UNITED STATESSECURITIES AND EXCHANGE COMMISSION
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ____________
Commission File Number 1-1204
AMERADA HESS CORPORATION
DELAWARE(State or other jurisdiction of incorporation or organization)
13-4921002(I.R.S. employer identification number)
1185 AVENUE OF THE AMERICAS, NEW YORK, N.Y.(Address of principal executive offices)10036(Zip Code)
(Registrant’s telephone number, including area code is (212) 997-8500)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceeding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
At September 30, 2004, 91,652,580 shares of Common Stock were outstanding.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
AMERADA HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
See accompanying notes to consolidated financial statements.
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PART I - FINANCIAL INFORMATION (CONT’D.)
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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PART I — FINANCIAL INFORMATION (CONT’D.)
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Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition.
Overview
Net income was $178 million for the third quarter of 2004, including $155 million from exploration and production operations and $85 million from refining and marketing activities.
Worldwide oil and gas production averaged 323,000 barrels of oil equivalent per day during the third quarter of 2004 and 340,000 barrels of oil equivalent per day during the first nine months of the year. In the third quarter, production was lower than in the first half of the year, primarily because of normal North Sea facilities maintenance. The Corporation anticipates that full-year 2004 production will average 340,000 barrels of oil equivalent per day. In the third quarter of 2004, the Corporation’s average crude oil selling price was $26.59 per barrel, including the effects of hedging (see discussion of selling prices on page 13).
In August, the government of Equatorial Guinea approved the Plan of Development for Northern Block G. The Corporation is currently awarding many of the major contracts on this development and expects first production in early 2007.
On Block A-18 in the Malaysia-Thailand joint development area, the Corporation anticipates first production early in 2005. The Corporation expects to reach the full contracted rate of 160 million cubic feet per day, net, by the end of 2005, following completion of the buyers’ gas separation plant, which is being constructed onshore Thailand. Negotiations with the buyers regarding additional gas sales are at an advanced stage.
In Libya, the Corporation and its partners are in the final stages of negotiations with the Libyan National Oil Company on terms of reentry into our former operations in the country.
Results of Operations
Net income for the third quarter of 2004 amounted to $178 million, compared with $146 million in the third quarter of 2003. Net income for the first nine months of 2004 was $748 million compared with $574 million in the first nine months of 2003, including $7 million and $169 million, respectively, from discontinued operations. The after-tax results by major operating activity for the three- and nine-months ended September 30, 2004 and 2003 were as follows (in millions, except per share data):
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Results of Operations (Continued)
Comparison of Results
In the discussion that follows, the financial effects of certain transactions are disclosed on an after-tax basis. Management reviews segment earnings on an after-tax basis and uses after-tax amounts in its analysis of variances in segment earnings. Management believes that after-tax amounts are a preferable method of explaining variances in earnings, since they show the entire effect of transactions rather than only the pre-tax amounts. After-tax amounts are determined by applying the appropriate income tax rate in each tax jurisdiction to pre-tax amounts.
Exploration and Production
Exploration and production earnings from continuing operations increased by $31 million in the third quarter and $213 million in the first nine months of 2004 compared with the corresponding periods of 2003. Earnings in the third quarter of 2003 include $30 million of United States income tax benefits relating to foreign exploration activities. Earnings for the first nine months of 2004 and 2003 include after-tax gains on asset sales of $33 million ($23 million before income taxes) and $31 million ($47 million before income taxes), respectively. Earnings for the first nine months of 2004 and 2003 also include after-tax charges of $9 million and $23 million ($15 million and $38 million before income taxes), respectively, for accrued severance and a reduction in leased office space in London.
After considering the gains on asset sales and other items described above, the remaining changes in exploration and production earnings are primarily attributable to changes in selling prices, sales volumes and operating costs and exploration expenses, as discussed below.
