Hess 2000 Annual Report Download - page 44

14. Financial Instruments, Hedging and Trading Activities
The Corporation uses futures, forwards, options and
swaps, individually or in combination, to reduce the
effects of fluctuations in crude oil, natural gas and refined
product prices and in fixed-price sales contracts. Foreign
currency contracts are used to protect the Corporation
from fluctuations in exchange rates. In addition, the Cor-
poration may use interest-rate swaps to adjust the interest
rates on a portion of its long-term debt.
Commodity Hedging: At December 31, 2000, the Corpora-
tion’s hedging activities included commodity future,
option and swap contracts, maturing mainly in 2001 and
2002 and covering 88 million barrels of crude oil (31 mil-
lion barrels of crude oil and refined products in 1999). The
Corporation also hedged 20 million Mcf of natural gas at
December 31, 2000, maturing in 2001.
The Corporation produced 96 million barrels of crude oil
and natural gas liquids and 249 million Mcf of natural gas
in 2000, and had approximately 16 million barrels of
crude oil and refined products in its refining and market-
ing inventories at December 31, 2000. Since the contracts
described above are designated as hedges and correlate to
price movements of crude oil, natural gas and refined
products, any gains or losses resulting from market
changes will be offset by losses or gains on the Corpora-
tion’s hedged inventory or production. At December 31,
2000, after-tax deferred gains from the Corporation’s hedg-
ing contracts expiring through 2002 were approximately
$100 million, of which $131 million were unrealized net
gains and $31 million were realized net losses. There was
$41 million of losses at December 31, 1999, including
$32 million of unrealized losses.
Financial Instruments: The Corporation has $438 million of
notional value foreign currency forward and purchased
option contracts maturing generally in 2001 ($865 million
at December 31, 1999) and $365 million in letters of credit
outstanding ($145 million at December 31, 1999). At
December 31, 2000, the Corporation has no interest-rate
swaps outstanding ($400 million at December 31, 1999).
Notional amounts do not quantify risk or represent assets
or liabilities of the Corporation, but are used in the
calculation of cash settlements under the contracts.
Fair Value Disclosure: The carrying amounts of cash and
cash equivalents, short-term debt and long-term, variable-
rate debt approximate fair value. The Corporation esti-
mates the fair value of its long-term, fixed-rate note
receivable and debt generally using discounted cash flow
analysis based on current interest rates for instruments
with similar maturities. Interest-rate swaps and foreign
currency exchange contracts are valued based on current
termination values or quoted market prices of comparable
contracts. The Corporation’s valuation of commodity con-
tracts considers quoted market prices, time value, volatil-
ity of the underlying commodities and other factors.
The carrying amounts of the Corporation’s financial
instruments and commodity contracts, including those
used in the Corporation’s hedging and trading activities,
generally approximate their fair values at December 31,
2000, except as follows:
2000 1999
Balance Balance
Millions of dollars, Sheet Fair Sheet Fair
asset (liability) Amount Value Amount Value
Long-term, fixed-rate
note receivable $ 491 $ 467 $539 $ 493
Fixed-rate debt (1,991) (2,090) (2,163) (2,141)
Interest-rate swaps ——— (11)
Market and Credit Risks: The Corporation’s financial instru-
ments expose it to market and credit risks and may at times
be concentrated with certain counterparties or groups
of counterparties. The credit worthiness of counterparties
is subject to continuing review and full performance is
anticipated.
Commodity Trading: The Corporation, principally through
a consolidated partnership, trades energy commodities,
including futures, forwards, options and swaps, based on
expectations of future market conditions. The Corpora-
tion’s results from trading activities, including its share of
the earnings of the trading partnership which has been
profitable in each year, amounted to net income of
$22 million in 2000, $19 million in 1999 and a net loss
of $26 million in 1998.
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