1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transaction period from_________ to ___________
COMMISSION FILE NUMBER 1-1204
-----------------------------
AMERADA HESS CORPORATION
(Exact name of registrant as specified in its charter)
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 preceding 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
_____ _____
At June 30, 1999, 90,564,005 shares of Common Stock were outstanding.
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2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
AMERADA HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
1999 1998 1999 1998
---- ---- ---- ----
REVENUES
Sales (excluding excise taxes) and
other operating revenues $ 1,429,957 $ 1,608,459 $ 2,968,650 $ 3,434,248
Non-operating income
Gain on asset sales 61,741 -- 108,063 80,321
Equity in income of HOVENSA L.L.C 569 -- 17,031 --
Other 37,622 26,739 86,209 43,848
----------- ----------- ----------- -----------
Total revenues 1,529,889 1,635,198 3,179,953 3,558,417
----------- ----------- ----------- -----------
COSTS AND EXPENSES
Cost of products sold 864,792 1,030,851 1,863,864 2,288,257
Production expenses 94,081 126,816 209,189 237,979
Marketing expenses 85,764 91,917 179,678 180,115
Other operating expenses 59,041 50,681 116,276 113,193
Exploration expenses, including dry holes
and lease impairment 78,109 99,596 140,887 203,815
General and administrative expenses 63,926 60,662 113,988 129,265
Interest expense 38,108 33,329 77,241 67,317
Depreciation, depletion and amortization 136,179 162,193 274,501 326,420
----------- ----------- ----------- -----------
Total costs and expenses 1,420,000 1,656,045 2,975,624 3,546,361
----------- ----------- ----------- -----------
Income (loss) before income taxes 109,889 (20,847) 204,329 12,056
Provision for income taxes 32,433 872 56,293 46,369
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 77,456 $ (21,719) $ 148,036 $ (34,313)
=========== =========== =========== ===========
NET INCOME (LOSS) PER SHARE -
BASIC AND DILUTED $ .86 $ (.24) $ 1.65 $ (.38)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 90,074 89,904 89,988 89,982
COMMON STOCK DIVIDENDS PER SHARE $ .15 $ .15 $ .30 $ .30
See accompanying notes to consolidated financial statements.
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3
PART I - FINANCIAL INFORMATION (CONT'D.)
AMERADA HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS)
JUNE 30, DECEMBER 31,
1999 1998
---- ----
A S S E T S
CURRENT ASSETS
Cash and cash equivalents $ 82,284 $ 73,791
Accounts receivable 1,479,753 1,013,184
Inventories 428,006 482,182
Other current assets 250,118 317,549
------------ ------------
Total current assets 2,240,161 1,886,706
------------ ------------
INVESTMENTS AND ADVANCES
HOVENSA L.L.C 719,612 702,581
Other 224,126 232,826
------------ ------------
Total investments and advances 943,738 935,407
------------ ------------
PROPERTY, PLANT AND EQUIPMENT
Total - at cost 11,188,529 11,027,239
Less reserves for depreciation, depletion,
amortization and lease impairment 6,933,386 6,835,301
------------ ------------
Property, plant and equipment - net 4,255,143 4,191,938
------------ ------------
NOTE RECEIVABLE 514,500 538,500
------------ ------------
DEFERRED INCOME TAXES AND OTHER ASSETS 252,234 330,432
------------ ------------
TOTAL ASSETS $ 8,205,776 $ 7,882,983
============ ============
L I A B I L I T I E S A N D S T O C K H O L D E R S' E Q U I T Y
CURRENT LIABILITIES
Accounts payable - trade $ 1,101,813 $ 713,831
Accrued liabilities 557,411 554,632
Deferred revenue 174,694 251,328
Taxes payable 151,186 100,686
Notes payable 17,263 3,500
Current maturities of long-term debt 32,268 172,820
------------ ------------
Total current liabilities 2,034,635 1,796,797
------------ ------------
LONG-TERM DEBT 2,646,806 2,476,145
------------ ------------
DEFERRED LIABILITIES AND CREDITS
Deferred income taxes 366,918 483,843
Other 388,932 482,786
------------ ------------
Total deferred liabilities and credits 755,850 966,629
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, par value $1.00
Authorized - 20,000,000 shares for issuance in series -- --
Common stock, par value $1.00
Authorized - 200,000,000 shares
Issued - 90,564,005 shares at June 30, 1999;
90,356,705 shares at December 31, 1998 90,564 90,357
Capital in excess of par value 775,086 764,412
Retained earnings 2,024,962 1,904,066
Accumulated other comprehensive income (122,127) (115,423)
------------ ------------
Total stockholders' equity 2,768,485 2,643,412
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,205,776 $ 7,882,983
============ ============
See accompanying notes to consolidated financial statements.
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4
PART I - FINANCIAL INFORMATION (CONT'D.)
