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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, 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 July 31,
2003: 100,851,559.
KERR-McGEE CORPORATION
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements PAGE
----
Consolidated Statement of Operations for the Three
and Six Months Ended June 30, 2003 and 2002 1
Consolidated Balance Sheet at June 30, 2003 and
December 31, 2002 2
Consolidated Statement of Cash Flows for the Six
Months Ended June 30, 2003 and 2002 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 29
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 36
Item 4. Controls and Procedures 37
Forward-Looking Information 38
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 38
Item 4. Submission of Matters to a Vote of Security Holders 38
Item 6. Exhibits and Reports on Form 8-K 39
SIGNATURE 40
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
KERR-McGEE CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
Three Months Six Months
Ended Ended
June 30, June 30,
--------------------- ---------------------
(Millions of dollars, except per-share amounts) 2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------------------------------
Sales $1,073.7 $ 932.0 $2,200.9 $1,730.5
-------- -------- -------- --------
Costs and Expenses
Costs and operating expenses 460.2 376.6 872.2 726.3
Selling, general and administrative expenses 79.1 121.6 150.0 177.1
Shipping and handling expenses 35.0 25.1 67.0 54.2
Depreciation and depletion 193.0 195.9 382.6 408.4
Accretion expense 6.3 - 12.5 -
Asset impairments, net of gains on disposal of assets held for sale (.5) 157.5 (.6) 157.5
Exploration, including dry holes and amortization of
undeveloped leases 66.6 46.8 207.1 78.7
Taxes, other than income taxes 21.0 28.2 46.4 54.6
Provision for environmental remediation and restoration,
net of reimbursements 1.9 88.0 19.2 90.4
Interest and debt expense 63.4 68.6 128.4 139.3
-------- -------- -------- --------
Total Costs and Expenses 926.0 1,108.3 1,884.8 1,886.5
-------- -------- -------- --------
147.7 (176.3) 316.1 (156.0)
Other Income (Expense) (26.9) (14.1) (25.2) (37.9)
-------- -------- -------- --------
Income (Loss) before Income Taxes 120.8 (190.4) 290.9 (193.9)
Benefit (Provision) for Income Taxes (51.0) 12.7 (116.9) 14.5
-------- -------- -------- --------
Income (Loss) from Continuing Operations 69.8 (177.7) 174.0 (179.4)
Income (Loss) from Discontinued Operations (net of income tax
provision (benefit) of $.2 and $(29.1) for the second quarter of
2003 and 2002, respectively, and $.2 and $(24.5) for the first six
months of 2003 and 2002, respectively) (.2) 119.7 .2 126.9
Cumulative Effect of Change in Accounting Principle (net of benefit
for income taxes of $18.2) - - (34.7) -
-------- -------- -------- --------
Net Income (Loss) $ 69.6 $ (58.0) $ 139.5 $ (52.5)
======== ======== ======== ========
Income (Loss) per Common Share
Basic -
Continuing operations $ .70 $ (1.77) $ 1.73 $ (1.79)
Discontinued operations - 1.19 - 1.27
Cumulative effect of change in accounting principle - - (.34) -
-------- -------- -------- --------
Total $ .70 $ (.58) $ 1.39 $ (.52)
======== ======== ======== ========
Diluted -
Continuing operations $ .68 $ (1.77) $ 1.67 $ (1.79)
Discontinued operations - 1.19 - 1.27
Cumulative effect of change in accounting principle - - (.31) -
-------- -------- -------- --------
Total $ .68 $ (.58) $ 1.36 $ (.52)
======== ======== ======== ========
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) 2003 2002
- -------------------------------------------------------------------------------------------------------------------------
ASSETS
- ------
Current Assets
Cash $ 108.6 $ 89.9
Accounts receivable 623.8 607.8
Inventories 400.9 402.4
Deposits, prepaid expenses and other assets 106.5 132.8
Current assets associated with properties held for disposal - 57.2
-------- ---------
Total Current Assets 1,239.8 1,290.1
-------- ---------
Property, Plant and Equipment 14,266.7 13,722.8
Less reserves for depreciation, depletion and amortization (7,023.6) (6,687.2)
--------- ---------
7,243.1 7,035.6
--------- ---------
Investments and Other Assets 1,091.2 1,035.2
Goodwill 356.4 355.9
Long-Term Assets Associated with Properties Held for Disposal 32.6 192.0
--------- ---------
Total Assets $ 9,963.1 $ 9,908.8
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities
Accounts payable $ 668.1 $ 785.1
Long-term debt due within one year 204.8 105.8
Other current liabilities 680.9 716.8
Current liabilities associated with properties held for disposal 18.3 2.1
--------- ---------
Total Current Liabilities 1,572.1 1,609.8
--------- ---------
Long-Term Debt 3,515.0 3,798.1
--------- ---------
Deferred Income Taxes 1,209.3 1,145.1
Other Deferred Credits and Reserves 1,048.5 803.7
Long-Term Liabilities Associated with Properties Held for Disposal - 16.1
--------- ---------
2,257.8 1,964.9
--------- ---------
Stockholders' Equity
Common stock, par value $1 - 300,000,000 shares
authorized, 100,873,854 shares issued at 6-30-03
and 100,391,054 shares issued at 12-31-02 100.9 100.4
Capital in excess of par value 1,707.5 1,687.3
Preferred stock purchase rights 1.0 1.0
Retained earnings 938.5 885.7
Accumulated other comprehensive loss (39.9) (62.3)
Common shares in treasury, at cost - 21,545 shares
at 6-30-03 and 7,299 at 12-31-02 (1.1) (.4)
Deferred compensation (88.7) (75.7)
--------- ---------
Total Stockholders' Equity 2,618.2 2,536.0
--------- ---------
Total Liabilities and Stockholders' Equity $ 9,963.1 $ 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)
Six Months Ended
June 30,
-----------------------
(Millions of dollars) 2003 2002
- -----------------------------------------------------------------------------------------------------------------
Operating Activities
- --------------------
Net income (loss) $ 139.5 $ (52.5)
Adjustments to reconcile net income to net cash
provided by operating activities -
Depreciation, depletion and amortization 419.9 426.1
Accretion expense 12.5 -
Asset impairments, net of gains on disposal of assets held for sale 5.6 182.2
Dry hole costs 128.2 15.3
Deferred income taxes 80.8 (100.1)
Provision for environmental remediation and
restoration, net of reimbursements 19.2 90.4
Gain on divestiture of discontinued operations - (108.1)
(Gain) loss on sale and retirement of assets (2.6) 2.0
Cumulative effect of change in accounting principle 34.7 -
Noncash items affecting net income 71.8 109.1
Other net cash provided by (used in) operating activities (144.7) 164.7
------- ---------
Net Cash Provided by Operating Activities 764.9 729.1
------- ---------
Investing Activities
- --------------------
Capital expenditures (517.9) (626.0)
Dry hole costs (128.2) (15.3)
Proceeds from sales of assets 195.9 296.3
Other investing activities (14.8) (25.9)
------- ---------
Net Cash Used in Investing Activities (465.0) (370.9)
------- ---------
Financing Activities
- --------------------
Issuance of long-term debt 31.5 842.2
Repayment of long-term debt (222.3) (1,047.9)
Decrease in short-term borrowings - (8.2)
Issuance of common stock - 4.9
Dividends paid (90.6) (90.2)
Other financing activities (.6) -
------- ---------
Net Cash Used in Financing Activities (282.0) (299.2)
------- ---------
Effects of Exchange Rate Changes on Cash and Cash Equivalents .8 (7.2)
------- ---------
Net Increase in Cash and Cash Equivalents 18.7 51.8
Cash and Cash Equivalents at Beginning of Period 89.9 91.3
------- ---------
Cash and Cash Equivalents at End of Period $ 108.6 $ 143.1
======= =========
The accompanying notes are an integral part of this statement.
KERR-McGEE CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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.
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
and becomes determinable (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 $8.3 and $17.6 million for the second quarter and first six
months of 2002, respectively, 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. In
January 2003, the company announced its plan to close the synthetic rutile
plant in Mobile, Alabama, and closed the plant in June 2003. Since the
plant had a determinate closure date, the company accrued an abandonment
liability of $17.6 million as of January 1, 2003, associated with its plans
to decommission the Mobile facility.
A summary of the changes in the asset retirement obligation during the
first six months of 2003 is included in the table below.
(Millions of dollars)
---------------------------------------------------------------------------
January 1, 2003 $395.6
Obligations incurred 6.8
Accretion expense 12.5
Abandonment expenditures (9.4)
Abandonment obligations settled through property divestitures (12.0)
------
June 30, 2003 $393.5
======
Pro forma net loss for the three months ended June 30, 2002, would have
been $60 million, with basic and diluted loss per share of $.60, if the
provisions of FAS 143 had been applied as of January 1, 2002, compared with
net income for the three months ended June 30, 2003, of $69.6 million, with
basic and diluted earnings per share of $.70 and $.68, respectively. Pro
forma net loss for the six months ended June 30, 2002, would have been
$56.5 million, with basic and diluted loss per share of $.56, if the
provisions of FAS 143 had been applied as of January 1, 2002, compared with
net income for the six months ended June 30, 2003, of $174.2 million before
the cumulative effect of change in accounting principle, with basic and
diluted earnings per share of $1.73 and $1.67, 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 as if the company had applied the fair-value recognition provisions
of FAS 123 to stock-based employee compensation.
