Hess 2002 Annual Report Download - page 35

During 2002, the Corporation completed the sale of six United States
flag vessels for $161 million in cash and a note for $29 million. The
sale resulted in a pre-tax gain of $102 million. The Corporation has
agreed to support the buyer’s charter rate for these vessels for up
to five years. A pre-tax gain of $50 million has been deferred as part
of the sale transaction to reflect potential obligations of the support
agreement. The support agreement requires that, if the actual con-
tracted rate for the charter of a vessel is less than the stipulated
charter rate in the agreement, the Corporation pay to the buyer the
difference between the contracted rate and the stipulated rate. If the
actual contracted rate exceeds the stipulated rate, the buyer must
apply such amount to reimburse the Corporation for any payments
made by the Corporation up to that date. While the Corporation’s
eventual obligations under the support agreement could exceed the
amount of the deferred gain, based on current charter rates the
amount recorded is appropriate. During 2002, the Corporation paid
$2 million relating to this support agreement.
A net pre-tax gain of $14 million was recorded during 2002 from
sales of oil and gas producing properties in the United States, United
Kingdom and Azerbaijan and the Corporation’s energy marketing
business in the United Kingdom.
The sale of the six United States flag vessels related to the refining and
marketing segment and the remaining asset sales related to explo-
ration and production activities.The pre-tax amounts of these asset
sales are recorded in non-operating income in the income statement.
The United Kingdom government enacted a 10% supplementary
tax on profits from oil and gas production in 2002. As a result of this
tax law change, the Corporation recorded a one-time provision for
deferred taxes of $43 million to increase the deferred tax liability
on its balance sheet.
In 2002, the Corporation recorded a pre-tax charge of $22 million
for the write-off of intangible assets in its U.S. energy marketing
business. In addition, accrued severance of $13 million was recorded
for cost reduction initiatives in refining and marketing, principally in
energy marketing. Approximately 165 positions were eliminated and
an office was closed.The estimated annual savings from the staff
reduction is $10 million, after-tax.
During 2002, the Corporation paid $21 million against its severance
reserves, including amounts provided in 2001 for exploration and
production operations. At December 31, 2002 the remaining balance
in the severance reserves is $8 million.
Hedging: 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. The
Corporation also uses derivatives in its energy marketing activities to
fix the purchase and selling prices of energy products. Related hedge
gains or losses are an integral part of the selling or purchase prices.
Generally, these derivatives are designated as hedges of expected
future cash flows or forecasted transactions (cash flow hedges), and
the gains or losses are recorded in accumulated other comprehen-
sive income. These transactions meet the requirements for hedge
accounting, including correlation. The Corporation reclassifies hedg-
ing gains and losses included in accumulated other comprehensive
income to earnings at the time the hedged transactions are recog-
nized. The ineffective portion of hedges is included in current earn-
ings. The Corporation’s remaining derivatives, including foreign
currency contracts, are not designated as hedges and the change
in fair value is included in income currently.
Trading: Derivatives used in energy trading activities are marked to
market, with net gains and losses recorded in operating revenue.
2. Special Items
2002: The Corporation recorded a pre-tax impairment charge of
$706 million relating to the Ceiba field in Equatorial Guinea. The
charge resulted from a reduction in probable reserves of approxi-
mately 12% of total field reserves, as well as the additional develop-
ment costs of producing these reserves over a longer field life. Fair
value was determined by discounting anticipated future net cash
flows. Discounted cash flow was less than the book value of the field,
which included allocated purchase price from the Triton acquisition.
The Corporation also recorded a pre-tax impairment charge of $394
million to reduce the carrying value of oil and gas properties located
primarily in the Main Pass/Breton Sound area of the Gulf of Mexico.
Most of these properties were obtained in the 2001 LLOG acquisition
and consisted of producing oil and gas fields with proved and proba-
ble reserves and exploration acreage. This charge principally reflects
reduced reserve estimates on these fields resulting from unfavorable
production performance. The fair values of producing properties were
determined by using discounted cash flows. Exploration properties
were evaluated by using results of drilling and production data from
nearby fields and seismic data for these and other properties in the
area. The pre-tax amounts of these charges were recorded in the
caption asset impairments in the income statement.
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