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 September 30, 1999
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
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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) and has been subject to
such filing requirements for the past 90 days. Yes X No
----- -----
At September 30, 1999, 90,694,905 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 NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
------------------------------ ------------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
REVENUES
Sales (excluding excise taxes) and
other operating revenues $ 1,801,651 $ 1,528,484 $ 4,770,301 $ 4,962,732
Non-operating revenues
Gain on asset sales 165,378 -- 273,441 80,321
Equity in income of HOVENSA L.L.C 7,001 -- 24,032 --
Other 209 23,578 86,418 67,426
----------- ----------- ----------- -----------
Total revenues 1,974,239 1,552,062 5,154,192 5,110,479
----------- ----------- ----------- -----------
COSTS AND EXPENSES
Cost of products sold 1,071,241 968,825 2,935,105 3,257,082
Production expenses 109,213 132,672 318,402 370,651
Marketing expenses 108,016 89,516 287,694 269,631
Other operating expenses 52,029 42,560 168,305 155,753
Exploration expenses, including dry holes
and lease impairment 45,446 57,668 186,333 261,483
General and administrative expenses 70,068 66,442 184,056 195,707
Interest expense 38,743 41,709 115,984 109,026
Depreciation, depletion and amortization 159,531 159,536 434,032 485,956
----------- ----------- ----------- -----------
Total costs and expenses 1,654,287 1,558,928 4,629,911 5,105,289
----------- ----------- ----------- -----------
Income (loss) before income taxes 319,952 (6,866) 524,281 5,190
Provision (benefit) for income taxes 161,467 (547) 217,760 45,822
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 158,485 $ (6,319) $ 306,521 $ (40,632)
=========== =========== =========== ===========
NET INCOME (LOSS) PER SHARE -
BASIC $ 1.77 $ (.07) $ 3.42 $ (.45)
=========== =========== =========== ===========
DILUTED $ 1.75 $ (.07) $ 3.40 $ (.45)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING - DILUTED 90,531 89,268 90,169 89,732
COMMON STOCK DIVIDENDS PER SHARE $ .15 $ .15 $ .45 $ .45
See accompanying notes to consolidated financial statements.
1
3
PART I - FINANCIAL INFORMATION (CONT'D.)
AMERADA HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS)
A S S E T S
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
CURRENT ASSETS
Cash and cash equivalents $ 25,589 $ 73,791
Accounts receivable 1,342,107 1,013,184
Inventories 466,983 482,182
Other current assets 219,183 317,549
------------ ------------
Total current assets 2,053,862 1,886,706
------------ ------------
INVESTMENTS AND ADVANCES
HOVENSA L.L.C 726,613 702,581
Other 219,296 232,826
------------ ------------
Total investments and advances 945,909 935,407
------------ ------------
PROPERTY, PLANT AND EQUIPMENT
Total - at cost 11,239,319 11,027,239
Less reserves for depreciation, depletion,
amortization and lease impairment 7,011,485 6,835,301
------------ ------------
Property, plant and equipment - net 4,227,834 4,191,938
------------ ------------
NOTE RECEIVABLE 490,500 538,500
------------ ------------
DEFERRED INCOME TAXES AND OTHER ASSETS 220,859 330,432
------------ ------------
TOTAL ASSETS $ 7,938,964 $ 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 $ 896,123 $ 713,831
Accrued liabilities 644,983 554,632
Deferred revenue 86,839 251,328
Taxes payable 173,579 100,686
Notes payable 33,771 3,500
Current maturities of long-term debt 31,637 172,820
------------ ------------
Total current liabilities 1,866,932 1,796,797
------------ ------------
LONG-TERM DEBT 2,335,848 2,476,145
------------ ------------
DEFERRED LIABILITIES AND CREDITS
Deferred income taxes 406,102 483,843
Other 403,259 482,786
------------ ------------
Total deferred liabilities and credits 809,361 966,629
------------ ------------
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 - 90,694,905 shares at September 30, 1999;
90,356,705 shares at December 31, 1998 90,695 90,357
Capital in excess of par value 782,036 764,412
Retained earnings 2,169,843 1,904,066
Accumulated other comprehensive income (115,751) (115,423)
------------ ------------
Total stockholders' equity 2,926,823 2,643,412
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,938,964 $ 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
NINE MONTHS ENDED SEPTEMBER 30
