activities
- --------------------
Net income (loss) $(52.5) $ 509.7
Adjustments to reconcile net income to net cash
provided by operating activities -
Depreciation, depletion and amortization 426.1 353.3
Asset impairment 182.2 13.2
Dry hole costs 15.3 30.7
Deferred income taxes (100.1) 56.2
Provision for environmental remediation and
restoration, net of reimbursement 90.4 3.7
Gain on exploration and production divestitures (108.1) -
Loss on sale and retirement of assets 2.0 1.1
Noncash items affecting net income 109.1 (146.3)
Other net cash provided by operating activities 164.7 37.8
--------- -------
Net Cash Provided by Operating Activities 729.1 859.4
--------- -------
Investing Activities
- --------------------
Capital expenditures (626.0) (855.3)
Dry hole expense (15.3) (30.7)
Proceeds from exploration and production divestitures 292.0 -
Acquisitions - (23.8)
Other investing activities (21.6) (25.9)
--------- -------
Net Cash Used in Investing Activities (370.9) (935.7)
--------- -------
Financing Activities
- --------------------
Issuance of long-term debt 842.2 419.8
Repayment of long-term debt (1,047.9) (240.2)
Increase (decrease) in short-term borrowings (8.2) 1.4
Issuance of common stock 4.9 31.7
Dividends paid (90.2) (85.1)
--------- -------
Net Cash Provided by (Used in) Financing Activities (299.2) 127.6
--------- -------
Effects of Exchange Rate Changes on Cash and Cash Equivalents (7.2) 1.4
--------- -------
Net Increase in Cash and Cash Equivalents 51.8 52.7
Cash and Cash Equivalents at Beginning of Period 91.3 144.0
--------- -------
Cash and Cash Equivalents at End of Period $ 143.1 $ 196.7
========= =======
The accompanying notes are an integral part of this statement.
KERR-McGEE CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
A. Basis of Presentation
The condensed financial statements included herein have been prepared by
the company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission and, in the opinion of management,
include all adjustments, consisting only of normal recurring accruals,
necessary to present fairly the resulting operations for the indicated
periods. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with accounting principles
generally accepted in the United States have been condensed or omitted
pursuant to such rules and regulations. Although the company believes
that the disclosures are adequate to make the information presented not
misleading, it is suggested that these condensed financial statements be
read in conjunction with the financial statements and the notes thereto
included in the company's latest annual report on Form 10-K. Presentation
of the 2001 amounts has been changed to be consistent with the
presentation of the Kazakhstan, Indonesian and Australian oil and gas
operations as discontinued in 2002 (see note D).
On August 1, 2001, the company completed the acquisition of all the
outstanding shares of common stock of HS Resources, Inc., an independent
oil and gas exploration and production company. To accomplish the
acquisition, the company organized and formed a new holding company,
Kerr-McGee Holdco, which later changed its name to Kerr-McGee
Corporation. All the outstanding shares of the former Kerr-McGee
Corporation were cancelled, and the same number of shares were issued by
the new holding company. The former Kerr-McGee Corporation was renamed
Kerr-McGee Operating Corporation and is now a wholly owned subsidiary of
the holding company, along with Kerr-McGee Rocky Mountain Corporation
(formerly HS Resources).
B. Derivatives
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities"
(FAS 133). The statement as amended requires recording all derivative
instruments as assets or liabilities, measured at fair value. Kerr-McGee
adopted this standard on January 1, 2001, by recording the fair value of
all the foreign currency forward purchase and sales contracts, and by
separating and recording the fair value of the options associated with
the company's debt exchangeable for stock of Devon Energy Corporation
(Devon) presently owned by the company. In adopting the standard, the
company recognized a net expense of $20.3 million in the 2001 first
quarter as a cumulative effect of the accounting change. Also, in
accordance with FAS 133, the company chose to reclassify 85% of the Devon
shares owned to "trading" from the "available for sale" category of
investments. On January 1, 2001, the company recognized after-tax income
totaling $117.9 million for the unrealized appreciation on the Devon
shares reclassified to trading. The portion of the stock investment now
classified as "trading" is marked-to-market through income each month.
In March 2002, the company hedged a portion of its oil and gas production
for the period April through December 2002 to increase the predictability
of its cash flows and support additional capital projects. Excluding the
Denver-Julesburg Basin production, the hedges outstanding at June 30,
2002 cover approximately 55% of the expected remaining 2002 oil
production (52% of the total worldwide expected remaining 2002 oil
production) and approximately 45% of expected remaining 2002 domestic gas
production (33% of the total domestic expected remaining 2002 gas
production). These positions have been designated and qualify as cash
flow hedges of a portion of 2002 production.
The production hedging transactions are in the form of fixed price swaps.
The hedges cover 30,000 barrels of oil per day of domestic oil production
at an average price of $24.09 per barrel and 60,000 barrels of oil per
day of North Sea oil production at an average price of $23.17 per barrel.
The company also entered into price swaps covering 250,000 MMBtu per day
of domestic natural gas production at an average price of $3.10 per
MMBtu. The price swaps will be settled using the closing prices on the
New York Mercantile Exchange (NYMEX) for domestic light sweet crude and
natural gas, and the International Petroleum Exchange (IPE) for Brent
crude.
The following table sets forth the company's outstanding oil and natural
gas hedging contracts executed in 2002 and their fair value at June 30,
2002.
Domestic Natural Gas
(Millions of North Sea Oil Hedging Domestic Oil Hedging Hedging
dollars) ------------------------ ------------------------- ----------------------
Notional Liability Notional Liability Notional Liability
Volumes Fair Volumes Fair Volumes Fair
2002 (Bbls) Value (Bbls) Value (MMBtu) Value
--------- ---------- ---------- --------- --------- ---------- ---------
July 1,860,000 $(4.5) 930,000 $(2.6) 7,750,000 $(1.4)
August 1,860,000 (4.5) 930,000 (2.6) 7,750,000 (1.1)
September 1,800,000 (4.0) 900,000 (2.4) 7,500,000 (1.3)
October 1,860,000 (3.8) 930,000 (2.2) 7,750,000 (1.6)
November 1,800,000 (3.4) 900,000 (1.9) 7,500,000 (3.8)
December 1,860,000 (3.2) 930,000 (1.8) 7,750,000 (6.0)
---------- ---------- --------- --------- ---------- ---------
Total 11,040,000 $(23.4) 5,520,000 $(13.5) 46,000,000 $(15.2)
========== ========== ========= ========= ========== =========
The changes in fair value of these contracts are recorded in accumulated
other comprehensive loss to the extent the hedges are effective. The
amounts in accumulated other comprehensive loss, $52.1 million loss at
June 30, 2002, will be recognized in earnings when the contracts are
settled under the terms of the swap agreements. The company expects to
reclassify all of the existing net losses at June 30, 2002, into earnings
during the next 12 months, assuming no further changes in fair market
value of the contracts. A total of $25.2 million loss was recognized in
the 2002 second quarter related to contracts that settled during the
period. This loss offsets the prices realized on the physical sale of the
crude oil and natural gas. The amount of hedge ineffectiveness recognized
in the 2002 second quarter was immaterial.
In May 2002, the company began accounting for certain of its previously
existing derivative instruments as hedges against fluctuating commodity
prices for its Denver-Julesburg Basin natural gas production. The company
has in place through October 2002 natural gas fixed-price swaps totaling
110,000 MMBtu per day at an average price of $2.82 per MMBtu. The
fixed-price swaps cover approximately 37% of the expected remaining 2002
gas production from the Denver-Julesburg Basin (10% of the total
worldwide expected remaining 2002 gas production) and will be settled
using the closing price on NYMEX. Associated with these fixed price
swaps, the company also entered into natural gas basis swaps covering
75,000 MMBtu per day through October 2002. The fixed price and basis
swaps had a net asset fair value of $5.6 million at June 30, 2002. At
June 30, 2002, the company had deferred gains totaling $15.3 million in
accumulated other comprehensive income associated with these contracts.
