Hess 2002 Annual Report Download - page 18

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Effective October 2002, the Corporation cancelled the $125 million
contingent note of PDVSA, issued to it in connection with the formation
of HOVENSA.At the same time, there were amendments of certain
contracts relating to the HOVENSA joint venture, including a six-year
extension of the contract for the supply of Mesa crude oil and an
amendment to the pricing formula for Merey crude oil supplied by
an affiliate of PDVSA.There was also an amendment to the services
agreement between the Corporation and HOVENSA. The contingent
note was not valued for accounting purposes and its cancellation had
no effect on the Corporation’s financial condition.
Retail, Energy Marketing and Other: Retail gasoline operations in
2002 were profitable, but less so than in 2001, reflecting lower mar-
gins. In 2001, retail results were substantially better than in 2000,
due to higher margins and increased sales volumes. Energy market-
ing activities were also profitable in 2002 compared with a loss in
2001. Earnings from the Corporation’s catalytic cracking facility in
New Jersey decreased in 2002, due to lower refining margins.
Earnings from the catalytic cracking facility in 2001 exceeded those
from 2000, reflecting higher margins and a shutdown for scheduled
maintenance in 2000. Total refined product sales volumes were
140 million barrels in 2002, 141 million barrels in 2001 and
134 million barrels in 2000.
The Corporation has a 50% voting interest in a consolidated part-
nership that trades energy commodities and energy derivatives. The
Corporation also takes trading positions in addition to its hedging
program. The Corporation’s after-tax results from trading activities,
including its share of the earnings of the trading partnership,
amounted to income of $3 million in 2002, $45 million in 2001
and $22 million in 2000.
Marketing expenses increased in 2002 and 2001, principally
reflecting expanded retail operations. The expenses of the trading
partnership are also included in marketing expenses and contributed
to the increase.
Refining and marketing results will continue to be volatile, reflecting
competitive industry conditions and supply and demand factors,
including the effects of weather.
Corporate: After-tax corporate expenses amounted to $63 million
in 2002, $78 million in 2001 and $43 million in 2000. In 2002, corpo-
rate administrative expenses before income taxes were comparable
to the 2001 amount. The decrease in after tax expenses in 2002
reflects lower United States taxes on foreign source income.
The increase in 2001 reflects increases in certain administrative
expenses, including officer severance and charitable contributions,
as well as increased income taxes related to foreign operations.
Interest: After-tax interest was $178 million in 2002, $135 million in
2001 and $126 million in 2000. The increase in both years is due to
increased borrowings related to acquisitions, partially offset by lower
interest rates and higher amounts capitalized. Capitalized interest,
before income taxes, was $101 million, $44 million and $3 million in
2002, 2001 and 2000. Interest expense in 2003 is expected to be
comparable to the 2002 amount. Although average debt outstanding
is expected to be lower in 2003, the amount of interest capitalized is
also expected to be reduced.
Consolidated Operating Revenues: Sales and other operating
revenues decreased by 11% compared with 2001, due to the sale of
the United Kingdom energy marketing business, and lower sales vol-
umes of refined products and purchased natural gas related to U.S.
energy marketing activities. These decreases were partially offset
by higher production of crude oil and natural gas. In 2001, sales and
other operating revenues increased by 12% compared with 2000.
The increase was primarily due to higher sales volumes of pur-
chased natural gas related to energy marketing activities in the
United States, as well as increased refined products sales. Crude
oil and natural gas production volumes were also higher.