Hess 2011 Annual Report Download - page 77

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HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Nature of Business: Hess Corporation and its subsidiaries (the Corporation) engage in the exploration for
and the development, production, purchase, transportation and sale of crude oil and natural gas. These activities are
conducted principally in Algeria, Australia, Azerbaijan, Brazil, Brunei, China, Denmark, Egypt, Equatorial Guinea,
France, Ghana, Indonesia, the Kurdistan region of Iraq, Libya, Malaysia, Norway, Peru, Russia, Thailand, the
United Kingdom and the United States (U.S.). In addition, the Corporation manufactures refined petroleum products
and purchases, markets and trades refined petroleum products, natural gas and electricity. The Corporation owns
50% of HOVENSA L.L.C. (HOVENSA), a joint venture in the U.S. Virgin Islands. In January 2012, HOVENSA
announced a decision to shut down its refinery and continue to operate the complex as an oil storage terminal. The
Corporation also operates a refining facility, terminals and retail gasoline stations, most of which include
convenience stores that are located on the East Coast of the United States.
In preparing financial statements in conformity with U.S. generally accepted accounting principles (GAAP),
management makes estimates and assumptions that affect the reported amounts of assets and liabilities in the
Consolidated Balance Sheet and revenues and expenses in the Statement of Consolidated Income. Actual results
could differ from those estimates. Among the estimates made by management are oil and gas reserves, asset
valuations, depreciable lives, pension liabilities, legal and environmental obligations, asset retirement obligations
and income taxes. Certain information in the financial statements and notes has been reclassified to conform to
the current period presentation. In the preparation of these financial statements, the Corporation has evaluated
subsequent events through the date of issuance.
Principles of Consolidation: The consolidated financial statements include the accounts of Hess
Corporation and entities in which the Corporation owns more than a 50% voting interest or entities that the
Corporation controls. The Corporation consolidates the trading partnership in which it owns a 50% voting
interest and over which it exercises control. The Corporation’s undivided interests in unincorporated oil and gas
exploration and production ventures are proportionately consolidated. Investments in affiliated companies, 20%
to 50% owned and where the Corporation has the ability to influence the operating or financial decisions of the
affiliate, including HOVENSA, are accounted for using the equity method.
Revenue Recognition: The Corporation recognizes revenues from the sale of crude oil, natural gas, refined
petroleum products and other merchandise when title passes to the customer. Sales are reported net of excise and
similar taxes in the Statement of Consolidated Income. The Corporation recognizes revenues from the production of
natural gas properties based on sales to customers. Differences between Exploration & Production (E&P) natural
gas volumes sold and the Corporation’s share of natural gas production are not material. Revenues from natural gas
and electricity sales by the Corporation’s marketing operations are recognized based on meter readings and
estimated deliveries to customers since the last meter reading.
In its E&P activities, the Corporation engages in crude oil purchase and sale transactions with the same
counterparty that are entered into in contemplation of one another for the primary purpose of changing location or
quality. Similarly, in its marketing activities, the Corporation enters into refined petroleum product purchase and sale
transactions with the same counterparty. These arrangements are reported net in Sales and other operating revenues in
the Statement of Consolidated Income.
Derivatives: The Corporation utilizes derivative instruments for both risk management and trading
activities. In risk management activities, the Corporation uses futures, forwards, options and swaps, individually
or in combination, to mitigate its exposure to fluctuations in prices of crude oil, natural gas, refined petroleum
products and electricity, as well as changes in interest and foreign currency exchange rates. In trading activities,
the Corporation, principally through a consolidated partnership, trades energy-related commodities and
derivatives, including futures, forwards, options and swaps based on expectations of future market conditions.
All derivative instruments are recorded at fair value in the Corporation’s Consolidated Balance Sheet. The
Corporation’s policy for recognizing the changes in fair value of derivatives varies based on the designation of
the derivative. The changes in fair value of derivatives that are not designated as hedges are recognized currently
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