Hess 2002 Annual Report Download - page 44

42
Financial Instruments: Foreign currency contracts are used to protect
the Corporation from fluctuations in exchange rates. The Corporation
enters into foreign currency contracts, which are not designated as
hedges, and the change in fair value is included in income currently.
The Corporation has $307 million of notional value foreign currency
forward contracts maturing in 2003 ($136 million at December 31,
2001). 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.The Corporation also has $149 mil-
lion in letters of credit outstanding at December 31, 2002 ($225 mil-
lion at December 31, 2001). Of the total letters of credit outstanding
at December 31, 2002, $89 million represents contingent liabilities;
the remaining $60 million relates to liabilities recorded on the
balance sheet.
Fair Value Disclosure: The Corporation estimates the fair value of
its fixed-rate notes 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 contracts considers quoted market prices
where applicable. In the absence of quoted market prices, the Corpo-
ration values contracts at fair value considering time value, volatility
of the underlying commodities and other factors.
The following table presents the year-end fair values of energy
commodities and derivative instruments used in non-trading and
trading activities:
Fair Value
Millions of dollars, At Dec. 31
asset (liability) 2002 2001
Commodities $27$54
Futures and forwards
Assets 370 154
Liabilities (378) (323)
Options
Held 65 420
Written (27) (466)
Swaps
Assets 1,323 1,472
Liabilities (1,394) (1,109)
The carrying amounts of the Corporation’s financial instruments and
commodity contracts, including those used in the Corporation’s non-
trading and trading activities, generally approximate their fair values
at December 31, 2002 and 2001, except as follows:
2002 2001
Balance Balance
Millions of dollars, Sheet Fair Sheet Fair
asset (liability) Amount Value Amount Value
Fixed-rate notes receivable $ 424 $ 364 $ 443 $ 440
Fixed-rate debt (4,984) (5,561) (4,936) (5,070)
Market and Credit Risks: The Corporation’s financial instruments
expose it to market and credit risks and may at times be concen-
trated with certain counterparties or groups of counterparties. The
credit worthiness of counterparties is subject to continuing review
and full performance is anticipated. In its trading activities, the
Corporation reduces its risk related to certain counterparties by using
master netting agreements and requiring collateral, generally cash.
In its trading activities, the Corporation has net receivables of $442
million at December 31, 2002, which are concentrated with counter-
parties, as follows: domestic and foreign trading companies — 40%,
gas and power companies — 32%, banks and major financial institu-
tions — 15% and integrated energy companies — 7%.
16. Future Accounting Changes
During 2002, the Emerging Issues Task Force issued EITF 02-3,
Issues Involved in Accounting for Derivative Contracts Held for Trad-
ing Purposes and Contracts Involved in Energy Trading and Risk
Management Activities. In accordance with EITF 02-3, the Corpora-
tion began accounting for trading inventory purchased after October
25, 2002 at the lower of cost or market. Inventory purchased prior to
this date was marked-to-market and reflected in income currently.
Beginning January 1, 2003, the Corporation will account for all trad-
ing inventory at the lower of cost or market. This accounting change
will not have a material effect on the Corporation’s income or
financial position.
The Financial Accounting Standards Board issued FAS No. 143,
Accounting for Asset Retirement Obligations. This statement changes
the method of accruing for costs associated with the retirement of
fixed assets for which a legal retirement obligation exists, such as
the dismantlement of oil and gas production facilities. This standard
is effective in 2003. The effect of this new accounting standard is not
material to the Corporation’s income or financial position.