(IN THOUSANDS)
1999 1998
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 306,521 $ (40,632)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Depreciation, depletion and amortization 434,032 485,956
Exploratory dry hole costs 34,374 125,207
Lease impairment 23,074 24,211
Gain on asset sales (273,441) (80,321)
Provision (benefit) for deferred income taxes 44,938 (9,838)
Changes in operating assets and liabilities and other (125,269) 12,088
----------- -----------
Net cash provided by operating activities 444,229 516,671
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (617,258) (1,120,360)
Proceeds from asset sales and other 413,055 119,288
----------- -----------
Net cash used in investing activities (204,203) (1,001,072)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in notes payable 30,271 19,158
Long-term borrowings 621,075 644,000
Repayment of long-term debt (902,664) (86,228)
Cash dividends paid (54,299) (54,668)
Stock options exercised 17,093 --
Common stock acquired -- (58,667)
----------- -----------
Net cash provided by (used in) financing activities (288,524) 463,595
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 296 (3,167)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (48,202) (23,973)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 73,791 91,154
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 25,589 $ 67,181
=========== ===========
See accompanying notes to consolidated financial statements.
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5
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 September 30, 1999 and December
31, 1998, and the consolidated results of operations for the three
and nine-month periods ended September 30, 1999 and 1998 and the
consolidated cash flows for the nine-month periods ended September
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 Corporation's accounting policies that
follow are presented to supplement the accounting policies
previously disclosed.
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 interests 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 under-way or planned. If 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 Long-Lived Assets: The Corporation reviews
long-lived assets including 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
assets are impaired and an impairment loss is recorded. The amount
of the impairment is based on the estimated fair value of the
assets determined by discounting anticipated future net cash
flows. The net present value of future cash flows is based on the
Corporation's estimates, including future oil and gas prices
applied to projected production profiles, discounted at a rate
commensurate with the risks involved. 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 $46,000 during the three
months ended September 30, 1999 ($.51 per share basic and
diluted). LIFO decreased net income $76,900 for the nine months
ended September 30, 1999 ($.86 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:
September 30, December 31,
1999 1998
------------- ------------
Crude oil and other charge stocks $ 116,512 $ 35,818
Refined and other finished products 388,038 386,917
Less: LIFO adjustment (118,347) - -
Materials and supplies 80,780 59,447
--------- ---------
Total inventories $ 466,983 $ 482,182
========= =========
At September 30, 1999, inventory costs were determined using LIFO
for approximately 70% of the Corporation's petroleum inventory.
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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
September 30, December 31,
1999 1998
------------- ------------
Current assets $ 441,241 $ 352,171
Net fixed assets 1,315,509 1,343,712
Other assets 25,288 27,711
Current liabilities (245,829) (133,454)
Long-term debt (140,000) (250,000)
Deferred liabilities and credits (32,721) (27,718)
----------- -----------
Partners' equity $ 1,363,488 $ 1,312,422
=========== ===========
Summarized Income Statement Information
For the three For the nine
months ended months ended
September 30,1999 September 30, 1999
----------------- ------------------
Total revenues $ 866,720 $ 2,125,027
Costs and expenses (851,780) (2,105,961)
Inventory market value changes -- 31,999
----------- -----------
Net income $ 14,940* $ 51,065*
=========== ===========
* The Corporation's share of HOVENSA's net income was $7,001 and
$24,032 for the three and nine-month periods ended September 30,
1999, respectively.