The company expects to reclassify the entire amount of these gains into
earnings by the end of October 2002, assuming no further changes in fair
market value of the contracts. During the 2002 second quarter, a $3.6
million gain was recognized related to contracts that settled during the
period. The amount of the hedge ineffectiveness in the 2002 second
quarter was immaterial.
As discussed in the company's 2001 Form 10-K, the company is also party
to other commodity contracts that have not been accounted for as hedges
and are recorded at their fair market value on the balance sheet and
marked-to-market through income each month. The net fair market value of
these commodity-related derivatives was a $28 million asset at June 30,
2002. The net loss associated with these derivatives totaled $2.3 million
in the second quarter of 2002 and $27.2 million in the first six months
of 2002.
From time to time, the company enters into forward contracts to buy and
sell foreign currencies. Certain of these contracts (purchases of
Australian dollars and British pound sterling) have been designated and
have qualified as cash flow hedges of the company's anticipated future
cash flow needs for a portion of its capital expenditures and operating
costs. These forward contracts generally have durations of less than
three years. The resulting changes in fair value of these contracts are
recorded in accumulated other comprehensive loss. The estimated fair
value of these contracts at June 30, 2002, was recorded as a $3.5 million
liability. The $3.5 million loss in accumulated other comprehensive loss
at June 30, 2002, will be recognized in earnings in the periods during
which the hedged forecasted transactions affect earnings (i.e., when the
forward contracts close in the case of a hedge of operating costs and
when the hedged assets are depreciated in the case of a hedge of capital
expenditures). In the second quarter of 2002, the company reclassified
$.4 million of losses on forward contracts from accumulated other
comprehensive loss to operating expenses in the income statement. Of the
existing net losses at June 30, 2002, approximately $2.6 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 second quarter, and since forward exchange rates are used to
measure the derivative values and the forward contracts have not been
closed early, ineffectiveness was not material.
The company has entered into other forward contracts to sell foreign
currencies, which will be collected as a result of pigment sales
denominated in foreign currencies, primarily European currencies. These
contracts have not been designated as hedges even though they do protect
the company from changes in foreign currency rate changes. The estimated
fair value of these contracts was recorded as a $.1 million asset. Almost
all of the pigment receivables have been sold in an asset securitization
program at their equivalent U.S. dollar value at the date the receivables
were sold. However, the company retains the risk of foreign currency rate
changes between the date of sale and collection of the receivables.
In connection with the issuance of $350 million of 5.375% notes due April
15, 2005, the company entered into an interest rate swap agreement in
April 2002. The terms of the agreement effectively change the interest
the company will pay on the debt until maturity from the fixed rate to a
variable rate of LIBOR plus 87.5 basis points. The company considers the
swap to be a hedge against the change in fair value of the debt as a
result of interest rate changes. The estimated fair value of the interest
rate swap was recorded as an asset of $7.1 million at June 30, 2002. The
company recognized a $1.8 million interest expense reduction in the 2002
second quarter from the swap arrangement.
C. Goodwill and Intangible Assets
In June 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (FAS) No. 141, "Business Combinations,"
and FAS 142, "Goodwill and Other Intangible Assets." FAS 141 requires all
business combinations initiated after June 30, 2001, to be accounted for
under the purchase method. The company adopted FAS 141 for its
acquisition of HS Resources. The company adopted FAS 142 on January 1,
2002, for all goodwill and other intangible assets. This statement
changes the accounting for goodwill and intangible assets that have
indefinite useful lives from an amortization method to an impairment
approach. The nonamortization provisions of this standard were
immediately applicable for any goodwill acquired after June 30, 2001. The
company has completed its 2002 impairment test for goodwill and
indefinite lived intangibles with no impairment being indicated.
The acquired intangible assets and goodwill of the company as of June 30,
2002, were as follows:
Gross
Carrying Accumulated
(Millions of dollars) Amount Amortization
-------- ------------
Amortized intangible assets:
Proprietary seismic library (10-year life) $ 2.0 $.1
Customer list (5-year life) 1.0 .1
Patents (life of patent) .1 -
----- ---
Total $ 3.1 $.2
===== ===
Carrying
Amount
--------
Unamortized intangible assets:
Intellectual properties associated
with pigment manufacturing processes $52.1
Goodwill $355.7
Amortization of purchased intangibles for each of the next five years is
estimated to be $.4 million. Of the goodwill recorded on the balance
sheet of the company at June 30, 2002, $347.1 million relates to the
exploration and production segment, and $8.6 million relates to the
chemical pigment segment. For the first six months of 2002, the chemical
pigment segment goodwill increased $.9 million as a result of foreign
currency translation gains.
The following table presents net income (loss) for each period exclusive
of amortization expense recognized in such periods related to intangibles
and goodwill, which are no longer amortized.
Three Months Ended Six Months Ended
June 30, June 30,
(In millions, except per-share amounts) 2002 2001 2002 2001
------ ------ ------ ------
Reported net income (loss) $(58.0) $175.0 $(52.5) $509.7
Add back intangible amortization,
net of tax - .6 - 1.2
------ ------ ------ ------
Adjusted net income (loss) $(58.0) $175.6 $(52.5) $510.9
====== ====== ====== ======
Diluted earnings per share for the second quarter of 2001 would have
remained unchanged and for the first six months of 2001 would have been 1
cent per share higher or $4.93 if the new standard had been applied in
2001.
D. Discontinued Operations and Asset Impairments
In August 2001, the Financial Accounting Standards Board issued FAS 144,
"Accounting for Impairment or Disposal of Long-Lived Assets." FAS 144
supersedes FAS 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of," and the portion of the
Accounting Principles Board Opinion No. 30 that deals with the disposal
of a business segment. The company adopted the statement on January 1,
2002.
During the second quarter of 2002, the company approved a plan to dispose
of its exploration and production interest in the Jabung block in
Sumatra, Indonesia. During the first quarter of 2002, the company
approved a plan to dispose of its exploration and production operations
in Kazakhstan and of its interest in the Bayu-Undan project in the East
Timor Sea offshore Australia. The results of these operations have been
reported separately as discontinued operations in the company's
Consolidated Statement of Operations for both 2002 and 2001. On June 13,
2002, the company completed the sale of its interest in the Jabung block
in Sumatra for $170.7 million in cash with $11 million contingent
purchase price pending government approval of the LPG project. The sale
resulted in a pretax gain of $73.3 million. On May 3, 2002, the company
completed the sale of its interest in the Bayu-Undan project for $132.3
million in cash. The sale resulted in a pretax gain of $34.8 million. The
net proceeds received by the company were used to reduce outstanding
debt.
Revenues applicable to the discontinued operations totaled $10 million
and $20.2 million for the three months ended June 30, 2002 and 2001,
respectively, and $25.2 million and $35.5 million for the six months
ended June 30, 2002 and 2001, respectively.
As part of the company's strategic plan to divest non-core oil and gas
properties, certain domestic, North Sea and Kazakhstan oil and gas assets
held for disposal were evaluated and deemed impaired during the 2002
second quarter. The impairment losses reflect the difference between the
estimated sales prices for the individual property or group of
properties, less the cost to sell, and the carrying amount of the net
assets. The amount of the impairment loss associated with the domestic
and North Sea assets totaled $146.6 million and is reported as asset
impairment in the Consolidated Statement of Operations. The impairment
associated with the disposal of the Kazakhstan assets is reported as part
of discontinued operations, which includes an asset impairment loss of
$24.7 million. Also during the second quarter of 2002, the oil and gas
assets associated with a field located in the northwest area of the North
Sea that the company does not currently plan to dispose of were deemed to
be impaired because the assets were no longer expected to recover their
net book value through future cash flows. Expectations of future cash
flows were lower than those previously forecasted. The amount of the
impairment loss associated with this asset totaled $10.9 million and is
reported as asset impairment in the Consolidated Statement of Operations.
The assets and liabilities of all the discontinued operations and other
assets being held for sale have been reclassified as Assets/Liabilities
Associated with Properties Held for Disposal in the Consolidated Balance
Sheet.