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Selling prices: Higher average selling prices of crude oil and natural gas increased exploration and production revenues by approximately $142 million in the third quarter and $295 million in the first nine months of 2004 compared with the same periods of 2003. The Corporation’s average selling prices, including the effects of hedging, were as follows:
The after-tax impacts of crude oil and U.S. natural gas hedges were opportunity costs of $180 million in the third quarter and $377 million in the first nine months of 2004 compared with opportunity costs of $54 million and $201 million in the same periods of the prior year.
The Corporation has after-tax deferred hedge losses of $1,047 million recorded in accumulated other comprehensive income. Of this amount, $842 million is unrealized and relates to open hedge positions. The remaining $205 million deferred loss is realized and relates to closed hedge positions. The deferred realized loss will be recognized in earnings as the underlying barrels are sold.
The Corporation has open hedge positions equal to 70% of its estimated worldwide crude oil production for the fourth quarter of 2004 and 60% of its estimated worldwide crude oil production for 2005. The average price for United States crude oil open hedge positions is $37.12 in 2004 and $31.24 in 2005. The average price for foreign crude oil open hedge positions is $32.14 in 2004 and $29.49 in 2005. In addition to the gains or losses on these open hedge positions, approximately $80 million of the $205 million deferred realized loss will reduce fourth quarter earnings and the remaining deferred realized loss will be recognized in 2005.
Production and sales volumes: The Corporation’s oil and gas production, on a barrel of oil equivalent basis, was 323,000 barrels per day in the third quarter of 2004 compared with 339,000 barrels per day in the third quarter of 2003. The decrease results primarily from natural field decline and increased maintenance. The Corporation’s oil and gas production in the first nine months of 2004 decreased to
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340,000 barrels per day from 378,000 barrels per day in 2003. This decline was primarily due to asset sales and exchanges in 2003 and natural field decline. The Corporation anticipates that its average production for the full year of 2004 will be approximately 340,000 barrels of oil equivalent per day. The Corporation’s net daily worldwide production was as follows (in thousands):
(*) Reflects natural gas production converted based on relative energy content (six Mcf equals one barrel).
The changes in crude oil and natural gas sales volumes in 2004 compared to the same periods of 2003 resulted in lower income before income taxes of approximately $85 million for the third quarter and $105 million for the first nine months of 2004 compared with the corresponding periods of 2003.
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Operating costs and exploration expenses: Operating costs and exploration expenses from continuing operations decreased by approximately $18 million in the third quarter of 2004 compared with the corresponding period in the prior year. Depreciation, depletion and amortization charges were lower in the third quarter of 2004 compared with 2003, reflecting lower production volumes and lower unit cost per barrel. Production expenses decreased slightly in the third quarter of 2004; however, on a barrel of oil equivalent basis, unit lifting costs per barrel increased.
For the first nine months of 2004 compared with the same period of 2003, operating costs and exploration expenses from continuing operations decreased by approximately $130 million. Exploratory drilling was lower in the first nine months of 2004; however, a larger portion of the annual drilling program is scheduled for the fourth quarter. Depreciation, depletion and amortization charges were also lower in the first nine months of 2004 compared with 2003, reflecting lower production volumes and lower unit cost per barrel from changes in the mix of producing fields.
Other: Foreign currency translation resulted in pre-tax gains of $9 million in the third quarter of 2004 and $11 million in the first nine months of 2004 compared with gains of $2 million and losses of $15 million in the corresponding periods of 2003. Foreign currency gains or losses are included in non-operating income (expense) in the income statement.
The effective income tax rate for exploration and production operations in the first nine months of 2004 was 46% compared to 52% in the first nine months of 2003.
The Corporation’s future exploration and production earnings may be impacted by external factors, such as volatility in the selling prices of crude oil and natural gas, reserve and production changes and changes in tax rates.