Note 5 - The provision for income taxes consisted of the following:
Three months Nine months
ended September 30 ended September 30
-------------------------- --------------------------
1999 1998 1999 1998
-------- -------- -------- --------
Current $ 83,981 $ 8,694 $172,822 $ 55,660
Deferred 77,486 (9,241) 44,938 (9,838)
-------- -------- -------- --------
Total $161,467 $ (547) $217,760 $ 45,822
======== ======== ======== ========
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PART I - FINANCIAL INFORMATION (CONT'D.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
Note 6 - Worldwide currency losses amounted to $23,840 (including $15,737
of income tax expense) for the three-month period ended September
30, 1999. Currency gains amounted to $11,536 (including $2,392 of
income tax benefits) for the nine-month period ended September 30,
1999. Net foreign currency gains for the corresponding periods of
1998 amounted to $1,357 and $1,672.
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 nine-months ended
September 30, 1999, the U.S. dollar strengthened in relation to
the pound sterling, which resulted in gains arising from the
translation of net sterling liability balances for financial
reporting purposes. However, during the three month period ended
September 30, 1999, the U.S. dollar weakened in relation to the
pound sterling, resulting in losses.
Note 7 - The weighted average number of common shares used in the basic and
diluted earnings per share computations are as follows:
Three months Nine months
ended September 30 ended September 30
---------------------- ----------------------
1999 1998 1999 1998
------ ------ ------ ------
Common shares - basic 89,799 89,268 89,629 89,732
Effect of dilutive securities
(equivalent shares)
Nonvested common stock 469 -- 422 --
Stock options 263 -- 118 --
------ ------ ------ ------
Common shares - diluted 90,531 89,268 90,169 89,732
====== ====== ====== ======
The antidilutive effects of 695 nonvested common shares and 40
stock options and 648 common shares and 90 stock options are
excluded in the three months and nine months ended September 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 $37,100 at September 30, 1999,
including $25,700 of unrealized losses, of which approximately 70%
relates to contracts that will mature in 2000.
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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 nine-month periods ended September 30, 1999, interest
costs of $3,604 and $14,404, respectively, were capitalized
compared to $5,897 and $19,093 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 Nine months
ended September 30 ended September 30
------------------------- -------------------------
1999 1998 1999 1998
-------- -------- -------- --------
Comprehensive income (loss) $164,861 $ 18,399 $306,193 $(11,748)
======== ======== ======== ========
Note 11 - The Corporation's results by operating segment were as follows:
Three months Nine months
ended September 30 ended September 30
-------------------------------- --------------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
Operating revenues
Exploration and production(1) $ 688,600 $441,400 $ 1,810,800 $ 1,427,200
Refining, marketing and
shipping 1,166,600 1,120,200 3,089,200 3,633,600
----------- ----------- ----------- -----------
Total $ 1,855,200 $ 1,561,600 $ 4,900,000 $ 5,060,800
=========== =========== =========== ===========
Net income (loss)
Exploration and production(2) $ 71,200 $ 5,600 $ 179,200 $ 63,800
Refining, marketing and
shipping(3) 128,100 33,400 240,000 18,100
Corporate (including interest) (40,800) (45,300) (112,700) (122,500)
----------- ----------- ----------- -----------
Total $ 158,500 $ (6,300) $ 306,500 $ (40,600)
=========== =========== =========== ===========
(1) Includes transfers to affiliates of $53,500 and $129,700 during
the three and nine-months ended September 30, 1999, respectively,
compared to $33,200 and $98,100 for the corresponding periods of
1998.
(2) Includes gains on asset sales of $30,100 and $56,200 during the
nine-months ended September 30, 1999 and 1998, respectively.
(3) Includes gains on asset sales of $105,800 and $145,900 during the
three and nine-month periods ended September 30, 1999,
respectively.
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PART I - FINANCIAL INFORMATION (CONT'D.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
Note 12 - At the end of 1998, the Corporation recorded a charge of $90,000
($77,000 after income taxes) for the decline in market value of
fixed-price, drilling-service contracts due to low crude oil
prices. Because of the uncertainties in estimating the future
market value of the drilling rig contracts, it is possible that
the Corporation's excess costs could be up to $30,000 greater than
accrued.