AMERADA HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
Six Months Ended June 30
(in thousands)
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 148,036 $ (34,313)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Depreciation, depletion and amortization 274,501 326,420
Exploratory dry hole costs 28,621 106,445
Lease impairment 12,806 17,451
Gain on asset sales (108,063) (80,321)
Provision (benefit) for deferred income taxes (32,548) (597)
Changes in operating assets and liabilities and other (95,675) 26,185
--------- ---------
Net cash provided by operating activities 227,678 361,270
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (420,209) (709,098)
Proceeds from asset sales and other 185,721 108,267
--------- ---------
Net cash used in investing activities (234,488) (600,831)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in notes payable 13,763 58,458
Long-term borrowings 370,059 515,000
Repayment of long-term debt (338,025) (313,222)
Cash dividends paid (40,695) (41,115)
Stock options exercised 10,345 --
Common stock acquired -- (28,473)
--------- ---------
Net cash provided by financing activities 15,447 190,648
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (144) (1,347)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 8,493 (50,260)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 73,791 91,154
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 82,284 $ 40,894
========= =========
See accompanying notes to consolidated financial statements.
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PART I - FINANCIAL INFORMATION (CONT'D.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
Note 1 - The financial statements included in this report reflect all
normal and recurring adjustments which, in the opinion of
management, are necessary for a fair presentation of the Company's
consolidated financial position at June 30, 1999 and December 31,
1998, and the consolidated results of operations for the three and
six-month periods ended June 30, 1999 and 1998 and the
consolidated cash flows for the six-month periods ended June 30,
1999 and 1998. The unaudited results of operations for the interim
periods reported are not necessarily indicative of results to be
expected for the full year.
Certain notes and other information have been condensed or omitted
from these interim financial statements. Such statements,
therefore, should be read in conjunction with the consolidated
financial statements and related notes included in the 1998 Annual
Report to Stockholders, which have been incorporated by reference
in the Corporation's Form 10-K for the year ended December 31,
1998. The 1998 income statement classification of certain accounts
has been restated to conform with current period presentation.
The Corporation's annual report includes a Summary of Significant
Accounting Policies. The accounting policies that follow should be
read in conjunction with those included in the Annual Report.
Revenue Recognition: The Corporation recognizes revenues from the
sale of crude oil, natural gas, petroleum products and other
merchandise when title passes to the customer.
The Corporation recognizes revenues from the production of natural
gas properties in which the Corporation has an interest based on
sales to customers. Differences between sales and the
Corporation's share of production are not material.
Exploration and Development Costs: Oil and gas exploration and
production activities are accounted for using the successful
efforts method. Costs of acquiring undeveloped oil and gas
leasehold acreage, including lease bonuses, brokers' fees and
other related costs, are capitalized.
Annual lease rentals and exploration expenses, including
geological and geophysical expenses and exploratory dry hole
costs, are charged against income as incurred.
Costs of drilling and equipping productive wells, including
development dry holes, and related production facilities are
capitalized.
The Corporation does not carry the capitalized costs of
exploratory wells as an asset for more than one year, unless oil
and gas reserves are found and classified as proved, or additional
exploration is underway or planned. If capitalized exploratory
wells do not meet these conditions, the costs are charged to
expense.
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PART I - FINANCIAL INFORMATION (CONT'D.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
Impairment of Oil and Gas Properties: The Corporation reviews oil
and gas properties for impairment whenever events or changes in
circumstances indicate that the carrying amounts may not be
recovered. If the carrying amounts are not expected to be
recovered by undiscounted future cash flow, the properties are
impaired and an impairment loss is recorded. The amount of the
impairment is based on the estimated fair value of the properties
determined by discounting anticipated future net cash flows. The
net present value of future cash flows is based on the
Corporation's estimates of future prices applied to projected
production profiles, discounted at a rate commensurate with the
risks involved. The oil and gas prices used for determining asset
impairments may differ from those used at year-end in the
standardized measure of discounted future net cash flows under
FAS No. 69. The impact of forward sales on asset impairments is
not material.
Provisions for impairment of undeveloped oil and gas leases are
based on periodic evaluations and other factors.
Note 2 - Effective January 1, 1999, the Corporation adopted the last-in,
first-out (LIFO) inventory method for valuing its refining and
marketing inventories. The Corporation believes that the LIFO
method more closely matches current costs and revenues and will
improve comparability with other oil companies.
The change to LIFO decreased net income $28,100 during the three
months ended June 30, 1999 ($.31 per share basic and diluted).
LIFO decreased net income $30,900 for the six months ended June
30, 1999 ($.34 per share). There is no cumulative effect
adjustment as of the beginning of the year for this type of
accounting change.