E. Income Tax and Interest Payments
Net cash provided by operating activities reflects cash payments for
income taxes and interest as follows:
Six Months Ended
June 30,
(Millions of dollars) 2002 2001
------- ------
Income tax payments $ 48.9 $297.0
Less refunds received (253.4) (18.8)
------- ------
Net income tax payments (refunds) $(204.5) $278.2
======= ======
Interest payments $ 128.6 $ 87.4
======= ======
F. Financial Instruments and Comprehensive Income
The second-quarter 2002 comprehensive income was $23.5 million, compared
with $166.7 million in the prior-year second quarter. For the first six
months ended June 30, 2002, comprehensive loss was $36.3 million,
compared with comprehensive income of $445.9 million in the same 2001
period.
The company has certain investments that are considered to be available
for sale. These financial instruments are carried in the Consolidated
Balance Sheet at fair value, which is based on quoted market prices. The
company had no securities classified as held to maturity at June 30,
2002, or December 31, 2001. At June 30, 2002 and December 31, 2001,
available-for-sale securities for which fair value can be determined were
as follows:
June 30, 2002 December 31, 2001
----------------------------- ------------------------------
Gross Gross
Unrealized Unrealized
Fair Holding Fair Holding
(Millions of dollars) Value Cost Gain Value Cost Loss
----- ----- ---------- ----- ----- --------
Equity securities $74.8 $31.9 $14.9 (1) $58.7 $31.9 $ (1.2) (1)
U.S. government obligations -
Maturing within one year 2.2 2.2 - 2.9 2.9 -
Maturing between one year
and four years 1.5 1.5 - 1.7 1.7 -
----- ------
Total $14.9 $(1.2)
===== ======
(1) These amounts include $28 million of gross unrealized hedging losses
on 15% of the exchangeable debt at the time of adoption of FAS 133.
G. Equity Affiliates
Investments in equity affiliates totaled $109.6 million at June 30, 2002,
and $101 million at December 31, 2001. Equity loss related to the
investments is included in Other Income in the Consolidated Statement of
Operations and totaled $4.6 million and $2.6 million for the three months
ended June 30, 2002 and 2001, respectively. For the first six months of
2002, the equity loss totaled $15.7 million compared with a loss of $1.0
million for the same 2001 period.
H. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share (EPS) from continuing operations for the three-month
and six-month periods ended June 30, 2002 and 2001.
For the Three Months Ended June 30,
---------------------------------------------------------------------------------
2002 2001
------------------------------------- ------------------------------------
Loss Income
from from
(In millions, except Continuing Per-Share Continuing Per-Share
per-share amounts) Operations Shares Loss Operations Shares Income
---------- ------ --------- ---------- ------ ---------
Basic EPS $(177.7) 100.3 $(1.77) $166.1 95.0 $1.75
========= =====
Effect of Dilutive Securities:
5 1/4% convertible debentures - - 5.3 9.8
7 1/2% convertible debentures - - 2.2 1.6
Stock options - - - .4
---------- ------ ---------- ------
Diluted EPS $(177.7) 100.3 $(1.77) $173.6 106.8 $1.63
========== ====== ========= ========== ====== =====
For the Six Months Ended June 30,
---------------------------------------------------------------------------------
2002 2001
------------------------------------- ------------------------------------
Loss Income
from from
(In millions, except Continuing Per-Share Continuing Per-Share
per-share amounts) Operations Shares Loss Operations Shares Income
---------- ------ --------- ---------- ------ ------
Basic EPS $(179.4) 100.3 $(1.79) $515.2 94.8 $5.43
========= =====
Effect of Dilutive Securities:
5 1/4% convertible debentures - - 10.7 9.8
7 1/2% convertible debentures - - 4.3 1.6
Stock options - - - .4
----------- ------ ---------- ------
Diluted EPS $(179.4) 100.3 $(1.79) $530.2 106.6 $4.97
=========== ====== ========= ========== ====== =====
I. Accounts Receivable Sales
In December 2000, the company began an accounts receivable monetization
program for its pigment business through the sale of selected accounts
receivable with a three-year, credit-insurance-backed asset
securitization program. The company retained servicing responsibilities
and subordinated interests and will receive a servicing fee of 1.07% of
the receivables sold for the period of time outstanding, generally 60 to
120 days. No recourse obligations were recorded since the company has
very limited obligations for any recourse actions on the sold
receivables. The collection of the receivables is insured, and only
receivables that qualify for credit insurance can be sold. A portion of
the insurance is reinsured by the company's captive insurance company.
However, the company also 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 $151.7 million and $155 million of its pigment
receivables during the second quarter of 2002 and 2001, respectively. The
sale of the receivables resulted in pretax losses of $1.2 million and $2
million during the second quarter of 2002 and 2001, respectively. During
the first six months of 2002 and 2001, the company sold $285.9 million
and $307.8 million, respectively, of its pigment receivables. The sale of
the receivables resulted in pretax losses of $2.2 million and $4.6
million during the first six months of 2002 and 2001, respectively. The
losses were equal to the difference in the book value of the receivables
sold and the total of cash and the fair value of the deposit retained by
the special-purpose entity. The outstanding balance on receivables sold
totaled $103.6 million at June 30, 2002, and $96.1 million at December
31, 2001.
J. Tax Law Change
On July 24, 2002, the United Kingdom government made certain changes to
its existing tax laws. Under one of these changes, companies will pay a
supplementary corporate tax charge of 10% on profits from their U.K. oil
and gas production. This is in addition to the current 30% corporate tax
on these profits. The U.K. government has also accelerated tax
depreciation for capital investments in U.K. upstream activities.
Finally, the U.K. government, subject to consultation, intends to abolish
North Sea royalty. It is anticipated that royalty will not be abolished
until after 2002. It is estimated that the effect of the tax changes in
2002 will increase the company's 2002 third quarter international
provision for deferred income taxes by approximately $140 million.
K. Condensed Consolidating Financial Information
In connection with the acquisition of HS Resources, a holding company
structure was implemented (see Note A. for a discussion of the new
organization).
On October 3, 2001, Kerr-McGee Corporation issued $1.5 billion of
long-term notes in a public offering. The notes are general, unsecured
obligations of the company and rank on parity with all of the company's
other unsecured and unsubordinated indebtedness. Kerr-McGee Operating
Corporation and Kerr-McGee Rocky Mountain Corporation have guaranteed the
notes. Additionally, Kerr-McGee Corporation has guaranteed all
indebtedness of its subsidiaries, including the indebtedness assumed in
the purchase of HS Resources. As a result of these guarantee
arrangements, the company is now required to present condensed
consolidating financial information. Since neither the new holding
company nor any guarantee arrangement existed during the first or second
quarter of 2001, comparative consolidating financial information is not
presented.
The following condensed consolidating financial information presents the
balance sheet as of June 30, 2002, the related statement of operations
for the second quarter and first six months of 2002, and the related
statement of cash flows for the first six months of 2002, for (a)
Kerr-McGee Corporation, the holding company, (b) the guarantor
subsidiaries, and (c) the non-guarantor subsidiaries on a consolidated
basis.