Note 13 - On October 1, 1999, the Corporation issued $1,000,000 of public
debentures. Of the $1,000,000, $300,000 bears interest at 7 3/8%
(effective interest rate of 7.44%) and is due in 2009 and $700,000
bears interest at 7 7/8% (effective interest rate of 7.99%) and is
due in 2029.
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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 third quarter of 1999
amounted to $52 million compared with a loss of $6 million in the
third quarter of 1998. Income excluding asset sales for the first
nine months of 1999 was $131 million compared with a loss of $97
million in the first nine months of 1998. Including gains on asset
sales, net income amounted to $158 million in the third quarter of
1999 and $307 million in the first nine months of 1999, compared
with losses of $6 million and $41 million in the corresponding
periods of 1998.
The after-tax results by major operating activity for the
three and nine-month periods ended September 30, 1999 and 1998
were as follows (in millions, except per share data):
Three months Nine months
ended September 30 ended September 30
-------------------- --------------------
1999 1998 1999 1998
----- ----- ----- -----
Exploration and production $ 71 $ 6 $ 149 $ 8
Refining, marketing and shipping 22 33 94 18
Corporate (11) (12) (26) (33)
Interest expense (30) (33) (86) (90)
----- ----- ----- -----
Income (loss) excluding asset sales 52 (6) 131 (97)
Gains on asset sales 106 - 176 56
----- ----- ----- -----
Net income (loss) $ 158 $ (6) $ 307 $ (41)
===== ===== ===== =====
Net income (loss)
per share (diluted) $1.75 $(.07) $3.40 $(.45)
===== ===== ===== =====
The net gain from asset sales in the third quarter of 1999
reflects the sale of the Corporation's Gulf Coast terminals and
certain retail sites. The net gain from asset sales in the first
nine months of 1999 also includes the sale of the southeast
pipeline terminals, additional retail sites and 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 $65 million in the third
quarter of 1999 and $141 million in the
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PART I - FINANCIAL INFORMATION (CONT'D.)
RESULTS OF OPERATIONS (CONTINUED)
first nine months of 1999, compared with the corresponding periods
of 1998. Exploration and production earnings in the third quarter
of 1999 include net nonrecurring expense of $29 million,
principally from foreign currency translation adjustments. Net
nonrecurring expense for the first nine months of 1999 amounted to
$12 million. The increases in exploration and production earnings
were primarily due to higher average crude oil selling prices,
increased worldwide crude oil production volumes, higher United
States natural gas volumes and lower exploration expenses. These
variances are more fully described below.
The Corporation's average selling prices, including the
effects of hedging, were as follows:
Three months Nine months
ended September 30 ended September 30
------------------------- -------------------------
1999 1998 1999 1998
-------- -------- -------- --------
Crude oil and natural gas liquids
(per barrel)
United States $ 18.15 $ 11.26 $ 14.62 $ 12.33
Foreign 20.32 12.55 15.48 13.64
Natural gas (per Mcf)
United States 2.39 1.93 2.07 2.08
Foreign 1.60 2.14 1.79 2.26
The Corporation's net daily worldwide production was as
follows:
Three months Nine months
ended September 30 ended September 30
---------------------- ----------------------
1999 1998 1999 1998
------- ------- ------- -------
Crude oil and natural gas liquids
(barrels per day)
United States 69,239 43,404 61,661 44,141
United Kingdom 114,901 106,199 113,624 111,412
Norway 27,594 23,617 27,019 29,056
Denmark 6,765 - - 2,280 - -
Gabon 9,977 15,428 10,583 14,173
Indonesia, Azerbaijan
and Thailand 5,079 3,140 4,527 2,605
------- ------- ------- -------
Total 233,555 191,788 219,694 201,387
======= ======= ======= =======
Natural gas (Mcf per day)
United States 346,164 280,807 337,993 288,979
United Kingdom 218,778 223,881 241,600 253,200
Norway 31,193 23,256 30,800 28,440
Indonesia and Thailand 12,005 3,754 6,300 3,900
------- ------- ------- -------
Total 608,140 531,698 616,693 574,519
======= ======= ======= =======
Barrels of oil equivalent (per day) 334,912 280,404 322,476 297,140
======= ======= ======= =======
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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. Higher United Kingdom crude oil production in the third
quarter of 1999 is also largely due to new fields. Production
resumed in the third quarter of 1999 from a United Kingdom field
which had been shut-in earlier in the year due to damage to a
floating production vessel. New production commenced in July from
the South Arne Field in Denmark. Net crude oil production from
this field is expected to reach 30,000 barrels per day in 2000.
