UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ____ to ____
Commission File Number 1-16619
KERR-McGEE CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware 73-1612389
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
Kerr-McGee Center, Oklahoma City, Oklahoma 73125
(Address of Principal Executive Offices and Zip Code)
Registrant's telephone number, including area code (405) 270-1313
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Number of shares of common stock, $1.00 par value, outstanding as of April 30,
2004: 101,394,560.
KERR-McGEE CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements PAGE
----
Consolidated Statement of Income for the Three Months Ended
March 31, 2004 and 2003 1
Consolidated Balance Sheet at March 31, 2004 and December 31, 2003 2
Consolidated Statement of Cash Flows for the Three Months Ended
March 31, 2004 and 2003 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 28
Item 3. Quantitative and Qualitative Disclosures about Market Risk 34
Item 4. Controls and Procedures 36
Forward - Looking Information 36
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 37
Item 6. Exhibits and Reports on Form 8-K 37
SIGNATURE 39
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
KERR-McGEE CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
Three Months Ended
March 31,
---------------------
(Millions of dollars, except per-share amounts) 2004 2003
- --------------------------------------------------------------------------------
Revenues $1,116.3 $1,099.6
-------- --------
Costs and Expenses
Costs and operating expenses 403.0 384.4
Selling, general and administrative expenses 83.6 70.9
Shipping and handling expenses 37.7 32.0
Depreciation and depletion 190.3 189.6
Accretion expense 6.6 6.2
Impairments on assets held for use 13.2 5.1
Loss (gain) associated with assets held for sale 3.4 (5.2)
Exploration, including dry holes and
amortization of undeveloped leases 50.6 140.5
Taxes, other than income taxes 28.4 25.4
Provision for environmental remediation and
restoration, net of reimbursements (.8) 17.3
Interest and debt expense 57.0 65.0
-------- --------
Total Costs and Expenses 873.0 931.2
-------- --------
243.3 168.4
Other Income (Expense) (.3) 1.7
-------- --------
Income from Continuing Operations before Income Taxes 243.0 170.1
Provision for Income Taxes (90.8) (65.9)
-------- --------
Income from Continuing Operations 152.2 104.2
Income from Discontinued Operations (net of income
tax provision) - .4
Cumulative Effect of Change in Accounting Principle,
(net of tax benefit of $18.2) - (34.7)
-------- --------
Net Income $ 152.2 $ 69.9
======== ========
Income (Loss) per Common Share
Basic -
Continuing operations $ 1.52 $ 1.04
Cumulative effect of accounting change - (.34)
-------- --------
Total $ 1.52 $ .70
======== ========
Diluted -
Continuing operations $ 1.41 $ .99
Cumulative effect of accounting change - (.31)
-------- --------
Total $ 1.41 $ .68
======== ========
Dividends Declared per Common Share $ .45 $ .45
======== ========
The accompanying notes are an integral part of this statement.
KERR-McGEE CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
March 31, December 31,
(Millions of dollars) 2004 2003
- --------------------------------------------------------------------------------
ASSETS
- ------
Current Assets
Cash $ 143.5 $ 142.0
Accounts receivable 525.0 583.3
Inventories 411.9 393.4
Investment in equity securities 490.5 509.8
Deposits, prepaid expenses and other assets 119.4 127.6
Current assets associated with properties held
for disposal .4 .4
--------- ---------
Total Current Assets 1,690.7 1,756.5
--------- ---------
Property, Plant and Equipment 14,518.4 14,353.2
Less reserves for depreciation, depletion and
amortization (7,190.9) (6,886.1)
--------- ---------
7,327.5 7,467.1
--------- ---------
Investments and Other Assets 553.7 564.7
Goodwill 357.0 357.3
Long-Term Assets Associated with Properties Held
for Disposal 12.3 28.3
--------- ---------
Total Assets $ 9,941.2 $10,173.9
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities
Accounts payable $ 398.3 $ 475.5
Long-term debt due within one year 475.7 574.3
Taxes on income 89.2 126.6
Taxes, other than income taxes 39.3 36.5
Accrued liabilities 1,059.8 1,018.7
--------- ---------
Total Current Liabilities 2,062.3 2,231.6
--------- ---------
Long-Term Debt 3,005.9 3,081.2
--------- ---------
Deferred Income Taxes 1,276.6 1,258.7
Asset Retirement Obligations 388.3 384.6
Other Deferred Credits and Reserves 547.0 566.0
Long-Term Liabilities Associated with Properties
Held for Disposal 11.1 16.0
--------- ---------
2,223.0 2,225.3
--------- ---------
Stockholders' Equity
Common stock, par value $1 - 300,000,000 shares
authorized, 101,458,368 shares issued at 3-31-04
and 100,892,354 shares issued at 12-31-03 101.5 100.9
Capital in excess of par value 1,734.7 1,708.3
Preferred stock purchase rights 1.0 1.0
Retained earnings 1,033.8 927.2
Accumulated other comprehensive loss (148.4) (45.4)
Common shares in treasury, at cost - 60,056 shares
at 3-31-04 and 31,924 at 12-31-03 (2.9) (1.6)
Deferred compensation (69.7) (54.6)
--------- ---------
Total Stockholders' Equity 2,650.0 2,635.8
--------- ---------
Total Liabilities and Stockholders' Equity $ 9,941.2 $10,173.9
========= =========
The "successful efforts" method of accounting for oil and gas exploration and
production activities has been followed in preparing these consolidated
financial statements.
The accompanying notes are an integral part of this statement.
KERR-McGEE CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31,
---------------------
(Millions of dollars) 2004 2003
- -------------------------------------------------------------------------------
Operating Activities
- --------------------
Net income $ 152.2 $ 69.9
Adjustments to reconcile net income to net cash
provided by operating activities -
Depreciation, depletion and amortization 203.1 206.7
Accretion expense 6.6 6.2
Impairments on assets held for use 13.2 5.1
Loss associated with assets held for sale 3.4 .9
Dry hole costs 8.1 104.6
Deferred income taxes 73.1 32.1
Provision for environmental remediation and
restoration, net of reimbursements (.8) 17.3
Cumulative effect of change in accounting principle - 34.7
Noncash items affecting net income 33.9 28.2
Other net cash used in operating activities (218.2) (184.0)
------- -------
Net Cash Provided by Operating Activities 274.6 321.7
------- -------
Investing Activities
- --------------------
Capital expenditures (161.7) (201.4)
Dry hole costs (8.1) (104.6)
Proceeds from sales of assets 3.6 185.4
Other investing activities 34.5 (10.0)
------- -------
Net Cash Used in Investing Activities (131.7) (130.6)
------- -------
Financing Activities
- --------------------
Issuance of long-term debt - 31.5
Repayment of long-term debt (102.0) (184.0)
Issuance of common stock 5.5 -
Dividends paid (45.4) (45.2)
Other financing activities - (.4)
------- -------
Net Cash Used in Financing Activities (141.9) (198.1)
------- -------
Effects of Exchange Rate Changes on Cash and
Cash Equivalents .5 (2.2)
------- -------
Net Increase (Decrease) in Cash and Cash Equivalents 1.5 (9.2)
Cash and Cash Equivalents at Beginning of Period 142.0 89.9
------- -------
Cash and Cash Equivalents at End of Period $ 143.5 $ 80.7
======= =======
The accompanying notes are an integral part of this statement.
KERR-McGEE CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
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, these condensed financial statements should 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.
Employee Stock Option Plans
---------------------------
The company accounts for its stock option plans under the intrinsic-value
method permitted by Accounting Principles Board Opinion 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.
Statement of Financial Accounting Standards (FAS) No. 123, "Accounting for
Stock-Based Compensation," prescribes a fair-value method of accounting for
employee stock options under which compensation expense is measured based
on the estimated fair value of stock options at the grant date and
recognized over the period of time that the options vest. The following
table illustrates the effect on net income and earnings per share had the
company applied the fair-value recognition provisions of FAS 123 to
stock-based employee compensation.
Three Months Ended
March 31,
(Millions of dollars, --------------------
except per share amounts) 2004 2003
---------------------------------------------------------------------------
Net income as reported $152.2 $69.9
Less stock-based compensation expense determined
using a fair-value method, net of taxes (3.4) (4.0)
------ -----
Pro forma net income $148.8 $65.9
====== =====
Net income per share -
Basic -
As reported $ 1.52 $ .70
Pro forma 1.48 .66
Diluted -
As reported $ 1.41 $ .68
Pro forma 1.38 .64
Reclassifications
-----------------
Certain reclassifications have been made to the prior year financial
statements to conform with the current year presentation. In the third
quarter of 2003, the company began reporting the net marketing fee received
from sales of nonequity North Sea crude oil marketed on behalf of other
partners in revenues. Prior to the 2003 third quarter, the company reported
purchases and sales of nonequity crude oil on a gross basis.
B. Derivatives
The company is exposed to risk from fluctuations in crude oil and natural
gas prices, foreign currency exchange rates, and interest rates. To reduce
the impact of these risks on earnings and to increase the predictability of
its cash flow, from time to time the company enters into certain derivative
contracts, primarily swaps and collars for a portion of its oil and gas
production, forward contracts to buy and sell foreign currencies, and
interest rate swaps.
The company periodically enters into financial derivative instruments that
generally fix the commodity prices to be received for a portion of its oil
and gas production in the future. At March 31, 2004 and December 31, 2003,
the outstanding commodity-related derivatives accounted for as hedges had a
net current liability fair value of $311.9 million and $167.8 million,
respectively. The fair value of these derivative instruments was determined
based on prices actively quoted, generally NYMEX and Dated Brent prices.
The company had after-tax deferred losses of $199.4 million and $106.3
million in accumulated other comprehensive loss associated with these
contracts at March 31, 2004 and December 31, 2003, respectively. The
company expects to reclassify these losses into earnings during 2004, when
the associated hedged production occurs (assuming no further changes in
fair-market value of the contracts). During the first quarter of 2004, the
company realized losses on settlement of $29.4 million on U.S. oil hedging,
$23.5 million on North Sea oil hedging and $8.5 million on U.S. natural gas
hedging. During the first quarter of 2003, the company realized losses on
contract settlements of $32.8 million on U.S. oil hedging, $28.5 million on
North Sea oil hedging and $55.4 million on U.S. natural gas hedging. Losses
for hedge ineffectiveness are recognized as a reduction to revenues in the
Consolidated Statement of Income and were not material for the first
quarter of 2004 or 2003.
Between March 31, 2004 and April 6, 2004, the company entered into
additional financial derivative instruments in the form of fixed-price
swaps and costless collars relating to specified quantities of projected
2004, 2005 and 2006 crude oil and natural gas production volumes. The 2005
and 2006 derivatives have been designated as hedges of the company's
expected future production; however, a portion of the 2004 contracts
currently do not qualify for hedge accounting since Kerr-McGee's U.S.
production from August through December 2004 is either already hedged or,
in the case of Rocky Mountain production, does not have corresponding basis
swaps in place to make the hedges highly effective. As a result, the
company will recognize mark-to-market gains and losses in earnings for the
non-hedge quantities beginning in the second quarter of 2004. If the
Westport Resources Corporation merger (discussed in Note K below) is
consummated, these contracts may qualify for hedge accounting treatment and
be designated as hedges in future periods.
In addition to the company's hedging program, Kerr-McGee Rocky Mountain
Corp. holds certain gas basis swaps settling between 2004 and 2008. Through
December 2003, the company treated these gas basis swaps as non-hedge
derivatives, and changes in fair value were recognized in earnings. On
December 31, 2003, the company designated those swaps settling in 2004 as
hedges since the basis swaps have been coupled with natural gas fixed-price
swaps, while the remainder settling between 2005 and 2008 will continue to
be treated as non-hedge derivatives. At March 31, 2004, these derivatives
are recorded at their fair value of $14.6 million, of which $1 million is
recorded as a current asset and $13.6 million is recorded in investments -
other assets. At December 31, 2003, these derivatives were recorded at
their fair value of $22.7 million, of which the company recorded $7.7
million in current assets and $14.9 million in investments - other assets.
