-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WmhbK3GcSxdL6hvx1d/7EaBtKE1ilwd9cigrAhjrJH5Qn6Cgr4S1zVcMkOkF9Jku 4Qq1AQHkLpela5EyK7AN2g== 0000950123-99-004715.txt : 19990517 0000950123-99-004715.hdr.sgml : 19990517 ACCESSION NUMBER: 0000950123-99-004715 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERADA HESS CORP CENTRAL INDEX KEY: 0000004447 STANDARD INDUSTRIAL CLASSIFICATION: PETROLEUM REFINING [2911] IRS NUMBER: 134921002 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-01204 FILM NUMBER: 99623731 BUSINESS ADDRESS: STREET 1: 1185 AVENUE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10036 BUSINESS PHONE: 2129978500 FORMER COMPANY: FORMER CONFORMED NAME: AMERADA PETROLEUM CORP DATE OF NAME CHANGE: 19690727 10-Q 1 AMERADA HESS CORPORATION 1 ================================================================================ 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 March 31, 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 ------------------------ 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 March 31, 1999, 90,367,705 shares of Common Stock were outstanding. ================================================================================ 2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements. AMERADA HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES STATEMENT OF CONSOLIDATED INCOME Three Months Ended March 31 (in thousands, except per share data)
1999 1998 ----------- ----------- REVENUES Sales (excluding excise taxes) and other operating revenues $ 1,538,693 $ 1,825,789 Non-operating income Gain on asset sales 46,322 80,321 Equity in income of HOVENSA L.L.C. 16,462 -- Other 48,587 17,109 ----------- ----------- Total revenues 1,650,064 1,923,219 ----------- ----------- COSTS AND EXPENSES Cost of products sold 999,072 1,188,406 Production expenses 115,108 111,163 Marketing expenses 93,914 88,198 Other operating expenses 57,235 131,512 Exploration expenses, including dry holes and lease impairment 62,778 104,219 General and administrative expenses 50,062 68,603 Interest expense 39,133 33,988 Depreciation, depletion and amortization 138,322 164,227 ----------- ----------- Total costs and expenses 1,555,624 1,890,316 ----------- ----------- Income before income taxes 94,440 32,903 Provision for income taxes 23,860 45,497 ----------- ----------- NET INCOME (LOSS) $ 70,580 $ (12,594) =========== =========== NET INCOME (LOSS) PER SHARE - BASIC AND DILUTED $ .79 $ (.14) =========== =========== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 89,868 90,079 COMMON STOCK DIVIDENDS PER SHARE $ .15 $ .15
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)
ASSETS MARCH 31, DECEMBER 31, 1999 1998 ------------ ------------ CURRENT ASSETS Cash and cash equivalents $ 54,558 $ 73,791 Accounts receivable 1,273,533 1,013,184 Inventories 405,969 482,182 Other current assets 228,667 317,549 ------------ ------------ Total current assets 1,962,727 1,886,706 ------------ ------------ INVESTMENTS AND ADVANCES HOVENSA L.L.C 719,043 702,581 Other 232,266 232,826 ------------ ------------ Total investments and advances 951,309 935,407 ------------ ------------ PROPERTY, PLANT AND EQUIPMENT Total - at cost 11,066,921 11,027,239 Less reserves for depreciation, depletion, amortization and lease impairment 6,862,586 6,835,301 ------------ ------------ Property, plant and equipment - net 4,204,335 4,191,938 ------------ ------------ NOTE RECEIVABLE 538,500 538,500 ------------ ------------ DEFERRED INCOME TAXES AND OTHER ASSETS 317,438 330,432 ------------ ------------ TOTAL ASSETS $ 7,974,309 $ 7,882,983 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable - trade $ 829,161 $ 713,831 Accrued liabilities 532,649 554,632 Deferred revenue 208,953 251,328 Taxes payable 152,165 100,686 Notes payable 32,500 3,500 Current maturities of long-term debt 44,422 172,820 ------------ ------------ Total current liabilities 1,799,850 1,796,797 ------------ ------------ LONG-TERM DEBT 2,608,993 2,476,145 ------------ ------------ DEFERRED LIABILITIES AND CREDITS Deferred income taxes 412,225 483,843 Other 459,608 482,786 ------------ ------------ Total deferred liabilities and credits 871,833 966,629 ------------ ------------ 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 - 90,367,705 shares at March 31, 1999; 90,356,705 shares at December 31, 1998 90,368 90,357 Capital in excess of par value 764,937 764,412 Retained earnings 1,961,090 1,904,066 Equity adjustment from foreign currency translation (122,762) (115,423) ------------ ------------ Total stockholders' equity 2,693,633 2,643,412 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,974,309 $ 7,882,983 ============ ============
See accompanying notes to consolidated financial statements. 2 4 PART I - FINANCIAL INFORMATION (CONT'D.) AMERADA HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES STATEMENT OF CONSOLIDATED CASH FLOWS Three Months Ended March 31 (in thousands)
