Hess 2002 Annual Report Download - page 24

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22
The Corporation uses foreign exchange contracts to reduce its
exposure to fluctuating foreign exchange rates. To counteract these
foreign exchange exposures, the Corporation enters into forward
purchase contracts for both the British pound sterling and the Danish
kroner. At December 31, 2002, the Corporation has $307 million
of notional value foreign exchange contracts maturing in 2003
($136 million at December 31, 2001). The change in fair value of the
foreign exchange contracts from a 10% change in exchange rates
is estimated to be $33 million at December 31, 2002 ($14 million
at December 31, 2001).
The Corporation may use interest-rate swaps to balance exposure
to interest rates. At December 31, 2002, the interest rate on substan-
tially all of the Corporation’s debt is fixed and there are no interest
rate swaps. The Corporation’s outstanding debt of $4,992 million
has a fair value of $5,569 million at December 31, 2002 (debt of
$5,665 million at December 31, 2001 had a fair value of $5,800 mil-
lion). A 15% change in interest rates would change the fair value of
debt at December 31, 2002 by $270 million. The impact of a 15%
change in interest rates on the fair value at December 31, 2001
would have been $350 million.
Trading: The trading partnership in which the Corporation has
a 50% voting interest trades energy commodities and derivatives.
The accounts of the partnership are consolidated with those of
the Corporation. The Corporation also takes trading positions for its
own account. These strategies include proprietary position manage-
ment and trading to enhance the potential return on assets. The
information that follows represents 100% of the trading partnership
and the Corporation’s proprietary trading accounts.
In trading activities, the Corporation is exposed to changes in crude
oil, natural gas and refined product prices, primarily in North America
and Europe. Trading positions include futures, swaps and options. In
some cases, physical purchase and sale contracts are used as
trading instruments and are included in the trading results.
Derivative trading transactions are marked-to-market and are
reflected in income currently. Total realized gains for the year
amounted to $6 million. The following table provides an assessment
of the factors affecting the changes in fair value of trading activities
in 2002 and represents 100% of the trading partnership and other
trading activities.
Millions of dollars
Fair value of contracts outstanding at the beginning
of the year $(58)
Change in fair value of contracts outstanding at the
beginning of the year and still outstanding at
the end of year (14)
Reversal of fair value for contracts closed during
the year 75
Fair value of contracts entered into during the year 33
Fair value of contracts outstanding at the end
of the year $36
The Corporation uses observable market values for determining the
fair value of its trading instruments. The majority of valuations are
based on actively quoted market values. In cases where actively
quoted prices are not available, other external sources are used
which incorporate information about commodity prices in actively
quoted markets, quoted prices in less active markets and other mar-
ket fundamental analysis. Internal estimates are based on internal
models incorporating underlying market information such as com-
modity volatilities and correlations. The Corporation’s risk manage-
ment department compares valuations regularly to independent
sources and models.
Millions of dollars Total 2003 2004
Source of fair value
Prices actively quoted $ 40 $ 29 $11
Other external sources (14) (14)
—
Internal estimates 10 11 (1)
Total $ 36 $ 26 $10
The following table summarizes the value-at-risk results for all
trading activities, including commodities. The results may change
from time to time as strategies change to capture potential market
rate movements.
Trading
Millions of dollars Activities
2002
At December 31 $6
Average for the year 10
High during the year 12
Low during the year 6
2001
At December 31 $13
Average for the year 17
High during the year 22
Low during the year 12