The net losses associated with these non-hedge derivatives were not
material for the first quarter of 2004 or 2003.
The company's marketing subsidiary, Kerr-McGee Energy Services Corporation
(KMES) markets natural gas (primarily equity gas) in the Denver area.
Existing contracts for the physical delivery of gas at fixed prices have
not been designated as hedges and are marked to market in accordance with
FAS 133. KMES also has entered into natural gas swaps and basis swaps that
offset its fixed-price risk on physical contracts. These derivative
contracts lock in the margins associated with the physical sale. The
company believes that risk associated with these derivatives is minimal due
to the creditworthiness of the counterparties. The net asset fair value of
these derivative instruments was not material at March 31, 2004 or 2003.
The fair values of the outstanding derivative instruments at March 31,
2004, were based on prices actively quoted. During the first quarter of
2004, the net gain associated with these derivative contracts was not
material. For the 2003 first quarter, net losses associated with these
contracts totaled $9.8 million, of which $10.8 million loss was reflected
as a reduction of revenue and $1 million gain was included in other income.
The gains or losses on these derivative contracts are substantially offset
by the fixed prices realized on the physical sale of the natural gas.
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, and sales of euro) have been
designated and have qualified as cash flow hedges of the company's
anticipated future cash flow needs for a portion of its operating costs,
capital expenditures and raw material purchases. These forward contracts
generally have durations of less than three years. At March 31, 2004, the
outstanding foreign exchange derivative contracts accounted for as hedges
had a net asset fair value of $24 million, of which the company recorded
$22.2 million in current assets, $5.9 million in investments and other
assets, and $4.1 million in current liabilities. 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, when the hedged assets are
depreciated in the case of a hedge of capital expenditures and when
finished inventory is sold in the case of a hedged raw material purchase).
At March 31, 2004, the company had an after-tax deferred gain of $18.2
million in accumulated other comprehensive loss related to these contracts.
In the first quarter of 2004, the company reclassified $4 million of gains
on forward contracts from accumulated other comprehensive loss to operating
expenses in the Consolidated Statement of Income. Of the existing net gains
at March 31, 2004, approximately $14 million will be reclassified into
earnings during the next 12 months, assuming no further changes in fair
value of the contracts. No hedges were discontinued during the first
quarter, and no ineffectiveness was recognized.
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. The company is collection agent and retains the risk of foreign
currency rate changes between the date of sale and collection of the
receivables. Under the terms of the asset securitization agreement
restructured in July 2003, the company is required to enter into forward
contracts for the value of the euro-denominated receivables sold into the
program to mitigate its foreign currency risk. Gains or losses on the
forward contracts are recognized currently in earnings and were not
material for the first quarter of 2004. No such gains or losses were
recorded in the 2003 first quarter.
The company has entered into other forward contracts to sell foreign
currencies that will be collected as a result of pigment sales denominated
in foreign 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 immaterial at March
31, 2004 and December 31, 2003.
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. As of April 30, 2004, Devon common stock
was trading at $61.20 per share. 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 has the right to retain up to 15% of the shares
if Devon's stock price is greater than $39.16 per share (the DECS holders
have an embedded call option on 85% of the shares). If Devon's stock price
at maturity is greater than $33.19 per share but less than $39.16 per
share, the company's right to retain Devon stock will be reduced
proportionately. The company is not entitled to retain any Devon stock if
the price of Devon stock at maturity is less than or equal to $33.19 per
share. Using the Black-Scholes valuation model, the company recognizes any
gains or losses resulting from changes in the fair value of the put and
call options in other income. At March 31, 2004 and December 31, 2003, the
net liability fair value of the embedded put and call options was $161.3
million and $154.9 million, respectively. The company recorded losses of
$6.4 million and $16.2 million during the three months ended March 31, 2004
and 2003, 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 the Devon stock classified as trading. The
fair value of the 8.4 million shares of Devon classified as trading
securities was $490.5 million at March 31, 2004, and $483 million at
December 31, 2003. During the first quarter of 2004 and 2003, the company
recorded unrealized gains of $7.5 million and $19.6 million, respectively,
in other income for the changes in fair value of the Devon shares
classified as trading. The company also held certain Devon shares
classified as available-for-sale securities, which were partially
liquidated in December 2003, with the remaining shares sold in January
2004. The available-for-sale Devon shares were in excess of the number of
shares the company believes will be required to extinguish the DECS;
however, should the price of Devon stock fall below $39.16 per share at the
maturity of the DECS, the company would be required to either purchase
additional Devon shares to settle the DECS or settle a portion of the DECS
with cash. The DECS and the derivative liability associated with the call
option are classified as current liabilities in the Consolidated Balance
Sheet as of March 31, 2004 and December 31, 2003.
In connection with the issuance of $350 million 5.375% notes due April 15,
2005, the company entered into an interest rate swap arrangement 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%. During February 2004, the company
reviewed the composition of its outstanding debt and entered into
additional interest rate swaps, converting an aggregate of $566 million in
fixed-rate debt to variable-rate debt. Under the interest rate swaps, $150
million of 6.625% notes due October 15, 2007, will pay a variable rate of
LIBOR plus 3.35%; $109 million of 8.125% notes due October 15, 2005, will
pay a variable rate of LIBOR plus 5.86%; and $307 million of 5.875% notes
due September 15, 2006, will pay a variable rate of LIBOR plus 3.1%. The
company considers these swaps to be a hedge against the change in fair
value of the related debt as a result of interest rate changes. The asset
fair value of the company's interest rate swaps at March 31, 2004 and
December 31, 2003, was $24.2 million and $15.1 million, respectively. Any
gain or loss on the swaps is offset by a comparable gain or loss resulting
from recording changes in the fair value of the related debt. The critical
terms of the swaps match the terms of the debt; therefore, the swaps are
considered highly effective and no hedge ineffectiveness has been recorded.
As a result of the swap arrangements, the company recognized a reduction in
interest expense of $4.3 million and $2.7 million in the first quarter of
2004 and 2003, respectively.
C. Discontinued Operations, Asset Disposals and Asset Impairments
During the first quarter of 2002, the company approved a plan to dispose of
its exploration and production operations in Kazakhstan. The divestiture
decision was made as part of the company's strategic plan to rationalize
noncore oil and gas properties. The results of the company's Kazakhstan
operations have been reported separately as discontinued operations in the
accompanying Consolidated Statement of Income.
On March 31, 2003, the company completed the sale of its Kazakhstan
operations for $168.6 million in cash, recognizing a loss on sale of $6.1
million during the first quarter of 2003. The loss on sale is reported as
part of discontinued operations. In connection with the sale, the company
recorded an $18.6 million settlement liability for the net cash flow of the
Kazakhstan operations from the effective date of the transaction to the
closing date. The settlement liability was paid during the third quarter of
2003. The net proceeds received by the company were used to reduce
outstanding debt.
For the three months ended March 31, 2003, revenues applicable to the
discontinued operations totaled $5.6 million and pretax income totaled $.4
million (including the loss on sale of $6.1 million).
In connection with the company's divestiture program, certain exploration
and production segment assets have been identified for disposal and
classified as held for sale. During the first quarter of 2004, the company
recorded losses totaling $3.4 million related to assets held for sale,
reflecting 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.
The company expects to complete the divestiture of its remaining
held-for-sale assets in 2004. 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.
Impairment losses totaling $13.2 million and $5.1 million were recognized
in the first quarter of 2004 and 2003, respectively, for certain assets
used in operations that are not considered held for sale. The 2004
impairments related primarily to a U.S. Gulf of Mexico field that
experienced premature water breakthrough and ceased production sooner than
expected.
During 2003, the company selectively marketed its 100%-owned Leadon field
to third parties. Although no divestiture negotiations are currently under
way, the company continues to review its options with respect to the field
and, particularly, the associated floating production, storage and
offloading (FPSO) facility. Management presently intends to continue
operating and producing the field until such time as the operating cash
flow generated by the field does not support continued production or until
a higher value option is identified. Given the significant value associated
with the FPSO relative to the size of the entire project, the company will
continue to pursue a long-term solution that achieves maximum value for
Leadon - which may include disposing of the field, monetizing the FPSO by
selling it as a development option for a third-party discovery, or
redeployment in other company operations. As of March 31, 2004, the
carrying value of the Leadon field assets totaled $364 million. 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 due to, among other
things, (i) unfavorable changes in commodity prices or operating costs,
(ii) a production profile that declines more rapidly than currently
anticipated, and/or (iii) unsuccessful results of continued marketing
activities or failure to locate a strategic buyer (or suitable redeployment
opportunity). Accordingly, management anticipates that the Leadon field
will be subject to periodic impairment review until such time as the field
is abandoned or sold. If future cash flows or fair value decrease from that
presently estimated, an additional write-down of the Leadon field could
occur in the future.
Capitalized costs associated with exploratory wells may be charged to
earnings in a future period if management determines that commercial
quantities of hydrocarbons have not been discovered. At March 31, 2004, the
company had capitalized costs of approximately $157 million associated with
such ongoing exploration activities, primarily in the deepwater Gulf of
Mexico, Alaska and China.
In January, the company began production through a new high productivity
oxidation line at its Savannah plant. It is expected that once fully
commissioned, this process will allow for improved manufacturing
efficiencies, lower operating expenses and lower capital requirements.
Separately, during the quarter the company idled one of two sulfate
production lines at its Savannah facility due to high inventory levels.
The company will continue to evaluate the performance of the new oxidation
line and will have a better understanding of how the Savannah site might be
reconfigured to exploit its capabilities by the latter part of 2004. This
reconfiguration could include redeployment and/or idling of certain assets,
and reduction of the future useful life of other assets, resulting in the
acceleration of depreciation expense.
D. Cash Flow Information
Net cash provided by operating activities reflects cash payments for income
taxes and interest as follows:
Three Months Ended
March 31,
--------------------
(Millions of dollars) 2004 2003
---------------------------------------------------------------------------
Income tax payments $ 52.8 $ 60.0
Less refunds received (.8) (14.7)
------ ------
Net income tax payments $ 52.0 $ 45.3
====== ======
Interest payments $101.4 $ 79.2
====== ======
Noncash items affecting net income included in the reconciliation of net
income to net cash provided by operating activities include the following:
Three Months Ended
March 31,
------------------
(Millions of dollars) 2004 2003
--------------------------------------------------------------------------
Incentive compensation provisions $18.3 $ 7.4
Increase in fair value of trading securities (1) (7.5) (19.6)
Increase in fair value of embedded options in
the DECS (1) 6.4 16.2
Net losses on equity method investments 8.3 6.1
Net periodic postretirement expense 6.5 5.9
Net periodic pension credit for qualified plan (5.3) (9.4)
Litigation reserve provisions - 6.5
All other (2) 7.2 15.1
----- ------
Total $33.9 $ 28.2
===== ======
Other net cash used in operating activities in the Consolidated Statement
of Cash Flows consists of the following:
Three Months Ended
March 31,
-------------------
(Millions of dollars) 2004 2003
---------------------------------------------------------------------------
Decrease due to changes in working capital accounts $(184.3) $(165.9)
Environmental expenditures (18.6) (9.5)
All other (2) (15.3) (8.6)
------- -------
Total $(218.2) $(184.0)
======= =======
Information about noncash investing and financing activities not reflected
in the Consolidated Statement of Cash Flows follows:
Three Months Ended
March 31,
------------------
(Millions of dollars) 2004 2003
---------------------------------------------------------------------------
Noncash investing activities
Increase in fair value of trading securities (1) $ 7.5 $19.6
Decrease in property related to Gunnison operating
lease agreement (3) (82.6) -
Noncash financing activities
Reduction in debt related to Gunnison operating
lease agreement (3) (75.3) -
Increase in fair value of embedded options in
the DECS (1) 6.4 16.2
(1) See Note B for a discussion of the accounting for the DECS.
