Hess 2002 Annual Report Download - page 43

The Corporation produced 119 million barrels of crude oil and natural
gas liquids and 275 million Mcf of natural gas in 2002. At December
31, 2002, the Corporation’s crude oil and natural gas hedging activi-
ties included commodity futures, option and swap contracts. Crude
oil hedges mature in 2003 and 2004 and cover 91 million barrels of
crude oil production (29 million barrels of crude oil in 2001).The Cor-
poration has natural gas hedges covering 35 million Mcf of natural
gas production at December 31, 2002, which mature in 2003
(143 million Mcf of natural gas at December 31, 2001).
Since the contracts described above are designated as hedges and
correlate to price movements of crude oil and natural gas, any gains
or losses resulting from market changes will be offset by losses or
gains on the Corporation’s production. At December 31, 2002, net
after-tax deferred losses in accumulated other comprehensive
income from the Corporation’s crude oil and natural gas hedging con-
tracts expiring through 2004 were $91 million ($141 million before
income taxes), including $71 million of unrealized losses. Of the net
after tax deferred loss, $97 million matures during 2003.At December
31, 2001 after tax deferred gains were $249 million ($374 million
before income taxes), including $164 million of unrealized gains.
Creditworthiness of counterparties to hedging transactions is
reviewed regularly and full performance is expected.
In its energy marketing business, the Corporation has entered into
cash flow hedges to fix the purchase prices of natural gas, heating
oil and electricity. The fair value of these contracts is $25 million and
is included in other comprehensive income. These contracts mature
generally through 2004. There is no significant concentration of
credit risk with counterparties.
Commodity Trading: The Corporation, principally through a consoli-
dated partnership, trades energy commodities, including futures, for-
wards, options and swaps, based on expectations of future market
conditions. The Corporation’s net income from trading activities,
including its share of the earnings of the trading partnership amounted
to $3 million in 2002, $45 million in 2001 and $22 million in 2000.
15. Financial Instruments, Non-Trading and
Trading Activities
On January 1, 2001, the Corporation adopted FAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. This
statement requires that the Corporation recognize all derivatives
on the balance sheet at fair value and establishes criteria for using
derivatives as hedges.
The January 1, 2001 transition adjustment resulting from
adopting FAS No. 133 was a cumulative increase in other compre-
hensive income of $100 million after income taxes ($145 million
before income taxes). Substantially all of the transition adjustment
resulted from crude oil and natural gas cash flow hedges. The transi-
tion adjustment did not have a material effect on net income or
retained earnings. The accounting change also affected current
assets and liabilities.
Non-Trading: The Corporation uses futures, forwards, options and
swaps, individually or in combination, to reduce the effects of fluctu-
ations in crude oil, natural gas and refined product selling 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 other comprehensive income
until the hedged transactions are recognized. The Corporation’s use
of fair value hedges is not material.
The Corporation reclassifies hedging gains and losses from accumu-
lated other comprehensive income to earnings at the time the
hedged transactions are recognized. In 2002, hedging increased
exploration and production results by $56 million after income taxes
($82 million before income taxes). Results from exploration and pro-
duction activities in 2001 were increased $74 million after income
taxes ($106 million before income taxes) by reclassified hedge gains.
This included $53 million after income taxes ($82 million before
income taxes) associated with the transition adjustment at the
beginning of the year. The ineffective portion of hedges is included in
current earnings in cost of products sold. The amount of hedge inef-
fectiveness was not material during the years ended December 31,
2002 and 2001.
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