Three Six
Months Ended Months Ended
June 30, June 30,
(Millions of dollars, --------------- ----------------
except per share amounts) 2003 2002 2003 2002
------------------------------------------------------------------------------------------------------------
Net income (loss) as reported $69.6 $(58.0) $139.5 $(52.5)
Less stock-based compensation expense
determined using a fair-value method for
all awards, net of taxes (4.1) (3.7) (8.1) (7.0)
----- ------ ------ ------
Pro forma net income (loss) $65.5 $(61.7) $131.4 $(59.5)
===== ====== ====== ======
Net income (loss) per share -
Basic -
As reported $ .70 $ (.58) $ 1.39 $ (.52)
Pro forma .65 (.61) 1.31 (.59)
Diluted -
As reported .68 (.58) 1.36 (.52)
Pro forma .64 (.61) 1.28 (.59)
Goodwill and Intangible Assets
------------------------------
In accordance with FAS 142, "Goodwill and Other Intangible Assets," which
the company adopted on January 1, 2002, goodwill and certain
indefinite-lived intangibles are not amortized but are reviewed annually
for impairment, or more frequently if impairment indicators arise. The
annual test for impairment was completed in the second quarter of 2003,
with no impairment indicated for the $356.4 million of goodwill or the
$53.8 million of indefinite-lived intangible assets.
New Accounting Standards
------------------------
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities - an Interpretation of ARB No. 51." For variable interest
entities in existence as of February 1, 2003, FIN 46 requires consolidation
by the primary beneficiary in the interim period beginning after June 15,
2003. In accordance with the provisions of FIN 46, the company believes it
will be required to consolidate the business trust created to construct and
finance the Gunnison production platform. The construction is being
financed by a synthetic lease credit facility between the trust and groups
of financial institutions for up to $157 million, with the company making
lease payments sufficient to pay interest on the financing. Consolidation
of the financing trust will occur in the period beginning July 1, 2003, and
the trust is expected to remain subject to consolidation through December
31, 2003. Completion of the Gunnison platform is expected to occur in the
first quarter of 2004, at which time the company plans to convert the
Gunnison synthetic lease to an operating lease and a different trust will
become the lessor/owner of the platform and related equipment. Upon
conversion to an operating lease, the company believes the variable
interest entity lessor will not be subject to consolidation. The company is
in the process of reviewing the effects of FIN 46 relative to its other
relationships with possible variable interest entities, such as the lessor
trusts that are party to the Nansen and Boomvang operating leases and
certain joint-venture arrangements, and does not presently believe that
consolidation of these entities is required.
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, collars and basis contracts 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
the 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.
Kerr-McGee Rocky Mountain Corp. and its marketing subsidiary, Kerr-McGee
Energy Services Corp., are 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 2002, the company designated the remaining
portion of the gas basis swaps that settled in 2002 and all that settle in
2003 as hedges.
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 June 30, 2003, the outstanding
commodity-related derivatives accounted for as hedges had a net liability
fair value of $135.5 million, of which $4.9 million was recorded in current
assets and $140.4 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 $83.1 million and $50.3 million in accumulated other
comprehensive loss associated with these contracts at June 30, 2003 and
December 31, 2002, respectively. The company expects to reclassify the
entire amount of these losses into earnings during the next six months,
assuming no further changes in fair-market value of the contracts. During
the second quarter of 2003, the company realized pretax losses on contract
settlements of $9.2 million on domestic oil hedging, $4 million on North
Sea oil hedging and $36.7 million on domestic natural gas hedging. During
the first six months of 2003, the company realized pretax losses on
contract settlements of $42 million on domestic oil hedging, $32.5 million
on North Sea oil hedging and $92.1 million on domestic natural gas hedging.
During the second quarter and first six months of 2002, the company
realized pre-tax losses on contract settlements of $5.9 million on domestic
oil hedging, $12.4 million on North Sea oil hedging and $3.3 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 physical sale of crude oil and
natural gas at prices higher than those in the derivative contracts is
offset by the losses realized on the contract settlements. Losses for hedge
ineffectiveness are recognized as a reduction to Sales in the Consolidated
Statement of Operations and totaled $.1 million and $3.7 million in the
2003 second quarter and first six months, respectively, and nil and $.1
million in the 2002 second quarter and first six months, respectively.
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 June 30, 2003, the
fair value of these contracts was $21.7 million. Of this amount, $12.6
million was recorded in current assets, $15.5 million in Investments and
Other Assets, $5.2 million in current liabilities, and $1.2 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 $2.9 million for the three
months ended June 30, 2003, of which $1.1 million was recorded as a gain in
Sales in the Consolidated Statement of Operations and $4 million was
recorded as a loss in Other Income. The net loss associated with the
derivative contracts was $16.2 million for the six months ended June 30,
2003, of which a $9.7 million loss was included in Sales in the
Consolidated Statement of Operations and a $6.5 million loss was included
in Other Income. The net loss associated with the derivative contracts
totaled $2.3 million in the second quarter of 2002, of which $1.6 million
was included in Sales and $.7 million was included in Other Income, and
$27.2 million in the first six months of 2002, of which $10.8 million was
included in Sales and $16.4 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 June 30, 2003, the outstanding foreign exchange derivative contracts
accounted for as hedges had a net asset fair value of $20 million, of which
$16.2 million was recorded in current assets and $3.8 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 June 30,
2003, the company had an after-tax deferred gain of $11.9 million in
accumulated other comprehensive loss related to these contracts. During the
second quarter and first six months of 2003, the company reclassified $3.7
million and $5 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 June 30, 2003, approximately $9.2 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 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 rates. The estimated fair
value of these contracts was not material at June 30, 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% debt 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 June 30, 2003, the fair values of the embedded put and call
options were nil and $124.7 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 second quarter of 2003, the company
recorded a loss of $41.9 million in Other Income for the changes in the
fair values of the put and call options, compared with a gain of $.1
million during the second quarter of 2002. During the first six months of
2003 and 2002, the company recorded losses of $58.1 million and $74.2
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
decrease 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 $450.5 million at June 30, 2003, and $387.2 million
at December 31, 2002. During the second quarter of 2003 and 2002, the
company recorded unrealized gains of $43.7 million and $8.5 million,
respectively, in Other Income for the changes in fair value of the Devon
shares classified as trading. During the first six months of 2003 and 2002,
the company recorded unrealized gains of $63.3 million and $89.7 million,
respectively, in Other Income for the changes in fair value of the Devon
shares classified as trading. The company accounts for the remaining 15% of
the Devon shares 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
loss.
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 $21.2
million and $20.6 million at June 30, 2003 and December 31, 2002,
respectively. The company recognized a reduction in interest expense from
the swap arrangement of $2.8 million and $5.5 million in the three and six
months ended June 30, 2003, respectively, and $1.8 million in the three and
six months ended June 30, 2002.
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, 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 in 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. In
connection with the planned disposals, the related assets were evaluated
and an impairment loss was recorded during the second quarter of 2002 for
the Kazakhstan operations, calculated as the difference between the
estimated sales price for the operation, less costs to sell, and the
company's carrying value of the assets. This impairment loss totaled $24.7
million and is reported as part of discontinued operations in the second
quarter of 2002.
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. 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 an $11 million contingent purchase price pending government
approval of an LPG project. The sale resulted in a pretax gain of $73.3
million (excluding the contingent purchase price). On March 31, 2003, the
company completed the sale of its Kazakhstan operations to Shell Kazakhstan
Development (Shell) for $168.6 million in cash. In connection with this
sale, the company has recorded an $18.3 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 third quarter of 2003. The net proceeds received by the company for
these divestitures were used to reduce outstanding debt.
Revenues applicable to the discontinued operations were nil and $10 million
for the three months ended June 30, 2003 and 2002, respectively, and $5.6
million and $25.2 million for the six months ended June 30, 2003 and 2002,
respectively. Pretax income for the discontinued operations was nil and
$90.6 million (including the gains on sale of $108.1 million and the
impairment loss of $24.7 million) for the three months ended June 30, 2003
and 2002, respectively, and $.4 million (including impairment losses of
$6.2 million) and $102.4 million (including the gains on sale of $108.1
million and the impairment loss of $24.7 million) for the six months ended
June 30, 2003 and 2002, respectively.
As part of the company's plan to divest noncore properties discussed above,
certain individually insignificant exploration and production segment
assets for which operations and cash flows were not clearly distinguishable
from the company's operations were identified for disposal and classified
as held for sale. Pretax asset impairment charges (credits) related to
certain assets held for sale in the U.S. onshore, Gulf of Mexico shelf and
U.K. North Sea regions totaled $(.3) million and $8.5 million during the
second quarter and first six months of 2003, respectively. The impairment
charges on assets held for sale for the three and six months ended June 30,
2002, totaled $146.6 million and included $110.6 million related to certain
domestic properties and $36 million related to certain North Sea
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 during
the six months ended June 30, 2003, for certain mature company-operated
properties and nonoperated royalty interests that are not considered held
for sale. For the three and six months ended June 30, 2002, pretax
impairment losses totaled $10.9 million on assets not considered held for
sale. This impairment loss was related to a field located in the northwest
area of the North Sea that was deemed impaired because expectations of
future cash flows were less than the carrying value of the related assets.