(2) No other individual item is material to total cash flows from
operations.
(3) See Note H for a discussion of the Gunnison Synthetic Trust.
E. Comprehensive Income and Financial Instruments
Comprehensive income for the three months ended March 31, 2004 and 2003, is
as follows:
Three Months Ended
March 31,
------------------
(Millions of dollars) 2004 2003
---------------------------------------------------------------------------
Net income $152.2 $ 69.9
Unrealized gains on securities - 2.3
Reclassification of unrealized gains on available-
for-sale securities included in net income (5.4) -
Change in fair value of cash flow hedges (90.9) (15.7)
Foreign currency translation adjustment (7.0) 11.0
Other .3 .8
------ ------
Comprehensive income $ 49.2 $ 68.3
====== ======
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 March 31, 2004 or
December 31, 2003. At March 31, 2004 and December 31, 2003,
available-for-sale securities for which fair value could be determined were
as follows:
March 31, 2004 December 31, 2003
------------------------------- -------------------------------
Gross Gross
Unrealized Unrealized
Fair Holding Fair Holding
(Millions of dollars) Value Cost Gain Value Cost Gain
------------------------------------------------------------------------------------------------------------
Equity securities $ - $ - $ - $26.8 $9.8 $8.3 (1)
U.S. government obligations 2.4 2.4 - 3.9 3.9 -
--- ----
Total $ - $8.3
=== ====
(1) This amount includes $8.6 million of gross unrealized hedging losses on
15% of the exchangeable debt at the time of adoption of FAS 133.
The equity securities represent the company's investment in Devon Energy
Corporation common stock. During January 2004, the company sold its
remaining Devon shares classified as available for sale for a pretax gain
of $9 million. Proceeds from the January sales totaled $27.4 million. The
cost of the shares sold and the amount of the gain reclassified from
accumulated other comprehensive income were determined using the average
cost of the shares held. The company also received proceeds of $11.5
million in January 2004 related to sales of Devon shares in December 2003,
with a 2004 settlement date.
F. Equity Affiliates
Investments in equity affiliates totaled $120.4 million at March 31, 2004,
and $123.1 million at December 31, 2003. Pretax equity loss related to the
investments is included in other income in the Consolidated Statement of
Income and totaled $8.3 million and $6.1 million for the three months ended
March 31, 2004 and 2003, respectively.
G. Work Force Reduction, Restructuring Provisions and Exit Activities
In September 2003, the company announced a program to reduce its U.S.
nonbargaining work force through both voluntary retirements and involuntary
terminations. As a result of the program, the company's eligible U.S.
nonbargaining work force was reduced by approximately 9%, or 271 employees.
Qualifying employees terminated under this program became eligible for
enhanced benefits under the company's pension and postretirement plans,
along with severance payments. The program was substantially completed by
the end of 2003, with certain retiring employees staying into the first
half of 2004 for transition purposes. In connection with the work force
reduction, the company recognized a pretax charge of $56.4 million during
the latter half of 2003, of which $34.2 million was for curtailment and
special termination benefits associated with the company's retirement plans
and $22.2 million was for severance-related costs. The remaining provision
for severance-related costs is included in the restructuring reserve table
below. Of the severance-related provision of $22.2 million, $16.4 million
has been paid through the first quarter of 2004, with $5.8 remaining in the
accrual at March 31, 2004.
During 2003, the company's chemical - pigment operating unit provided $60.8
million pretax for costs associated with the closure of its synthetic
rutile plant in Mobile, Alabama. Included in the $60.8 million were $14.1
million for the cumulative effect of change in accounting principle related
to the recognition of an asset retirement obligation, $15.2 million for
accelerated depreciation, $14.9 million for other shut-down related costs,
$10.5 million for severance benefits and $6.1 million for benefit plan
curtailment costs. The provision for severance benefits is included in the
restructuring reserve table below (see Note N for a discussion of the asset
retirement obligation). Of the total $10.5 million severance accrual, $8.6
million has been paid through the first quarter of 2004. Approximately 135
employees will ultimately be terminated in connection with this plant
closure, of which 117 had been terminated as of March 31, 2004.
During 2002, the company's chemical - other operating unit provided $16.5
for costs associated with its plans to exit the forest products business.
The company provided an additional $5.1 million in 2003 for severance
benefits associated with exiting the forest products business, of which
$1.6 million was recorded during the first quarter of 2003. During the
first quarter of 2004, the company provided an additional $1.2 million for
dismantlement and closure costs. These costs on a pretax basis are
reflected in costs and operating expenses in the Consolidated Statement of
Income. Included in the total provision of $22.8 million were $16.7 million
for dismantlement and closure costs, and $6.1 million for severance costs.
Of the total provision, $12.1 million has been paid through the 2004 first
quarter and $10.1 million remained in the accrual at March 31, 2004. In
connection with the plant closures, 252 employees will be terminated, of
which 187 had been terminated as of March 31, 2004.
In 2001, the company's chemical - pigment operating unit provided $31.8
million pretax related to the closure of a plant in Antwerp, Belgium. Of
this total accrual, $26.9 million had been paid through the 2004 first
quarter and $4.6 million remained in the accrual at March 31, 2004. As a
result of this plant closure, 121 employees were terminated.
Also in 2001, the company's chemical - other operating unit provided $11.9
million in pretax costs for the discontinuation of manganese metal
production at its Hamilton, Mississippi, facility. Of the total provision,
$10.9 million has been paid through the 2004 first quarter and $1 million
remained in the accrual at March 31, 2004, for pond closure costs.
Completion of the remaining action of pond closure may take from three to
10 years, depending on environmental constraints.
The provisions, payments, adjustments and reserve balances for the
three-month period ended March 31, 2004, are included in the table below.
Dismantlement
and
(Millions of dollars) Total Severance Closure
---------------------------------------------------------------------------
December 31, 2003 $ 39.1 $ 26.5 $12.6
Provisions 1.2 - 1.2
Payments (16.8) (13.8) (3.0)
Adjustments (.1) (.3) .2
------ ------ -----
March 31, 2004 $ 23.4 $ 12.4 $11.0
====== ====== =====
H. Debt
As of March 31, 2004, long-term debt due within one year consists of the
following.
March 31,
(Millions of dollars) 2004
---------------------------------------------------------------------------
5 1/2% Exchangeable Notes (DECS) due August 2, 2004,
net of unamortized discount of $2.6 million $327.7
8.375% Notes due July 15, 2004 145.0
Guaranteed Debt of Employee Stock Ownership Plan 9.61%
Notes due in installments through January 2, 2005 3.0
------
Total $475.7
======
During 2001, the company entered into a leasing arrangement with Kerr-McGee
Gunnison Trust (Gunnison Synthetic Trust) for the construction of the
company's share of a platform to be used in the development of the Gunnison
field, in which the company has a 50% working interest. Under the terms of
the agreement, the company financed its share of construction costs for the
platform under 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 at varying rates on the
notes. Construction of the platform was completed in December 2003, with
the company's share of construction costs totaling $149 million. On
December 31, 2003, $65.6 million of the synthetic lease facility was
converted to a leveraged lease structure, whereby the company leases an
interest in the platform under an operating lease agreement from a separate
business trust.
Both the Gunnison Synthetic Trust and the new operating lease trust are
considered variable interest entities under the provisions of FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities - an
Interpretation of ARB No. 51." As such, the company is required to analyze
its relationship with each trust to determine whether the company is the
primary beneficiary and, if so, required to consolidate the trusts. Based
on the analyses performed, the company is not the primary beneficiary of
the operating lease trust; however, the company was considered the primary
beneficiary of the Gunnison Synthetic Trust. Accordingly, the remaining
assets and liabilities of the Gunnison Synthetic Trust were reflected in
the company's Consolidated Balance Sheet at December 31, 2003, which
included $82.6 million in property, plant and equipment, $3.8 million in
accrued liabilities, $75.3 million in long-term debt, and $3.5 million in
minority interest. On January 15, 2004, the remaining $82.6 million of the
synthetic lease facility was converted to a leveraged lease structure, and
the related lessor trust is not subject to consolidation. As a result, the
associated property and debt are not reflected in the company's
Consolidated Balance Sheet at March 31, 2004.
I. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share (EPS) from continuing operations for the three-month
periods ended March 31, 2004 and 2003.
For the Three Months Ended March 31,
--------------------------------------------------------------------------------
2004 2003
------------------------------------ ------------------------------------
Income from Income from
(In millions, except Continuing Per-Share Continuing Per-Share
per-share amounts) Operations Shares Income Operations Shares Income
-----------------------------------------------------------------------------------------------------------------
Basic EPS $152.2 100.3 $1.52 $104.2 100.1 $1.04
===== =====
Effect of dilutive securities:
5 1/4% convertible
debentures 5.3 9.8 5.3 9.8
Restricted stock - 1.0 - .7
Stock options - .2 - -
------ ----- ------ -----
Diluted EPS $157.5 111.3 $1.41 $109.5 110.6 $ .99
====== ===== ===== ====== ===== =====
Under the 2002 Long-Term Incentive Plan, the company may grant incentive
opportunities in the form of stock, stock options and performance-related
awards to key employees. During the first quarter of 2004, the company
granted 438,000 shares of restricted common stock with a grant date fair
value of $49.45 per share. Deferred compensation of $21.7 million
associated with the restricted stock issuance will be amortized over the
three year vesting period.
J. 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. On July 30, 2003, the company restructured the existing accounts
receivable monetization program to include the sale of receivables
originated by the company's European chemical operations. The maximum
availability under the new program is $165 million. Under the terms of the
program, selected qualifying customer accounts receivable may be sold
monthly to a special-purpose entity (SPE), which in turn sells an undivided
ownership interest in the receivables to a third-party multi-seller
commercial paper conduit sponsored by an independent financial institution.
The company sells, and retains an interest in, excess receivables to the
SPE as over-collateralization for the program. The company's retained
interest in the SPE's receivables is classified in trade accounts
receivable in the accompanying Consolidated Balance Sheet. The retained
interest is subordinate to, and provides credit enhancement for, the
conduit's ownership interest in the SPE's receivables, and is available to
the conduit to pay certain fees or expenses due to the conduit, and to
absorb credit losses incurred on any of the SPE's receivables in the event
of termination. However, the company believes that the risk of credit loss
is very low since its bad-debt experience has historically been
insignificant. The company retains servicing responsibilities 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 no obligations for any recourse actions on
the sold receivables. The company also holds 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 $236.8 million and $156.8 million of its pigment
receivables during the first quarter of 2004 and 2003, respectively. The
sale of the receivables resulted in pretax losses of $1.4 million and $1.1
million during the first quarter of 2004 and 2003, 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, net of
the company's retained interest in receivables serving as
over-collateralization, totaled $165 million at both March 31, 2004 and
December 31, 2003.
