Hess 2002 Annual Report Download - page 20

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In 2001, the Corporation recorded an after-tax charge of $19 million
for estimated losses due to the bankruptcy of certain subsidiaries of
Enron Corporation. In addition, the Corporation recorded a net charge
of $12 million for severance expenses resulting from cost reduction
initiatives, principally in exploration and production operations.
Approximately 150 positions were eliminated.
In 2000, the after-tax gain of $60 million on termination of a pro-
posed acquisition principally reflected income on foreign currency
contracts purchased in anticipation of the acquisition. This special
item also included income from a fee on termination of the acquisi-
tion, partially offset by transaction costs. The charge in 2000 of
$24 million reflects costs associated with an alternative fuel
research and development venture.
Liquidity and Capital Resources
Net cash provided by operating activities, including changes in
operating assets and liabilities, amounted to $1,965 million in 2002,
$1,960 million in 2001 and $1,795 million in 2000. Excluding changes
in balance sheet items, operating cash flow was $2,074 million,
$2,135 million and $1,948 million in 2002, 2001 and 2000, respec-
tively. Although the Corporation’s earnings in 2002 were lower than
in 2001, the decrease was primarily due to impairment charges and
higher depreciation, depletion and amortization expenses which
are non-cash charges. As a result, net cash provided by operating
activities in 2002 was comparable to that of 2001. Assuming average
2002 oil and gas selling prices and excluding changes in working
capital and proceeds from asset sales, the Corporation anticipates
that operating cash flow will decline in 2003 by approximately 30%
and, therefore, less cash flow will be available for financial manage-
ment purposes, including debt reduction. This decline is primarily due
to lower anticipated production in 2003.
A portion of the lower anticipated production resulted from reduced
proved reserve estimates on the LLOG fields acquired in 2001 and a
reduction of probable reserves and an extended field life with lower
planned production rates on the Ceiba field, also acquired in 2001.
The reduced production and reserves will result in lower than
expected cash flows and growth from these two fields over the next
several years, assuming average 2002 oil and gas prices.
In 2002, the Corporation sold United States flag vessels, its energy
marketing business in the United Kingdom and several small oil
and gas fields for net proceeds of $412 million.
In February 2003, the Corporation exchanged its crude oil producing
properties in Colombia, plus $10 million in cash, for an additional 25%
interest in natural gas reserves in the joint development area of
Malaysia and Thailand. Current production from Colombia is approxi-
mately 20,000 barrels of crude oil per day. Net income in 2002 from
operations in Colombia amounted to $96 million. Expected income in
2003 would have been significantly below this amount as a result of
higher depreciation, depletion and amortization expenses and an
increased effective income tax rate. This transaction is expected to
result in a net charge to earnings of approximately $60 million in the
first quarter of 2003. This charge reflects the adjustment of the book
value of the asset being transferred to fair value.
In the first quarter of 2003, the Corporation also completed the sale
of its 1.5% interest in the Trans Alaska Pipeline System and will
record a net gain of approximately $30 million. The Corporation also
entered into an agreement during 2002 with Premier Oil plc to
exchange its 25% shareholding interest in Premier, plus $17 million
in cash, for a 23% interest in Natuna Sea Block A in Indonesia.
Completion of the transaction is conditional upon certain govern-
mental consents. The Corporation does not expect a material income
statement impact from this transaction.
In addition, several non-strategic oil and gas assets are being con-
sidered for sale. These assets include certain Gulf of Mexico shelf
properties, several small United Kingdom fields and interests in
Indonesian fields. These properties have current production of
approximately 25,000 barrels of oil equivalent per day.
The balances in accounts receivable, as well as accounts payable
and accrued liabilities, are substantially lower at December 31, 2002
than at December 31, 2001. Consolidated revenues are also lower
and certain expenses, including marketing expenses, are lower than
they otherwise would have been. These decreases are largely due
to the sale of the United Kingdom energy marketing business in the
first quarter of 2002.
Total debt was $4,992 million at December 31, 2002 compared
with $5,665 million at December 31, 2001. The Corporation’s debt
to capitalization ratio was 54.0% at December 31, 2002 compared
with 53.6% at the prior year-end. Debt reduction of $673 million
in 2002 did not reduce the debt to capitalization ratio, because of
the net loss in 2002 and required reduction in stockholders’ equity
for the pension plan and deferred hedging losses recorded in
accumulated other comprehensive income.
Loan agreement covenants allow the Corporation to borrow an
additional $1.9 billion for the construction or acquisition of assets
at December 31, 2002. At year-end, the amount that can be bor-
rowed under the loan agreements for the payment of dividends
is $720 million. At December 31, 2002, the Corporation has
$1.5 billion of additional borrowing capacity available under
its revolving credit agreements and has additional unused lines
of credit for $206 million under uncommitted arrangements
with banks.