The company recognized a net gain on disposal of assets held for sale of
$14.2 million during the first six months of 2003, which is netted with
total asset impairment charges of $13.6 million in the Consolidated
Statement of Operations. No gain or loss on disposal of assets held for
sale was recognized in the first six months 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:
Six Months Ended
June 30,
-----------------------
(Millions of dollars) 2003 2002
---------------------------------------------------------------------------
Income tax payments $ 64.9 $ 48.9
Less refunds received (14.8) (253.4)
------ -------
Net income tax payments (refunds) $ 50.1 $(204.5)
====== =======
Interest payments $119.0 $ 128.6
====== =======
Noncash items affecting net income included in the reconciliation of net
income to net cash provided by operating activities include the following:
Six Months Ended
June 30,
------------------
(Millions of dollars) 2003 2002
---------------------------------------------------------------------------
Unrealized gain on trading securities $(63.3) $(89.7)
Increase in fair value of embedded options in the DECS 58.1 74.2
Litigation reserve provisions 6.5 70.0
Loss from equity affiliates 12.8 15.7
All other (1) 57.7 38.9
------ ------
Total $ 71.8 $109.1
====== ======
Other net cash provided by (used in) operating activities in the
Consolidated Statement of Cash Flows consists of the following:
Six Months Ended
June 30,
-------------------
(Millions of dollars) 2003 2002
---------------------------------------------------------------------------
Increase (decrease) due to changes in working
capital accounts $ (83.7) $255.9
Environmental expenditures (36.4) (48.9)
Cash abandonment expenditures - exploration and
production (9.4) (28.1)
All other (1) (15.2) (14.2)
------- ------
Total $(144.7) $164.7
======= ======
(1) No other individual item is material to total cash flows from
operations.
E. Comprehensive Income and Financial Instruments
Comprehensive income (loss) for the three and six months ended June 30,
2003 and 2002, is as follows:
Three Months Six Months
Ended Ended
June 30, June 30,
---------------- ------------------
(Millions of dollars) 2003 2002 2003 2002
--------------------------------------------------------------------------------------------------------------
Net income (loss) $69.6 $(58.0) $139.5 $(52.5)
Unrealized gains on securities 5.1 1.0 7.4 10.5
Change in fair value of cash flow hedges 1.9 43.0 (13.7) (25.2)
Foreign currency translation adjustment 17.1 37.5 28.0 30.9
Other - - 0.8 -
----- ------ ------ -------
Comprehensive income (loss) $93.7 $ 23.5 $162.0 $(36.3)
===== ====== ====== ======
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, 2003 or
December 31, 2002. At June 30, 2003 and December 31, 2002,
available-for-sale securities for which fair value can be determined were
as follows:
June 30, 2003 December 31, 2002
------------------------------- ------------------------------
Gross Gross
Unrealized Unrealized
Fair Holding Fair Holding
(Millions of dollars) Value Cost Gain Value Cost Gain
------------------------------------------------------------------------------------------------------------
Equity securities $81.1 $31.9 $21.2 (1) $69.7 $31.9 $9.8 (1)
U.S. government obligations -
Maturing within one year 3.8 3.8 - 2.4 2.4 -
Maturing between one year
and four years .1 .1 - 1.6 1.6 -
----- ----
Total $21.2 $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 $120.9 million at June 30, 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 $6.7 million and $4.6 million for the three months
ended June 30, 2003 and 2002, respectively. For the first six months of
2003, the loss in equity affiliates totaled $12.8 million, compared with
$15.7 million for the same 2002 period.
G. Restructuring Provisions and Exit Activities
The company closed its synthetic rutile plant in Mobile, Alabama, during
June 2003. During the second quarter and first six months of 2003, the
company's chemical - pigment operating unit provided $8.1 million and $24.6
million for costs associated with the closure of this facility. Included in
the $24.6 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 $10.5 million for the accrual of severance
benefits. The provision for severance benefits is included in the
restructuring reserve balance below (see Note A for a discussion of the
asset retirement obligation). Of the total provision of $10.5 million, $4.3
million has been paid through the 2003 second quarter and $6.2 million
remained in the accrual at June 30, 2003. Approximately 140 employees will
ultimately be terminated in connection with this plant closure.
Additionally, during the first six months of 2003, the company recognized
$15.1 million in accelerated depreciation on the plant assets, $6.1 million
for curtailment costs related to pension and postretirement benefits, $3.9
million for cleanup and decommissioning costs associated with the plant,
and $.7 million for other settlement costs.
During 2002, the company's chemical - other operating unit provided $16.5
million for costs associated with its plans to exit the forest products
business, of which nil was recorded in the second quarter of 2002 and $.7
million was recorded during the first six months of 2002. During the first
half of 2003, the company provided an additional $3.6 million associated
with exiting the forest products business. Included in the total provision
of $20.1 million were $15.6 million for dismantlement and closure costs,
and $4.5 million for severance costs. These costs are reflected in costs
and operating expenses in the Consolidated Statement of Operations. Of the
total accrual, $2.3 million has been paid through the 2003 second quarter
and $17.8 million remained in the accrual at June 30, 2003. In connection
with the plant closures, 252 employees will be terminated, of which 52 were
terminated as of June 30, 2003. Additionally, during the first six months
of 2003, the company recognized $8.1 million for curtailment costs related
to pension and postretirement benefits.
In 2001, the company's chemical - pigment operating unit provided $31.8
million related to the closure of a plant in Antwerp, Belgium. The
provision consisted of $12 million for severance costs, $11.5 million for
dismantlement costs, $6.7 million for contract settlement costs and $1.6
million for other plant closure costs. Of this total accrual, $26.8 million
has been paid through the 2003 second quarter and $6.6 million remained in
the accrual at June 30, 2003. As a result of this plant closure, 121
employees have been terminated as of June 30, 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. The provision consisted of $6.6 million
for pond-closure cost, $2.4 million for severance costs and $2.9 million
for other plant closure costs. Of the total provision, $10.5 million has
been paid through the 2003 second quarter and $1.4 million remained in the
accrual at June 30, 2003, for pond closure costs.
The provisions, payments, adjustments and restructuring reserve balances
for the six-month period ended June 30, 2003, are included in the table
below.
Dismantlement
Personnel and
(Millions of dollars) Total Costs Closure
---------------------------------------------------------------------------
December 31, 2002 $26.6 $ 3.8 $22.8
Provisions 14.1 14.1 -
Payments (8.3) (5.9) (2.4)
Adjustments (1) (.4) (.5) .1
----- ----- -----
June 30, 2003 $32.0 $11.5 $20.5
===== ===== =====
(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 and
six-month periods ended June 30, 2003 and 2002.
For the Three Months Ended June 30,
---------------------------------------------------------------------------------
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 $69.8 100.1 $ .70 $(177.7) 100.3 $(1.77)
===== ======
Effect of dilutive securities:
5 1/4% convertible
debentures 5.3 9.8 - -
Restricted stock - .7 - -
Stock options - .1 - -
----- ----- ------- -----
Diluted EPS $75.1 110.7 $ .68 $(177.7) 100.3 $(1.77)
===== ===== ===== ======= ===== ======
For the Six Months Ended June 30,
---------------------------------------------------------------------------------
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 $174.0 100.1 $1.73 $(179.4) 100.3 $(1.79)
===== ======
Effect of dilutive securities:
5 1/4% convertible
debentures 10.7 9.8 - -
Restricted stock - .7 - -
------ ----- ------- -----
Diluted EPS $184.7 110.6 $1.67 $(179.4) 100.3 $(1.79)
====== ===== ===== ======= ===== ======
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. Under the existing program, the company retained servicing
responsibilities and subordinated interests and receives 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 $155.7 million and $151.7 million of its pigment
receivables during the second quarter of 2003 and 2002, respectively. The
sale of the receivables resulted in pretax losses of $1 million and $1.2
million during the second quarter of 2003 and 2002, respectively. The
company sold $312.5 million and $285.9 million of its pigment receivables
during the first six months of 2003 and 2002, respectively. The sale of the
receivables resulted in pretax losses of $2.1 million and $2.2 million
during the first six months of 2003 and 2002, 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
$108 million at June 30, 2003, and $110.6 million at December 31, 2002.
On July 30, 2003, the company amended its existing accounts receivable
monetization program. The new program has been expanded to include the sale
of receivables originated by the company's European chemical operations and
the maximum availability under the program is $165 million.