K. Business Combination
On April 7, 2004, the company announced plans to merge with Westport
Resources Corporation (Westport) in a transaction valued at approximately
$3.4 billion. The merger agreement, unanimously approved by the board of
directors of both companies, provides that Westport stockholders will
receive .71 shares of Kerr-McGee common stock for each common share of
Westport. As a result, Kerr-McGee expects to issue approximately 49 million
new shares to Westport's stockholders (including shares that may be issued
upon exercise of outstanding stock options) and will assume Westport's
outstanding debt of approximately $1 billion. The transaction is subject to
approval by the stockholders of both companies, as well as other customary
closing conditions. If approved, the transaction is expected to be
consummated in the third quarter of 2004, shortly after the companies'
respective stockholder meetings.
L. Condensed Consolidating Financial Information
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 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 and Kerr-McGee Rocky Mountain
Corporation in 2004 and 2003.
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 Subsidiary Companies
Condensed Consolidating Statement of Income
For the Three Months Ended March 31, 2004
Non-
Kerr-McGee Guarantor Guarantor
(Millions of dollars) Corporation Subsidiaries Subsidiaries Eliminations Consolidated
- ---------------------------------------------------------------------------------------------------------------------
Revenues $ - $210.9 $905.4 $ - $1,116.3
------ ------ ------ ------- --------
Costs and Expenses
Costs and operating expenses - 109.7 293.7 (.4) 403.0
Selling, general and administrative expenses - .1 83.5 - 83.6
Shipping and handling expenses - 1.7 36.0 - 37.7
Depreciation and depletion - 30.0 160.3 - 190.3
Accretion expense - .7 5.9 - 6.6
Impairments on assets held for use - .9 12.3 - 13.2
Loss associated with assets held for sale - - 3.4 - 3.4
Exploration, including dry holes and
amortization of undeveloped leases - 3.6 47.0 - 50.6
Taxes, other than income taxes - 8.3 20.1 - 28.4
Provision for environmental remediation
and restoration, net of reimbursements - (.8) - - (.8)
Interest and debt expense 27.5 9.2 69.3 (49.0) 57.0
------ ------ ------ ------- --------
Total Costs and Expenses 27.5 163.4 731.5 (49.4) 873.0
------ ------ ------ ------- --------
(27.5) 47.5 173.9 49.4 243.3
Other Income (Expense) 270.5 (6.6) 29.1 (293.3) (.3)
------ ------ ------ ------- --------
Income from Continuing Operations
before Income Taxes 243.0 40.9 203.0 (243.9) 243.0
Provision for Income Taxes (90.8) (14.4) (77.6) 92.0 (90.8)
------ ------ ------ ------- --------
Net Income $152.2 $ 26.5 $125.4 $(151.9) $ 152.2
====== ====== ====== ======= ========
Kerr-McGee Corporation and Subsidiary Companies
Condensed Consolidating Statement of Income
For the Three Months Ended March 31, 2003
Non-
Kerr-McGee Guarantor Guarantor
(Millions of dollars) Corporation Subsidiaries Subsidiaries Eliminations Consolidated
- ---------------------------------------------------------------------------------------------------------------------
Revenues $ - $153.8 $947.9 $ (2.1) $1,099.6
------ ------ ------ ------- --------
Costs and Expenses
Costs and operating expenses - 71.5 315.5 (2.6) 384.4
Selling, general and administrative expenses - 7.1 63.8 - 70.9
Shipping and handling expenses - 2.6 29.4 - 32.0
Depreciation and depletion - 29.9 159.7 - 189.6
Accretion expense - .6 5.6 - 6.2
Impairments on assets held for use - - 5.1 - 5.1
Gain associated with assets held for sale - - (5.2) - (5.2)
Exploration, including dry holes and
amortization of undeveloped leases - 3.9 136.6 - 140.5
Taxes, other than income taxes .1 5.5 19.8 - 25.4
Provision for environmental remediation
and restoration, net of reimbursements - 5.1 12.2 - 17.3
Interest and debt expense 28.9 8.3 72.9 (45.1) 65.0
------ ------ ------ ------- --------
Total Costs and Expenses 29.0 134.5 815.4 (47.7) 931.2
------ ------ ------ ------- --------
(29.0) 19.3 132.5 45.6 168.4
Other Income 146.6 .6 29.9 (175.4) 1.7
------ ------ ------ ------- --------
Income from Continuing Operations
before Income Taxes 117.6 19.9 162.4 (129.8) 170.1
Provision for Income Taxes (47.7) (4.2) (61.2) 47.2 (65.9)
------ ------ ------ ------- --------
Income from Continuing Operations 69.9 15.7 101.2 (82.6) 104.2
Income (Loss) from Discontinued Operations,
net of tax - 12.0 (11.6) - .4
Cumulative Effect of Change in Accounting
Principle, net of tax - (1.3) (33.4) - (34.7)
------ ------ ------ ------- --------
Net Income $ 69.9 $ 26.4 $ 56.2 $ (82.6) $ 69.9
====== ====== ====== ======= ========
Kerr-McGee Corporation and Subsidiary Companies
Condensed Consolidating Balance Sheet
March 31, 2004
Non-
Kerr-McGee Guarantor Guarantor
(Millions of dollars) Corporation Subsidiaries Subsidiaries Eliminations Consolidated
- ---------------------------------------------------------------------------------------------------------------------
ASSETS
- ------
Current Assets
Cash $ 2.9 $ - $ 140.6 $ - $ 143.5
Intercompany receivables 710.5 28.1 1,735.2 (2,473.8) -
Accounts receivable - 72.4 452.6 - 525.0
Inventories - 4.6 407.3 - 411.9
Deposits, prepaid expenses and other assets 2.5 16.0 591.4 - 609.9
Current assets associated with properties
held for disposal - - .4 - .4
-------- -------- -------- --------- --------
Total Current Assets 715.9 121.1 3,327.5 (2,473.8) 1,690.7
Property, Plant and Equipment - Net - 1,974.5 5,353.0 - 7,327.5
Investments in and Advances to Subsidiaries 4,009.5 584.3 - (4,593.8) -
Investments and Other Assets 9.8 91.9 531.6 (79.6) 553.7
Goodwill - 346.3 10.7 - 357.0
Long-Term Assets Associated with Properties
Held for Disposal - - 12.3 - 12.3
-------- -------- -------- --------- --------
Total Assets $4,735.2 $3,118.1 $9,235.1 $(7,147.2) $9,941.2
======== ======== ======== ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities
Intercompany borrowings $ 66.4 $ 594.7 $1,741.5 $(2,402.6) $ -
Accounts payable 45.6 43.0 309.7 - 398.3
Long-term debt due within one year - - 475.7 - 475.7
Other current liabilities 3.4 166.8 1,018.2 (.1) 1,188.3
-------- -------- -------- --------- --------
Total Current Liabilities 115.4 804.5 3,545.1 (2,402.7) 2,062.3
Investments by and Advances from Parent - - 702.9 (702.9) -
Long-Term Debt 1,829.4 - 1,176.5 - 3,005.9
Deferred Credits and Reserves (5.9) 675.0 1,554.4 (.5) 2,223.0
Stockholders' Equity 2,796.3 1,638.6 2,256.2 (4,041.1) 2,650.0
-------- -------- -------- --------- --------
Total Liabilities and Stockholders' Equity $4,735.2 $3,118.1 $9,235.1 $(7,147.2) $9,941.2
======== ======== ======== ========= ========
Kerr-McGee Corporation and Subsidiary Companies
Condensed Consolidating Balance Sheet
December 31, 2003
Non-
Kerr-McGee Guarantor Guarantor
(Millions of dollars) Corporation Subsidiaries Subsidiaries Eliminations Consolidated
- ---------------------------------------------------------------------------------------------------------------------
ASSETS
- ------
Current Assets
Cash $ 2.2 $ - $ 139.8 $ - $ 142.0
Intercompany receivables 795.3 (26.7) 2,110.5 (2,879.1) -
Accounts receivable - 125.2 458.1 - 583.3
Inventories - 5.4 388.0 - 393.4
Deposits, prepaid expenses and other assets - 17.9 619.5 - 637.4
Current assets associated with properties
held for disposal - - .4 - .4
-------- -------- -------- --------- ---------
Total Current Assets 797.5 121.8 3,716.3 (2,879.1) 1,756.5
-------- -------- -------- --------- ---------
Property, Plant and Equipment - Net - 1,975.3 5,491.8 - 7,467.1
Investments in and Advances to Subsidiaries 3,948.5 519.6 - (4,468.1) -
Investments and Other Assets 10.2 96.0 537.6 (79.1) 564.7
Goodwill - 346.4 10.9 - 357.3
Long-Term Assets Associated with Properties
Held for Disposal - - 28.3 - 28.3
-------- -------- -------- --------- ---------
Total Assets $4,756.2 $3,059.1 $9,784.9 $(7,426.3) $10,173.9
======== ======== ======== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities
Intercompany borrowings $ 68.6 $ 563.4 $2,182.9 $(2,814.9) $ -
Accounts payable 45.4 38.9 391.2 - 475.5
Long-term debt due within one year - - 574.3 - 574.3
Other current liabilities 36.8 173.2 971.8 - 1,181.8
-------- -------- -------- --------- ---------
Total Current Liabilities 150.8 775.5 4,120.2 (2,814.9) 2,231.6
-------- -------- -------- --------- ---------
Investments by and Advances from Parent - - 617.9 (617.9) -
Long-Term Debt 1,829.3 - 1,251.9 - 3,081.2
Deferred Credits and Reserves (5.9) 678.3 1,554.8 (1.9) 2,225.3
Stockholders' Equity 2,782.0 1,605.3 2,240.1 (3,991.6) 2,635.8
-------- -------- -------- --------- ---------
Total Liabilities and Stockholders' Equity $4,756.2 $3,059.1 $9,784.9 $(7,426.3) $10,173.9
======== ======== ======== ========= =========
Kerr-McGee Corporation and Subsidiary Companies
Condensed Consolidating Statement of Cash Flows
For the Three Months Ended March 31, 2004
Non-
Kerr-McGee Guarantor Guarantor
(Millions of dollars) Corporation Subsidiaries Subsidiaries Eliminations Consolidated
- ---------------------------------------------------------------------------------------------------------------------
Operating Activities
- --------------------
Net income $ 152.2 $ 26.5 $ 125.4 $(151.9) $ 152.2
Adjustments to reconcile net income to net cash
provided by (used in) operating activities -
Depreciation, depletion and amortization - 32.8 170.3 - 203.1
Accretion expense - .7 5.9 - 6.6
Impairments on assets held for use - .9 12.3 - 13.2
Loss associated with properties held for sale - .1 3.3 - 3.4
Dry hole costs - - 8.1 - 8.1
Deferred income taxes - 6.0 67.1 - 73.1
Equity in earnings of subsidiaries (156.7) 3.9 - 152.8 -
Provision for environmental remediation
and restoration, net of reimbursements - (.8) - - (.8)
Noncash items affecting net income (.1) 9.6 24.4 - 33.9
Other net cash used in operating activities (35.4) 42.8 (225.6) - (218.2)
------- ------ ------- ------- -------
Net Cash Provided by (Used in)
Operating Activities (40.0) 122.5 191.2 .9 274.6
------- ------ ------- ------- -------
Investing Activities
- --------------------
Capital expenditures - (33.7) (128.0) - (161.7)
Dry hole costs - - (8.1) - (8.1)
Proceeds from sales of assets - .2 3.4 - 3.6
Other investing activities - (.1) 34.6 - 34.5
------- ------ ------- ------- -------
Net Cash Used in Investing
Activities - (33.6) (98.1) - (131.7)
------- ------ ------- ------- -------
Financing Activities
- --------------------
Increase (decrease) in intercompany
notes payable 80.6 (88.9) 8.7 (.4) -
Repayment of long-term debt - - (102.0) - (102.0)
Issuance of common stock 5.5 - - - 5.5
Dividends paid (45.4) - - - (45.4)
Other financing activities - - .5 (.5) -
------- ------ ------- ------- -------
Net Cash Provided by (Used in)
Financing Activities 40.7 (88.9) (92.8) (.9) (141.9)
------- ------ ------- ------- -------
Effects of Exchange Rate Changes on Cash
and Cash Equivalents - - .5 - .5
Net Increase in Cash and Cash Equivalents .7 - .8 - 1.5
Cash and Cash Equivalents at Beginning of Period 2.2 - 139.8 - 142.0
------- ------ ------- ------- -------
Cash and Cash Equivalents at End of Period $ 2.9 $ - $ 140.6 $ - $ 143.5
======= ====== ======= ======= =======
Kerr-McGee Corporation and Subsidiary Companies
Condensed Consolidating Statement of Cash Flows
For the Three Months Ended March 31, 2003
Non-
Kerr-McGee Guarantor Guarantor
(Millions of dollars) Corporation Subsidiaries Subsidiaries Eliminations Consolidated
- ---------------------------------------------------------------------------------------------------------------------
Operating Activities
- --------------------
Net income $ 69.9 $ 26.4 $ 56.2 $(82.6) $ 69.9
Adjustments to reconcile net income to net cash
provided by (used in) operating activities -
Depreciation, depletion and amortization - 30.3 176.4 - 206.7
Accretion expense - .6 5.6 - 6.2
Impairments on assets held for use - - 5.1 - 5.1
Loss associated with assets held for sale - - .9 - .9
Dry hole costs - - 104.6 - 104.6
Deferred income taxes - 23.7 8.4 - 32.1
Equity in earnings of subsidiaries (76.5) 19.8 - 56.7 -
Provision for environmental remediation
and restoration, net of reimbursements - 5.1 12.2 - 17.3
Cumulative effect of change in