In 1999, depreciation, depletion and amortization charges
relating to exploration and production activities were higher than
the 1998 amounts, reflecting the increased production volumes
shown above. On a per barrel-produced basis, depreciation and
related charges for the first nine months of 1999 were lower than
in 1998 due to the impact of new lower-cost fields and the effect
of positive oil and gas reserve revisions at the end of 1998. In
the third quarter of 1999, per barrel depreciation and related
charges increased somewhat reflecting mid-year reserve revisions.
Production expenses were lower in 1999 as a result of lower
operating costs of new fields and shut-in production from the
vessel damage noted above. Exploration expenses were also lower in
1999 due to a reduced exploration budget. General and
administrative expenses were comparable in the third quarter but
lower in the first nine months 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 Nine
months months
------ ------
United Kingdom foreign currency translation $ (7) $ 13
United Kingdom tax on foreign currency translation (14) 2
Litigation settlement (8) (8)
State income tax refund - 6
Loss on renegotiation of drilling rig contracts - (17)
Marine service vessel contract termination charge - (8)
---- ----
$(29) $(12)
==== ====
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 third quarter of 1999, the U.S. dollar
weakened in relation to the pound sterling resulting in the
currency loss and tax effect shown above. During the nine month
period, the U.S. dollar strengthened in relation to the pound
sterling. The United Kingdom income tax calculation will continue
to be Sterling based until December 31 when it will also be
changed to the U.S. dollar functional currency. The Corporation's
hedging program and the change to the U.S. dollar functional
currency for income taxes will mitigate U.K. currency translation
gains or losses in the future.
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PART I - FINANCIAL INFORMATION (CONT'D.)
RESULTS OF OPERATIONS (CONTINUED)
In the third quarter of 1999, a deductible allowance against
the Petroleum Revenue Tax (PRT) in the United Kingdom expired,
increasing the effective income tax rate on exploration and
production earnings. In the first nine months of 1999, the
effective income tax rate was lower than in 1998 reflecting the
relative significance of nondeductible exploration drilling and
other costs at the low levels of income in 1998. The effective
income tax rate in 1999 also included the deductible allowance
which reduced the United Kingdom PRT tax.
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.
Refining, Marketing and Shipping
Excluding asset sales, refining, marketing and shipping
operations had income of $22 million in the third quarter of 1999
compared with $33 million in the third quarter of 1998. Results
for the first nine months of 1999 amounted to income of $94
million compared with $18 million in the first nine months 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
The Corporation recorded equity income of $7 million from
HOVENSA in the third quarter of 1999 compared with $33 million in
the third quarter of 1998 when the refinery was wholly-owned.
Margins for all refined products continued to be weak during the
third quarter of 1999. HOVENSA accounts for inventory on the LIFO
method which has a negative impact on margins during periods of
rising crude oil costs. In 1999, LIFO accounting reduced the
Corporation's share of HOVENSA's earnings by approximately $40
million.
In the first nine months of 1999, the Corporation's equity
income from HOVENSA was $24 million compared with $37 million in
1998 when the refinery was wholly-owned. Both periods include the
benefit of the reversal of inventory writedowns that had been
recorded at the prior year-ends, with $28 million additional
benefit recorded in 1998. 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 third quarter and $35
million in the first nine months of 1999 on the note received in
connection with the formation of the joint venture.