Kerr-McGee Corporation and Subsidiaries
Condensed Consolidating Statement of Operations
For the Three Months June 30, 2002
Kerr-McGee Guarantor Non-Guarantor
(Millions of dollars) Corporation Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------------ ------------- ------------ ------------
Sales $ .1 $78.4 $913.7 $ (60.2) $932.0
----------- ------------ ------------- ------------ ------------
Costs and Expenses
Costs and operating expenses - 22.0 423.4 (60.5) 384.9
Selling, general and administrative
expenses - 86.7 34.9 - 121.6
Shipping and handling expenses - (.4) 25.5 - 25.1
Depreciation and depletion - 31.9 155.7 - 187.6
Asset impairment - 3.2 154.3 - 157.5
Exploration, including dry holes and
amortization of undeveloped leases - 3.2 43.6 - 46.8
Taxes, other than income taxes (.1) 3.8 24.5 - 28.2
Provision for environmental remediation
and restoration - 73.8 14.2 - 88.0
Interest and debt expenses 28.1 64.2 28.3 (52.0) 68.6
----------- ------------ ------------- ------------ ------------
Total Costs and Expenses 28.0 288.4 904.4 (112.5) 1,108.3
(27.9) (210.0) 9.3 52.3 (176.3)
Other Income (Loss) (180.9) 118.8 9.4 38.6 (14.1)
----------- ------------ ------------- ------------ ------------
Income (Loss) before Income Taxes (208.8) (91.2) 18.7 90.9 (190.4)
Benefit (Provision) for Income Taxes 72.6 38.8 (59.9) (38.8) 12.7
------------- ------------- ------------- ------------ ------------
Income (Loss) from Continuing Operations (136.2) (52.4) (41.2) 52.1 (177.7)
Income from Discontinued Operations,
net of tax - - 119.7 - 119.7
------------- ------------- ------------- ------------ ------------
Net Income (Loss) $(136.2) $(52.4) $ 78.5 $ 52.1 $ (58.0)
============= ============= ============== ============ ============
Kerr-McGee Corporation and Subsidiaries
Condensed Consolidating Statement of Operations
For the Six Months June 30, 2002
Kerr-McGee Guarantor Non-Guarantor
(Millions of dollars) Corporation Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------------ ------------- ------------ ------------
Sales $ - $ 154.9 $1,724.7 $ (149.1) $1,730.5
----------- ------------ ------------- ------------ ------------
Costs and Expenses
Costs and operating expenses - 49.7 843.9 (149.7) 743.9
Selling, general and administrative
expenses - 100.7 76.4 - 177.1
Shipping and handling expenses - 2.6 51.6 - 54.2
Depreciation and depletion - 64.1 326.7 - 390.8
Asset Impairment - 3.2 154.3 - 157.5
Exploration, including dry holes and
amortization of undeveloped leases - 5.2 73.5 - 78.7
Taxes, other than income taxes - 9.8 44.8 - 54.6
Provision for environmental remediation
and restoration - 73.8 16.6 - 90.4
Interest and debt expenses 55.1 128.8 56.4 (101.0) 139.3
----------- ------------ ------------- ------------ ------------
Total Costs and Expenses 55.1 437.9 1,644.2 (250.7) 1,886.5
(55.1) (283.0) 80.5 101.6 (156.0)
Other Income (Loss) (244.5) 209.3 25.2 (27.9) (37.9)
----------- ------------ ------------- ------------ ------------
Income (Loss) before Income Taxes (299.6) (73.7) 105.7 73.7 (193.9)
Benefit (Provision) for Income Taxes 107.7 32.7 (93.2) (32.7) 14.5
----------- ------------ ------------- ------------ ------------
Income (Loss) from Continuing Operations (191.9) (41.0) 12.5 41.0 (179.4)
Income from Discontinued Operations,
net of tax - - 126.9 - 126.9
----------- ------------ ------------- ------------ ------------
Net Income (Loss) $(191.9) $(41.0) $139.4 $ 41.0 $(52.5)
=========== ============ ============= ============ ============
Kerr-McGee Corporation and Subsidiaries
Condensed Consolidating Balance Sheet
June 30, 2002
Kerr-McGee Guarantor Non-Guarantor
(Millions of dollars) Corporation Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------------ ------------- ------------ ------------
ASSETS
Current Assets
Cash $ - $ 2.3 $ 140.8 $ - $ 143.1
Intercompany receivables 984.4 44.5 1,385.1 (2,414.0) -
Notes and accounts receivable - 37.3 510.5 (.5) 547.3
Inventories - 7.4 392.5 - 399.9
Deposits, prepaid expenses - 62.6 61.9 (1.8) 122.7
Current assets associated with properties
held for disposal - 1.1 101.3 - 102.4
----------- ------------ ------------- ------------- -------------
Total Current Assets 984.4 155.2 2,592.1 (2,416.3) 1,315.4
Property, Plant and Equipment, net - 2,048.5 5,516.7 - 7,565.2
Other Assets 12.5 763.1 227.3 (82.4) 920.5
Goodwill - 347.1 8.6 - 355.7
Long-term Assets Associated with Properties
Held for Disposal - 2.5 738.6 - 741.1
Investments in and Advances to Subsidiaries 1,416.2 4,549.1 1,848.2 (7,813.5) -
----------- ------------ ------------- -------------- -------------
Total Assets $2,413.1 $7,865.5 $10,931.5 $(10,312.2) $10,897.9
=========== ============ ============= ============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 45.2 $ 68.3 $ 541.4 $ - $ 654.9
Short-term borrowings - .2 - - .2
Intercompany borrowings - 1,377.3 1,041.6 (2,418.9) -
Long-term debt due within one year - 7.5 - - 7.5
Other current liabilities 27.4 (107.3) 777.0 (1.8) 695.3
Current liabilities associated with
properties held for disposal - - 41.9 - 41.9
----------- ----------- ------------- -------------- -------------
Total Current Liabilities 72.6 1,346.0 2,401.9 (2,420.7) 1,399.8
Long-Term Debt 1,847.1 2,019.7 492.2 - 4,359.0
Deferred Credits and Reserves - 1,097.8 819.1 (.7) 1,916.2
Long-term Liabilities Associated with
Properties Held for Disposal - - 159.2 - 159.2
Investments by and Advances from Parent - - 826.9 (826.9) -
Stockholders' Equity 493.4 3,402.0 6,232.2 (7,063.9) 3,063.7
------------ ----------- ------------- -------------- --------------
Total Liabilities and Stockholders'
Equity $2,413.1 $7,865.5 $10,931.5 $(10,312.2) $10,897.9
============ =========== ============= ============== ==============
Kerr-McGee Corporation and Subsidiaries
Condensed Consolidating Statement of Cash Flows
For the Six Months Ended June 30, 2002
Kerr-McGee Guarantor Non-Guarantor
(Millions of dollars) Corporation Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------------ ------------- ------------ ------------
Operating Activities
- --------------------
Net income (loss) $(191.9) $ (41.0) $ 139.4 $ 41.0 $ (52.5)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities -
Depreciation, depletion and amortization - 65.3 360.8 - 426.1
Asset impairment - 3.2 179.0 - 182.2
Equity in earnings of subsidiaries 180.2 (139.3) - (40.9) -
Dry hole costs - - 15.3 - 15.3
Deferred income taxes - (37.6) (62.5) - (100.1)
Provision for environmental remediation
and restoration of inactive sites - 73.8 16.6 - 90.4
Gain on sale and retirement of assets - (1.3) (104.8) - (106.1)
Noncash items affecting income 0.1 68.2 40.8 - 109.1
Other net cash provided by (used in)
operating activities (7.2) 118.0 53.4 .5 164.7
------------- ------------- ------------- ------------- -----------
Net Cash Provided by (Used in)
Operating Activities (18.8) 109.3 638.0 .6 729.1
------------- ------------- ------------- ------------- -----------
Investing Activities
- --------------------
Capital expenditures - (77.2) (548.8) - (626.0)
Dry hole expense - - (15.3) - (15.3)
Exploration and production divestitures - - 292.0 - 292.0
Other investing activities - (3.3) (18.3) - (21.6)
------------- ------------- ------------- ------------- -----------
Net Cash Used in Investing
Activities - (80.5) (290.4) - (370.9)
------------- ------------- ------------- ------------- -----------
Financing Activities
- --------------------
Issuance of long-term debt 350.0 - 492.2 - 842.2
Repayment of long-term debt - (18.7) (1,029.2) - (1,047.9)
Increase (decrease) short-term borrowings - - (8.2) - (8.2)
Increase (decrease) in intercompany notes
payable (245.9) (11.3) 257.8 (.6) -
Issuance of common stock 4.9 - - - 4.9
Dividends paid (90.2) - - - (90.2)
------------- ------------- ------------- ------------- -----------
Net Cash Provided by (Used in)
Financing Activities 18.8 (30.0) (287.4) (.6) (299.2)
------------- ------------- ------------- ------------- -----------
Effects of Exchange Rate Changes on Cash
and Cash Equivalents - - (7.2) - (7.2)
------------- ------------- ------------- ------------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents - (1.2) 53.0 - 51.8
Cash and Cash Equivalents at Beginning of
Period - 3.5 87.8 - 91.3
------------- ------------- ------------- ------------- -----------
Cash and Cash Equivalents at End of Period $ - $ 2.3 $ 140.8 $ - $ 143.1
============= ============= ============= ============= ===========
L. Contingencies
West Chicago, Illinois
In 1973, a wholly owned subsidiary, Kerr-McGee Chemical Corporation, now
Kerr-McGee Chemical LLC (Chemical), closed the facility in West Chicago,
Illinois, that processed thorium ores. Historical operations had resulted
in low-level radioactive contamination at the facility and in the
surrounding areas. In 1979, Chemical filed a plan with the Nuclear
Regulatory Commission (NRC) to decommission the facility. In 1990, the
NRC transferred jurisdiction over the facility to the State of Illinois
(the State). Following is the current status of various matters
associated with the closed facility.