accounting principle - 1.3 33.4 - 34.7
Noncash items affecting net income .4 3.1 24.7 - 28.2
Other net cash used in operating activities (29.8) (69.5) (84.7) - (184.0)
------- ------ ------- ------ -------
Net Cash Provided by (Used in)
Operating Activities (36.0) 40.8 342.8 (25.9) 321.7
------- ------ ------- ------ -------
Investing Activities
- --------------------
Capital expenditures - (31.7) (169.7) - (201.4)
Dry hole costs - - (104.6) - (104.6)
Proceeds from sales of assets - - 185.4 - 185.4
Other investing activities - - (10.0) - (10.0)
------- ------ ------- ------ -------
Net Cash Used in Investing
Activities - (31.7) (98.9) - (130.6)
------- ------ ------- ------ -------
Financing Activities
- --------------------
Increase (decrease) in intercompany
notes payable 81.4 (9.1) (72.3) - -
Issuance of long-term debt - - 31.5 - 31.5
Repayment of long-term debt - - (184.0) - (184.0)
Dividends paid (45.2) - (26.3) 26.3 (45.2)
Other financing activities .2 - (.2) (.4) (.4)
------- ------ ------- ------ -------
Net Cash Provided by (Used in)
Financing Activities 36.4 (9.1) (251.3) 25.9 (198.1)
------- ------ ------- ------ -------
Effects of Exchange Rate Changes on Cash
and Cash Equivalents - - (2.2) - (2.2)
------- ------ ------- ------ -------
Net Increase (Decrease) in Cash and Cash
Equivalents .4 - (9.6) - (9.2)
Cash and Cash Equivalents at Beginning of
Period 2.5 - 87.4 - 89.9
------- ------ ------- ------ -------
Cash and Cash Equivalents at End of Period $ 2.9 $ - $ 77.8 $ - $ 80.7
======= ====== ======= ====== =======
M. 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 - Pursuant to agreements reached in 1994 and 1997 among
Chemical, the City of West Chicago (the City) and the State regarding the
decommissioning of the closed West Chicago facility, Chemical has
substantially completed the excavation of contaminated soils and has
shipped the bulk of those soils to a licensed disposal facility. Removal of
the remaining materials is expected to be substantially completed by the
end of 2004, leaving principally surface restoration and groundwater
monitoring and/or remediation for subsequent years. Surface restoration is
expected to be completed in 2004, except for areas designated for use in
connection with the Kress Creek and Sewage Treatment Plant remediation
discussed below. 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 have been affected by the
excavation and removal 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. Chemical has substantially completed remedial work for two of
the areas (known as the Residential Areas and Reed-Keppler Park). 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 reached an agreement in principle with the
appropriate federal and state agencies and local communities regarding the
characterization and cleanup of the sites, past and future government
response costs, and the waiver of natural resource damage claims. The
agreement in principle is expected to be incorporated in a consent decree,
which must be agreed to by the appropriate federal and state agencies and
local communities and then entered by a federal court. Court approval is
expected in 2004. Chemical has already conducted an extensive
characterization of Kress Creek and the Sewage Treatment Plant and, at the
request of EPA, Chemical is conducting limited additional characterization
that is expected to be completed in 2004. The cleanup work, which is
expected to take about four years to complete following entry of the
consent decree, will require excavation of contaminated soils and stream
sediments, shipment of excavated materials to a licensed disposal facility
and restoration of affected areas.
Financial Reserves - As of March 31, 2004, the company had remaining
reserves of $94 million for costs related to West Chicago. Although actual
costs may exceed current estimates, the amount of any increase cannot be
reasonably estimated at this time. The amount of the reserve is not reduced
by reimbursements expected from the federal government under Title X of the
Energy Policy Act of 1992 (Title X) (discussed below).
Government Reimbursement - Pursuant to Title X, the U.S. Department of
Energy (DOE) is obligated to reimburse Chemical for certain decommissioning
and cleanup costs incurred in connection with the West Chicago sites in
recognition of the fact that about 55% of the facility's production was
dedicated to U.S. government contracts. The amount authorized for
reimbursement under Title X is $365 million plus inflation adjustments.
That amount is expected to cover the government's full share of West
Chicago cleanup costs. Through March 31, 2004, Chemical had been reimbursed
approximately $215 million under Title X.
Reimbursements under Title X are provided by congressional appropriations.
Historically, congressional appropriations have lagged Chemical's cleanup
expenditures. As of March 31, 2004, the government's share of costs
incurred by Chemical but not yet reimbursed by the DOE totaled
approximately $66 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 expects to receive reimbursement for the
remainder of this receivable by the end of 2006, and 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. Construction of a long-term remediation system is substantially
complete, and the system is in its startup phase. It is anticipated that
this system will be fully operational by mid-2004. 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. One state agency, the California Environmental Protection Agency
(CalEPA), has set a public health goal for perchlorate, which is a
preliminary step to setting a drinking water standard. However, a drinking
water standard has not yet been established. The resolution of the
regulatory matters could materially affect the scope, duration and cost of
the long-term groundwater remediation that Chemical is required to perform.
Financial Reserves - Remaining reserves for Henderson totaled $17 million
as of March 31, 2004. 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 additional
costs 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, exercised significant control over production at the plant and
the sale of products produced at the plant, 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 and other
remediation at Henderson. The insurance policy provides coverage only after
Chemical exhausts a self-insured retention of approximately $61 million and
covers only those costs incurred to achieve a cleanup level specified in
the policy. As noted above, federal and state agencies have not established
a drinking water standard and, therefore, it is possible that Chemical may
be required to achieve a cleanup level more stringent than that covered by
the policy. If so, the amount recoverable under the policy could be
affected.
Through March 31, 2004, Chemical had incurred expenditures of about $65
million that it believes can be applied to the self-insured retention. In
April 2004, Chemical reached an agreement in principle with one of its
vendors to reimburse Chemical approximately $6 million for a portion of
Chemical's costs. Reimbursement from the vendor will effectively reduce
Chemical's out-of-pocket costs and, therefore, will reduce the amount of
expenditures that Chemical believes can be applied to the self-insured
retention to $59 million. The company believes that the remaining reserve
of $17 million at March 31, 2004, also will qualify under the insurance
policy, which would exhaust the self-insured retention and result in an
insurance reimbursement of about $15 million based on current cost
estimates. The company believes that the reimbursements of $6 million from
Chemical's vendor and $15 million under the insurance policy are probable
and, accordingly, the company has recorded receivables in the financial
statements totaling $21 million.
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 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 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 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, which is expected to take about four more years.
As of March 31, 2004, the company had remaining reserves of $10 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.
Investigation and remediation of hydrocarbon contamination is being
performed with oversight of the Oklahoma Department of Environmental
Quality. Soil remediation to address hydrocarbon contamination is expected
to continue for about four more years. The long-term scope, duration and
cost of groundwater remediation are uncertain and, therefore, additional
costs may be incurred in the future. 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. This work is expected to be
substantially completed in 2004.
As of March 31, 2004, the company had remaining reserves of $15 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.
Mobile, Alabama
In June 2003, Chemical ceased operations at its facility in Mobile,
Alabama, which Chemical had used to produce feedstock for its titanium
dioxide plants. Operations prior to closure had resulted in minor
contamination of groundwater adjacent to surface impoundments. A
groundwater recovery system was installed prior to closure and continues in
operation as required under Chemical's National Pollutant Discharge
Elimination System (NPDES) permit. Future remediation work, including
groundwater recovery, closure of the impoundments and other minor work, is
expected to be substantially completed in about five years. As of March 31,
2004, the company had remaining reserves of $11 million. 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
Between 1999 and 2001, 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 (in Columbus, Mississippi; Bossier City, Louisiana; and Avoca,
Pennsylvania). The lawsuits sought 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.
Chemical executed settlement agreements, which are expected to resolve
substantially all of the Louisiana, Pennsylvania and Columbus, Mississippi,
lawsuits described above. Accordingly most of the suits have been, or are
expected to be, dismissed. The company believes that the resolution of the
claims that remain outstanding with respect to forest products operations
in Columbus, Mississippi; Bossier City, Louisiana; and Avoca, Pennsylvania,
described above will not have a material adverse effect on the company.
Following the adoption by the Mississippi legislature of tort reform,
plaintiffs' lawyers filed many new lawsuits across the state of Mississippi
in advance of the reform's effective date. On December 31, 2002,
approximately 245 lawsuits were filed against Chemical and its affiliates
on behalf of approximately 4,600 claimants in connection with Chemical's
Columbus, Mississippi, operations, seeking recovery on legal theories
substantially similar to those advanced in the litigation described above.
Substantially all of these lawsuits have been removed to the U.S. District
Court for the Northern District of Mississippi, and the company is seeking
to consolidate these lawsuits for pretrial and discovery purposes. Chemical
and its affiliates believe the lawsuits are without substantial merit and
are vigorously defending against them. 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.
On December 31, 2002, and June 13, 2003, two lawsuits were filed against
Chemical in connection with a former wood-treatment plant located in
Hattiesburg, Mississippi, and the plaintiffs' lawyers also have asserted
similar claims on behalf of other persons not named in the lawsuits. The
lawsuits and other claims seek recovery on legal theories substantially
similar to those advanced in the litigation described above. Chemical
resolved the majority of these claims pursuant to a settlement reached in
April 2003, which has resulted in aggregate payments by Chemical of
approximately $600,000. Chemical and its affiliates believe that claims not
resolved pursuant to the Hattiesburg settlements are without substantial
merit and are vigorously defending against such claims.
The company believes that the resolution of the claims that remain
outstanding with respect to the follow-on litigation will not have a
material adverse effect on the company's financial condition or results of
operations.