1999 1998 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 70,580 $ (12,594) Adjustments to reconcile net income (loss) to net cash provided by operating activities Depreciation, depletion and amortization 138,322 164,227 Exploratory dry hole costs 16,723 54,986 Lease impairment 6,267 8,287 Gain on asset sales (46,322) (80,321) Provision (benefit) for deferred income taxes (29,922) (6,768) Changes in operating assets and liabilities and other (48,303) 30,571 --------- --------- Net cash provided by operating activities 107,345 158,388 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (200,779) (318,392) Proceeds from asset sales and other 67,768 107,103 --------- --------- Net cash used in investing activities (133,011) (211,289) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Increase (decrease) in notes payable 29,000 (14,241) Long-term borrowings 250,059 260,000 Repayment of long-term debt (245,345) (169,494) Cash dividends paid (27,111) (27,445) Common stock acquired -- (6,441) --------- --------- Net cash provided by financing activities 6,603 42,379 --------- --------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (170) (1,094) --------- --------- NET DECREASE IN CASH AND CASH EQUIVALENTS (19,233) (11,616) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 73,791 91,154 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 54,558 $ 79,538 ========= =========
See accompanying notes to consolidated financial statements. 3 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 March 31, 1999 and December 31, 1998, and the consolidated results of operations and the consolidated cash flows for the three-month periods ended March 31, 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. 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 during the quarter ended March 31, 1999 by $2,794 ($.03 per share basic and diluted). It is not possible to determine the cumulative effect of the change on retained earnings at January 1, 1999 or the pro forma effects of retroactive application of the change for prior periods. Note 3 - Inventories consist of the following:
March 31, December 31, 1999 1998 -------------- -------------- Crude oil and other charge stocks $ 65,861 $ 35,818 Refined and other finished products 272,207 386,917 Materials and supplies 67,901 59,447 -------------- -------------- Total inventories $ 405,969 $ 482,182 ============== ==============
4 6 PART I - FINANCIAL INFORMATION (CONT'D.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) Note 4 - The Corporation's investment in the HOVENSA joint venture is accounted for on the equity method. Summarized financial information for HOVENSA as of March 31, 1999 is as follows: Summarized Balance Sheet Information At March 31, 1999 Current assets $ 412,354 Net fixed assets 1,331,385 Other assets 27,299 Current liabilities (166,217) Long-term debt (225,000) Deferred liabilities and credits (33,449) ----------- Partners' equity $ 1,346,372 ===========
Summarized Income Statement Information For the three months ended March 31,1999 Total revenues $ 538,623 Costs and expenses (536,672) Inventory market value changes 31,999 ---------- Net income $ 33,950* ==========
* The Corporation's share of HOVENSA's net income was $16,462. Note 5 - The provision for income taxes consisted of the following:
Three months ended March 31 --------------------------- 1999 1998 --------- --------- Current $ 53,782 $ 52,265 Deferred (29,922) (6,768) --------- --------- Total $ 23,860 $ 45,497 ========= =========
5 7 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 used in translating the foreign currency financial statements of its United Kingdom operations from the British pound sterling to the U.S. dollar. During the quarter ended March 31, 1999, the U.S. dollar strengthened in relation to the pound sterling. As a result, the Corporation had an after-tax currency gain of $26,487 compared with a loss of $278 in the first quarter of 1998. Foreign currency gains and losses are reflected in non-operating income in the income statement. Note 7 - The weighted average number of common shares used in the basic and diluted earnings per share computations are as follows:
Three months ended March 31 ---------------- 1999 1998 ------- ------- Common shares - basic 89,456 90,079 Effect of dilutive securities (equivalent shares) Nonvested common stock 397 -- Stock options 15 -- ------- ------- Common shares - diluted 89,868 90,079 ======= =======
In the first quarter of 1998, the table excludes the antidilutive effect of 594 nonvested common shares and 113 stock options. 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 $10,071 at March 31, 1999, including $11,300 of unrealized losses. Note 9 - Interest costs related to certain long-term construction projects have been capitalized in accordance with FAS No. 34. During the three months ended March 31, 1999 and 1998, interest costs of $5,117 and $5,593, respectively, were capitalized. Note 10 - Comprehensive income includes net income and the effects of foreign currency translation recorded in stockholders' equity. Comprehensive income for the three months ended March 31, 1999 and 1998 was $63,241 and $613, respectively. 6 8 PART I - FINANCIAL INFORMATION (CONT'D.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) Note 11 - The Corporation's results by operating segment in the first quarter of 1999 and 1998 were as follows:
Three months ended March 31 ------------------------- 1999 1998 ----------- ----------- Operating revenues Exploration and production (1) $ 581,300 $ 536,000 Refining, marketing and shipping 981,500 1,320,300 ----------- ----------- Total $ 1,562,800 $ 1,856,300 =========== =========== Net income (loss) Exploration and production (2) $ 56,900 $ 64,400 Refining, marketing and shipping 52,800 (33,500) Corporate (including interest) (39,100) (43,500) ----------- ----------- Total $ 70,600 $ (12,600) =========== ===========
(1) Includes transfers to affiliates of $24,100 and $30,500 in 1999 and 1998, respectively. (2) Includes gains on asset sales of $30,100 and $56,200 in 1999 and 1998, respectively. 7 9 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 first quarter of 1999 amounted to $41 million compared with a loss of $69 million in the first quarter of 1998. Including gains on asset sales, net income amounted to $71 million in the first quarter of 1999 compared with a net loss of $13 million in the first quarter of 1998. The after-tax results by major operating activity for the first quarters of 1999 and 1998 were as follows (in millions, except per share data):
Three months ended March 31 -------------- 1999 1998 ----- ----- Exploration and production $ 27 $ 8 Refining, marketing and shipping 53 (33) Corporate (10) (15) Interest expense (29) (29) ----- ----- Income (loss) excluding asset sales 41 (69) Gains on asset sales 30 56 ----- ----- Net income (loss) $ 71 $ (13) ===== ===== Net income (loss) per share (diluted) $ .79 $(.14) ===== =====
In the first quarter of 1999, exploration and production earnings include net nonrecurring income of $18 million, principally from foreign currency translation adjustments. The net gain from asset sales in 1999 reflects the sale of natural gas properties in California. Assets sold in 1998 include 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 $19 million in the first quarter of 1999 reflecting increased production volumes, lower exploration expenses and income from foreign currency translation adjustments, partially offset by lower worldwide crude oil selling prices. 8 10 PART I - FINANCIAL INFORMATION (CONT'D.) RESULTS OF OPERATIONS (CONTINUED) The Corporation's average selling prices, including the effects of hedging, were as follows:
Three months ended March 31 ------------------- 1999 1998 ------- ------- Crude oil and natural gas liquids (per barrel) United States $ 10.35 $ 13.89 Foreign 11.21 14.56 Natural gas (per Mcf) United States 1.76 2.21 Foreign 2.08 2.56
The Corporation's net daily worldwide production was as follows:
Three months ended March 31 -------------------- 1999 1998 -------- -------- Crude oil and natural gas liquids (barrels per day) United States 52,658 44,825 Foreign 171,302 164,291 -------- -------- Total 223,960 209,116 ======== ======== Natural gas (Mcf per day) United States 338,972 298,882 Foreign 294,181 283,459 -------- -------- Total 633,153 582,341 ======== ========
The increase in United States and foreign crude oil production principally reflects new fields which came onstream in late 1998. Increased natural gas production reflects new fields in the United States and higher demand in the United Kingdom. In April 1999, the floating production vessel used to produce the Fife, Fergus and Flora fields in the United Kingdom North Sea was damaged and removed from the fields for repair. The Corporation's share of production from these fields exceeds 20,000 barrels of crude oil per day. The vessel is operated by a third party and repairs are estimated to take four months. 9 11 PART I - FINANCIAL INFORMATION (CONT'D.) RESULTS OF OPERATIONS (CONTINUED) In 1999, depreciation, depletion, and amortization charges relating to exploration and production activities were comparable to the 1998 amount, 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. Exploration expenses were lower in 1999, due to a reduced exploration budget in response to lower oil prices. General and administrative expenses were also lower, principally due to cost reduction initiatives in the United States and United Kingdom. The Corporation's gas marketing activities in the United Kingdom had volume related cost increases in the first quarter of 1999 which are included in marketing expenses in the income statement. The effective income tax rate on exploration and production earnings was lower in 1999, principally reflecting reduced provisions for United Kingdom taxes, due to foreign currency translation adjustments and deductible allowances. In 