Closed Facility - In 1994, Chemical, the City of West Chicago (the City)
and the State reached agreement on the initial phase of the
decommissioning plan for the closed West Chicago facility, and Chemical
began shipping material from the site to a licensed permanent disposal
facility.
In February 1997, Chemical executed an agreement with the City covering
the terms and conditions for completing the final phase of
decommissioning work. The State has indicated approval of the agreement
and has issued license amendments authorizing much of the work. Chemical
expects most of the work to be completed within the next two years,
leaving principally only groundwater remediation and/or monitoring for
subsequent years.
In 1992, the State enacted legislation imposing an annual storage fee
equal to $2 per cubic foot of byproduct material located at the closed
facility, which cannot exceed $26 million per year. Initially, all
storage fee payments were reimbursed to Chemical as decommissioning costs
were incurred. Chemical was fully reimbursed for all storage fees paid
pursuant to this legislation. In June 1997, the legislation was amended
to provide that future storage fee obligations are to be offset against
decommissioning costs incurred but not yet reimbursed.
Vicinity Areas - The U.S. Environmental Protection Agency (EPA) has
listed four areas in the vicinity of the closed West Chicago facility on
the National Priority List promulgated by EPA under authority of the
Comprehensive Environmental Response, Compensation, and Liability Act of
1980 (CERCLA) and has designated Chemical as a potentially responsible
party in these four areas. The EPA issued unilateral administrative
orders for two of the areas (known as the residential areas and
Reed-Keppler Park), which require Chemical to conduct removal actions to
excavate contaminated soils and ship the soils elsewhere for disposal.
Without waiving any of its rights or defenses, Chemical is conducting the
work required by the two orders. Chemical has completed the required
excavation and restoration work at the park site and will be monitoring
the site pending final EPA approval. Work at the residential sites is
expected to be substantially complete by the end of 2002.
The other two areas (known as the Sewage Treatment Plant and Kress Creek)
currently are being studied to determine the extent of contamination, and
Chemical is in discussions with the relevant authorities regarding
cleanup requirements. Chemical has indicated a willingness to undertake a
cleanup of the final two sites subject to various conditions, including
the continued reimbursement of the government's share of costs for
cleaning up the West Chicago sites. If these conditions are met, the
costs of cleanup for these two sites are not expected to exceed the
additional federal funding, as more fully discussed below.
Government Reimbursement - Pursuant to Title X of the Energy Policy Act
of 1992 (Title X), the U.S. Department of Energy (DOE) is obligated to
reimburse Chemical for certain decommissioning and cleanup costs in
recognition of the fact that much of the facility's production was
dedicated to United States government contracts. Title X was amended in
1998 to increase the amount authorized for reimbursement to $140 million
plus inflation adjustments. Through June 30, 2002, Chemical has been
reimbursed approximately $146 million under Title X. These reimbursements
are provided by congressional appropriations.
Historically, congressional authorizations under Title X have lagged
Chemical's cleanup expenditures. At June 30, 2002, the amount of claims
filed by Chemical but not yet reimbursed by the DOE totaled approximately
$96 million. The Congress has passed a bill that would bring the
congressional authorizations current as well as authorize reimbursement
for the government's share of future costs. The bill currently is
awaiting the President's signature.
Forest Products
The forest products business of Chemical treats railroad ties with wood
preservatives. Chemical currently operates wood treatment plants in six
states and has formerly owned wood-treating plants in other states. Wood
preservatives and other substances used in the wood-treatment process are
or may be present at some of these sites and require cleanup. Costs
associated with the cleanup activities are accrued when losses are
probable and costs are reasonably estimable.
The EPA has notified Chemical that it is a potentially responsible party
at a former wood treatment site in New Jersey that has been listed by the
EPA as a Superfund site. EPA has alleged the site was once owned and
operated by a predecessor of Chemical. EPA has preliminarily estimated
that cleanup costs may approximate $120 million or more. Chemical is
evaluating possible defenses to any claim by EPA for response costs. The
company has not provided a reserve for the site as it is not possible to
reliably estimate whatever liability Chemical may have for the cleanup
because of uncertainties regarding Chemical's connection to the site.
The company and Chemical have been named in 22 lawsuits in three states
(Mississippi, Louisiana and Pennsylvania) in connection with present and
former forest products operations. The lawsuits seek recovery under a
variety of common law and statutory legal theories for personal injuries
and property damages allegedly caused by exposure to and/or release of
creosote and other substances used in the wood-treatment process. Some of
the lawsuits are filed on behalf of specifically named individual
plaintiffs, while others purport to be filed on behalf of classes of
allegedly similarly situated plaintiffs. Lead lawyers for the plaintiffs
claim that in the aggregate about 10,000 persons are involved or
otherwise represented as plaintiffs in these cases.
The company has reached an agreement to settle five of the seven cases
pending in Mississippi. The settlements address approximately 6,000
claims asserted against the company in Mississippi. The settlements do
not cover the remaining two cases, known as Maranatha Faith Center v.
Kerr-McGee and Jamison v. Kerr-McGee, which involve 27 plaintiffs who
allege property damage and/or personal injury arising out of a site near
the company's Mississippi operation. In addition, the company has an
agreement in principle to settle all of the cases pending in Louisiana.
This agreement addresses approximately 3,000 claims asserted against the
company in Louisiana. The settlements are subject to a number of
conditions, including the signing of releases by a specified number of
claimants and court approval of various matters. The company also is
seeking to resolve the cases filed in Pennsylvania and the two remaining
cases in Mississippi, and pending any resolution is vigorously defending
those cases.
The company established a $70 million reserve for the above settlements
and the estimated liability for the remaining cases, making the total
reserve for litigation related to forest products $86 million. The
company believes the reserve is adequate to cover the potential liability
associated with these matters. In light of the inherent uncertainties
associated with litigation, however, there is no assurance that the
company will not be required to adjust the reserve in the future.
Other Matters
The company and/or its subsidiaries are parties to a number of legal and
administrative proceedings involving environmental and/or other matters
pending in various courts or agencies. These include proceedings
associated with facilities currently or previously owned, operated or
used by the company, its subsidiaries, and/or their predecessors, and
include claims for personal injuries and property damages. The company's
current and former operations also involve management of regulated
materials and are subject to various environmental laws and regulations.
These laws and regulations will obligate the company and/or its
subsidiaries to 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
and/or its subsidiaries operate. Environmental regulations in the North
Sea are particularly stringent.
The company provides for costs related to contingencies when a loss is
probable and the amount is reasonably estimable. It is not possible for
the company to reliably estimate the amount and timing of all future
expenditures related to environmental and legal matters and other
contingencies because:
* some sites are in the early stages of investigation, and other
sites may be identified in the future;
* cleanup requirements are difficult to predict at sites where
remedial investigations have not been completed or final
decisions have not been made regarding cleanup requirements,
technologies or other factors that bear on cleanup costs;
* environmental laws frequently impose joint and several
liability on all potentially responsible parties, and it can
be difficult to determine the number and financial condition
of other potentially responsible parties and their share of
responsibility for cleanup costs;
* environmental laws and regulations are continually changing,
and court proceedings are inherently uncertain; and
* 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.