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, some of which 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
contained, 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 remediation activities vary significantly in duration, scope and cost
from site to site depending on the mix of unique site characteristics,
applicable technologies and regulatory agencies involved;
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, as well as enforcement policies,
are continually changing, and the outcome of court proceedings and
discussions with regulatory agencies are inherently uncertain;
o some legal matters are in the early stages of investigation or
proceeding or their outcomes otherwise may be difficult to predict,
and other legal matters may be identified in the future;
o unanticipated construction problems and weather conditions can hinder
the completion of environmental remediation;
o the inability to implement a planned engineering design or use planned
technologies and excavation methods may require revisions to the
design of remediation measures, which delay remediation and increase
costs; and
o the identification of additional areas or volumes of contamination and
changes in costs of labor, equipment and technology generate
corresponding changes in environmental remediation costs.
As of March 31, 2004, the company had reserves totaling $241 million for
cleaning up and remediating environmental sites, reflecting the reasonably
estimable costs for addressing these sites. This includes $94 million for
the West Chicago sites, $17 million for the Henderson, Nevada, site and $33
million for forest products sites. Additionally, as of March 31, 2004, the
company had litigation reserves totaling approximately $30 million for the
reasonably estimable losses associated with litigation. 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.
N. Asset Retirement Obligations
The company adopted FAS 143, "Accounting for Asset Retirement Obligations,"
on January 1, 2003, which resulted in an increase in net property of $107.9
million, an increase in abandonment liabilities of $160.8 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. Additionally in January 2003, the company
announced its plan to close the synthetic rutile plant in Mobile, Alabama,
by the end of 2003. Since the plant had a determinate closure date, the
company also accrued an abandonment liability associated with its plans to
decommission the Mobile facility.
A summary of the changes in the asset retirement obligation during the
first three months of 2004 is included in the table below.
(Millions of dollars)
---------------------------------------------------------------------------
Balance, December 31, 2003 $420.9
Accretion expense 6.6
Abandonment expenditures (3.0)
Changes in estimates, including timing (2.1)
------
Balance, March 31, 2004 422.4
Less: current asset retirement obligation (23.0)
Less: asset retirement obligation classified as
held for disposal (11.1)
------
Long-term asset retirement obligation $388.3
======
O. Employee Benefit Plans
The company has both noncontributory and contributory defined-benefit
retirement plans and company-sponsored contributory postretirement plans
for health care and life insurance. Most employees are covered under the
company's retirement plans, and substantially all U.S. employees may become
eligible for the postretirement benefits if they reach retirement age while
working for the company. During the first quarter of 2004, the company
contributed $3.2 million to the U.S. nonqualified and foreign retirement
plans, and $2.5 million to its U.S. postretirement plan. Kerr-McGee expects
to contribute $2 million to its U.S. nonqualified retirement plans, $6.4
million to its foreign retirement plans and $14.4 to its U.S.
postretirement plan during 2004. No contributions are expected in 2004 for
the U.S. qualified retirement plan.
In December 2003, the FASB issued FAS 132 (revised 2003), "Employers'
Disclosures about Pensions and Other Postretirement Benefits." FAS 132 does
not change the measurement or recognition provisions for pension and
postretirement plans; however, certain additional disclosures are required
by the new standard, including the interim disclosure below.
Total costs recognized for employee retirement and postretirement benefit
plans for the first quarter of 2004 and 2003 were as follows:
Postretirement
Retirement Plans Health and Life Plans
------------------------ ---------------------
Three Months Ended Three Months Ended
March 31, March 31,
------------------------ ---------------------
(Millions of dollars) 2004 2003 2004 2003
-------------------------------------------------------------------------------------------------------------
Net periodic cost -
Service cost $ 7.1 $ 6.4 $ .7 $1.1
Interest cost 18.2 18.2 4.7 5.4
Expected return on plan assets (29.3) (30.4) - -
Net amortization -
Prior service cost 2.1 2.2 .4 .1
Net actuarial (gain) loss 1.0 (2.5) .7 -
----- ----- ---- ----
Total $ (.9) $ (6.1) $6.5 $6.6
===== ====== ==== ====
The following assumptions were used in estimating the net periodic expense:
Three Months Ended Three Months Ended
March 31, 2004 March 31, 2003
--------------------------------- -------------------------------
United States International United States International
---------------------------------------------------------------------------------------------------------------
Discount rate 6.25% 5.25 - 5.5% 6.75% 5.5 - 5.75%
Expected return on plan assets 8.5 5.75 - 7.25 8.5 5.75 - 7.0
Rate of compensation increases 4.5 2.0 - 5.0 4.5 2.5 - 6.5
On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 ("the Act") was signed into law. The Act expanded
Medicare to include, for the first time, coverage for prescription drugs.
Kerr-McGee expects that this legislation will eventually reduce the cost
associated with its retiree medical programs. However, at this point,
Kerr-McGee's investigation into its options in response to the legislation
is preliminary and guidance from various governmental and regulatory
agencies concerning the requirements that must be met to obtain these cost
reductions, as well as the manner in which such savings should be measured,
has not yet been issued.
Because of various uncertainties surrounding Kerr-McGee's response to this
legislation and the appropriate accounting methodology for this event, the
company has elected to defer financial recognition of the impact of this
legislation until the FASB issues final accounting guidance. When issued,
the final guidance could require the company to change previously reported
information. This one-time deferral election is permitted under FASB Staff
Position No. 106-1, "Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003." The
net periodic postretirement benefit cost reflected above does not reflect
the effects of the Act on the plan.
P. Business Segments
Following is a summary of revenues and operating profit for each of the
company's business segments for the first quarter of 2004 and 2003.
Three Months Ended
March 31,
--------------------------
(Millions of dollars) 2004 2003
---------------------------------------------------------------------------
Revenues
Exploration and production $ 833.8 $ 795.9
Chemicals - Pigment 252.4 253.3
Chemicals - Other 30.0 50.3
-------- --------
1,116.2 1,099.5
All other .1 .1
-------- --------
Total Revenues $1,116.3 $1,099.6
======== ========
Operating Profit (Loss)
Exploration and production $ 329.9 $ 272.2
Chemicals - Pigment 7.2 7.4
Chemicals - Other (6.8) (10.0)
-------- --------
Total Operating Profit 330.3 269.6
Other Expense (87.3) (99.5)
-------- --------
Income from Continuing Operations
Before Income Taxes 243.0 170.1
Provision for Income Taxes (90.8) (65.9)
-------- --------
Income from Continuing Operations 152.2 104.2
Discontinued Operations, Net of Income Taxes - .4
Cumulative Effect of Change in Accounting
Principle, Net of Income Taxes - (34.7)
-------- --------
Net Income $ 152.2 $ 69.9
======== ========
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Comparison of 2004 Results with 2003 Results
First-quarter 2004 income from continuing operations totaled $152.2
million, compared with $104.2 million for the same 2003 period. Net income
for the 2004 first quarter was $152.2 million, compared with 2003
first-quarter net income of $69.9 million.
First-quarter 2004 operating profit was $330.3 million, compared with
first-quarter 2003 operating profit of $269.6 million, an increase of $60.7
million between periods. Higher operating profit resulted primarily from
higher realized oil and gas sales prices, slightly higher natural gas sales
volumes and lower exploration costs, partially offset by lower crude oil
sales volumes and higher other operating costs.
The first-quarter 2004 other expense totaled $87.3 million, compared with
expense of $99.5 million in the same 2003 period. The decrease is due in
part to a decrease in environmental and litigation provisions of $13.7
million, lower net interest expense of $7.9 million, and a 2004 gain on
sale of trading securities of $9 million, partially offset by a net foreign
currency transaction loss of $2 million versus a net gain of $3.4 million
in the same 2003 period and higher general and administrative costs of $6.8
million. The $7.9 million decrease in net interest expense between periods
resulted primarily from lower average outstanding debt balances during the
first quarter of 2004 as compared with the prior year, together with an
increase in interest savings from the company's interest rate swap
agreements.
Income tax expense for the first quarter of 2004 was $90.8 million
resulting in an effective tax rate of 37.4%, compared with $65.9 million,
or 38.7%, in the same 2003 period.
Segment Operations
Exploration and Production
Oil and gas sales revenues, production statistics and average prices from
continuing operations are shown in the following table.
Three Months Ended
March 31,
------------------
2004 2003
---------------------------------------------------------------------------
Revenues -
Crude oil and condensate sales $361.3 $405.4
Natural gas sales 371.3 323.1
Gas marketing activities 81.7 59.8
Other 19.5 7.6
------ ------
Total $833.8 $795.9
====== ======
Production -
Crude oil and condensate (thousands of barrels per day) 143 165
Natural gas (MMcf per day) 763 761
Total equivalent barrels of oil (thousands of barrels
per day) 270 292
Average prices -
Crude oil and condensate (per barrel) (a) $27.30 $26.97
Natural gas (per Mcf) (a) $ 5.35 $ 4.71
(a) The effect of the company's oil and gas commodity hedging program is
included in the average sales prices shown above. During the first
quarter of 2004, hedging activity reduced the average sales price of
crude oil and natural gas by $4.00 per barrel and $.12 per Mcf,
respectively. For the first quarter of 2003, hedging activity reduced
the average sales price of crude oil and natural gas by $4.08 per
barrel and $.81 per Mcf, respectively.
Crude Oil Revenues - Oil revenues declined $44.1 million in the first
quarter of 2004 as compared to the same period in 2003, primarily as a
result of lower production, offset in part by slightly higher realized oil
prices. The average realized price for oil improved $0.33 per barrel,
resulting in an increase of $4.2 million in oil revenues, while lower oil
production reduced revenues by $48.3 million.
The oil production decline was primarily due to the 2003 divestiture of
various noncore properties combined with lower production generated in the
North Sea area. As part of the company's effort to improve the overall
quality of its asset portfolio, targeting high-cost, noncore assets, 2003
property sales were completed in the U.S. onshore region, Gulf of Mexico
shelf and the U.K. North Sea, as well as the South China Sea. In addition,
production from new fields in the North Sea area, such as Tullich,
contributed at peak rates in the first quarter of 2003. Production rates
for these new fields declined for the same period in 2004.
Natural Gas Revenues - Natural gas revenues increased by $48.2 million in
the first quarter of 2004 compared with the same 2003 period as a result of
a $0.64 per Mcf, or 14%, increase in the average realized price for natural
gas. Gas production volumes of 763 MMcf per day were slightly above first
quarter 2003 gas production rates. The Gunnison field in the deepwater Gulf
of Mexico, which began production late in the fourth quarter of 2003,
helped offset production declines that resulted from divestiture activities
and other U.S onshore field declines.
Operating Profit - Revenues, operating costs and expenses, and marketing
activities associated with the exploration and production segment are shown
in the following table.
Three Months Ended
March 31,
------------------------
2004 2003
---------------------------------------------------------------------------
Revenues, excluding marketing revenues $752.1 $736.1
------ ------
Operating costs and expenses:
Lifting Costs:
Lease Operating Expense $ 88.9 $ 87.9
Production Taxes 15.1 14.4
------ ------
Total Lifting Costs 104.0 102.3
Depreciation and Depletion 161.7 156.7
Accretion Expense 6.6 6.2
Impairments on Assets Held for Use 13.2 5.1
Loss (Gain) on Assets Held for Sale 3.4 (5.2)
General and Administrative Expense 31.2 22.0
Transportation Expense 26.8 21.7
Exploration Expense 50.6 140.5
Gas Gathering, Pipeline and Other Expenses 24.9 15.8
------ ------
Total Operating Costs and Expenses 422.4 465.1
------ ------
Net, excluding marketing activities 329.7 271.0
Marketing - Gas Marketing Revenues 81.7 59.8
Marketing - Gas Purchase Costs (including
transportation) (81.5) (58.6)
------ ------
Total Operating Profit $329.9 $272.2
====== ======
Lease Operating Expense - Lease operating expense was $88.9 million in the
first quarter of 2004, a $1 million increase over the first quarter of
2003. On a per-unit basis, lease operating expense increased by 8% from
$3.32 per BOE in 2003 to $3.58 per BOE in 2004. The increase is a result of
higher lease operating expenses in the Gulf of Mexico relating primarily to
the Gunnison development and additional well work-over activity in the
Rocky Mountain Wattenberg field, as well as higher U.K. expenses due to the
impact of foreign currency exchange rates on expenses. These increases are
offset in part by lower operating expenses in the U.S. onshore and
international areas due to the divestiture of noncore, high-cost
properties.