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
June 30, 2003 and December 31, 2002, and its predecessor, Kerr-McGee
Operating Corporation, at June 30, 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 June 30, 2003
Non-
Kerr-McGee Guarantor Guarantor
(Millions of dollars) Corporation Subsidiaries Subsidiaries Eliminations Consolidated
- ----------------------------------------------------------------------------------------------------------------------------
Sales $ - $169.3 $908.7 $ (4.3) $1,073.7
------ ------ ------ ------ --------
Costs and Expenses
Costs and operating expenses - 82.1 382.7 (4.6) 460.2
Selling, general and administrative expenses - 3.0 76.1 - 79.1
Shipping and handling expenses - 2.1 32.9 - 35.0
Depreciation and depletion - 30.4 162.6 - 193.0
Accretion expense - .6 5.7 - 6.3
Asset impairments, net of gains on disposal of
assets held for sale - 1.7 (2.2) - (.5)
Exploration, including dry holes and
amortization of undeveloped leases - 2.9 63.7 - 66.6
Taxes, other than income taxes .1 3.2 17.7 - 21.0
Provision for environmental remediation
and restoration, net of reimbursements - .7 1.2 - 1.9
Interest and debt expense 28.8 8.3 70.0 (43.7) 63.4
------ ------ ------ ------ --------
Total Costs and Expenses 28.9 135.0 810.4 (48.3) 926.0
------ ------ ------ ------ --------
(28.9) 34.3 98.3 44.0 147.7
Other Income (Expense) 149.7 (25.8) 14.7 (165.5) (26.9)
------ ------ ------ ------ --------
Income before Income Taxes 120.8 8.5 113.0 (121.5) 120.8
Benefit (Provision) for Income Taxes (51.2) 1.4 (45.9) 44.7 (51.0)
------ ------ ------ ------ --------
Income from Continuing Operations 69.6 9.9 67.1 (76.8) 69.8
Income (Loss) from Discontinued Operations,
net of tax - .4 (.6) - (.2)
------ ------ ------ ------ --------
Net Income $ 69.6 $ 10.3 $ 66.5 $(76.8) $ 69.6
====== ====== ====== ====== ========
Kerr-McGee Corporation and Subsidiaries
Condensed Consolidating Statement of Operations
For the Three Months Ended June 30, 2002
Non-
Kerr-McGee Guarantor Guarantor
(Millions of dollars) Corporation Subsidiaries Subsidiaries Eliminations Consolidated
- ----------------------------------------------------------------------------------------------------------------------------
Sales $ - $ 81.0 $ 851.0 $ - $ 932.0
------ ------ -------- ------ --------
Costs and Expenses
Costs and operating expenses - 21.0 355.6 - 376.6
Selling, general and administrative expenses - .9 120.7 - 121.6
Shipping and handling expenses - (.4) 25.5 - 25.1
Depreciation and depletion - 30.5 165.4 - 195.9
Asset impairments - 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 - 2.5 25.7 - 28.2
Provision for environmental remediation
and restoration, net of reimbursements - - 88.0 - 88.0
Interest and debt expense 28.1 8.7 83.8 (52.0) 68.6
------ ------ -------- ------ --------
Total Costs and Expenses 28.1 69.6 1,062.6 (52.0) 1,108.3
------ ------ -------- ------ --------
(28.1) 11.4 (211.6) 52.0 (176.3)
Other Income (Expense) (71.6) 38.9 18.4 .2 (14.1)
------ ------ -------- ------ --------
Income (Loss) before Income Taxes (99.7) 50.3 (193.2) 52.2 (190.4)
Benefit (Provision) for Income Taxes 41.7 (18.6) 15.0 (25.4) 12.7
------ ------ -------- ------ --------
Income (Loss) from Continuing Operations (58.0) 31.7 (178.2) 26.8 (177.7)
Income from Discontinued Operations,
net of tax - - 119.7 - 119.7
------ ------ -------- ------ --------
Net Income (Loss) $(58.0) $ 31.7 $ (58.5) $ 26.8 $ (58.0)
====== ====== ======== ====== ========
Kerr-McGee Corporation and Subsidiaries
Condensed Consolidating Statement of Operations
For the Six Months Ended June 30, 2003
Non-
Kerr-McGee Guarantor Guarantor
(Millions of dollars) Corporation Subsidiaries Subsidiaries Eliminations Consolidated
- ----------------------------------------------------------------------------------------------------------------------------
Sales $ - $323.1 $1,884.2 $ (6.4) $2,200.9
------ ------ -------- ------- --------
Costs and Expenses
Costs and operating expenses - 153.6 725.8 (7.2) 872.2
Selling, general and administrative expenses - 10.1 139.9 - 150.0
Shipping and handling expenses - 4.7 62.3 - 67.0
Depreciation and depletion - 60.3 322.3 - 382.6
Accretion expense - 1.2 11.3 - 12.5
Asset impairments, net of gains on disposal of
assets held for sale - 1.7 (2.3) - (.6)
Exploration, including dry holes and
amortization of undeveloped leases - 6.8 200.3 - 207.1
Taxes, other than income taxes .2 8.7 37.5 - 46.4
Provision for environmental remediation
and restoration, net of reimbursements - 5.8 13.4 - 19.2
Interest and debt expense 57.7 16.6 142.9 (88.8) 128.4
------ ------ -------- ------- --------
Total Costs and Expenses 57.9 269.5 1,653.4 (96.0) 1,884.8
------ ------ -------- ------- --------
(57.9) 53.6 230.8 89.6 316.1
Other Income (Expense) 296.3 (25.2) 44.6 (340.9) (25.2)
------ ------ -------- ------- --------
Income before Income Taxes 238.4 28.4 275.4 (251.3) 290.9
Provision for Income Taxes (98.9) (2.8) (107.1) 91.9 (116.9)
------ ------ -------- ------- --------
Income from Continuing Operations 139.5 25.6 168.3 (159.4) 174.0
Income (Loss) from Discontinued Operations,
net of tax - 12.4 (12.2) - .2
Cumulative Effect of Change in Accounting
Principle, net of tax - (1.3) (33.4) - (34.7)
------ ------ -------- ------- --------
Net Income $139.5 $ 36.7 $ 122.7 $(159.4) $ 139.5
====== ====== ======== ======= ========
Kerr-McGee Corporation and Subsidiaries
Condensed Consolidating Statement of Operations
For the Six Months Ended June 30, 2002
Non-
Kerr-McGee Guarantor Guarantor
(Millions of dollars) Corporation Subsidiaries Subsidiaries Eliminations Consolidated
- ----------------------------------------------------------------------------------------------------------------------------
Sales $ - $160.1 $1,570.4 $ - $1,730.5
------ ------ -------- ------- --------
Costs and Expenses
Costs and operating expenses - 47.7 678.6 - 726.3
Selling, general and administrative expenses - 1.6 175.5 - 177.1
Shipping and handling expenses - 2.6 51.6 - 54.2
Depreciation and depletion - 61.3 347.1 - 408.4
Asset impairments - 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 .1 7.3 47.2 - 54.6
Provision for environmental remediation
and restoration, net of reimbursements - - 90.4 - 90.4
Interest and debt expense 55.1 17.5 167.7 (101.0) 139.3
------ ------ -------- ------- --------
Total Costs and Expenses 55.2 146.4 1,785.9 (101.0) 1,886.5
------ ------ -------- ------- --------
(55.2) 13.7 (215.5) 101.0 (156.0)
Other Income (Expense) (36.3) 7.9 41.6 (51.1) (37.9)
------ ------ -------- ------- --------
Income (Loss) before Income Taxes (91.5) 21.6 (173.9) 49.9 (193.9)
Benefit (Provision) for Income Taxes 39.0 (12.5) 7.5 (19.5) 14.5
------ ------ -------- ------- --------
Income (Loss) from Continuing Operations (52.5) 9.1 (166.4) 30.4 (179.4)
Income from Discontinued Operations,
net of tax - - 126.9 - 126.9
------ ------ -------- ------- --------
Net Income (Loss) $(52.5) $ 9.1 $ (39.5) $ 30.4 $ (52.5)
====== ====== ======== ======= ========
Kerr-McGee Corporation and Subsidiaries
Condensed Consolidating Balance Sheet
June 30, 2003
Non-
Kerr-McGee Guarantor Guarantor
(Millions of dollars) Corporation Subsidiaries Subsidiaries Eliminations Consolidated
- ----------------------------------------------------------------------- ------------- --------------------------------------
ASSETS
- ------
Current Assets
Cash $ 2.1 $ - $ 106.5 $ - $ 108.6
Intercompany receivables 857.1 (7.6) 1,320.1 (2,169.6) -
Accounts receivable - 101.6 522.2 - 623.8
Inventories - 6.6 394.3 - 400.9
Deposits, prepaid expenses and other assets - 20.0 86.5 - 106.5
-------- -------- -------- --------- --------
Total Current Assets 859.2 120.6 2,429.6 (2,169.6) 1,239.8
Property, Plant and Equipment, net - 1,976.3 5,266.8 - 7,243.1
Investments and Other Assets 11.0 90.9 1,068.3 (79.0) 1,091.2
Goodwill - 346.4 10.0 - 356.4
Long-term Assets Associated with Properties
Held for Disposal - - 27.7 4.9 32.6
Investments in and Advances to Subsidiaries 3,874.0 384.9 93.5 (4,352.4) -
-------- -------- -------- --------- --------
Total Assets $4,744.2 $2,919.1 $8,895.9 $(6,596.1) $9,963.1
======== ======== ======== ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities
Accounts payable $ 45.4 $ 55.9 $ 566.8 $ - $ 668.1
Intercompany borrowings 61.2 538.6 1,506.8 (2,106.6) -
Long-term debt due within one year - - 204.8 - 204.8
Other current liabilities 25.0 146.8 509.1 - 680.9
Current liabilities associated with
properties held for disposal - - 18.3 - 18.3
-------- -------- -------- --------- --------
Total Current Liabilities 131.6 741.3 2,805.8 (2,106.6) 1,572.1
Long-Term Debt 1,847.3 - 1,667.7 - 3,515.0
Other Deferred Credits and Reserves - 709.2 1,544.6 4.0 2,257.8
Investments by and Advances from Parent - - 537.0 (537.0) -
Stockholders' Equity 2,765.3 1,468.6 2,340.8 (3,956.5) 2,618.2
-------- -------- -------- --------- --------
Total Liabilities and Stockholders' Equity $4,744.2 $2,919.1 $8,895.9 $(6,596.1) $9,963.1
======== ======== ======== ========= ========
Kerr-McGee Corporation and Subsidiaries
Condensed Consolidating Balance Sheet
December 31, 2002
Non-
Kerr-McGee Guarantor 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 Six Months Ended June 30, 2003
Non-
Kerr-McGee Guarantor Guarantor
(Millions of dollars) Corporation Subsidiaries Subsidiaries Eliminations Consolidated
- ----------------------------------------------------------------------------------------------------------------------------
Operating Activities
- --------------------
Net income $ 139.5 $ 36.7 $ 122.7 $(159.4) $ 139.5
Adjustments to reconcile net income to net cash
provided by (used in) operating activities -
Depreciation, depletion and amortization - 62.5 357.4 - 419.9
Accretion expense - 1.2 11.3 - 12.5
Asset impairments, net of gains on
disposal of assets held for sale - - 5.6 - 5.6
Equity in (earnings) losses of subsidiaries (152.6) 31.9 - 120.7 -
Dry hole costs - - 128.2 - 128.2
Deferred income taxes - 50.8 30.0 - 80.8
Provision for environmental remediation
and restoration, net of reimbursements - 5.8 13.4 - 19.2
(Gain) loss on sale and retirement of
assets - (12.0) 9.4 - (2.6)
Cumulative effect of change in accounting
principle - 1.3 33.4 - 34.7
Noncash items affecting net income .9 26.6 44.3 - 71.8
Other net cash used in operating activities (7.4) (133.6) (3.7) - (144.7)
------- ------- ------- ------- --------
Net Cash Provided by (Used in)
Operating Activities (19.6) 71.2 752.0 (38.7) 764.9
------- ------- ------- ------- --------
Investing Activities
- --------------------
Capital expenditures - (61.2) (456.7) - (517.9)
Dry hole costs - - (128.2) - (128.2)
Proceeds from sales of assets - - - - -
Other investing activities - 7.1 174.0 - 181.1
------- -------- ------- ------- --------
Net Cash Used in Investing Activities - (54.1) (410.9) - (465.0)
------- ------- ------- ------- --------
Financing Activities
- --------------------
Issuance of long-term debt - - 31.5 - 31.5
Repayment of long-term debt - - (222.3) - (222.3)