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PART I - FINANCIAL INFORMATION (CONT'D.)
RESULTS OF OPERATIONS (CONTINUED)
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." 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 Nine months ended
September 30, 1998 September 30, 1998
------------------ ------------------
Sales and other operating revenues $166 $552
Cost of products sold 99 388
Other operating expenses 21 72
Depreciation and amortization 20 63
The Corporation's share of refinery runs amounted to 214,000
barrels per day in the first nine months of 1999 compared with
423,000 barrels per day in 1998 when the refinery was
wholly-owned.
Retail, energy marketing and other
Retail and energy marketing results declined in the third
quarter of 1999 compared with the corresponding period of 1998,
reflecting the inability to pass along higher product costs
through selling prices. Results in the first nine months of 1999
improved somewhat from 1998 in spite of the adoption of LIFO
effective January 1. Marketing sales volumes decreased to 93
million barrels in the first nine months of 1999 compared with 110
million barrels in the first nine months of 1998, reflecting lower
spot sales. Operating expenses, excluding amounts related to the
refinery in 1998 as indicated above, increased due to third party
shipping activities. Revenue from shipping operations is included
in operating revenue in the income statement.
In the third quarter of 1999, refining and marketing results
included after-tax charges of $6 million (of which $2 million was
the Corporation's share of HOVENSA's expense) relating to the
termination of participation in an environmental oil spill
response organization. The Corporation is now participating in
another spill response organization with lower ongoing operating
expenses.
The Corporation has a 50% interest in a consolidated
partnership which trades energy commodities. The Corporation also
periodically takes forward positions on energy contracts outside
of its hedging program. The combined results of these activities
were gains of $9 million and $28 million in the third quarter and
nine months of 1999, compared with losses of $2 million and $5
million in the corresponding periods of 1998. Expenses of the
trading partnership are included in marketing expenses in the
income statement.
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PART I - FINANCIAL INFORMATION (CONT'D.)
RESULTS OF OPERATIONS (CONTINUED)
Corporate
Net corporate expenses were comparable in the third quarters
of 1999 and 1998. In the first nine months of 1999, net corporate
expenses were $7 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 increased by 18% in the
third quarter of 1999 and decreased by 4% in the first nine months
of 1999 compared with the corresponding periods of 1998. Revenues
in 1999 exclude third party sales of HOVENSA due to equity
accounting, as discussed above. Excluding the impact of HOVENSA,
revenues in the third quarter and nine months increased reflecting
higher crude oil and refined product selling prices and increased
crude oil and natural gas sales volumes, partially offset by lower
refined product sales volumes.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities, including changes
in operating assets and liabilities, amounted to $444 million in
the first nine months of 1999 compared with $517 million in the
first nine months of 1998. The decrease was primarily due to
changes in working capital components, mainly accounts receivable
from trading operations. The sales of the southeast pipeline and
Gulf Coast terminals, certain retail sites and natural gas
properties in California, generated proceeds of $394 million in
the first nine months of 1999. In 1998, the sales of oil and gas
properties in the United States and Norway generated proceeds of
$98 million.
Total debt was $2,401 million at September 30, 1999 compared
with $2,652 million at December 31, 1998. The debt to
capitalization ratio was 45.1% at September 30, compared with
50.1% at year-end. At September 30, 1999, floating rate debt
amounted to 46.5% of total debt. At September 30, 1999, the
Corporation had $941 million of additional borrowing capacity
available under its revolving credit agreements and additional
unused lines of credit under uncommitted arrangements with banks
of $345 million.
On October 1, 1999, the Corporation issued $1 billion of
public debentures. The proceeds of the issuance were used to repay
bank debt. Of the $1 billion, $300 million bears interest at 7
3/8% (effective interest rate of 7.44%) and is due in 2009 and
$700 million bears interest at 7 7/8% (effective interest rate of
7.99%) and is due in 2029.