1999, the Corporation changed the functional currency used in translating the foreign currency financial statements of its United Kingdom operations. The change involved designating the U.S. dollar rather than the British pound sterling as the primary currency. During the first quarter, the U.S. dollar strengthened in relation to the pound sterling. As a result, the Corporation recorded an after-tax currency gain of $26 million, principally on the translation of sterling liabilities. The Corporation has now hedged this translation exposure and would not expect such significant primary currency effects in the future. The Corporation also recorded a charge of $8 million due to the termination of long-term contracts for two marine service vessels. Currently, crude oil selling prices are significantly higher than the average selling prices received by the Corporation in the first quarter of 1999. Exploration and production earnings are very sensitive to these selling prices. The Corporation anticipates that prices will continue to be volatile. Refining, Marketing and Shipping Refining, marketing and shipping operations had income of $53 million in the first quarter of 1999, compared with a loss of $33 million in the first quarter of 1998. The Corporation's 50% share of HOVENSA earnings was $16 million in the first quarter of 1999 compared with a loss in the corresponding period of 1998 when the refinery was wholly-owned. Both periods included the positive impact of inventory write-downs 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 in the first quarter of 1999 also include interest income of $12 million on the note received in connection with the formation of the joint venture. 10 12 PART I - FINANCIAL INFORMATION (CONT'D.) RESULTS OF OPERATIONS (CONTINUED) Results from retail operations improved slightly in the first quarter of 1999 compared with the first quarter of 1998, principally reflecting lower operating expenses. Results from energy marketing activities were comparable to the 1998 first quarter. Both periods were negatively affected by relatively mild winter weather. 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 gains of $18 million and $3 million in the first quarter of 1999 and 1998, respectively. Marketing expenses in the consolidated income statement include the costs of retail operations, energy marketing and the consolidated trading partnership. Marketing expenses increased slightly in the first quarter of 1999, principally due to energy marketing and trading activities. Other operating expenses and depreciation relating to refining, marketing and shipping activities are lower in 1999 due to equity accounting for the HOVENSA joint venture. Refined product sales volumes decreased to 397,000 barrels per day in the first quarter of 1999 compared with 543,000 barrels per day in 1998. The decrease is primarily attributable to HOVENSA sales to third parties which are no longer included in the Corporation's reported sales. The Corporation's share of refinery runs amounted to 222,000 barrels per day in the first quarter of 1999 compared with 419,000 barrels per day in 1998 when the St. Croix refinery was wholly-owned. Contracts for the Corporation's planned sale of several non-strategic U.S. oil terminals and retail sites are expected to be signed in the second quarter. Corporate and Interest Net corporate expenses decreased by $5 million in the first quarter of 1999 compared with the first quarter of 1998, due in part to lower compensation expenses. After-tax interest expense was comparable in the first quarters of 1999 and 1998 and is expected to be similar to the 1998 amount over the remainder of the year. Consolidated Revenues Sales and other operating revenues decreased by approximately 15% in the first quarter of 1999. In addition to the exclusion of third party sales of HOVENSA as a result of equity accounting, the decrease was primarily due to lower crude oil and refined product selling prices. Virgin Islands refinery third party sales amounted to $184 million in the first quarter of 1998. 11 13 PART I - FINANCIAL INFORMATION (CONT'D.) LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities, including changes in operating assets and liabilities, amounted to $107 million in the first quarter of 1999 compared with $158 million in the first quarter of 1998. The decrease was primarily due to changes in working capital components, principally accounts receivable. The sale of natural gas properties in California generated proceeds of $54 million in the first quarter of 1999 and the sales of oil and gas properties in the United States and Norway resulted in proceeds of $98 million in 1998. Total debt was $2,686 million at March 31, 1999 compared with $2,652 million at December 31, 1998. The debt to capitalization ratio was 49.9% at March 31, compared with 50.1% at year-end. At March 31, 1999, floating rate debt amounted to 37.2% of total debt, including the effect of