Refining and Marketing
Earnings from refining and marketing activities amounted to $85 million in the third quarter of 2004 compared with $89 million in the corresponding period of 2003. For the first nine months of 2004, refining and marketing operations earned $358 million compared with $272 million in 2003. The first nine months of 2003 includes an after-tax loss on the sale of the Corporation’s interest in a shipping joint venture of $20 million ($9 million before income taxes).
The Corporation’s downstream operations include HOVENSA L.L.C. (HOVENSA), a 50% owned refining joint venture with a subsidiary of Petroleos de Venezuela S.A. (PDVSA), accounted for on the equity method. Additional refining and marketing activities include a fluid catalytic cracking facility in Port Reading, New Jersey, as well as retail gasoline stations, energy marketing and trading
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operations. In the second quarter of 2004, the Corporation invested in a joint venture, Hess LNG L.L.C., to pursue investments in liquified natural gas terminals and related supply, trading and marketing opportunities.
HOVENSA: The Corporation’s share of HOVENSA’s income, before income taxes, was $75 million in the third quarter of 2004 compared with $43 million in the third quarter of 2003. For the first nine months of 2004, the Corporation’s share of HOVENSA’s income was $223 million compared with $108 million for the first nine months of 2003. HOVENSA’s total crude runs amounted to 488,000 barrels per day in the first nine months of 2004 and 436,000 barrels per day in the first nine months of 2003. In the early part of 2003, crude runs were reduced reflecting interruptions in crude oil deliveries from Venezuela. During the third quarter of 2004, the Corporation received a cash distribution of $88 million from HOVENSA.
In the third quarter and first nine months of 2004, the Corporation recorded deferred income tax expense in refining and marketing results of $18 million and $29 million, respectively, relating to HOVENSA’s earnings. The Corporation anticipates that for the remainder of the year deferred taxes will be provided on HOVENSA earnings at a rate of approximately 20% to 25%. In 2005, the Corporation expects that deferred taxes will be recorded at the Virgin Islands statutory rate of 38.5%. As of September 30, the Corporation has approximately $200 million of net operating loss carryforwards available to offset its share of future HOVENSA taxable income.
Earnings from refining and marketing activities also include interest income on the note received from PDVSA at the formation of the joint venture. Interest on the PDVSA note amounted to $19 million in the first nine months of 2004 and $23 million in the same period of 2003. Interest income is recorded in non-operating income in the income statement.
Retail, Energy Marketing and Other: Results of retail gasoline operations were lower in the third quarter and first nine months of 2004 compared with the corresponding periods of 2003 reflecting lower gasoline margins, although sales volumes increased. Energy marketing earnings were also lower in the third quarter and first nine months of 2004 due to decreased margins compared with 2003. Results of the Port Reading refining facility were lower in the third quarter of 2004 than in the same period of the prior year, but higher in the first nine months of 2004 reflecting changes in margins in each period and a storm related shutdown for 25 days in the third quarter of 2004. Refined product sales volumes were 394,000 barrels per day in the third quarter of 2004 and 427,000 barrels per day in the first nine months of 2004, compared with 390,000 and 417,000 barrels per day in the corresponding periods of 2003.
The Corporation has a 50% voting interest in a consolidated partnership that trades energy commodities and derivatives. The Corporation also takes trading positions for its own account. The Corporation’s after-tax results from trading
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activities, including its share of the earnings of the trading partnership amounted to income of $11 million ($18 million before income taxes) in the third quarter and $44 million ($75 million before income taxes) in the first nine months of 2004. Trading activities resulted in income of $3 million ($8 million before income taxes) in the third quarter and $15 million ($26 million before income taxes) in the first nine months of 2003.
Marketing expenses increased in the third quarter and first nine months of 2004, compared with the corresponding periods of the prior year. The increases include employee costs relating to new convenience stores, repairs of storm related damage and increased compensation costs resulting from higher earnings of the trading partnership.
Refining and marketing earnings will likely continue to be volatile reflecting competitive industry conditions and supply and demand factors, including the effects of weather.
