Occidental Petroleum 2002 Annual Report Download - page 71

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December 31, 2002, sublease rental amounts included in the future operating
lease payments totaled $95 million, as follows (in millions): 2003--$8,
2004--$8, 2005--$9, 2006--$9, 2007--$8 and 2008 and thereafter--$53.
Occidental has guaranteed the residual value of certain leased assets of
approximately $190 million, including the LaPorte, Texas VCM plant. If the
assets are not purchased at the end of the lease-term, Occidental would be
obligated to pay any deficiency between the fair value of the assets and the
guaranteed residual; however, Occidental does not expect to make payments under
this provision.
Included in the 2002 and 2001 property, plant and equipment accounts were
$10 million and $11 million, respectively, of property leased under capital
leases and $7 million and $8 million, respectively, of related accumulated
amortization.
Occidental is leasing a cogeneration facility which was completed in 2002.
This facility supplies all the steam and electric power requirements for
Occidental's Taft chlor-alkali plant at a lower cost than if the plant were to
generate its own steam and purchase electricity from a public utility. An owner
trust with investors as participating beneficiaries owns the project. The equity
participants in the owner trust funded the owner trust with equity during
construction in the amount of three percent of the cumulative project costs
throughout the period and in an amount in excess of 14 percent of the final
project costs upon the commencement of the lease term. In connection with the
completion of construction and satisfaction of certain other conditions, the
26-year term of the operating lease commenced in December 2002. At December 31,
2002, Occidental estimates the present value of the remaining lease payments to
be $455 million.
52
Occidental has entered into various operating lease agreements, mainly for
railcars, power plants, manufacturing facilities and office space. The leased
assets are used in Occidental's operations where leasing offers advantages of
greater operating flexibility and generally costs less than alternative methods
of funding that were available at the time financing decisions were made. Lease
payments are charged to Occidental's operations, mainly as cost of sales.
The accounting treatment for the leases described above, including the Taft
lease, is dictated by SFAS 13 and other related pronouncements. These leases
have been classified as operating leases in accordance with the operating lease
criteria.
As discussed in Note 4, FIN No. 46 is expected to result in the
consolidation of certain variable interest entities that are owners of plant and
equipment Occidental leases from them. The probable consolidation will affect
the LaPorte, Texas VCM plant lease. If consolidation were to take place, there
would be no significant effect on Occidental's financial condition, however,
consolidation would result in an increase in assets of approximately $132
million and liabilities of $154 million, with an after-tax charge of
approximately $22 million in the third quarter of 2003. Occidental expects to
record this charge as a cumulative effect of a change in accounting principles.
Annual expense for depreciation will increase by approximately $12 million
pre-tax. If Occidental chose to terminate the leases prior to adoption, there
would be no cumulative effect of a change in accounting principles.
NOTE 8 ENVIRONMENTAL EXPENDITURES
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Occidental's operations in the United States are subject to stringent
federal, state and local laws and regulations relating to improving or
maintaining the quality of the environment. Foreign operations also are subject
to environmental-protection laws. Costs associated with environmental compliance
have increased over time and are generally expected to rise in the future.
Environmental expenditures related to current operations are factored into the
overall business planning process. These expenditures are mainly considered an
integral part of production in manufacturing quality products responsive to
market demand.
The laws which require or address environmental remediation may apply
retroactively to past waste disposal practices and releases. In many cases, the