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PART I - FINANCIAL INFORMATION (CONT'D.)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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 nine
months 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 $57
million for contract payments. The balance of the reserve at
September 30, 1999 was $38 million. While the Corporation
currently anticipates work for all but one of the drilling rigs,
it is unable to determine with any certainty its ability to
continue to subcontract 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 nine months of 1999,
the Corporation charged $19 million in payments against the
severance reserve. All employees included in the 1998 severance
program have been terminated and the remaining severance liability
of $2 million will be paid during the fourth quarter of the year.
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 September 30, 1999, the Corporation had open hedge positions
equal to 18% of its estimated worldwide crude oil production over
the next twelve months and approximately 5% of its production for
the succeeding twelve months. The Corporation also had hedges
covering 8% of its marketing inventories. 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 September 30, 1999, the Corporation had $563 million of foreign
currency exchange contracts outstanding. In addition, the
Corporation uses interest-rate conversion agreements to adjust the
ratio of fixed and floating interest rate debt. At September 30,
there were no interest-rate conversion agreements outstanding;
however, on October 1, 1999, the Corporation entered into $300
million of interest-rate conversion agreements in connection with
the issuance of public debentures, as discussed above.
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PART I - FINANCIAL INFORMATION (CONT'D.)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Capital expenditures in the first nine months of 1999
amounted to $617 million compared with $1,120 million in the first
nine months of 1998. Capital expenditures for exploration and
production activities were $560 million in the first nine months
of 1999 compared with $1,034 million in the first nine months of
1998. Capital expenditures for the remainder of 1999 are expected
to be approximately $250 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 define 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 the 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.
The Corporation has assessed its remaining software.
Remediation and testing of the remaining software are complete.
Several vendor supplied software packages are scheduled for
implementation during the fourth quarter of 1999. The Corporation
has completed approximately 98% of this portion of the project at
September 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 finished.
Remediation of a few non-critical systems, where required, will be
completed in the fourth quarter. At September 30, assessment and
remediation of embedded computer systems is approximately 99%
complete.
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PART I - FINANCIAL INFORMATION (CONT'D.)
YEAR 2000 (CONTINUED)
The Corporation has also undertaken a supplier and customer
analysis of Year 2000 readiness. The identification process is
complete. Approximately 99% of critical suppliers have indicated
that they expect to be able to function properly in 2000.
Communication with third parties to assess their progress in
addressing Year 2000 problems will continue through the remainder
of the year. The third party analysis is approximately 93%
complete at September 30.
Costs
The new systems that replaced approximately 70% of
noncompliant software cost approximately $50 million. In addition,
the Corporation has spent $12 million for remediation of remaining
systems, primarily for outside consultants. This amount, which was
expensed as incurred, represents substantially all of the expected
remediation costs.
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.
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 risk
assessments and has substantially finished developing contingency
plans. The Corporation will update and enhance the contingency
plans as required by changing internal and external conditions.
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YEAR 2000 (CONTINUED)
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.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
4(1) Indenture dated as of October 1, 1999 between Registrant
and The Chase Manhattan Bank, as Trustee.
4(2) First Supplemental Indenture dated as of October 1, 1999
between Registrant and The Chase Manhattan Bank, as
Trustee, relating to Registrant's 7 3/8% Notes due 2009 and
7 7/8% Notes due 2029.
10(1) Change of Control Termination Benefits Agreement dated as
of September 1, 1999 between Registrant and John B. Hess.
Substantially identical agreements (differing only in the
signatories thereto) were entered into between Registrant
and W. S. H. Laidlaw, J. Barclay Collins and John Y.
Schreyer.
10(2) Change of Control Termination Benefits Agreement dated as
of September 1, 1999 between Registrant and Francis R.
Gugen. Substantially identical agreements (differing only
in the signatories thereto) were entered into between
Registrant and other executive officers (other than the
named executive officers referred to in Exhibit 10(1)).
(b) Reports on Form 8-K
The Registrant filed no report on Form 8-K during the three
months ended September 30, 1999.
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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.
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: November 12, 1999
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