Note 3 - Inventories consist of the following:
June 30, December 31,
1999 1998
---- ----
Crude oil and other charge stocks $ 44,557 $ 35,818
Refined and other finished products 311,083 386,917
Materials and supplies 72,366 59,447
-------- --------
Total inventories $428,006 $482,182
======== ========
At June 30, 1999, inventory costs were determined using LIFO for
approximately 70% of the Corporation's petroleum inventory. If the
LIFO inventory were valued at the lower of average cost or market,
it would have been approximately $47 million higher.
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PART I - FINANCIAL INFORMATION (CONT'D.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
Note 4 - The Corporation accounts for its investment in HOVENSA, L.L.C.
using the equity method. Summarized financial information for
HOVENSA follows:
Summarized Balance Sheet Information
June 30, December 31,
1999 1998
---- ----
Current assets $ 432,852 $ 352,171
Net fixed assets 1,321,558 1,343,712
Other assets 26,060 27,711
Current liabilities (234,637) (133,454)
Long-term debt (165,000) (250,000)
Deferred liabilities and credits (32,286) (27,718)
---------- ----------
Partners' equity $1,348,547 $1,312,422
========== ==========
Summarized Income Statement Information
For the three For the six
months ended months ended
June 30,1999 June 30, 1999
------------ -------------
Total revenues $ 719,684 $ 1,258,307
Costs and expenses (717,509) (1,254,181)
Inventory market value changes -- 31,999
--------- -----------
Net income $ 2,175* $ 36,125*
========= ===========
* The Corporation's share of HOVENSA's net income was $569 and
$17,031 for the three and six-month periods ended June 30, 1999,
respectively.
Note 5 - The provision for income taxes consisted of the following:
Three months Six months
ended June 30 ended June 30
1999 1998 1999 1998
---- ---- ---- ----
Current $35,059 $(5,299) $ 88,841 $46,966
Deferred (2,626) 6,171 (32,548) (597)
------- ------- -------- -------
Total $32,433 $ 872 $ 56,293 $46,369
======= ======= ======== =======
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PART I - FINANCIAL INFORMATION (CONT'D.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
Note 6 - Effective January 1, 1999, the Corporation changed the functional
currency of its United Kingdom operations from the British pound
sterling to the U.S. dollar. During the six-months ended June 30,
1999, the U.S. dollar strengthened in relation to the pound
sterling, which resulted in gains from the translation of net
sterling liability balances for financial reporting purposes.
Income tax benefits were also recorded for deductible foreign
currency losses on U.S. dollar liabilities in the sterling based
tax calculation.
Worldwide currency gains amounted to $8,889 and $35,376,
respectively, for the three and six-month periods ended June 30,
1999, of which $12,556 and $18,129 represented income tax
benefits. Net foreign currency gains for the corresponding periods
of 1998 amounted to $593 and $315.
Note 7 - The weighted average number of common shares used in the basic and
diluted earnings per share computations are as follows:
Three months Six months
ended June 30 ended June 30
1999 1998 1999 1998
---- ---- ---- ----
Common shares - basic 89,634 89,904 89,547 89,982
Effect of dilutive securities
(equivalent shares)
Nonvested common stock 378 - - 397 - -
Stock options 62 - - 44 - -
------ ------ ------ ------
Common shares - diluted 90,074 89,904 89,988 89,982
====== ====== ====== ======
The antidilutive effects of 656 nonvested common shares and 127
stock options and 626 common shares and 120 stock options are
excluded in the three months and six months ended June 30, 1998,
respectively.
Note 8 - 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.
These contracts correlate to movements in the value of inventory
and the prices of crude oil and natural gas, and as hedges, any
resulting gains or losses are recorded as part of the hedged
transaction. Net deferred losses resulting from the Corporation's
petroleum hedging activities were approximately $5,592 at June 30,
1999, including $465 of unrealized losses.
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PART I - FINANCIAL INFORMATION (CONT'D.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
Note 9 - Interest costs related to certain long-term construction projects
have been capitalized in accordance with FAS No. 34. During the
three and six-month periods ended June 30, 1999, interest costs of
$5,683 and $10,800, respectively, were capitalized compared to
$7,603 and $13,196 for the corresponding periods of 1998.