Transportation Costs - In the first quarter of 2004, transportation costs,
representing the costs paid to third-party providers to transport oil and
gas production, increased $5.1 million from the first quarter of 2003. The
increase in transportation expense resulted from higher transportation
costs associated with new deepwater Gulf of Mexico producing fields, as
well as increased costs in the U.K. North Sea.
Depreciation, Depletion and Amortization (DD&A) - DD&A expense increased $5
million in the first quarter of 2004, representing a 3% increase over the
same 2003 period. On a per-unit basis, DD&A increased from $5.93 per BOE in
2003 to $6.52 per BOE in 2004. Higher DD&A unit costs resulted primarily
from increases in the U.K. North Sea area due to a reduction in the
expected life-of-field facility salvage values on certain fields. In
addition, first quarter DD&A expense in the U.K. North Sea was impacted by
downward revisions of oil and gas reserves on certain fields which occurred
at year-end 2003.
General and Administrative Expenses - General and administrative expenses
were higher in the first quarter of 2004, increasing by $9.2 million over
the same period in 2003. The increase is primarily the result of higher
employee-based compensation and pension costs, together with lower overhead
charge-outs for U.S. onshore properties due to 2003 divestitures.
Exploration Expense - Exploration expense decreased by $89.9 million in the
first quarter of 2004 compared with 2003, primarily as a result of lower
dry hole costs of $96.5 million and lower amortization of nonproducing
leasehold expense of $4.3 million. Partially offsetting these decreases
were higher geological and geophysical project costs of $8.4 million and
additional exploration staffing expense of $3 million. Exploration staffing
levels were increased during 2003 in support of the company's worldwide
exploration efforts and continued development of the company's high
potential prospect inventory.
Capitalized costs associated with exploratory wells may be charged to
earnings in a future period if management determines that commercial
quantities of hydrocarbons have not been discovered. At March 31, 2004, the
company had capitalized costs of approximately $157 million associated with
such ongoing exploration activities, primarily in the deepwater Gulf of
Mexico, Alaska and China.
Asset Impairments and Gain (Loss) on Sale of Assets - Kerr-McGee records
impairment losses when performance analysis indicates that future net cash
flows from production will not be sufficient to recover the carrying
amounts of the related assets. In general, such write-downs often occur on
mature properties that are nearing the end of their productive lives or
cease production sooner than anticipated. Asset impairment losses recorded
in the first quarter of 2004 associated with assets held for use totaled
$13.2 million. The 2004 impairments related primarily to a U.S. Gulf of
Mexico field that experienced premature water breakthrough and ceased
production sooner than expected. Asset impairment losses in the first
quarter 2003 totaled $5.1 million. For a discussion regarding the status of
the company's Leadon field in the U.K. North Sea, see Note C to the
accompanying Consolidated Financial Statements.
The company recognized a loss on sale of assets of $3.4 million in the
first quarter of 2004 associated primarily with oil and gas properties held
for sale in the U.S. Gulf of Mexico shelf. From time to time, the company
may identify other oil and gas properties to be disposed of that are
considered noncore or nearing the end of their productive lives.
Gas Marketing Activities - In the Rocky Mountain producing area, Kerr-McGee
purchases third-party natural gas for aggregation and sale with the
company's own production from the Wattenberg field in Colorado. In
addition, Kerr-McGee has purchased transportation capacity to markets in
the Midwest to facilitate sale of its natural gas in market regions outside
the immediate vicinity of its production. This activity began with the
company's acquisition of HS Resources in August 2001 and has increased
since that time.
Marketing revenue increased $21.9 million in the first quarter of 2004
compared with the same period in 2003. The increase is primarily the result
of higher purchase and resale of natural gas in the Rocky Mountain area and
higher natural gas prices. Gas purchase costs increased $22.9 million for
the same period.
Chemicals - Pigment
Operating profit for the first quarter of 2004 was $7.2 million on revenues
of $252.4 million, compared with operating profit of $7.4 million on
revenues of $253.3 million for the same 2003 period. Average selling prices
increased 2% due to stronger foreign currencies between periods while total
revenues decreased $0.9 million due to slightly lower sales volumes.
Pricing gains over the prior-year quarter were offset by manufacturing cost
increases, also due to stronger foreign currencies and increased operating
expenses.
In January, the company began production through a new high productivity
oxidation line at its Savannah plant. It is expected that once fully
commissioned, this process will allow for improved manufacturing
efficiencies, lower operating expenses and lower capital requirements.
Separately, during the quarter the company idled one of two sulfate
production lines at its Savannah facility due to high inventory levels.
The company will continue to evaluate the performance of the new oxidation
line and by the latter part of 2004 will have a better understanding of how
the Savannah site might be reconfigured to exploit its capabilities. This
reconfiguration could include redeployment of certain assets, idling of
certain assets and reduction of the future useful life of other assets,
resulting in the acceleration of depreciation expense.
Chemicals - Other
Operating loss in the 2004 first quarter was $6.8 million on revenues of
$30 million, compared with an operating loss of $10 million on revenues of
$50.3 million in the same 2003 period. The decrease in revenues from the
prior-year quarter was primarily due to the exit of the forest products
business. The decrease in operating loss was primarily due to a 2003 net
environmental provision of $11 million for ammonium perchlorate related to
the company's Henderson, Nevada, operations (see Note M). This was offset
in part by increased charges of $5.3 million in 2004 for the forest
products operations related to increases in dismantlement and environmental
costs, combined with operating losses in the electrolytic operations of
$2.4 million.
The company's Henderson, Nevada, manufacturing plant, which had been
temporarily shut down in the third quarter of 2003, resumed operations in
December 2003 as demand for U.S. electrolytic manganese dioxide (EMD)
product increased. The company withdrew its previously filed EMD
anti-dumping petition in February 2004 as market conditions improved.
Financial Condition
At March 31, 2004, the company's net working capital position was a
negative $371.6 million, compared with a negative $235.5 million at March
31, 2003, and a negative $475.1 million at December 31, 2003. The current
ratio was .8 to 1 at March 31, 2004, December 31, 2003, and March 31, 2003.
The negative working capital position 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 to lower borrowing costs.
The company's percentage of net debt (debt less cash) to capitalization was
56% at March 31, 2004, compared with 57% at December 31, 2003 and 59% at
March 31, 2003. The decrease from December 31, 2003, resulted primarily
from reduced debt balances and an increase in stockholders' equity for the
period. The company had unused lines of credit and revolving credit
facilities of $1.4 billion at March 31, 2004. Of this amount, $870 million
can be used to support commercial paper borrowings of Kerr-McGee Credit LLC
and $490 million can be used to support European commercial paper
borrowings of Kerr-McGee (G.B.) PLC, Kerr-McGee Chemical GmbH, Kerr-McGee
Pigments (Holland) B.V. and Kerr-McGee International ApS. Currently, the
size of the company's commercial paper program totals $1.2 billion, which
can be issued based on market conditions. Long-term debt obligations due
within one year of $475.7 million consist primarily of $145 million, 8.375%
notes due July 15, 2004 and $330.3 million (face value), 5 1/2% notes
exchangeable for common stock due August 2, 2004. As discussed below, the
notes exchangeable for common stock may be settled in either Devon stock
or, at the company's option, an equivalent amount of cash.
As of March 31, 2004, the company's senior unsecured debt was rated BBB by
Standard & Poor's and Fitch and Baa3 by Moody's. The company believes that
it has the ability to provide for its operational needs and its long- and
short-term capital programs through its operating cash flow (partially
protected by the company's hedging program), borrowing capacity and ability
to raise capital. Should operating cash flow decline, the company may
reduce its capital expenditures program, borrow under its commercial paper
program and/or consider selective long-term borrowings or equity issuances.
Kerr-McGee's commercial paper programs are backed by the revolving credit
facilities currently in place.
The company holds derivative financial instruments that require margin
deposits if unrealized losses exceed limits established with individual
counterparty institutions. From time to time, the company may be required
to advance cash to its counterparties to satisfy margin deposit
requirements. Between January 1, 2004 and May 6, 2004, margin calls totaled
$12.3 million, of which $7.6 million had been refunded to the company and
$4.7 million remained outstanding as of May 6, 2004.
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. As of April 30, 2004, Devon common stock
was trading at $61.20 per share. 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 has the right to retain up to 15% of the shares
if Devon's stock price is greater than $39.16 per share (the DECS holders
have an embedded call option on 85% of the shares). If Devon's stock price
at maturity is greater than $33.19 per share but less than $39.16 per
share, the company's right to retain Devon stock will be reduced
proportionately. The company is not entitled to retain any Devon stock if
the price of Devon stock at maturity is less than or equal to $33.19 per
share. Using the Black-Scholes valuation model, the company recognizes any
gains or losses resulting from changes in the fair value of the put and
call options in other income. At March 31, 2004 and December 31, 2003, the
net liability fair value of the embedded put and call options was $161.3
million and $154.9 million, respectively. The company recorded losses of
$6.4 million and $16.2 million during the three months ended March 31, 2004
and 2003, 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 the Devon stock classified as trading. The
fair value of the 8.4 million shares of Devon classified as trading
securities was $490.5 million at March 31, 2004, and $483 million at
December 31, 2003. During the first quarter of 2004 and 2003, the company
recorded unrealized gains of $7.5 million and $19.6 million, respectively,
in other income for the changes in fair value of the Devon shares
classified as trading. The company also held certain Devon shares
classified as available-for-sale securities, which were partially
liquidated in December 2003, with the remaining shares sold in January
2004. The available-for-sale Devon shares were in excess of the number of
shares the company believes will be required to extinguish the DECS;
however, should the price of Devon stock fall below $39.16 per share at the
maturity of the DECS, the company would be required to either purchase
additional Devon shares to settle the DECS or settle a portion of the DECS
with cash. The DECS and the derivative liability associated with the call
option are classified as current liabilities in the Consolidated Balance
Sheet as of March 31, 2004 and December 31, 2003.
Operating activities provided net cash of $274.6 million in the first three
months of 2004, compared with $321.7 million for the same 2003 period. The
$47.1 million decrease in operating cash flow between periods resulted in
part from a $28.9 million increase in taxes and interest paid during the
first quarter of 2004. The remaining decrease resulted from other working
capital changes. For the first quarter of 2004, capital spending, including
dry hole costs, totaled $169.8 million and dividends paid totaled $45.4
million, which compares with $274.6 million of net cash provided by
operating activities during the same period. Excess operating cash flow,
proceeds from the sale of Devon stock of $38.9 million and other cash
inflows were used to fund the company's net reduction in long-term debt of
$102 million in the 2004 first quarter.
Capital expenditures for the first three months of 2004, excluding dry hole
costs, totaled $161.7 million, compared with $201.4 million for the
comparable prior-year period. Exploration and production expenditures were
85% of the first quarter 2004 total expenditures. Chemical - pigment
expenditures were 12% of the total, while chemical - other and corporate
incurred the remaining 3% of the first-quarter 2004 expenditures.
Management anticipates that the cash requirements for the next several
years can be provided through internally generated funds and selective
borrowings.