As of June 30, 2002, the company had reserves totaling $224 million for
cleaning up and remediating environmental sites, reflecting the
reasonably estimable costs for addressing these sites. This includes $46
million for the West Chicago sites and $39 million for forest products
sites. Cumulative expenditures at all environmental sites through June
30, 2002, total $977 million. Also at June 30, 2002, the company had
litigation reserves totaling approximately $115 million for the
reasonably estimable losses associated with litigation, including the $86
million for former forest products operations. Management believes, after
consultation with general counsel, that currently the company has
reserved adequately for the reasonably estimable costs of environmental
matters and other contingencies. However, additions to the reserves may
be required as additional information is obtained that enables the
company to better estimate its liabilities, including liability at sites
now under review, though the company cannot now reliably estimate the
amount of future additions to the reserves.
M. Business Segments
Following is a summary of sales and operating profit for each of the
company's business segments for the second quarter and first six months
of 2002 and 2001.
Three Months Ended Six Months Ended
June 30, June 30,
(Millions of dollars) 2002 2001 2002 2001
-------- ------ -------- --------
Sales
Exploration and production $ 614.6 $624.6 $1,149.2 $1,371.4
Chemicals - Pigment 264.8 245.0 481.3 493.2
Chemicals - Other 52.4 49.6 99.8 96.7
------- ------ -------- ---------
931.8 919.2 1,730.3 1,961.3
All other .2 .1 .2 .2
------- ------ -------- --------
Total Sales $ 932.0 $919.3 $1,730.5 $1,961.5
======= ====== ======== ========
Operating Profit
Exploration and production $ 44.0 $299.2 $ 162.7 $ 703.0
Chemicals - Pigment 13.3 25.9 1.8 62.3
Chemicals - Other (1.1) 3.6 2.5 (19.5)
------- ------ -------- --------
Total Operating Profit 56.2 328.7 167.0 745.8
Other Income (Expense) (1) (246.6) (64.8) (360.9) 72.5
------- ------ -------- --------
Income (Loss) from Continuing Operations
before Income Taxes (190.4) 263.9 (193.9) 818.3
Benefit (Provision) for Income Taxes 12.7 (97.8) 14.5 (303.1)
------- ------ -------- --------
Income (Loss) from Continuing Operations (177.7) 166.1 (179.4) 515.2
Discontinued Operations, Net of Income
Taxes 119.7 8.9 126.9 14.8
Cumulative Effect of Change in Accounting
Principle, Net of Income Taxes - - - (20.3)
------- ------ -------- --------
Net Income (Loss) $ (58.0) $175.0 $ (52.5) $ 509.7
======= ====== ======== =========
(1) The 2002 second quarter and six months include pretax charges of
$73.8 million for environmental provisions and $70 million for litigation
provisions. These amounts are included as corporate provisions since the
items relate to former operations that are not part of the company's
current operating activities. The first six months of 2001 includes a
gain of $181.4 million associated with the reclassification of 85% of the
corporate investment in Devon common stock to "trading" from "available
for sale" category of investments.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
Comparison of 2002 Results with 2001 Results
Second-quarter 2002 loss from continuing operations totaled $177.7 million,
compared with income of $166.1 million for the same 2001 period. Loss from
continuing operations for the first six months of 2002 was $179.4 million,
compared with income of $515.2 million for the same 2001 period. The net loss
for the 2002 second quarter was $58 million, compared with 2001 second-quarter
net income of $175 million. For the first six months of 2002, the net loss was
$52.5 million, compared with net income of $509.7 million for the same 2001
period.
Second-quarter 2002 operating profit was $56.2 million, down 83% from $328.7
million in the 2001 quarter. Operating profit for the 2002 second quarter was
impacted by special charges totaling $172 million, including $157.5 million for
impairment of oil and gas assets, mainly non-core assets held for sale that do
not meet the criteria for discontinued operations, and $14.2 million relating to
environmental provisions for operating sites. Excluding these special charges,
the decrease in operating profit was primarily due to lower crude oil, natural
gas and pigment sales prices, higher depreciation expense, and higher operating
expense for the exploration and production unit, partially offset by higher
crude oil, natural gas and pigment sales volumes and lower pigment per-unit
production costs.
Operating profit for the first six months of 2002 was $167 million, compared
with $745.8 million in the same 2001 period. Operating profit was negatively
impacted by higher asset impairment charges; lower crude oil, natural gas and
pigment sales prices; higher depreciation expense; and higher operating expense
for the exploration and production unit, partially offset by higher crude oil,
natural gas and pigment sales volumes and lower exploration expense.
The second-quarter 2002 other expense totaled $246.6 million, compared with
$64.8 million in the same 2001 period. In July 2002, a review of the company's
environmental remediation projects was completed and additional reserves
totaling $73.8 million were determined to be necessary to provide for costs
related to activities at former plant sites. Also in the 2002 second quarter,
the company agreed to settle certain forest products litigation claims for which
$70 million in reserves were provided. Excluding these items, other expense
totaled $102.8 million in the second quarter of 2002, compared with $64.8
million in 2001. The increase in the 2002 second quarter was primarily due to
higher net interest expense resulting from increased debt balances and foreign
currency transaction losses, compared with gains in 2001, partially offset by
gains on derivative instruments.
Other expense for the first six months of 2002 was $360.9 million, compared with
other income of $72.5 million for the same 2001 period. For the first six months
of 2002, other expense included special pretax charges of $73.8 million for
environmental provisions and $70 million for litigation reserves. Benefiting
other income in the first six months of 2001 was a pretax special gain of $181.4
million associated with the reclassification of 85% of the company's investment
in Devon common stock to "trading" from "available for sale" (see note B).
Excluding these special items, the increase in other expense for the first six
months of 2002 was primarily due to higher net interest expense, foreign
currency transaction losses compared with 2001 gains, higher losses from equity
affiliates and losses on derivative instruments compared with 2001 gains.
The income tax benefit for the second quarter of 2002 was $12.7 million,
compared with tax expense of $97.8 million in the same 2001 period. For the
first six months of 2002, the income tax benefit was $14.5 million, compared
with tax expense of $303.1 million in 2001. The income tax benefit for both 2002
periods included a $55.3 million tax benefit related to environmental provisions
and litigation reserves. The provision for the first six months of 2001 included
$63.5 million of tax expense related to the reclassification of the Devon common
stock. Excluding the tax effect on these items, the decrease in provisions for
both 2002 periods is due primarily to lower income.
SEGMENT OPERATIONS
Exploration and Production -
Operating profit for the second quarter of 2002 was $44 million, compared with
$299.2 million for the same 2001 period. Operating profit for the first six
months of 2002 and 2001 was $162.7 million and $703 million, respectively. The
decrease in operating profit in both 2002 periods was primarily due to lower
crude oil and natural gas sales prices, higher depreciation and depletion
expense, and higher operating costs, partially offset by higher crude oil and
natural gas sales volumes. In addition, partially offsetting the decline in
operating profit for the first six months of 2002 was lower exploration expense
compared with the same period in 2001.
Revenues were $614.6 million and $624.6 million for the three months ended June
30, 2002 and 2001, respectively, and $1,149.2 million and $1,371.4 million for
the first six months of 2002 and 2001, respectively. The following table shows
the company's average crude oil and natural gas sales prices and volumes for
both the second quarter and first six months of 2002 and 2001.
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
------------ ------------ ------------ -------------
Crude oil and condensate sales
(thousands of bbls/day)
Domestic
Offshore 54.3 55.6 53.8 56.0
Onshore 29.4 18.5 29.3 19.1
North Sea 98.0 99.3 104.5 104.4
Other International 8.5 8.8 8.6 8.9
------ ------ ------ ------
Total continuing operations 190.2 182.2 196.2 188.4
Discontinued operations 5.6 8.7 7.3 8.0
------ ------ ------ ------
Total 195.8 190.9 203.5 196.4
====== ====== ====== ======
Average crude oil sales price (per barrel)
Domestic
Offshore $22.19 $22.85 $20.23 $23.94
Onshore 21.54 24.68 19.95 26.17
North Sea 22.74 26.37 21.08 25.61
Other International 23.82 21.30 20.34 22.04
Average for continuing operations 22.44 24.88 20.65 25.00
Discontinued operations $21.35 $25.44 $19.42 $24.66
Natural gas sold (MMcf/day)
Domestic
Offshore 253 297 248 289
Onshore 379 162 381 162
North Sea 99 64 100 66
------ ------- ------ ------
Total 731 523 729 517
====== ======= ====== ======
Average natural gas sales price (per Mcf)
Domestic
Offshore $3.32 $4.81 $2.91 $5.90
Onshore 3.02 4.42 2.75 5.77
North Sea 1.81 2.11 2.32 2.68
Average $2.96 $4.36 $2.74 $5.45
During the 2002 second quarter, the company announced that the Leadon field in
the North Sea was operating at lower volumes than initially projected.