Note 10 - Comprehensive income, which includes net income and the effects of
foreign currency translation recorded directly in stockholders'
equity, is as follows:
Three months Six months
ended June 30 ended June 30
1999 1998 1999 1998
---- ---- ---- ----
Comprehensive income (loss) $78,091 $(30,760) $141,332 $(30,147)
======= ======== ======== ========
Note 11 - The Corporation's results by operating segment were as follows:
Three months Six months
ended June 30 ended June 30
1999 1998 1999 1998
---- ---- ---- ----
Operating revenues
Exploration and production(1) $ 541,000 $ 449,900 $1,122,200 $ 985,800
Refining, marketing and
shipping 941,100 1,193,000 1,922,600 2,513,400
---------- ---------- ---------- ----------
Total $1,482,100 $1,642,900 $3,044,800 $3,499,200
========== ========== ========== ==========
Net income (loss)
Exploration and production(2) $ 51,000 $ (6,200) $ 108,000 $ 58,200
Refining, marketing and
shipping(3) 59,200 18,200 111,900 (15,300)
Corporate (including interest) (32,800) (33,700) (71,900) (77,200)
---------- ---------- ---------- ----------
Total $ 77,400 $ (21,700) $ 148,000 $ (34,300)
========== ========== ========== ==========
(1) Includes transfers to affiliates of $52,100 and $76,200 during the three
and six-month periods ended June 30, 1999, respectively, compared to
$34,400 and $65,000 for the corresponding periods of 1998.
(2) Includes gains on asset sales of $30,100 and $56,200 during the six-months
ended June 30, 1999 and 1998, respectively.
(3) Includes gains on asset sales of $40,100 in the three and six-month
periods ended June 30, 1999.
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PART I - FINANCIAL INFORMATION (CONT'D.)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
RESULTS OF OPERATIONS
Income excluding asset sales for the second quarter of 1999
amounted to $37 million compared with a loss of $22 million in the
second quarter of 1998. Income excluding asset sales for the first
half of 1999 was $78 million compared with a loss of $90 million
in the first half of 1998. Including gains on asset sales, net
income amounted to $77 million in the second quarter of 1999 and
$148 million in the first half of 1999, compared with losses of
$22 million and $34 million in the corresponding periods of 1998.
The after-tax results by major operating activity for the
three and six-month periods ended June 30, 1999 and 1998 were as
follows (in millions, except per share data):
Three months Six months
ended June 30 ended June 30
1999 1998 1999 1998
---- ---- ---- ----
Exploration and production $ 51 $ (6) $ 78 $ 2
Refining, marketing and shipping 19 18 72 (15)
Corporate (5) (6) (15) (20)
Interest expense (28) (28) (57) (57)
----- ----- ----- -----
Income (loss) excluding asset sales 37 (22) 78 (90)
Gains on asset sales 40 -- 70 56
----- ----- ----- -----
Net income (loss) $ 77 $ (22) $ 148 $ (34)
===== ===== ===== =====
Net income (loss)
per share (diluted) $ .86 $(.24) $1.65 $(.38)
===== ===== ===== =====
The net gain from asset sales in the second quarter of 1999
reflects the sale of the southeast pipeline terminals and certain
retail sites in South Carolina. The net gain from asset sales in
the first half of 1999 also includes the sale of natural gas
properties in California. The 1998 asset sales reflect the sales
of three oil and gas properties in the United States and Norway.
Exploration and Production
Excluding gains on asset sales, earnings from exploration
and production activities increased by $57 million in the second
quarter of 1999 and $76 million in the first half of 1999,
compared with the corresponding periods of 1998. The increase in
the second quarter was due primarily to higher average crude oil
selling
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PART I - FINANCIAL INFORMATION (CONT'D.)
RESULTS OF OPERATIONS (CONTINUED)
prices and lower exploration expenses. The increase in the first
half of 1999 includes net nonrecurring income of $18 million,
principally from foreign currency translation adjustments. The
year-to-date increase also reflects higher production volumes,
reduced exploration expenses and a lower effective income tax
rate in the United Kingdom. These variances are more fully
explained below.
The Corporation's average selling prices, including the
effects of hedging, were as follows:
Three months Six months
ended June 30 ended June 30
1999 1998 1999 1998
---- ---- ---- ----
Crude oil and natural gas liquids
(per barrel)
United States $14.24 $11.82 $12.47 $12.86
Foreign 14.86 13.79 12.87 14.18
Natural gas (per Mcf)
United States 2.06 2.10 1.91 2.16
Foreign 1.72 2.40 1.87 2.48
The Corporation's net daily worldwide production was as
follows:
Three months Six months
ended June 30 ended June 30
1999 1998 1999 1998
---- ---- ---- ----
Crude oil and natural gas liquids
(barrels per day)
United States 62,904 44,211 57,809 44,516
United Kingdom 96,887 109,136 112,976 114,061
Norway 26,796 30,262 26,727 31,821
Gabon 10,637 17,156 10,891 13,536
Indonesia and Azerbaijan 4,240 2,683 4,247 2,333
------- ------- ------- -------
Total 201,464 203,448 212,650 206,267
======= ======= ======= =======
Natural gas (Mcf per day)
United States 328,764 287,447 333,840 293,133
United Kingdom 244,991 268,042 253,200 258,133
Norway 31,707 30,632 30,600 31,075
Indonesia 3,598 4,124 3,400 3,974
------- ------- ------- -------
Total 609,060 590,245 621,040 586,315
======= ======= ======= =======
Barrels of oil equivalent (per day) 302,974 301,822 316,157 303,986
======= ======= ======= =======
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PART I - FINANCIAL INFORMATION (CONT'D.)