On April 7, 2004, the company announced plans to merge with Westport
Resources Corporation (Westport) in a transaction valued at approximately
$3.4 billion. The merger agreement, unanimously approved by the board of
directors of both companies, provides that Westport stockholders will
receive .71 shares of Kerr-McGee common stock for each common share of
Westport. As a result, Kerr-McGee expects to issue approximately 49 million
new shares to Westport's stockholders (including shares that may be issued
upon exercise of outstanding stock options). The transaction is subject to
approval by the stockholders of both companies, as well as other customary
closing conditions. If approved, the transaction is expected to be
consummated in the third quarter of 2004, shortly after the companies'
respective stockholder meetings.
Westport's December 31, 2003 proved oil and gas reserves totaled 297
million barrels of oil equivalent, consisting primarily of natural gas
reserves located in North America. Kerr-McGee believes the merger will
create a more balanced portfolio of oil and gas assets for future growth by
combining Westport's lower-risk, predominantly U.S. onshore properties with
Kerr-McGee's existing asset portfolio.
In connection with the proposed Westport merger, Kerr-McGee will assume
Westport's outstanding debt on the effective date of the merger. As of
December 31, 2003, Westport's long-term debt consisted of $700 million face
value, 8 1/4% Senior Subordinated Notes due 2011 and $262 million
outstanding under Westport's revolving credit facility. Following
completion of the merger, Kerr-McGee is considering calling Westport's 8
1/4% Senior Subordinated Notes and issuing Kerr-McGee debt in a similar
amount. Kerr-McGee's decision to pursue such transactions will depend, in
part, on prevailing interest rates and market conditions following
completion of the merger, and there can be no assurance that the company
will pursue such transactions.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
The company is exposed to market risk fluctuations in crude oil and natural
gas prices. To increase the predictability of its cash flows and support
capital expenditure plans, the company initiated a hedging program in 2002
and periodically enters into financial derivative instruments that
generally fix the commodity prices to be received for a portion of the
company's oil and gas production in the future. At March 31, 2004, the
company had outstanding contracts to hedge a total of 13.8 million barrels
of North Sea crude oil production, 14.2 million barrels of domestic crude
oil production and 157.2 million MMBtu of domestic natural gas production
for the period from April through December 2004. The net liability fair
value of the hedge contracts outstanding at March 31, 2004, was $59.7
million for North Sea crude oil, $79.4 million for domestic crude oil and
$172.8 million for domestic natural gas.
At March 31, 2004, the following commodity-related derivative contracts
were outstanding related to the company's 2004 hedging program:
Average
Daily Average
Contract Type (1) Period Volume Price
--------------------------------------------------------------------------------------------------------------
Natural Gas Hedges MMBtu $/MMBtu
------------------ ----- -------
Fixed-price swaps (NYMEX) Q2 - 2004 565,000 $4.74
Q3, Q4 - 2004 575,000 $4.75
Basis swaps (CIG and Northwest) Q2, Q3 - 2004 55,000 $.047
Q4 - 2004 41,739 $.038
Crude Oil Hedges Bbl $/Bbl
---------------- --- -----
Fixed-price swaps (WTI) Q2 - 2004 54,300 $28.23
Q3 - 2004 50,915 $27.75
Q4 - 2004 50,015 $28.29
Fixed-price swaps (Brent) Q2 - 2004 51,800 $26.27
Q3 - 2004 46,850 $26.45
Q4 - 2004 52,000 $26.71
Natural Gas (non-hedge contracts)
---------------------------------
Basis swaps (Northwest) 2005 35,000 $0.31
2006 35,000 $0.31
2007 35,000 $0.31
2008 17,473 $0.25
(1) These contracts may be subject to margin calls above certain limits
established with individual counterparty institutions.
Prior to entering into the merger agreement with Westport, Kerr-McGee
entered into additional financial derivative transactions relating to
specified amounts of projected 2004, 2005 and 2006 crude oil and natural
gas production volumes. From March 31, 2004 through April 6, 2004, the
following derivative contracts were added.
Average
Daily Average
Contract Type (1) Period Volume Price
--------------------------------------------------------------------------------------------------------------
Natural Gas Hedges MMBtu $/MMBtu
------------------ ----- -------
Fixed-price swaps (NYMEX) Aug. - Sept. 2004 61,967 $5.96
Q4 - 2004 93,207 $5.96
Costless collars (NYMEX) 2005 280,000 $5.00 - $6.25
2006 340,000 $4.75 - $5.51
Crude Oil Hedges Bbl $/Bbl
---------------- --- -----
Fixed-price swaps (WTI) Aug. 2004 5,000 $32.60
Sept. - Dec. 2004 9,000 $32.60
Costless collars (WTI) 2005 14,000 $28.50 - $31.89
2006 19,000 $27.00 - $30.58
Natural Gas (non-hedge contracts) MMBtu $/MMBtu
--------------------------------- ----- -------
Fixed-price swaps (NYMEX) (2) Aug. - Sept. 2004 123,033 $5.96
Q4 - 2004 91,793 $5.96
Crude Oil (non-hedge contracts) Bbl $/Bbl
------------------------------- --- -----
Fixed-price swaps (WTI) (2) Aug. - 2004 4,000 $32.60
(1) These contracts may be subject to margin calls above certain limits
established with individual counterparty institutions.
(2) These 2004 swaps will be treated as non-hedge derivatives since
Kerr-McGee's U.S. production from August - December 2004 (excluding
Westport volumes) is either already hedged or, in the case of Rocky
Mountain production, does not have corresponding basis swaps in place
to make the hedges highly effective. As a result, even though these
derivatives effectively reduce commodity price risk for the combined
company's expected production, Kerr-McGee will recognize mark-to-market
gains and losses in earnings for the non-hedge quantities through the
end of 2004 (or until such time as the derivatives qualify for hedge
accounting treatment) rather than deferring such amounts in other
comprehensive income. For purposes of Kerr-McGee's 2004 annual results,
this interim period mark-to-market accounting merely represents a
timing difference since, under either approach, all gains and losses on
the swaps will be recognized in earnings by year end.
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 and certain sales of euro) 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
loss.
Following are the notional amounts at the contract exchange rates,
weighted-average contractual exchange rates and estimated contract values
for open contracts at March 31, 2004 to purchase (sell) foreign currencies.
Contract values are based on the estimated forward exchange rates in effect
at quarter-end. All amounts are U.S. dollar equivalents.
Estimated
(Millions of dollars, Notional Weighted-Average Contract
except average contract rates) Amount Contract Rate Value
--------------------------------------------------------------------------------------------------------------
Open contracts at March 31, 2004 -
Maturing in 2004 -
British pound sterling $ 178.6 1.6903 $189.4
Australian dollar 28.2 .5359 38.5
Euro (103.7) 1.1939 (93.4)
British pound sterling (.8) 1.7863 (.8)
New Zealand dollar (.7) .6535 (.7)
Japanese yen (.7) .0090 (.8)
Maturing in 2005 -
British pound sterling 76.7 1.5995 83.7
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 2002, Tiwest Pty Ltd, an Australian joint venture that produces
titanium dioxide and in which Chemical indirectly has a 50%
interest, received a complaint and notice of violation from the
Department of Environmental Waters and Catchment Protection in
Western Australia alleging violations of the Environmental
Protection Act (1986). This matter concerned an alleged chlorine
release at the facility. Tiwest defended the proceeding in the Court
of Petty Sessions, Perth, Western Australia, and on March 26, 2004,
the Court found in favor of Tiwest. Accordingly, this matter has
been resolved, subject to any appeal of the Court's decision.
(b) For a discussion of other legal proceedings and contingencies,
reference is made to Note M to the Consolidated Financial Statements
included in Part I, Item 1. of this Form 10-Q, which is incorporated
herein by reference.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits -
Exhibit No
----------
2.1 Agreement and Plan of Merger, dated as of April 6,
2004, among Kerr-McGee Corporation, Kerr-McGee (Nevada)
LLC and Westport Resources Corporation, filed as
Exhibit 99.1 to the company's Current Report on Form
8-K dated April 8, 2004, and incorporated herein by
reference.
3.1 Amended and restated Certificate of Incorporation of
Kerr-McGee Corporation, filed as Exhibit 4.1 to the
company's Registration Statement on Form S-4 dated June
28, 2001, and incorporated herein by reference.
3.2 Amended and restated Bylaws of Kerr-McGee Corporation,
filed as Exhibit 3.2 to the company's Annual Report on
Form 10-K for the year ended December 31, 2003, and
incorporated herein by reference.
10.1 Voting Agreement, dated as of April 6, 2004, among
Kerr-McGee Corporation, Belfer Corp., Renee Holdings
Partnership, L.P., Vantz Limited Partnership, LDB Two
Corp., Belfer Two Corp., Liz Partners, L.P., filed as
Exhibit 99.2 to the company's Current Report on Form
8-K dated April 8, 2004, and incorporated herein by
reference.
10.2 Voting Agreement, dated as of April 6, 2004, among
Kerr-McGee Corporation and EQT Investments, LLC., filed
as Exhibit 99.3 to the company's Current Report on Form
8-K dated April 8, 2004, and incorporated herein by
reference.
10.3 Voting Agreement, dated as of April 6, 2004, among
Kerr-McGee Corporation and Medicor Foundation, filed as
Exhibit 99.4 to the company's Current Report on Form
8-K dated April 8, 2004, and incorporated herein by
reference.
10.4 Voting Agreement, dated as of April 6, 2004, among
Kerr-McGee Corporation and Westport Energy LLC., filed
as Exhibit 99.5 to the company's Current Report on Form
8-K dated April 8, 2004, and incorporated herein by
reference.
10.5 Voting Agreement, dated as of April 6, 2004, among
Kerr-McGee Corporation and Donald D. Wolf, filed as
Exhibit 99.6 to the company's Current Report on Form
8-K dated April 8, 2004, and incorporated herein by
reference.
10.6 Registration Rights Agreement, dated as of April 6,
2004, among Kerr-McGee Corporation, Westport Energy
LLC, Medicor Foundation and EQT Investments, LLC, filed
as Exhibit 99.7 to the company's Current Report on Form
8-K dated April 8, 2004, and incorporated herein by
reference.
Exhibit No
----------
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 March 31, 2004:
o Current Report dated January 21, 2004, announcing a
conference call to discuss the company's fourth-quarter
2003 financial and operating results, and expectations
for the future.
o Current Report dated January 28, 2004, announcing a
security analyst meeting to discuss the company's
financial and operating results for 2003 and certain
expectations for oil and natural gas production volumes
for the year 2004.
o Current Report dated January 28, 2004, announcing the
company had posted on its website a table containing
hedge guidance for 2003 and 2004 oil and gas derivative
instruments.
o Current Report dated January 28, 2004, 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
December 31, 2003.
o Current Report dated January 28, 2004, announcing the
company's fourth-quarter 2003 earnings.
o Current Report dated January 30, 2004, announcing that
the company would present at the Credit Suisse First
Boston Energy Conference on February 4, 2004.
o Current Report dated February 11, 2004, announcing that
the company will webcast its executive briefing for
investors and security analysts on February 18, 2004.
o Current Report dated February 19, 2004, announcing a
conference call to discuss the company's interim
first-quarter 2004 financial and operating activities,
and expectations for the future.
o Current Report dated March 19, 2004, announcing a
conference call to discuss the company's interim
first-quarter 2004 financial and operating activities,
and expectations for the future.
o Current Report dated March 24, 2004, announcing that
the company would present at the Howard Weil Energy
Conference on March 29, 2004.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
KERR-McGEE CORPORATION
Date: May 7, 2004 By: /s/ John M. Rauh
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John M. Rauh
Vice President and Controller
and Chief Accounting Officer