Corporate
After-tax corporate expenses amounted to $23 million in the third quarter and $49 million in the first nine months of 2004 compared with $25 million and $73 million in the same periods of 2003. The third quarter 2004 amount includes $7 million after tax ($10 million before tax) from incremental pension and benefit costs. The results for the first nine months of 2004 include a non-cash income tax benefit of $13 million resulting from the completion of a prior year United States income tax audit. Corporate expenses in the first nine months of 2003 include after-tax charges of $15 million ($27 million before income taxes) from early repayment of debt.
Interest Expense
After-tax interest totaled $39 million in the third quarter of 2004 compared with $42 million in the third quarter of 2003. In the first nine months of 2004, after-tax interest amounted to $112 million compared with $132 million in the first nine months of 2003. The corresponding amounts before income taxes were $62 million in the third quarter of 2004, $73 million in the third quarter of 2003, $179 million in the first nine months of 2004 and $224 million in the first nine months of 2003. Interest expense in 2004 was lower than in 2003 due to lower average outstanding debt and higher capitalized interest. Capitalized interest was $41 million in the first nine months of 2004 and $31 million in the first nine months of 2003.
Discontinued Operations
Income from discontinued operations of $7 million in the first nine months of 2004 reflects the settlement of a previously accrued contingency relating to a foreign exploration and production operation that was disposed of in 2003.
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In the first quarter of 2003, the Corporation exchanged its crude oil producing properties in Colombia (acquired in 2001 as part of the Triton acquisition), plus $10 million in cash, for an additional 25% interest in Block A-18 in the joint development area of Malaysia and Thailand (JDA). The exchange resulted in an after-tax charge to income of $59 million in discontinued operations in the first quarter of 2003. In the second quarter of 2003, the Corporation sold Gulf of Mexico Shelf properties, the Jabung Field in Indonesia and several small United Kingdom fields for $445 million. An after-tax gain from these asset sales of $175 million was included in discontinued operations. Discontinued operations in first nine months of 2003 also include $53 million of income from operations prior to the sales of these assets.
Sales and Other Operating Revenues
Sales and other operating revenues increased by 19% in the third quarter and 13% in the first nine months of 2004 compared with the corresponding periods of 2003. This increase principally reflects higher selling prices and sales volumes of refined products, partially offset by decreased sales of purchased natural gas in energy marketing. The increase in cost of goods sold also reflects the change in sales volumes of refined products.
Liquidity and Capital Resources
Overview: Cash flows from operating activities in the first nine months of 2004 totaled $1,649 million, including changes in operating assets and liabilities of $377 million. Cash and short-term investments at September 30, 2004 totaled $1,056 million, an increase of $538 million from year-end. At September 30, 2004, the Corporation’s debt to capitalization ratio was 42.2% compared to 42.5% at December 31, 2003. Total debt was $3,836 million at September 30, 2004 and $3,941 million at December 31, 2003.
Cash Flows from Operating Activities: Net cash provided by operating activities, including changes in operating assets and liabilities, totaled $1,649 million in the first nine months of 2004 compared with $1,159 million in the first nine months of 2003. This change is primarily due to higher earnings and the timing of cash flows associated with changes in operating assets and liabilities, principally working capital accounts. Operating assets and liabilities increased $377 million in 2004 and decreased $232 million in 2003. During the third quarter of 2004, the Corporation received a cash distribution of $88 million from HOVENSA.
Cash Flows from Investing Activities: Capital expenditures in the first nine months of 2004 were $1,092 million of which $1,047 million related to exploration and production activities. Capital expenditures in the same period of 2003 were $1,015 million, including $958 million for exploration and production. Proceeds from asset and investment sales totaled $53 million in 2004 and $525 million in 2003.