RESULTS OF OPERATIONS (CONTINUED)
The increase in United States crude oil and natural gas
production principally reflects new fields which came onstream in
late 1998. Lower United Kingdom production in the second quarter
of 1999 is due largely to shut-in production while damage to a
floating production vessel is being repaired by the operator of
the vessel. Production is scheduled to resume in the third
quarter. New production commenced in July from the South Arne
Field in Denmark. Production from this field is expected to reach
30,000 barrels of crude oil per day in 2000.
In the first half of 1999, depreciation, depletion, and
amortization charges relating to exploration and production
activities were comparable to the 1998 amounts, but lower on a per
barrel-produced basis, reflecting the impact of new lower-cost
fields and the effect of positive oil and gas reserve revisions at
the end of 1998. Production expenses were lower in the second
quarter and first half of 1999 as a result of lower operating
costs of new fields and, in the second quarter, production shut-in
as a result of the vessel damage noted above. Exploration expenses
were lower in 1999, due to a reduced exploration budget. General
and administrative expenses were comparable in the second quarter
of each year but lower in the first half of 1999, primarily due to
cost reduction initiatives in the United States and United
Kingdom.
The following items are included in 1999 exploration and
production income (in millions):
1999
Three Six
months months
------ ------
United Kingdom foreign currency translation $ 2 $ 20
Tax impact of foreign currency translation 9 17
State income tax refund 6 6
Loss on renegotiation of drilling rig contracts (17) (17)
Marine service vessel contract termination charge - (8)
---- ----
$ - $ 18
==== ====
In 1999, the Corporation changed the functional currency of
its United Kingdom operations from the British pound sterling to
the U.S. dollar. During the first half of 1999, the U.S. dollar
strengthened in relation to the pound sterling resulting in the
currency gain and tax effect shown above. The United Kingdom tax
calculation continues to be Sterling based and includes deductible
losses on dollar denominated liabilities.
The effective income tax rate on exploration and production
earnings was lower in the first half of 1999, principally
reflecting reduced provisions for United Kingdom taxes, due to the
foreign currency translation adjustment indicated above and higher
deductible allowances. Allowances deducted in calculating the
Petroleum Revenue Tax provided incremental tax benefits of
approximately $18 million when compared with allowances recorded
in the comparable period of 1998. The effective income tax rate on
exploration and production earnings is expected to increase in the
second half of the year.
The selling price of crude oil has increased from the low
levels experienced in late 1998 and early 1999. However, the
Corporation anticipates continued volatility.
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PART I - FINANCIAL INFORMATION (CONT'D.)
RESULTS OF OPERATIONS (CONTINUED)
Refining, Marketing and Shipping
Excluding asset sales, refining, marketing and shipping
operations had income of $19 million in the second quarter of 1999
compared with $18 million in the second quarter of 1998. Results
for the first half of 1999 amounted to income of $72 million
compared with a loss of $15 million in the first half of 1998. The
Corporation's downstream operations include HOVENSA, a 50% owned
refining joint venture, and retail, energy marketing and other
activities as discussed below.
HOVENSA
Margins for all refined products were weak in the second
quarter of 1999, resulting in the Corporation recording equity
income from HOVENSA of less than $1 million. In the second quarter
of 1998, the operating results were higher, due principally to
gasoline margins. HOVENSA adopted LIFO at its formation in October
1998, and as a result, its earnings in the second quarter of 1999
were $17 million lower than they would have been using the FIFO
method.
In the first half of 1999, the Corporation's equity income
from HOVENSA was $17 million compared with $4 million in 1998,
when the refinery was wholly-owned. Results in 1999 and 1998
included $16 million (AHC share) and $44 million, respectively,
resulting from the reversal of inventory writedowns that had been
recorded at the prior year-ends. Income taxes are not recorded on
HOVENSA results due to available loss carryforwards.
Refining, marketing and shipping results also include
interest income of $12 million in the second quarter and $24
million in the first half of 1999 on the note received in
connection with the formation of the joint venture.
As a result of equity accounting for HOVENSA, the Company's
share of HOVENSA income is recorded in the line item "Equity in
income of HOVENSA L.L.C." Therefore, in 1999 no amounts for
HOVENSA are included in the income statement captions below. Prior
to the formation of HOVENSA, refinery results were fully
consolidated. In 1998, the amounts shown below were reflected in
the captions indicated (in millions):
Three months ended Six months ended
June 30, 1998 June 30, 1998
------------- -------------
Sales to third parties
and other operating revenues $198 $386
Cost of products sold 112 289
Other operating expenses 22 51
Depreciation and amortization 22 43
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PART I - FINANCIAL INFORMATION (CONT'D.)
