Hess 1999 Annual Report Download - page 37

3. Accounting Changes
Effective January 1, 1999, the Corporation adopted the last-in,
first-out (LIFO) inventory method for valuing its refining and
marketing inventories. The Corporation believes that the
LIFO method more closely matches current costs and reve-
nues and will improve comparability with other oil companies.
The change to LIFO decreased net income by $97,051,000 for
the year ended December 31, 1999 ($1.08 per share basic and
diluted). There is no cumulative effect adjustment as of the
beginning of the year for this type of accounting change.
On January 1, 1998, the Corporation began capitalizing the
cost of internal use software in accordance with AICPA State-
ment of Position 98-1. This accounting change increased net
income for 1998 by $13,867,000 ($.15 per share).
In June 1998, the Financial Accounting Standards Board
issued FAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. The Corporation must adopt FAS No. 133
by January 1, 2001. This statement requires that the Corpora-
tion recognize all derivatives on the balance sheet at fair value.
For derivatives that are not hedges, the change in fair value
must be recognized in income. For derivatives that hedge
changes in the fair value of assets, liabilities or firm commit-
ments, the gains or losses are recognized in earnings together
with the offsetting losses or gains on the hedged items. For
derivatives that hedge cash flows of forecasted transactions,
the gains or losses are recognized in other comprehensive
income until the hedged items are recognized in income.
The Corporation has not yet determined what the effect of
FAS No. 133 will be on its income and financial position.
4. Inventories
Inventories at December 31 are as follows:
Thousands of dollars 1999 1998
Crude oil and other charge stocks $ 67,539 $ 35,818
Refined and other finished products 393,064 386,917
Less: LIFO adjustment (149,309) —
311,294 422,735
Materials and supplies 61,419 59,447
Total $ 372,713 $482,182
5. Refining Joint Venture
In 1998, the Corporation formed HOVENSA L.L.C.
(HOVENSA), a joint venture with Petroleos de Venezuela, S.A.
(PDVSA). The Corporation’s Virgin Islands subsidiary and
PDVSA, V.I., Inc. (PDVSA V.I.), a wholly-owned subsidiary of
PDVSA, contributed their 50% interests in the fixed assets of
the Virgin Islands refinery, previously wholly-owned by the
Corporation, to HOVENSA. HOVENSA is 50% owned by a
subsidiary of the Corporation and 50% owned by PDVSA V.I.
and operates the refinery. The Corporation purchased refined
products from HOVENSA at a cost of approximately
$1,196,000,000 during 1999 and $151,000,000 during the two
months ended December 31, 1998. The Corporation sold
crude oil to HOVENSA at a cost of approximately $81,000,000
during 1999 and $7,000,000 during the two months ended
December 31, 1998.
The Corporation’s investment in the joint venture is
accounted for using the equity method. Summarized financial
information for HOVENSA as of December 31, 1999 and for
the year then ended and as of December 31, 1998 and for the
two months since inception follows:
Thousands of dollars 1999 1998
Summarized Balance Sheet Information
At December 31
Current assets $ 432,877 $ 352,171
Net fixed assets 1,328,407 1,343,712
Other assets 27,094 27,711
Current liabilities (282,312) (133,454)
Long-term debt (150,000) (250,000)
Deferred liabilities and credits (25,750) (27,718)
Partners’ equity $ 1,330,316 $1,312,422
Summarized Income Statement Information
For the periods ended December 31
Total revenues $ 3,081,969 $ 344,896
Costs and expenses (3,064,075) (375,903)**
Net income (loss)* $ 17,894 $ (31,007)
*The Corporation’s share of HOVENSA’s income in 1999 was $6,988 and its share of
the 1998 loss was $15,848.
**1998 results include an inventory writedown of $31,999, which reduced costs of
products sold in 1999.
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