Commissioning of the production facilities, mechanical malfunctions, drilling
problems and reservoir performance have all contributed to the lower than
expected results. The company is currently evaluating possible solutions for
addressing the primary performance issues. Once these activities are completed,
the production performance and the value of the field will be re-evaluated. The
Leadon field in the North Sea achieved first oil in November 2001. The company's
investment in the Leadon field totals $877 million.
Chemicals - Pigment
Second-quarter 2002 operating profit was $13.3 million on revenues of $264.8
million, compared with operating profit of $25.9 million on revenues of $245
million for the same 2001 period. For the first six months of 2002 and 2001,
operating profit was $1.8 million and $62.3 million, respectively, on revenues
of $481.3 million and $493.2 million, respectively. Revenues increased in the
second quarter of 2002 due to higher pigment sales volumes, partially offset by
lower pigment sales prices. The decline in operating profit in the 2002 second
quarter was primarily due to higher costs of pigment sales, partially offset by
higher revenues. Revenues for the first six months of 2002 decreased compared
with the same 2001 period, primarily due to lower pigment sales prices,
partially offset by higher pigment sales volumes. The decline in operating
profit for the first six months of 2002 was primarily due to lower revenues and
higher pigment costs of sales.
Chemicals - Other
Operating loss in the 2002 second quarter was $1.1 million on revenues of $52.4
million, compared with operating profit of $3.6 million on revenues of $49.6
million in the same 2001 period. Operating profit for the first six months of
2002 was $2.5 million on revenues of $99.8 million, compared with an operating
loss of $19.5 million on revenues of $96.7 million in the same 2001 period. The
2002 second quarter includes a special charge of $7 million associated with an
increase in environmental provisions at Henderson, Nev. Impacting the first six
months of 2001 was a $24.9 million special charge for the termination of
manganese metal production at the Hamilton, Miss., electrolytic facility.
Excluding these special charges, operating profit for both 2002 periods
increased primarily due to improved results from the forest products operations.
The company is considering options for exiting the forest products business.
Financial Condition
At June 30, 2002, the company's net working capital position was a negative
$84.4 million, compared with a negative $136 million at June 30, 2001, and a
positive $192.2 million at December 31, 2001. The current ratio was .9 to 1 at
both June 30, 2002 and 2001, compared with 1.2 to 1 at December 31, 2001. The
negative working capital at both June 30, 2002 and 2001, was not indicative of a
lack of liquidity as the company maintains sufficient current assets to settle
current liabilities when due. Additionally, the company has sufficient unused
lines of credit and revolving credit facilities, as discussed below. Current
asset balances are minimized as one way to finance capital expenditures and
lower borrowing costs.
The company's percentage of net debt (debt less cash) to capitalization was 58%
at June 30, 2002, compared with 59% at December 31, 2001, and 43% at June 30,
2001. The increase from June 30, 2001, resulted primarily from the acquisition
of HS Resources. The company had unused lines of credit and revolving credit
facilities of $1,462.2 million at June 30, 2002. Of this amount, $870 million
can be used to support commercial paper borrowings of Kerr-McGee Credit LLC and
$420 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.
In April 2002, the company issued $350 million of 5.375% notes due April 15,
2005. See note B regarding the interest rate swap associated with this debt. The
proceeds received by the company were used to repay various short-term
borrowings.
Operating activities provided net cash of $729.1 million in the first six months
of 2002. The cash provided by operating activities and proceeds from exploration
and production divestitures in the first six months of 2002 was sufficient to
pay the company's capital expenditures of $626 million, repay the net reduction
in long-term debt of $205.7 million and pay dividends of $90.2 million.
Capital expenditures for the first six months of 2002, excluding dry hole costs
and acquisitions, totaled $626 million, compared with $855.3 million for the
same period last year. Exploration and production expenditures, principally in
the Gulf of Mexico and North Sea, were 91% of the 2002 total. Chemical - pigment
expenditures were 6% of the 2002 total. Chemical - other and corporate incurred
the remaining 3% of the expenditures. Management anticipates that the cash
requirements for the next several years can be provided through internally
generated funds and selective borrowings.
Commodity Market Risk
In March 2002, the company hedged a portion of its oil and natural gas
production for the period April through December 2002 to increase the
predictability of its cash flows and support additional capital projects. The
company hedged a total of 16.5 million barrels of North Sea crude oil
production, 8.3 million barrels of domestic crude oil production and 68.8
million MMBtu of domestic natural gas production. The fair value of the hedge
contracts outstanding at June 30, 2002, was a liability of $23.4 million for
North Sea crude oil, $13.5 million for domestic crude oil and $15.2 million for
domestic natural gas.
Critical Accounting Policies
Preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates,
judgments and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, and the disclosure of contingent assets and
liabilities. However, the accounting principles used by the company generally do
not change the company's reported cash flows or liquidity. Generally, accounting
rules do not involve a selection among alternatives, but involve a selection of
the appropriate policies for applying the basic principles. Interpretation of
the existing rules must be done and judgments made on how the specifics of a
given rule apply to the company.
The more significant reporting areas impacted by management's judgments and
estimates are crude oil and natural gas reserve estimation, impairment of
assets, site dismantlement, environmental remediation, litigation and tax
accruals. Management's judgments and estimates in these areas are based on
information available from both internal and external sources, including
engineers, legal counsel, environmental studies and historical experience in
similar matters. Actual amounts could differ from the estimates as additional
information becomes known.
Oil and Gas Reserves
The estimates of oil and gas reserves are prepared by the company's geologists
and engineers. Only proved oil and gas reserves are included in any financial
statement disclosure. The Securities and Exchange Commission has defined proved
reserves as the estimated quantities of crude oil, natural gas and natural gas
liquids which geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs under existing
economic and operating conditions. Even though the company's geologists and
engineers are knowledgeable and follow authoritative guidelines for estimating
reserves, they must make a number of subjective assumptions based on
professional judgments in developing the estimates. Reserve estimates are
updated at least annually and consider recent production levels and other
technical information about each field. Revisions in the estimated reserves may
be necessary due to reservoir performance, new drilling, sales price and cost
changes, technological advances, new geological or geophysical data or other
economic factors. The company cannot predict the amounts or timing of future
reserve revisions.
Depreciation rates are determined based on these reserve quantity estimates and
the capitalized costs of producing properties. As the estimated reserves are
adjusted, the depreciation expense for a property will change, assuming no
change in production volumes or the costs capitalized. Reserves are the basis
for accumulating the estimated costs for the dismantlement and removal of the
company's oil and gas production and related facilities. Such costs are
presently accumulated over the estimated life of the facilities by use of the
unit-of-production method. Estimated reserves may also be used as the basis for
calculating the expected future cash flows from a property, which are used to
determine whether that property may be impaired. Reserves are also used to
estimate the supplemental disclosure of the standardized measure of discounted
future net cash flows relating to its oil and gas producing activities. Changes
in the estimated reserves are considered changes in estimates for accounting
purposes and are reflected on a prospective basis.
Successful Efforts Method of Accounting
The company has elected to utilize the successful efforts method of accounting
for its oil and gas exploration and development activities. Exploration
expenses, including geological and geophysical costs, rentals and exploratory
dry holes, are charged against income as incurred. Costs of successful wells and
related production equipment and developmental dry holes are capitalized and
amortized by field using the unit-of-production method as oil and gas is
produced. The successful efforts method reflects the inherent volatility in
exploring for and producing oil and gas. The accounting method may yield
significantly different operating results than the full cost method.