Increase (decrease) in intercompany
notes payable 109.8 (17.1) (92.7) - -
Dividends paid (90.6) - (39.6) 39.6 (90.6)
Other financing activities - - .3 (.9) (.6)
------- ------- ------- ------- --------
Net Cash Provided by (Used in)
Financing Activities 19.2 (17.1) (322.8) 38.7 (282.0)
------- ------- ------- ------- --------
Effects of Exchange Rate Changes on Cash
and Cash Equivalents - - .8 - .8
------- ------- ------- ------- --------
Net Increase (Decrease) in Cash and Cash
Equivalents (.4) - 19.1 - 18.7
Cash and Cash Equivalents at Beginning of
Period 2.5 - 87.4 - 89.9
------- ------- ------- ------- --------
Cash and Cash Equivalents at End of Period $ 2.1 $ - $ 106.5 $ - $ 108.6
======= ======= ======= ======= ========
Kerr-McGee Corporation and Subsidiaries
Condensed Consolidating Statement of Cash Flows
For the Six Months Ended June 30, 2002
Non-
Kerr-McGee Guarantor Guarantor
(Millions of dollars) Corporation Subsidiaries Subsidiaries Eliminations Consolidated
- ----------------------------------------------------------------------------------------------------------------------------
Operating Activities
- --------------------
Net income (loss) $ (52.5) $ 9.1 $ (39.5) $ 30.4 $ (52.5)
Adjustments to reconcile net income or loss to
net cash provided by (used in) operating
activities -
Depreciation, depletion and amortization - 62.4 363.7 - 426.1
Asset impairments - 3.2 179.0 - 182.2
Equity in (earnings) losses of subsidiaries 40.8 (9.9) - (30.9) -
Dry hole costs - - 15.3 - 15.3
Deferred income taxes (6.3) (1.4) (92.4) - (100.1)
Provision for environmental remediation
and restoration, net of reimbursements - - 90.4 - 90.4
Gain on sale and retirement of assets - (1.0) (105.1) - (106.1)
Noncash items affecting net income or loss .1 16.2 92.8 - 109.1
Other net cash provided by (used in)
operating activities (.9) (3.3) 168.4 .5 164.7
------- ------ --------- ------ ---------
Net Cash Provided by (Used in)
Operating Activities (18.8) 75.3 672.6 - 729.1
------- ------ --------- ------ ---------
Investing Activities
- --------------------
Capital expenditures - (64.5) (561.5) - (626.0)
Dry hole costs - - (15.3) - (15.3)
Proceeds from sales of assets - 2.9 293.4 - 296.3
Other investing activities - - (25.9) - (25.9)
------- ------ --------- ------ ---------
Net Cash Used in Investing Activities - (61.6) (309.3) - (370.9)
------- ------- --------- ------ ---------
Financing Activities
- --------------------
Issuance of long-term debt 350.0 - 492.2 - 842.2
Repayment of long-term debt - - (1,047.9) - (1,047.9)
Increase (decrease) in short-term borrowings - - (8.2) - (8.2)
Increase (decrease) in intercompany
notes payable (245.9) (14.8) 260.7 - -
Issuance of common stock 4.9 - - - 4.9
Dividends paid (90.2) - - - (90.2)
------- ------ --------- ------ ---------
Net Cash Provided by (Used in)
Financing Activities 18.8 (14.8) (303.2) - (299.2)
------- ------ --------- ------ ---------
Effects of Exchange Rate Changes on Cash
and Cash Equivalents - - (7.2) - (7.2)
------- ------ --------- ------ ---------
Net Increase (Decrease) in Cash and Cash
Equivalents - (1.1) 52.9 - 51.8
Cash and Cash Equivalents at Beginning of
Period - 1.1 90.2 - 91.3
------- ------ --------- ------ ---------
Cash and Cash Equivalents at End of Period $ - $ - $ 143.1 $ - $ 143.1
======= ====== ========= ====== =========
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 Priorities 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 an extensive characterization of the two
sites and, at the request of EPA made in connection with its review of a
conceptual agreement with local governmental authorities on a cleanup plan,
Chemical is conducting limited additional characterization that is expected
to be finished in the next few months. 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 June 30, 2003, the company had remaining
reserves of $96 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 June 30, 2003, Chemical had been reimbursed
approximately $171 million under Title X.
Reimbursements under Title X are provided by congressional appropriations.
Historically, congressional appropriations have lagged Chemical's cleanup
expenditures. As of June 30, 2003, the government's share of costs incurred
by Chemical but not yet reimbursed by the DOE totaled approximately $100
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. The U.S. Navy expanded production significantly in 1953
when it completed construction of a plant for the manufacture of ammonium
perchlorate. 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 began decommissioning the facility and remediating associated
perchlorate contamination, including surface impoundments and groundwater
when it decided to exit the business in 1998. In 1999 and 2001, Chemical
entered into consent orders with the Nevada Division 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 - The company's remaining reserves for Henderson totaled
$40 million as of June 30, 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 is based on
the fact that 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 discovery stage. 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 June 30, 2003, Chemical has incurred expenditures of about $42
million that it believes can be applied to the self-insured retention. The
company believes that the remaining reserve of $40 million at June 30,
2003, also will qualify under the insurance policy, which would exhaust the
self-insured retention and leave about $21 million for recovery under the
policy. The company believes that reimbursement of the $21 million under
the insurance policy is probable and, accordingly, the company has recorded
a $21 million receivable in the financial statements.
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 June 30, 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. 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 June 30, 2003, the company had remaining reserves of $17 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; seven cases were filed in Louisiana and relate to a
former wood-treatment plant that was located in Bossier City, Louisiana;
and eight cases were filed in Pennsylvania, and relate to a closed
wood-treatment plant in Avoca, Pennsylvania. The parties have executed
agreements to settle five of the seven Mississippi cases, all seven of the
Louisiana cases and all eight Pennsylvania cases. The agreement to settle
the Pennsylvania cases was reached in the second quarter of 2003.
The settlement agreements require Chemical to pay up to $65 million for the
benefit of about 10,400 identified claimants who are eligible under the
agreements and who sign releases. 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 contemplate a
class-action settlement fund in Mississippi for the benefit of a class of
residents who do not sign individual releases and who do not choose to opt
out of the class settlements. Chemical may be required to pay up to a
maximum of $7.5 million to the Mississippi class-action settlement fund.
The class-action settlement agreement, including certification of the class
and approval of the settlement, was approved by the federal court in
Mississippi on February 21, 2003. However, two members of the class
subsequently appealed the order approving the class-action settlement, and
that appeal remains pending.
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 June 30, 2003, Chemical had paid approximately $49
million pursuant to the settlement agreements to Mississippi and Louisiana
claimants who signed releases. The timing of payments to the Pennsylvania
claimants will depend on when valid individual releases are received from
the approximately 1,000 identified claimants. No payments will be made to
the Mississippi class settlement fund unless and until the appellate court
has upheld the order approving the class-action settlement agreement.
The precise amount of Chemical's ultimate obligations under all the
foregoing agreements depends on the number of claimants who sign and
deliver valid individual releases, the outcome of the appeal of the order
approving the class-action settlement, the number of the Mississippi class
members whose proof of claim forms are approved by a court-appointed
administrator and the number of class members who opt out of the class.
Additionally, future 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 settlements with minors.
Although the settlement agreements are expected to resolve all of the
Louisiana and Pennsylvania 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, the claims by class members
that may arise in the future for currently unmanifested personal injuries,
or the claims of any class members if the court's order approving the
class-action settlement agreement is not ultimately upheld. The two cases
in Mississippi that are not covered by the settlement agreements together
involve 27 plaintiffs who allege property damage and/or personal injury
arising out of the Columbus, Mississippi, operations. The company is
vigorously defending those cases, pending any future settlement.
Insurance Litigation - In 2001, Chemical and its parent company filed suit
against two insurance carriers 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,
some or all 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
includes the estimated amounts owed under the settlements described above
and an estimated amount for the remaining two Mississippi cases. As noted
above, through June 30, 2003, Chemical had paid approximately $49 million
pursuant to the settlement agreements. As of June 30, 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 uncertainties described above.
Follow-on Litigation - 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.
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, relates to a former
wood-treatment plant located in Hattiesburg, Mississippi. A second lawsuit,
Pearlina Jones et al. v. Kerr-McGee Chemical Corporation, was filed in the
second quarter of 2003 in the Chancery Court of Forest County, Mississippi,
and relates to the same wood-treatment plant. The lawsuits seek recovery on
legal theories substantially similar to those advanced in the forest
products litigation described above.
In the second quarter of 2003, the parties agreed to settle the Bolton
lawsuit and Jones lawsuit. The settlement agreement requires Chemical to
pay up to $600,000 for the benefit of about 1,500 identified claimants who
sign releases. Although the settlement is expected to resolve most of the
claims in the two Hattiesburg lawsuits, the settlement will not resolve the
claims of plaintiffs who do not sign releases. The precise amount of
Chemical's obligation under the agreement depends on the number of
plaintiffs who sign and deliver valid individual releases. Of the potential
$600,000 obligation, approximately $200,000 had been paid as of June 30,
2003, and it is expected that the balance will be paid by the end of the
year.