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Liquidity and Capital Resources (Continued)
Cash Flows from Financing Activities: The Corporation reduced debt by $106 million during the first nine months of 2004. Debt reduction in the first nine months of 2003 was $502 million. Dividends paid were $145 million in the first nine months of 2004 compared with $108 million in the same period of the prior year. The increase was due to dividends on the 7% preferred stock issued in the fourth quarter of 2003. During the first nine months of 2004, the Corporation received proceeds from the exercise of stock options totaling $85 million.
Future Capital Requirements and Resources: Capital expenditures excluding acquisitions, if any, for the remainder of 2004 are currently estimated to be approximately $450 million. The Corporation anticipates that available cash and cash flow from operations will fund these expenditures.
At September 30, 2004, the Corporation had a $1.5 billion credit facility under its committed revolving credit agreement. During the third quarter, the Corporation entered into an amendment of this agreement that permits the Corporation to request the issuance of letters of credit up to $1.5 billion. The Corporation’s revolving credit agreement expires in 2006; however, the Corporation anticipates that it will enter into a new committed facility before the existing facility expires. The Corporation also has a shelf registration under which it may issue $825 million of additional debt securities, warrants, common stock or preferred stock.
With higher crude oil prices, the Corporation’s collateral requirements under certain contracts with hedging and trading counterparties have increased. The Corporation used letters of credit from the credit facility and uncommitted lines to meet these collateral requirements. Outstanding letters of credit increased to $1,627 million at September 30, 2004 compared with $229 million at December 31, 2003. At September 30, the Corporation has used $762 million of the $1.5 billion facility for letters of credit. The amount of the credit line remaining is $738 million.
Loan agreement covenants allow the Corporation to borrow an additional $4.9 billion for the construction or acquisition of assets at September 30, 2004. At September 30, 2004, the maximum amount of dividends that can be paid from borrowings under the loan agreements is $1.8 billion.
Prior to June 30, 1986, the Corporation had extensive exploration and production operations in Libya; however, U.S. Government sanctions required suspension of participation in these operations. The Corporation wrote off the book value of its Libyan assets in connection with the cessation of operations. On February 24, 2004, the Corporation received U.S. Government authorization to negotiate and enter into an executory agreement with the government of Libya that would define the terms for resuming active participation in the Libyan properties. On April 29, 2004, the U.S. Government lifted most of the sanctions imposed on Libya. It has also taken the necessary steps to have the Iran-Libya Sanctions Act of 1976 terminated by Congress with respect to Libya. As a result, the Corporation
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and its partners will be able to resume operations in Libya if they are able to reach a successful conclusion to ongoing commercial negotiations. If these negotiations are successful, management anticipates capital expenditures will likely increase over the current plan.
In the fourth quarter of 2004, the President signed the American Jobs Creation Act (the Act), which will allow corporations to repatriate foreign earnings at an effective income tax rate of 5.25%. The Corporation is evaluating the repatriation provisions of the Act. The maximum amount that the Corporation could repatriate under the Act is $1.9 billion. The Corporation has not determined the amount, if any, of such repatriation. A repatriation of earnings would result in an additional income tax charge on the amount remitted.
Credit Ratings: In the first quarter of 2004, two credit rating agencies downgraded their ratings of the Corporation’s debt. One of the revised ratings was below investment grade. If an additional rating agency were to reduce its credit rating below investment grade, the incremental margin requirements at September 30, 2004 would be approximately $30 million.
Other: In connection with the sale of six vessels in 2002, the Corporation agreed to support the buyer’s charter rate on these vessels for up to five years. The support agreement requires that if the actual contracted rate for the charter of a vessel is less than the stipulated support rate in the agreement, the Corporation will pay to the buyer the difference between the contracted rate and the stipulated rate. The balance in the charter support reserve at January 1, 2004 was $32 million. During the first nine months of 2004, the Corporation made net payments of $3 million for charter support, reducing the reserve to $29 million.