RESULTS OF OPERATIONS (CONTINUED)
The Corporation's share of refinery runs amounted to 222,000
barrels per day in the first half of 1999 compared with 436,000
barrels per day in 1998 when the refinery was wholly-owned.
Retail, energy marketing and other
Retail and energy marketing results improved somewhat in the
second quarter and first half of 1999 compared with the
corresponding periods of 1998. However, gasoline and distillate
margins continued to be negatively affected by competitive
industry conditions. Marketing sales volumes decreased to 64
million barrels in the first half of 1999 compared with 74 million
barrels in the first half of 1998, reflecting lower spot and
contract sales. Operating expenses, excluding amounts related to
the refinery in 1998 as indicated above, increased due to expanded
third party shipping activities.
The Corporation periodically takes forward positions on
energy contracts outside of its hedging program. The Corporation
also has a 50% interest in a consolidated partnership which trades
energy commodities. The combined results of these activities were
a gain of $19 million in the first half of 1999 compared with a
loss of $3 million in 1998.
Corporate
Net corporate expenses were comparable in the second
quarters of 1999 and 1998. In the first half of 1999, net
corporate expenses were $5 million lower than in 1998. The net
expenses for both periods were offset by dividend income from
insurers, with approximately $5 million more received in 1999.
Sales and Other Operating Revenues
Sales and other operating revenues decreased by 11% and 14%
in the second quarter and first half of 1999 compared with the
corresponding periods of 1998. In addition to the exclusion of
HOVENSA third party sales in 1999 due to equity accounting (as
discussed above), the decreases are primarily due to lower refined
product sales volumes in the second quarter of 1999 and, in
addition, lower average selling prices in the first half.
13
15
PART I - FINANCIAL INFORMATION (CONT'D.)
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities, including changes
in operating assets and liabilities, amounted to $228 million in
the first half of 1999 compared with $361 million in the first
half of 1998. The decrease was primarily due to changes in working
capital components, principally accounts receivable and
inventories. The sales of fixed assets, including the southeast
pipeline terminals, South Carolina gasoline stations and natural
gas properties in California, generated proceeds of $169 million
in the first half of 1999. The Corporation expects to receive
additional proceeds in excess of $200 million and record
approximately $110 million of income in the third quarter upon the
closing of the sale of its Gulf Coast terminals and additional
retail sites. In 1998, the sales of oil and gas properties in the
United States and Norway generated proceeds of $98 million.
Total debt was $2,696 million at June 30, 1999 compared with
$2,652 million at December 31, 1998. The debt to capitalization
ratio was 49.3% at June 30, compared with 50.1% at year-end. At
June 30, 1999, floating rate debt amounted to 41.5% of total debt,
including the effect of interest rate conversion (swap)
agreements. At June 30, 1999, the Corporation had $930 million of
additional borrowing capacity available under its revolving credit
agreements and additional unused lines of credit under uncommitted
arrangements with banks of $310 million.
The Corporation is considering issuing $400 to $600 million
of public debentures in 1999. The proceeds of the issuance would
be used for the repayment of bank debt and general corporate
purposes.
At the end of 1998, the Corporation recorded a charge of $90
million (before income taxes) for the decline in market value of
fixed-price drilling service contracts. During the first half of
1999, the Corporation accrued an additional $5 million for a
drilling rig that was subcontracted at an amount less than
previously estimated. The Corporation reduced the reserve by $43
million for contract payments. The balance of the reserve at the
end of the first half of 1999 was $52 million. At this time, the
Corporation is unable to determine with any certainty its ability
to continue to subcontract drilling rigs, or the value of possible
subcontracts, and therefore, is unable to reasonably estimate the
adequacy of its reserve. It is possible that future income could
be reduced by as much as an additional $30 million related to the
rig contracts.
At the beginning of 1999, the Corporation had a reserve for
severance costs of $21 million and for exit costs (accrued office
lease costs) of $8 million. During the first half of 1999, the
Corporation charged $15 million in payments against the severance
reserve. All employees included in the 1998 severance program have
been terminated and the remaining severance liability of $6
million will be paid in the second half of the year.
14
16
PART 1 - FINANCIAL INFORMATION (CONT'D.)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Futures, forwards, options and swaps are used to reduce the
effects of changes in the selling prices of crude oil, natural gas
and refined products. These instruments fix the selling prices of
a portion of the Corporation's products and the related gains or
losses are an integral part of the Corporation's selling prices.
At June 30, 1999, the Corporation had open hedge positions equal
to 2% of its estimated worldwide crude oil production over the
next twelve months. As market conditions change, the Corporation
will adjust its hedge positions.
The Corporation reduces its exposure to fluctuating foreign
exchange rates by using forward contracts to fix the exchange rate
on a portion of the currency required in its North Sea operations.