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 June 30, 2003, the company had reserves totaling $264 million for
cleaning up and remediating environmental sites, reflecting the reasonably
estimable costs for addressing these sites. This includes $96 million for
the West Chicago sites, $40 million for the Henderson, Nevada, site and $42
million for forest products sites. Cumulative expenditures at all
environmental sites through June 30, 2003, total $1.060 billion (before
considering government reimbursements). Additionally, as of June 30, 2003,
the company had litigation reserves totaling approximately $60 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 second quarter and first six months of
2003 and 2002.
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- -----------------------
(Millions of dollars) 2003 2002 2003 2002
-----------------------------------------------------------------------------------------------------------------
Sales
Exploration and production $ 741.9 $ 614.6 $1,565.4 $1,149.2
Chemicals - Pigment 283.8 264.8 537.1 481.3
Chemicals - Other 48.0 52.4 98.3 99.8
-------- ------- -------- --------
1,073.7 931.8 2,200.8 1,730.3
All other - .2 .1 .2
-------- ------- -------- --------
Total Sales $1,073.7 $ 932.0 $2,200.9 $1,730.5
======== ======= ======== ========
Operating Profit (Loss)
Exploration and production $ 272.8 $ 44.0 $ 545.0 $ 162.7
Chemicals - Pigment (14.2) 13.3 (6.8) 1.8
Chemicals - Other (8.4) (1.1) (18.4) 2.5
-------- ------- -------- --------
Total Operating Profit 250.2 56.2 519.8 167.0
Other Expense (129.4) (246.6) (228.9) (360.9)
-------- ------- -------- --------
Income (Loss) from Continuing Operations
before Income Taxes 120.8 (190.4) 290.9 (193.9)
Benefit (Provision) for Income Taxes (51.0) 12.7 (116.9) 14.5
-------- ------- -------- --------
Income (Loss) from Continuing Operations 69.8 (177.7) 174.0 (179.4)
Discontinued Operations, Net of Income Taxes (.2) 119.7 .2 126.9
Cumulative Effect of Change in Accounting
Principle, Net of Income Taxes - - (34.7) -
-------- ------- -------- --------
Net Income (Loss) $ 69.6 $ (58.0) $ 139.5 $ (52.5)
======== ======= ======== ========
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Comparison of 2003 Results with 2002 Results
Second-quarter 2003 income from continuing operations totaled $69.8
million, compared with a loss of $177.7 million for the same 2002 period.
Income from continuing operations for the first six months of 2003 was $174
million, compared with a loss of $179.4 million for the comparable 2002
period. Net income for the 2003 second quarter was $69.6 million, compared
with a 2002 second-quarter net loss of $58 million. For the first six
months of 2003, net income was $139.5 million, compared with a net loss of
$52.5 million for the same 2002 period.
Second-quarter 2003 operating profit was $250.2 million, compared with
second-quarter 2002 operating profit of $56.2 million, an increase of $194
million. The increase was primarily due to lower asset impairments, higher
sales prices for crude oil and natural gas, and lower operating costs
within the exploration and production operating unit. While operating
results improved within the exploration and production business, operating
results for the chemical - pigment and chemical - other operating units
declined $27.5 million and $7.3 million, respectively. The chemical -
pigment operating unit experienced higher titanium dioxide pigment sales
prices over the prior-year quarter; however, higher pigment product costs
and shutdown provisions associated with the closure of the Mobile, Alabama,
synthetic rutile plant more than offset the increase in sales prices.
Operating results for the chemical - other operating unit were adversely
impacted by a shutdown provision for the forest products business,
partially offset by lower environmental costs related to the Henderson,
Nevada, facility. Operating profit for the first six months of 2003
increased $352.8 million over the same 2002 period, to $519.8 million from
$167 million. The increase in operating profit for the six-month period is
attributable to lower asset impairments, higher realized sales prices for
crude oil, natural gas and pigment, and lower operating costs within the
exploration and production unit, partially offset by the Mobile and forest
products shutdown provisions and higher pigment product costs. These
variances are discussed in more detail in the segment discussion that
follows.
Other expense for the second quarter of 2003 totaled $129.4 million,
compared with expense of $246.6 million in the same 2002 period, a $117.2
million decrease between periods. During the 2002 second quarter, a review
of the company's environmental remediation projects was completed,
resulting in additional reserves totaling $73.8 million being provided for
costs related to activities at former plant sites. Also, in the 2002 second
quarter, the company provided a $70 million litigation reserve for the
settlement of certain forest products litigation claims. These items,
together with lower net interest expense of $5.1 million, resulted in a
combined decrease of $148.9 million between periods, which was partially
offset by higher corporate general and administrative expense of $15.6
million, lower income from trading securities and nonoperating derivative
financial instruments of $10.2 million, and higher losses from equity
affiliates of $2.1 million. The increase in corporate general and
administrative costs resulted primarily from higher general liability
insurance costs of $4.9 million, higher retirement, deferred compensation
and incentive costs of $4.6 million and higher departmental costs of $4.4
million. Lower average outstanding debt balances and lower average interest
rates during the second quarter of 2003 as compared with the same quarter
in the prior year resulted in the $5.1 million decrease in net interest
expense. 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.
Other expense for the first six months of 2003 totaled $228.9 million,
compared with expense of $360.9 million in the same 2002 period, for a
decrease of $132 million between periods. The decrease resulted primarily
from lower environmental-related costs of $66.3 million, lower litigation
costs of $63.2 million, lower interest expense of $11.3 million, lower
losses on asset sales of $4.4 million, lower losses from equity affiliates
of $2.9 million, and lower foreign currency transaction losses of $2.5
million. These decreases were partially offset by higher corporate general
and administrative costs of $21.4 million between periods, consisting
primarily of higher general liability insurance costs of $8.4 million,
higher retirement, deferred compensation and incentive costs of $6.9
million, and higher departmental costs of $2.9 million.
Income tax expense for the second quarter of 2003 was $51 million, compared
with an income tax benefit of $12.7 million in the same 2002 period. For
the first six months of 2003, income tax expense was $116.9 million,
compared with an income tax benefit of $14.5 million in 2002. The income
tax benefit for both 2002 periods included a $55.3 million tax benefit
related to environmental provisions and litigation reserves, and included
$100.4 million for the reversal of U.K. deferred Petroleum Revenue Tax
benefits, which were not realizable when the company sold certain of its
northern North Sea properties. The remaining change was primarily due to
the company generating income in the 2003 second quarter and first six
months versus losses in the comparable 2002 periods. Additionally, on July
24, 2002, the U.K. 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
provision for income taxes for the second quarter and first six months of
2003 by $7.8 million and $19 million, respectively. 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 had a material effect on the company's earnings through
June 30, 2003.
Segment Operations
Exploration and Production -
Operating profit for the second quarter of 2003 was $272.8 million,
compared with $44 million for the same 2002 period. For the six months
ended June 30, 2003 and 2002, operating profit totaled $545 million and
$162.7 million, respectively, an increase of $382.3 million. The increase
in operating profit in both 2003 periods was primarily due to the impact of
oil and gas asset impairments in the 2002 second quarter, higher 2003
average realized crude oil and natural gas sales prices, and lower
production costs, partially offset by lower crude oil and natural gas sales
volumes and higher exploration expense resulting primarily from an increase
in dry hole costs. Including the effects of hedging, realized crude oil and
natural gas sales prices for the 2003 second quarter increased 13% and 45%,
respectively, over 2002 levels. For the first six months of 2003, realized
crude oil and natural gas sales prices increased 27% and 65%, respectively,
over the same 2002 period.
The company believes that tight crude oil and natural gas supplies have
caused oil and gas prices to increase significantly over prior-year levels.
Early in the 2003 second quarter, crude oil prices began to decline from
the first-quarter 2003 levels due to the short duration of the war in Iraq
and a perceived over-supply resulting from production increases by OPEC
before the war. However, prices remained strong throughout the 2003 second
quarter in comparison to the prior year due to subsequent output cuts by
OPEC and uncertainty regarding the timing of Iraq's ability to resume its
prewar production levels. The U.S. natural gas sector continues to
experience tight market conditions and strong prices as storage levels
remain at historically low levels.
Total revenues for the second quarter of 2003 increased $127.3 million to
$741.9 million from $614.6 million for the 2002 second quarter. The
increase resulted from higher oil and gas prices of $124.8 million and an
increase in other operating revenues of $77 million, partially offset by
lower crude oil sales volumes of $66.4 million and lower natural gas sales
volumes of $8.1 million. For the six months ended June 30, 2003, total
revenues increased $416.2 million to $1.565 billion from $1.149 billion in
2002. The increase resulted from higher oil and gas prices of $393.3
million, higher natural gas sales volumes of $1 million and an increase in
other operating revenues of $147.9 million, partially offset by lower crude
oil sales volumes of $126 million. The increase in other operating revenues
for both 2003 periods 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 is primarily due to the divestiture of
high-cost properties in Ecuador, the U.S. and U.K. North Sea regions during
2002 and the 2003 first quarter, partially offset by higher oil sales in
the Gulf of Mexico.