At December 31, 2003, the Corporation had an accrual of $38 million for severance and leased office space in London. During the first nine months of 2004, $15 million of additional pre-tax costs were accrued and $16 million of payments were made. The September 30, 2004 accrual for severance and office lease costs is $37 million. Additional accruals for lease costs of approximately $20 million before income taxes are anticipated in 2005.
Off-Balance Sheet Arrangements: The Corporation has leveraged leases not included in its balance sheet, primarily related to retail gasoline stations that the Corporation operates. The net present value of these leases is $464 million at September 30, 2004. The Corporation’s September 30, 2004 debt to capitalization ratio would increase from 42.2% to 45.0% if the leases were included as debt.
The Corporation guarantees the payment of up to 50% of HOVENSA’s crude oil and feedstock purchases from suppliers other than PDVSA. The amount of the Corporation’s guarantee fluctuates based on the volume of crude oil purchased and related prices. At September 30, 2004, the guarantee totaled $220 million. In addition, the Corporation has agreed to provide funding up to a maximum of $40
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million to the extent HOVENSA does not have funds to meet its senior debt obligations.
In the first quarter of 2004, the Corporation guaranteed its share of an investee’s borrowings to finance construction of an oil pipeline. The amount guaranteed is approximately $43 million. The guarantee will be in place through the end of the pipeline’s construction, which the Corporation expects to be in 2006.
Market Risk Disclosure
In the normal course of its business, the Corporation is exposed to commodity risks related to changes in the price of crude oil, natural gas, refined products and electricity, as well as to changes in interest rates and foreign currency values. In the disclosures that follow, these operations are referred to as non-trading activities. The Corporation also has trading operations, principally through a 50% voting interest in a trading partnership. These activities are also exposed to commodity risks primarily related to the prices of crude oil, natural gas and refined products.
Instruments: The Corporation uses forward commodity contracts, foreign exchange forward contracts, futures, swaps and options in the Corporation’s non-trading and trading activities. These contracts are widely traded instruments mainly with standardized terms.
Quantitative Measures: The Corporation uses value-at-risk and other limits to monitor and control commodity risk within its trading and non-trading activities. The value-at-risk model uses historical simulation and the results represent the potential loss in fair value over one day at a 95% confidence level. The model captures both first and second order sensitivities for options. The potential change in fair value based on commodity price risk is presented in the non-trading and trading sections below.
Non-Trading: The Corporation’s non-trading activities include hedging of crude oil and natural gas production. Futures and swaps are used to fix the selling prices of a portion of the Corporation’s future production and the related gains or losses are an integral part of the Corporation’s selling prices. As of September 30, the Corporation has open hedge positions equal to 70% of its estimated worldwide crude oil production for the period from October 1 to December 31, 2004 and 60% of its estimated 2005 worldwide crude oil production. The average price for West Texas Intermediate crude oil (WTI) related open hedge positions is $37.12 in 2004 and $31.24 in 2005. The average price for Brent crude oil related open hedge positions is $32.14 in 2004 and $29.49 in 2005. Approximately 20% of the Corporation’s hedges are WTI related and the remainder is Brent. In addition, the Corporation has 24,000 barrels per day of Brent related crude oil production hedged from 2006 through 2012 at an average price of $26.20 per barrel. As market conditions change, the Corporation may adjust its hedge percentages.
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Market Risk Disclosure (Continued)
Because the selling price of crude oil has increased since the beginning of the year, accumulated other comprehensive income (loss) at September 30, 2004 includes after-tax deferred losses of $1,047 million ($205 million of realized losses and $842 million of unrealized losses) related to crude oil and natural gas contracts used as hedges of exploration and production sales. Realized losses in accumulated other comprehensive income represent losses on closed contracts that are deferred until the underlying barrels are sold. Approximately $80 million of the realized loss will reduce fourth quarter earnings and the remainder will be recognized in 2005. The pre-tax amount of all deferred hedge losses is reflected in accounts payable and the related income tax benefits are recorded as deferred tax assets on the balance sheet.