Impairment of Assets
All long-lived assets are monitored for potential impairment when circumstances
indicate that the carrying value of the asset may be greater than its future net
cash flows. The evaluations involve a significant amount of judgment since the
results are based on estimated future events, such as inflation rates, future
sales prices for oil, gas or chemicals, future costs to produce these products,
estimates of future oil and gas reserves to be recovered and the timing thereof,
the economic and regulatory climates and other factors. The need to test a
property for impairment may result from significant declines in sales prices,
unfavorable adjustments to oil and gas reserves, tax law changes, and changes in
environmental or abandonment regulations. Assets held for sale are reviewed for
impairment when the company approves the plan to sell. Estimates of anticipated
sales prices are highly judgmental and subject to material revision in future
periods. Because of the uncertainty inherent in these factors, the company
cannot predict when or if future impairment charges will be recorded.
Environmental Remediation, Litigation and Other Contingency Reserves
Kerr-McGee management makes judgments and estimates in accordance with
applicable accounting rules when it establishes reserves for environmental
remediation, litigation and other contingent matters. Provisions for such
matters are charged to expense when it is probable that a liability has been
incurred and reasonable estimates of the liability can be made. It is not
possible for management to reliably estimate the amount and timing of all future
expenditures related to environmental, legal or other contingent matters because
of continually changing laws and regulations, inherent uncertainties associated
with court and regulatory proceedings as well as cleanup requirements and
related work, the possible existence of other potentially responsible parties,
and the changing political and economic environment. For these reasons, actual
environmental, litigation and other contingency costs can vary significantly
from the company's estimates. For additional information about contingencies,
refer to Note L.
Tax Accruals
The company has operations in several countries around the world and is subject
to income and other similar taxes in these countries. The estimation of the
amounts of income tax to be recorded by the company involves interpretation of
complex tax laws and regulations, evaluation of tax audit findings, and
assessment of how the foreign taxes effect domestic taxes. Although the
company's management believes its tax accruals are adequate, differences may
occur in the future depending on the resolution of pending and new tax matters.
The above description of the company's critical accounting policies is not
intended to be an all-inclusive discussion of the uncertainties considered
and estimates made by management in applying accounting principles and
policies. Results may vary significantly if different policies were used or
required and if new or different information becomes known to management.
Forward-Looking Information
Statements in this quarterly report regarding the company's or management's
intentions, beliefs or expectations, or that otherwise speak to future
events, are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Future results and developments
discussed in these statements may be affected by numerous factors and
risks, such as the accuracy of the assumptions that underlie the
statements, the success of the oil and gas exploration and production
program, drilling risks, the market value of Kerr-McGee's products,
uncertainties in interpreting engineering data, demand for consumer
products for which Kerr-McGee's businesses supply raw materials, general
economic conditions, and other factors and risks discussed in the company's
SEC filings. Actual results and developments may differ materially from
those expressed in this quarterly report.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
A. The company and its wholly owned subsidiary Kerr-McGee Chemical,
LLC are involved in litigation in connection with current and
former forest products operations. See Item 3 of the company's 2001
Annual Report on Form 10-K, which is incorporated herein by
reference, for additional information on this and other
contingencies.
The company has reached an agreement to settle five of the seven
cases pending in Mississippi. The settlements address approximately
6,000 claims asserted against the company in Mississippi. The
settlements do not cover the remaining two cases, known as
Maranatha Faith Center v. Kerr-McGee and Jamison v. Kerr-McGee,
which involve 27 plaintiffs who allege property damage and/or
personal injury arising out of a site near the company's
Mississippi operation. In addition, the company has an agreement in
principle to settle all of the cases pending in Louisiana. This
agreement addresses approximately 3,000 claims asserted against the
company in Louisiana. The settlements are subject to a number of
conditions, including the signing of releases by a specified number
of claimants and court approval of various matters. The company
also is seeking to resolve the cases filed in Pennsylvania and the
two remaining cases in Mississippi, and pending any resolution is
vigorously defending those cases.
The company established a $70 million reserve for the above
settlements and the estimated liability for the remaining cases,
making the total reserve for litigation related to forest products
$86 million. The company believes the reserve is adequate to cover
the potential liability associated with these matters. In light of
the inherent uncertainties associated with litigation, however,
there is no assurance that the company will not be required to
adjust the reserve in the future.
B. The company's wholly owned chemical subsidiary operates through an
indirect subsidiary the downstream portion of an Australian joint
venture. The joint venture, known as Tiwest Pty Ltd, engages in the
production of titanium dioxide pigment. The company has a 50%
interest in the joint venture. The joint venture received a
complaint and notice of violation from the Department of
Environmental Waters and Catchment Protection in Western Australia
alleging violations of the Environmental Protection Act (1986).
This matter currently is pending in the Court of Petty Sessions,
Perth, Western Australia, and concerns a chlorine release at the
facility. The liability of the joint venture and the amount of any
monetary fine are uncertain. As currently filed, the maximum fine
is $625,000 (Australian dollars), and is not expected to have a
material adverse effect on the company.
C. For a discussion of contingencies, reference is made to the
Environmental Matters section of Management's Discussion and
Analysis in the 2001 Annual Report to Stockholders, which is
incorporated by reference in Item 7 of the 2001 Form 10-K. See also
note L to the consolidated financial statements included herein.
Reference is also made to Item 3 of the company's 2001 Annual
Report on Form 10-K and Part II Item 1 of the company's 2002 First
Quarter Report on Form 10-Q, which are incorporated herein by
reference.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The 2002 annual meeting of stockholders was held on May 14, 2002.
(b) Directors elected at the 2002 annual meeting were the following:
Matthew R. Simmons
Nicholas J. Sutton
Ian L. White-Thomson
Directors whose term of office continues after the 2002 annual
meeting were the following:
William E. Bradford Martin C. Jischke
Luke R. Corbett William C. Morris
Sylvia A. Earle Leroy C. Richie
David C. Genever-Watling Farah M. Walters
(c) The following matters were voted upon at the annual meeting:
(1) Following are the directors elected at the 2002 annual meeting
and the tabulation of votes Related to each nominee.
Votes
Affirmative Withheld
----------- --------
Matthew R. Simmons 82,459,084 4,158,950
Nicholas J. Sutton 82,274,536 4,343,498
Ian L. White-Thomson 82,423,701 4,194,333
(2) The stockholders ratified the appointment of Ernst & Young LLP
as independent public Accountants for 2002. Affirmative votes
were 84,810,166; negative votes were 2,890,135, and abstentions
were 131,558.
(3) The stockholders approved the 2002 Annual Incentive
Compensation Plan. Affirmative Votes were 82,298,008; negative
votes were 3,703,230, and abstentions were 301,061.
(4) The stockholders approved the 2002 Long Term Incentive Plan.
Affirmative votes were 67,905,999; negative votes were
10,300,044, and abstentions were 418,576.
(5) The stockholders approved the Amendment of the Amended and
Restated Certificate of Incorporation of Kerr-McGee Operating
Corporation. Affirmative votes were 72,457,276; negative votes
were 5,674,492 and abstentions were 492,852.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits -
Exhibit No
----------
10.1 The 2002 Annual Incentive Compensation Plan effective
May 14,2002.
10.2 The 2002 Long Term Incentive Plan effective May 14, 2002.
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K -
On May 21, 2002, the company filed a report on Form 8-K announcing
a conference call to discuss its interim second-quarter 2002
financial and operating activities and expectations for the future.
On June 20, 2002, the company filed a report on Form 8-K announcing
a conference call to discuss its interim second-quarter 2002
financial and operating activities and expectations for the future.
On July 22, 2002, the company filed a report on Form 8-K announcing
a conference call to discuss its second-quarter 2002 financial and
operating results and expectations for the future.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
KERR-McGEE CORPORATION
Date: August 9, 2002 By:/s/ John M. Rauh
-------------- ----------------------------------
John M. Rauh
Vice President and Controller
and Chief Accounting Officer