Operating costs totaled $469.1 million for the second quarter of 2003 and
$570.6 million for the second quarter of 2002, a decrease of $101.5
million. The decrease resulted primarily from lower asset impairment
charges of $158 million, lower oil and gas production costs of $38.3
million, and lower depreciation and depletion expense of $18.7 million,
offset by higher product, gas-gathering and pipeline costs of $74.6
million, higher exploration expense of $19.8 million, and accretion expense
of $6.3 million. As part of its strategic plan to divest noncore oil and
gas properties, certain domestic and North Sea assets classified as
held-for-sale properties were evaluated and deemed impaired during the
second quarter of 2002, resulting in prior year pretax impairment charges
of $157.5 million. 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. Production costs per barrel of oil
equivalent (BOE) dropped to $3.72 per BOE from $4.61 per BOE in the 2002
second quarter. Property divestitures were also the primary cause for the
drop in crude oil production volumes to 154,800 barrels per day from
189,300 barrels per day in the 2002 second quarter. Higher crude oil
production volumes from new projects in the Gulf of Mexico partially offset
the decrease between periods. The $74.6 million increase in product,
gas-gathering and pipeline costs is directly correlated to the $77 million
increase in other operating revenues discussed above, and resulted
primarily from higher product costs for natural gas marketing activities,
combined with higher volumes. Of the total increase in exploration expense,
$11 million was due to higher dry hole costs.
For the six months ended June 30, 2003, operating costs totaled $1.020
billion, compared with $986.5 million in the same 2002 period. The $33.9
million increase between periods resulted primarily from higher product,
gas-gathering and pipeline costs of $141.9 million, higher exploration
expense of $128.4 million and accretion expense of $12.5 million, partially
offset by lower asset impairment charges of $158.1 million (discussed
above), lower oil and gas production costs of $58.7 million, and lower
depreciation and depletion expense of $47.6 million. The $141.9 million
increase in product, gas-gathering and pipeline costs is directly
correlated to the $147.9 million increase in other operating revenues
discussed above, and resulted primarily from higher product costs for
natural gas marketing activities, combined with higher volumes. Higher dry
hole costs accounted for $112.9 million of the total increase in
exploration expense. Consistent with the 2003 second quarter, the decrease
in production costs and depreciation and depletion expense resulted from
lower production volumes between periods caused by the high-cost property
divestitures discussed above, which also favorably impacted production
costs through an overall improved cost structure. Crude oil production
volumes decreased to 160,100 barrels per day from 197,000 barrels per day
in the first six months of 2002.
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 2003 and 2002.
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ---------------------
2003 2002 2003 2002
-----------------------------------------------------------------------------------------------------------------
Crude oil and condensate sales
(thousands of bbls/day)
Domestic
Offshore 57.5 54.3 58.6 53.8
Onshore 20.7 29.4 21.0 29.3
North Sea 75.3 98.0 78.5 104.5
Other international 4.3 8.5 4.3 8.6
------ ------ ------ ------
Total continuing operations 157.8 190.2 162.4 196.2
Discontinued operations - 5.6 1.2 7.3
------ ------ ------ ------
Total 157.8 195.8 163.6 203.5
====== ====== ====== ======
Average crude oil sales price (per barrel) (a)
Domestic
Offshore $25.44 $22.19 $25.87 $20.23
Onshore 25.57 21.54 26.58 19.95
North Sea 24.96 22.74 26.06 21.08
Other international 27.42 23.82 29.24 20.34
Average for continuing operations 25.28 22.44 26.14 20.65
Discontinued operations $ - $21.35 $24.47 $19.42
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -------------------
2003 2002 2003 2002
--------------------------------------------------------------------------------------------------------------
Natural gas sold (MMcf/day)
Domestic
Offshore 275 253 280 248
Onshore 342 379 356 381
North Sea 80 99 93 100
----- ----- ----- -----
Total 697 731 729 729
===== ===== ===== =====
Average natural gas sales price (per Mcf) (a)
Domestic
Offshore $4.95 $3.32 $5.17 $2.91
Onshore 4.22 3.02 4.41 2.75
North Sea 2.37 1.81 2.92 2.32
Average $4.29 $2.96 $4.51 $2.74
(a) The effects of the company's hedging program during the second quarter
and first six months of 2003 and 2002 are included in the average sales
prices shown above. Losses on commodity hedges reduced the average
crude oil and condensate sales prices from continuing operations by
$.92 per barrel and $1.06 per barrel during the second quarter of 2003
and 2002, respectively, and reduced the average natural gas sales
prices by $.58 per Mcf and $.05 per Mcf during the second quarter of
2003 and 2002, respectively. During the first six months of 2003 and
2002, losses on commodity hedges reduced the average crude oil and
condensate sales prices from continuing operations by $2.53 per barrel
and $.51 per barrel, respectively, and the average natural gas sales
prices by $.70 per Mcf and $.03 per Mcf, respectively.
The company continues to review its options with respect to the Leadon
field, which was written down to estimated 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.
Given the uncertainty concerning possible outcomes, it is reasonably
possible that the company's estimate of future cash flows from the Leadon
field and associated fair value could change in the near term. If estimated
future cash flows or fair value decrease significantly, an additional
write-down of the Leadon field could occur in the future. As of June 30,
2003, the carrying value of the Leadon field assets totaled $379.1 million.
Chemicals - Pigment
Operating loss for the second quarter of 2003 was $14.2 million on revenues
of $283.8 million, compared with operating profit of $13.3 million on
revenues of $264.8 million for the same 2002 period. A net improvement in
the pigment sales price and volume mix of $31.7 million during the 2003
second quarter was more than offset by shutdown provisions for the Mobile,
Alabama, facility of $28.9 million; higher average product costs of $24.7
million; and higher selling and administrative costs of $4.5 million,
resulting in an operating loss for the second quarter of 2003 compared with
operating profit in 2002. For the first six months of 2003, operating loss
was $6.8 million on revenues of $537.1 million, compared with operating
profit of $1.8 million on revenues of $481.3 million in the comparable
prior-year period. The operating loss for the first six months of 2003
compared with a profit in the same period of 2002, was primarily due to
shutdown provisions for the Mobile facility totaling $36.3 million, higher
average product costs of $19.4 million, and higher selling and
administrative costs of $7.2 million, partially offset by an increase due
to an improved sales price and volume mix of $54.4 million over the 2002
six-month period. The second quarter and year-to-date shutdown provisions
for the Mobile operations included $6.1 million for curtailment costs
related to pension and postretirement benefits.
Revenues increased $19 million in the second quarter of 2003, of which
$41.3 million was due to higher average sales prices, partially offset by a
decrease of $22.3 million due to lower sales volumes. For the six months
ended June 30, 2003, revenues increased $55.8 million, or 12%, due to
higher average sales prices of $66.7 million, partially offset by lower
pigment sales volumes of $10.9 million. The higher average sales prices
were driven by stronger customer demand, which supported price increases
for pigment products throughout 2002 and into 2003. However, pigment sales
volumes decreased by 10,400 tonnes in the 2003 second quarter and by 4,100
tonnes for the first six months compared with prior-year levels, primarily
in the European sector.
In January 2003, Kerr-McGee announced its plans to close the Mobile,
Alabama, facility and the plant was closed in June 2003. This closure was
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 annual savings
of approximately $25 million to $30 million beginning in 2004.
Chemicals - Other
Operating loss in the 2003 second quarter was $8.4 million on revenues of
$48 million, compared with an operating loss of $1.1 million on revenues of
$52.4 million in the same 2002 period. Of the $7.3 million increase in the
operating loss, $11.9 million was attributable to lower operating results
from the forest products operations, partially offset by a $4.6 million
increase in operating results from the electrolytic operations due to the
impact of a $7 million environmental provision in the prior-year quarter.
The decrease in forest products operating profit was due primarily to
additional shutdown provisions of $8.8 million during the 2003 second
quarter, which included $8.1 million for curtailment costs related to
pension and postretirement benefits.
Operating loss for the six months ended June 30, 2003, was $18.4 million on
revenues of $98.3 million, compared with operating profit of $2.5 million
on revenues of $99.8 million in the same 2002 period. The $20.9 million
decrease in operating profit for the first six months of 2003 was primarily
due to lower operating results of $13.1 million from the forest products
operations (of which $8.8 million is due to the shutdown provisions
discussed above) and higher environmental costs of $4 million for
remediation of ammonium perchlorate related to the company's Henderson,
Nevada, operations (see Note K).
During the third quarter of 2003, Kerr-McGee Chemical LLC placed its
electrolytic manganese dioxide (EMD) manufacturing operation in Henderson,
Nevada, on standby to reduce inventory levels because of the harmful effect
of low-priced imports on the company's EMD business and the operation will
remain on standby indefinitely. In response to the pricing activities of
importing companies, Kerr-McGee Chemical LLC filed a petition for the
imposition of antidumping duties with the U.S. Department of Commerce
International Trade Administration and the U.S. International Trade
Commission on July 31, 2003. In its petition, the company alleges that
manufacturers in Australia, Greece, Ireland, Japan, South Africa, and the
People's Republic of China export EMD to the United States in violation of
the U.S. antidumping laws and requests that the U.S. Department of Commerce
apply substantial antidumping duties to the EMD imported from such
countries. The company is vigorously prosecuting the petition; however, the
outcome of the proceeding is uncertain. The company intends to resume EMD
manufacturing if and when competitiveness is restored.
Financial Condition
At June 30, 2003, the company's net working capital position was a negative
$332.3 million, compared with a negative $84.4 million at June 30, 2002,
and a negative $319.7 million at December 31, 2002. The current ratio was
.8 to 1 at both June 30, 2003 and December 31, 2002, compared with .9 to 1
at June 30, 2002. The negative working capital position at June 30, 2003,
is 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, 2003, compared with 60% at December 31, 2002, and 58% at
June 30, 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 June 30, 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
capacity of the company's commercial paper program totals $1.2 billion,
which can be issued based on market conditions. Long-term debt obligations
due within one year of $204.8 million consist primarily of $100 million, 8%
notes due October 15, 2003, and $100 million of floating rate notes due
June 28, 2004. The company expects to use internally generated cash flows
or its commercial paper program to fund the payment of these debt
maturities.
