Hess 2002 Annual Report Download - page 26

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As part of its initiative to monitor the public filings of Fortune 500 compa-
nies, the Staff of the Division of Corporation Finance of the Securities and
Exchange Commission reviewed and commented on the Corporation’s
Form 10-K for the year ended December 31, 2001 and certain quarterly
and current reports on Forms 10-Q and 8-K filed or furnished thereafter.
While most of the Staff’s comments have been resolved, the Staff has
questioned whether geographic components of the Corporation’s explo-
ration and production business should constitute operating segments and
reporting units. The Corporation and its independent auditors continue to
believe that its overall exploration and production business is the operat-
ing segment and the reporting unit, that this treatment is consistent with
the manner in which the business is managed, and this determination
conforms with the applicable accounting requirements; however, the
Staff may disagree. If it was ultimately determined that the overall explo-
ration and production business is not the operating segment, and is
therefore not the reporting unit, goodwill would be allocated and tested
for impairment at a lower reporting unit level, which could result in the
Corporation recognizing an impairment of goodwill that it would not
otherwise need to recognize.
The Corporation has hedged most of its 2003 crude oil and natural
gas production and a portion of its 2004 production. The hedging
contracts correlate to the selling prices of crude oil or natural gas
and are designated as hedges. Therefore, gains or losses on these
instruments are recorded in income in the period in which the pro-
duction is sold. At December 31, 2002, the Corporation has $91 mil-
lion of deferred hedging losses after income taxes included in other
comprehensive income.
Environment, Health and Safety
The Corporation is committed to continuous improvement of its envi-
ronmental, health and safety performance. This includes compliance
with all laws and regulations covering environment, health and safety
wherever it operates and the establishment of internal standards that
may go beyond local requirements. The Corporation is committed to
promoting environment, health, safety and social responsibility poli-
cies and management systems that protect the Corporation’s work-
force, customers and local communities. In 2002, the Corporation
established new environment, health and safety and social responsi-
bility policies. Senior management has overall responsibility for set-
ting environment, health and safety direction and providing oversight.
To ensure that the Corporation meets its goals and the requirements
of regulatory authorities, the Corporation has programs for compli-
ance evaluation, facility auditing and employee training. Environment
and safety management systems, based on international standards,
are used throughout the Corporation to ensure consistency and
adherence to policy objectives. Improved performance in environ-
ment, health and safety raises the Corporation’s operating costs and
requires increased capital expenditures while reducing potential
risks to corporate assets, reputation and ability to operate.
The Port Reading refining facility and the HOVENSA refinery manufac-
ture conventional and reformulated gasolines that are cleaner burning
than required under U.S. regulations currently in effect. In addition, the
benzene and sulfur content in the Corporation’s gasoline is approxi-
mately one-half of the national average (excluding California), result-
ing in significantly lower toxic emissions than the industry average.
The regulation of motor fuels in the United States and elsewhere
continues to be an area of considerable change and will require large
capital expenditures in future years. In December 1999, the United
States Environmental Protection Agency (“EPA”) adopted rules that
phase in limitations on the sulfur content of gasoline beginning in
2004. In December 2000, the EPA adopted regulations to reduce
substantially the allowable sulfur content of diesel fuel by 2006.
The Corporation and HOVENSA continue to review options to
determine the most cost effective compliance strategies for these
fuel regulations. The costs to comply will depend on a variety of fac-
tors, including the availability of suitable technology and contractors
and the credit trading programs. Capital expenditures necessary to
comply with the low-sulfur gasoline requirements at Port Reading
are expected to be approximately $70 million over the next four
years. Capital expenditures to comply with low-sulfur gasoline and
diesel fuel requirements at HOVENSA are presently expected to be
$450 million over the next four years. HOVENSA expects to finance
these capital expenditures through cash flow and, if necessary,
future borrowings.
Legislation to restrict or ban the use of MTBE, a gasoline oxygenate,
and to require the use of ‘renewable’ fuels was considered by the
United States Congress in 2002 and will likely be reconsidered.
The Corporation and HOVENSA both manufacture and use MTBE
primarily to meet the federal requirement for oxygen in reformulated
gasoline, and do not presently use ethanol. Several states in the Cor-
poration’s market area have enacted bans on MTBE use, including
Connecticut (effective October 2003) and New York (effective Janu-
ary 2004), and other states are considering them. If Congress bans
MTBE or if state bans take effect, or if an obligation to use ethanol or
other renewable fuels is imposed, the effect on the Corporation and
HOVENSA could be significant. Whether the effect is significant will
depend on several factors, including the extent and timing of any
such bans or obligations, requirements for maintenance of certain
air emission reductions if MTBE is banned, the cost and availability
of alternative oxygenates or credits and whether the minimum oxy-
gen content standard for reformulated gasoline remains in effect.
The Corporation is reviewing its options to market and produce
reformulated gasolines if MTBE bans take effect.