At June 30, 1999, the Corporation had $568 million of foreign
currency exchange contracts outstanding. In addition, the
Corporation uses interest-rate conversion agreements to reduce
exposure to floating interest rates. At June 30, the Corporation
had $290 million of interest-rate conversion agreements
outstanding.
Capital expenditures in the first half of 1999 amounted to
$420 million compared with $709 million in the first half of 1998.
Capital expenditures for exploration and production activities
were $383 million in the first half of 1999 compared with $659
million in the first half of 1998. Capital expenditures for the
remainder of 1999 are expected to be approximately $450 million
and will be financed by internally generated funds.
YEAR 2000
Some older computer software and embedded computer systems
use two digits rather than four to reflect dates used in
performing calculations. Because these computer programs and
embedded systems may not properly recognize the Year 2000, errors
may result causing potentially serious disruptions. In addition,
third parties with which the Corporation does business face the
same problems.
The Corporation has a worldwide program to identify software
and hardware that is not Year 2000 compliant. The Corporation is
also determining the Year 2000 status of major vendors and
customers and is working on contingency plans. The Corporation's
Chief Information Officer and its Vice President of Internal Audit
jointly manage its Year 2000 project.
Status of Year 2000 Project
Since 1995, the Corporation has installed new financial and
business systems as part of its reengineering project. Although
the primary purpose of this project was to increase efficiency and
effectiveness, the new software is Year 2000 compliant. These new
systems have replaced approximately 70% of noncompliant software.
15
17
PART 1 - FINANCIAL INFORMATION (CONT'D.)
YEAR 2000 (CONTINUED)
The Corporation has assessed its remaining software.
Remediation and testing of the remaining software are largely
complete. Several vendor supplied software packages are scheduled
for upgrades during the third quarter of 1999. The Corporation has
completed approximately 90% of this portion of the project at June
30. The Corporation principally uses external consultants on this
phase of the project.
There are embedded computer systems used throughout the
Corporation's operations. The Corporation has hired consultants to
evaluate embedded systems. The inventory and assessment phases are
complete and remediation of critical systems is largely finished.
Remediation of all other systems, where required, will be
completed in the third quarter. At June 30, assessment and
remediation of embedded computer systems is approximately 90%
complete.
The Corporation has also undertaken a supplier and customer
analysis of Year 2000 readiness. The identification process is
complete. Communication with third parties to assess their
progress in addressing Year 2000 problems is in progress and will
continue through the remainder of the year. The third party
analysis is approximately 85% complete at June 30.
Costs
The new systems that replace approximately 70% of
noncompliant software cost approximately $50 million. The
Corporation expects to spend an additional $12 million for
remediation of remaining systems, primarily for outside
consultants, which is being expensed as incurred. To date, the
Corporation has expended approximately $10 million of the expected
$12 million total.
The Corporation has not deferred ongoing information
technology projects because of Year 2000 efforts.
Risks
There are uncertainties inherent in the Year 2000 problem,
partially resulting from the readiness of customers and suppliers.
The failure to correct material Year 2000 problems could interrupt
business and operations. Uncorrected, these interruptions could
have a material effect on the Corporation's results of operations.
However, the objective of the Corporation's Year 2000 project is
to reduce these risks.
The Corporation believes that the most reasonably likely
worst case scenario would be business disruptions at various
locations that could adversely affect the Corporation's results of
operations. However, the Corporation does not believe that these
disruptions will be severe or long-term.
16
18
PART 1 - FINANCIAL INFORMATION (CONT'D.)
YEAR 2000 (CONTINUED)
Contingency Planning
The final portion of the Corporation's Year 2000 program is
contingency planning. Contingency plans are necessary to ensure
that risks associated with Year 2000 are mitigated. In the normal
course of business, the Corporation develops contingency plans to
ensure that it has alternate suppliers for critical materials and
equipment and that production of crude oil, natural gas and
refined products can be sold. The Corporation has completed a
strategy for developing Year 2000 contingency plans. The
Corporation plans to assess risks and finish developing plans
during the third quarter of 1999. The Corporation will update and
enhance the contingency plans as required by changing internal and
external conditions.
In addition, the Corporation has engaged external consultants
to review and benchmark the progress of its Year 2000 project.
Safe Harbor
Certain information in this section on Year 2000 is forward
looking. This includes projected timetables and costs to complete
projects, and possible effects. These disclosures are based on the
Corporation's current understanding and assessment of the Year
2000 problem. Assumptions used, such as availability of resources,
and the status of its Year 2000 assessment and remediation
projects may change. In addition, suppliers and customers may fail
to be ready for the Year 2000. Consequently, actual results may
differ from these disclosures.