The Corporation also markets energy commodities including refined petroleum products, natural gas and electricity. The Corporation uses futures and swaps to fix the purchase prices of commodities to be sold under fixed-price sales contracts.
The Corporation estimates that at September 30, 2004, the value-at-risk for commodity related derivatives that are settled in cash and used in non-trading activities was $111 million ($44 million at December 31, 2003). The results may vary from time to time as hedge levels and oil and gas prices change.
Trading and Risk Management: 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 are primarily proprietary position management. 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 may include futures, forwards, swaps and options. In some cases, physical purchase and sale contracts are used as trading instruments and are included in the trading results.
Gains or losses from sales of physical products are recorded at the time of sale. Derivative trading transactions are marked-to-market and are reflected in income currently. Total realized gains for the first nine months of 2004 amounted to $112 million ($35 million of realized gains for the first nine months of 2003). The following table provides an assessment of the factors affecting the changes in fair value of trading activities and represents 100% of the trading partnership and other trading activities (in millions):
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The Corporation uses observable market values for determining the fair value of its trading instruments. 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 market fundamental analysis. Internal estimates are based on internal models incorporating underlying market information such as commodity volatilities and correlations. The Corporation’s risk management department regularly compares valuations to independent sources and models. The sources of fair value at September 30, 2004 follow (in millions):
The Corporation estimates that at September 30, 2004, the value-at-risk for trading activities, including commodities, was $14 million ($7 million at December 31, 2003). The results may change from time to time.
The following table summarizes the fair values of net receivables relating to the Corporation’s trading activities and the credit rating of counterparties at September 30 (in millions):
*Based on information provided by counterparties and other available sources.
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Forward-Looking Information
Certain sections of Management’s Discussion and Analysis of Results of Operations and Financial Condition, including references to the Corporation’s future results of operations and financial position, liquidity and capital resources, capital expenditures, oil and gas production, tax rates, debt repayment, hedging, derivative and market risk disclosures and off-balance sheet arrangements include forward-looking information. Forward-looking disclosures are based on the Corporation’s current understanding and assessment of these activities and reasonable assumptions about the future. Actual results may differ from these disclosures because of changes in market conditions, government actions and other factors.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
The information required by this item is presented under Item 2, “Management’s Discussion and Analysis of Results of Operations and Financial Condition – Market Risk Disclosure.”
Item 4. Controls and Procedures
Based upon their evaluation of the Corporation’s disclosure controls and procedures (as defined in Exchange Act Rules 13a - 14(c) and 15d - 14(c)) as of September 30, 2004, John B. Hess, Chief Executive Officer, and John P. Rielly, Chief Financial Officer, concluded that these disclosure controls and procedures were effective as of September 30, 2004.
There have been no significant changes in the Corporation’s internal controls or in other factors that could significantly affect internal controls after September 30, 2004.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On or about July 15, 2004, Hess Oil Virgin Islands Corp. (“HOVIC”), a wholly owned subsidiary of Registrant, and HOVENSA L.L.C., in which Registrant owns a 50% interest, each received a letter from the Commissioner of the Virgin Islands Department of Planning and Natural Resources and Natural Resources Trustee, advising of the Trustee’s intention to bring suit against HOVIC and HOVENSA under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”). The letter alleges that HOVIC and HOVENSA are potentially responsible for damages to natural resources arising from releases of hazardous substances from the “HOVENSA Oil Refinery.” HOVENSA currently owns and operates a petroleum refinery on the south shore of St. Croix, United States Virgin Islands, which had been operated by HOVIC until October 1998. The letter does not specify the basis for the claim or a claimed damage amount. If an action is brought, Registrant and HOVENSA intend to vigorously defend it.
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PART II - OTHER INFORMATION (CONT’D.)
Item 6. Exhibits and Reports on Form 8-K
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: November 5, 2004
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