On July 30, 2003, the company amended its existing accounts receivable
monetization program. The new program has been expanded to include the sale
of receivables originated by the company's European chemical operations and
the maximum availability under the program is $165 million.
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, borrow under existing credit facilities
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 any gains or losses resulting from
changes in the fair value of the put and call options. At June 30, 2003,
the fair values of the embedded put and call options were nil and $124.7
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 second quarter of 2003, the company recorded a loss of $41.9
million in Other Income for the changes in the fair values of the put and
call options, compared with a gain of $.1 million during the second quarter
of 2002. During the first six months of 2003 and 2002, the company recorded
losses of $58.1 million and $74.2 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 $450.5
million at June 30, 2003, and $387.2 million at December 31, 2002. During
the second quarter of 2003 and 2002, the company recorded unrealized gains
of $43.7 million and $8.5 million, respectively, in Other Income for the
changes in fair value of the Devon shares classified as trading. During the
first six months of 2003 and 2002, the company recorded unrealized gains of
$63.3 million and $89.7 million, respectively, in Other Income for the
changes in fair value of the Devon shares classified as trading. The
company accounts for the remaining 15% of the Devon shares 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 $81.1 million at June
30, 2003, and $69.7 million at December 31, 2002.
Operating activities provided net cash of $764.9 million in the first six
months of 2003. Cash provided by operating activities and proceeds of
$195.9 million from exploration and production divestitures were sufficient
to fund the company's net reduction in long-term debt of $190.8 million,
capital expenditures (including dry hole costs) of $646.1 million, and
dividends of $90.6 million during the first six months of 2003.
Capital expenditures for the first six months of 2003, excluding dry hole
costs, totaled $517.9 million, compared with $626 million for the
comparable prior-year period. The decrease is largely attributable to lower
capital spending within the exploration and production operating unit in
the U.K. North Sea region during the first half of 2003 and prior-year
capital spending on discontinued operations, partially offset by higher
2003 spending in the Rocky Mountains and deepwater Gulf of Mexico as
compared to the prior year. 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 7% of the
2003 total, while chemical - other and corporate incurred the remaining 2%
of the year-to-date 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 $8.3 million and $17.6 million for the second quarter and first
six months of 2002, respectively, 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. In
January 2003, the company announced its plan to close the synthetic rutile
plant in Mobile, Alabama, and closed the plant in June 2003. Since the
plant had a determinate closure date, the company accrued an abandonment
liability of $17.6 million associated with its plans to decommission the
Mobile facility.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities - an Interpretation of ARB No. 51." For variable interest
entities in existence as of February 1, 2003, FIN 46 requires consolidation
by the primary beneficiary in the interim period beginning after June 15,
2003. In accordance with the provisions of FIN 46, the company believes it
will be required to consolidate the business trust created to construct and
finance the Gunnison production platform. The construction is being
financed by a synthetic lease credit facility between the trust and groups
of financial institutions for up to $157 million, with the company making
lease payments sufficient to pay interest on the financing. Consolidation
of the financing trust will occur in the period beginning July 1, 2003, and
the trust is expected to remain subject to consolidation through December
31, 2003. Completion of the Gunnison platform is expected to occur in the
first quarter of 2004, at which time the company plans to convert the
Gunnison synthetic lease to an operating lease and a different trust will
become the lessor/owner of the platform and related equipment. Upon
conversion to an operating lease, the company believes the variable
interest entity lessor will not be subject to consolidation. The company is
in the process of reviewing the effects of FIN 46 relative to its other
relationships with possible variable interest entities, such as the lessor
trusts that are party to the Nansen and Boomvang operating leases and
certain joint-venture arrangements, and does not presently believe that
consolidation of these entities is required.
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 capital projects
since hedging contracts fix the commodity prices to be received in the
future. At June 30, 2003, the company had outstanding contracts to hedge a
total of 8.2 million barrels of North Sea crude oil production, 6.4 million
barrels of domestic crude oil production and 69 MMBtu of domestic natural
gas production for the period from July through December 2003. The net
liability fair value of the hedge contracts outstanding at June 30, 2003,
was $25 million for North Sea crude oil, $23 million for domestic crude oil
and $87.5 million for domestic natural gas.
At June 30, 2003, the following commodity-related derivative contracts were
outstanding:
Daily Average
Contract Type (1) Period Volume Price
---------------------------------------------------------------------------
Natural Gas Hedges MMBtu $/MMBtu
------------------ ----- -------
Fixed-price swaps (NYMEX) 2003 310,000 $4.00
Costless collars (NYMEX) 2003 65,000 $3.50-$5.26
Basis swaps (Rockies) 2003 64,580 $0.36
Crude Oil Hedges Bbl $/Bbl
---------------- --- -----
Fixed-price swaps (WTI) Q3 - 2003 34,500 $25.99
Q4 - 2003 35,000 $26.01
Fixed-price swaps (Brent) Q3 - 2003 44,500 $24.99
Q4 - 2003 45,000 $25.04
Natural Gas (non-hedge contracts) MMBtu $/MMBtu
--------------------------------- ----- -------
Basis swaps (Rockies) 2004 35,000 $0.31
2005 35,000 $0.31
2006 35,000 $0.31
2007 35,000 $0.31
2008 20,000 $0.25
(1) These contracts may be subject to margin calls above certain limits
established with individual counterparty institutions.
Through August 4, 2003, the company added the following derivative
contracts and expanded its hedging program to cover a portion of its 2004
production.
Daily Average
Contract Type (1) Period Volume Price
---------------------------------------------------------------------------
Crude Oil Hedges Bbl $/Bbl
---------------- --- -----
Fixed-price swaps (WTI) 2004 3,500 $27.12
Fixed-price swaps (Brent) 2004 3,500 $25.81
Natural Gas (non-hedge contracts) MMBtu $/MMBtu
--------------------------------- ----- -------
Basis swaps (Rockies) Q3 - 2003 43,100 $0.94
Q4 - 2003 61,700 $0.80
Q1 - 2004 60,000 $0.72
(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 June 30, 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 June 30, 2003 -
Maturing in 2003 -
British pound sterling $76.6 1.5417 $82.8
Australian dollar 31.2 .5592 37.1
Euro (12.2) 1.1359 (12.3)
British pound sterling (.7) 1.5959 (.7)
Japanese yen (.6) .0085 (.6)
New Zealand dollar (.6) .5692 (.6)
Maturing in 2004 -
Australian dollar 37.7 .5366 45.6
Item 4. Controls and Procedures.
As of the end of the period covered by 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-15. Based on 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) In its Annual Report on Form 10-K, the Company reported that in December
2001, Kerr-McGee North Sea (U.K.) Limited received a notice of violation
of the Prevention of Oil Pollution Act 1971 and of the Merchant Shipping
(Oil Pollution Preparedness, Response and Cooperation Convention)
Regulations 1998 from authorities in Scotland. In the second quarter, the
notice of violation was resolved with the payment by Kerr-McGee North Sea
(U.K.) Limited of a fine of (pound)10,000 (ten thousand pounds sterling).
(b) For a discussion of other 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 4. Submission of Matters to a Vote of Security Holders.
(a) The 2003 annual meeting of stockholders was held on May 13, 2003.
(b) Directors elected at the 2003 annual meeting were the following:
Sylvia A. Earle
Martin C. Jischke
Leroy C. Richie
Directors whose term of office continues after the 2003 annual meeting
were the following:
William E. Bradford Luke R. Corbett
David C. Genever-Watling Farah M. Walters
Matthew R. Simmons Nicholas J. Sutton
Ian L. White-Thomson
(c) The following matters were voted upon at the 2003 annual meeting:
(1)Following are the directors elected at the 2003 annual meeting and
the tabulation of votes related to each nominee.
Votes
Affirmative Withheld
----------- --------
Sylvia A. Earle 87,325,790 2,096,079
Martin C. Jischke 87,293,842 2,128,027
Leroy C. Richie 87,315,787 2,106,082
(2)The stockholders ratified the appointment of Ernst & Young LLP as
independent public accountants for 2002. Affirmative votes were
87,750,516; negative votes were 1,147,799, and abstentions were
523,554.
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/A dated
June 18, 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.
31.1 Certification Pursuant to Securities Exchange Act Rule
15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification Pursuant to Securities Exchange Act Rule
15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 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 June 30, 2003:
o Current Report dated April 25, 2003, announcing a conference
call to discuss its first-quarter 2003 financial and operating
results, and expectations for the future.
o Current Report dated April 29, 2003, announcing a security
analyst meeting to discuss its financial and operating outlook
for 2003 and certain expectations for oil and natural gas
production volumes for the year 2003.
o Current Report dated April 30, 2003, announcing the company's
first-quarter 2003 earnings.
o Current Report dated April 30, 2003, announcing the company had
posted on its website a table containing a reconciliation of
GAAP to Adjusted Net Income for the year-to-date and quarterly
fiscal periods ended March 31, 2003.
o Current Report dated May 23, 2003, announcing a conference call
to discuss interim second-quarter 2003 financial and operating
activities, and expectations for the future.
o Current Report dated May 28, 2003, announcing a security
analyst meeting to discuss its financial and operating outlook
for 2003 and certain expectations for oil and natural gas
production volumes for the year 2003.
o Current Report dated June 20, 2003, announcing a conference
call to discuss interim second-quarter 2003 financial and
operating activities, and expectations for the future.
o Current Report dated June 25, 2003, announcing a security
analyst meeting to discuss its 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: August 5, 2003 By: /s/ John M. Rauh
-------------- -----------------------------
John M. Rauh
Vice President and Controller
and Chief Accounting Officer