17
19
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
As reported in Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998, on April 27, 1993, the
Texas Natural Resource Conservation Commission ("TNRCC", then
known as the Texas Water Commission) notified the Registrant of
alleged violations of the Texas Water Code as a result of alleged
discharges of hydrocarbon compounds into the groundwater in the
vicinity of the Registrant's terminal in Corpus Christi, Texas.
TNRCC sought a civil penalty of $542,400 and sought to require
Registrant to undertake remedial actions at the Corpus Christi
terminal. Registrant also reported in the Form 10-K allegations
made to the Registrant's internal reporting hotline of
noncompliance at the Corpus Christi terminal with federal and
state environmental regulations and its investigation of those
allegations. These allegations and the subsequent investigations
were voluntarily disclosed to TNRCC and related to (i) onsite
disposal of wastes and whether or not such wastes should have been
managed as a hazardous waste under the Resource Conservation and
Recovery Act; and (ii) nonreporting or misreporting of the results
of wastewater discharge samples required to be obtained by the
Corpus Christi wastewater discharge permit. The Registrant has
received and anticipates entering into an Agreed Order with TNRCC
in full settlement of all civil liabilities to TNRCC that might
have attached as a result of the alleged discharge of hydrocarbons
and certain specified waste disposal and wastewater discharge
allegations which had been investigated and disclosed by
Registrant. Pursuant to the proposed Agreed Order, Registrant will
pay a civil penalty of $278,063 and undertake remedial actions at
Corpus Christi, without admitting the allegations of fact or
conclusions of law in the Agreed Order. Groundwater remediation
systems are already in operation at Corpus Christi and the
remedial action requirements of the proposed Agreed Order are not
expected to have a material adverse effect on the Registrant.
Investigations by TNRCC and the United States Environmental
Protection Agency ("EPA") relating to waste disposal practices and
wastewater discharge reporting at Corpus Christi are continuing.
It is not possible at this time for Registrant to state whether
any additional proceedings arising out of the investigations will
be commenced against the Registrant, or what claims would be
asserted or what relief would be sought.
The Registrant is currently investigating allegations made to
the Registrant's internal reporting hotline of noncompliance at
its Galena Park, Texas terminal with state environmental
regulations. The Registrant's investigation focuses on whether (i)
the vapor control system at Galena Park met applicable regulatory
requirements during loading of marine vessels; and (ii) Galena
Park implemented required controls on air emissions resulting from
tank cleaning operations. Registrant voluntarily disclosed these
allegations to TNRCC on February 12, 1999. Registrant is
cooperating with the TNRCC and EPA in the conduct of its
investigation. It is not possible at this time for Registrant to
state whether any proceedings arising out of the investigations
will be commenced against the Registrant, or what claims would be
asserted or what relief would be sought.
18
20
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
The Annual Meeting of Stockholders of the Registrant was
held on May 5, 1999. The Inspectors of Election reported that
83,724,539 shares of Common Stock of the Registrant were
represented in person or by proxy at the meeting, constituting
92.7% of the votes entitled to be cast. At the meeting,
stockholders voted upon the election of five nominees for the
Board of Directors for the three-year term expiring in 2002 and
the ratification of the selection by the Board of Directors of
Ernst & Young LLP as the independent auditors of the Registrant
for the fiscal year ended December 31, 1999.
With respect to the election of directors, the inspectors of
election reported as follows:
For Withhold Authority to Vote
Name Nominee Listed For Nominee Listed
---- -------------- ------------------
Edith E. Holiday 82,797,821 926,718
W.S.H. Laidlaw 82,743,450 981,089
Roger B. Oresman 82,729,947 994,592
Robert N. Wilson 82,806,815 917,724
Robert F. Wright 82,724,577 999,962
The inspectors further reported that 83,458,463 votes were
cast for the ratification of the selection of Ernst & Young LLP as
independent auditors for the fiscal year ending December 31, 1999,
77,466 votes were cast against said ratification and holders of
188,610 votes abstained.
There were no broker non-votes with respect to the election
of directors or the ratification of the selection of independent
auditors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
None
(b) Reports on Form 8-K
The Registrant filed no report on Form 8-K during the three
months ended June 30, 1999.
19
21
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.
AMERADA HESS CORPORATION
(REGISTRANT)
By s/s John B. Hess
-------------------------------------
JOHN B. HESS
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
By s/s John Y. Schreyer
-------------------------------------
JOHN Y. SCHREYER
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
`
Date: August 9, 1999
20
5
1,000
6-MOS
DEC-31-1999
JAN-01-1999
JUN-30-1999
82,284
0
1,479,753
0
428,006
2,240,161
11,188,529
6,933,386
8,205,776
2,034,635
2,646,806
0
0
90,564
2,677,921
8,205,776
2,968,650
3,179,953
1,863,864
1,863,864
0
0
77,241
204,329
56,293
148,036
0
0
0
148,036
1.65
1.65