interest rate conversion (swap) agreements. At March 31, 1999, the Corporation had $968 million of additional borrowing capacity available under its revolving credit agreements and additional unused lines of credit under uncommitted arrangements with banks of $277 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. In 1998, the Corporation recorded a charge of $90 million (before income taxes) for the decline in market value of fixed-price drilling service contracts due to low crude oil prices. During the first quarter of 1999, the related accrued liabilities were reduced by $12 million reflecting payments for excess costs on the drilling service contracts. In addition, the Corporation charged $5 million in payments against accrued severance liabilities established in connection with a reduction to its workforce in the fourth quarter of 1998. The remaining severance balance at March 31 is $24 million. No other changes were made to either reserve. 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 March 31, 1999, the Corporation had open hedge positions equal to 3% of its estimated worldwide crude oil production over the next twelve months. The Corporation also had open contracts equal to 2% of its estimated United States natural gas production over the next twelve months. In addition, the Corporation had hedges covering 22% of its refining and marketing inventories. As market conditions change, the Corporation will adjust its hedge positions. 12 14 PART I - FINANCIAL INFORMATION (CONT'D.) LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) 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 March 31, 1999 the Corporation had $335 million of foreign currency exchange contracts outstanding. In addition, the Corporation uses interest-rate conversion agreements to reduce exposure to floating interest rates. At March 31, the Corporation had $400 million of interest-rate conversion agreements outstanding. No shares were repurchased in the first quarter of 1999 under the Corporation's stock repurchase program. The Corporation's stock repurchase program expired on March 31, 1999. Capital expenditures in the first quarter of 1999 amounted to $201 million compared with $318 million in the first quarter of 1998. Capital expenditures for exploration and production activities were $185 million in the first quarter of 1999 compared with $295 million in the first three months of 1998. Capital expenditures for the remainder of 1999 are expected to be approximately $700 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 planning. The Corporation's Year 2000 project is jointly managed by its Chief Information Officer and its Vice President of Internal Audit. Status of Year 2000 Project Since 1995, the Corporation has been installing new financial and business systems as part of its reengineering project. Although the primary purpose of the project is to increase efficiency and effectiveness, the new software is Year 2000 compliant. These new systems have replaced, or will replace, approximately 70% of noncompliant software. The final phase of the new software installation is scheduled for completion in the second quarter of 1999. 13 15 PART I - FINANCIAL INFORMATION (CONT'D.) YEAR 2000 (CONTINUED) The Corporation has assessed its remaining software. Remediation of the remaining software is largely complete and testing of changes is in progress. Testing and certification are scheduled for completion during the second quarter of 1999. Several vendor supplied software packages are scheduled for upgrades during the third quarter of 1999. The Corporation has completed approximately 80% of this portion of the project at March 31. 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 mostly complete. Remediation of critical systems, where required, should finish in the second quarter of 1999. Remediation of all other systems, where required, will be completed in the third quarter. At March 31, assessment and remediation of embedded computer systems is approximately 70% 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. The third party analysis will be completed by the end of the second quarter of 1999 and is approximately 65% complete at March 31. Costs The new systems that replace approximately 70% of noncompliant software will have a total cost of approximately $50 million (of which approximately 95% has been expended at March 31). 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 $8 million of the expected 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 financial position and results of operations. Consequently, the Corporation cannot determine whether Year 2000 failures will materially affect its financial position or results of operations. However, the objective of the Corporation's Year 2000 project is to reduce these risks. 14 16 PART I - 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 has developed 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. During the first quarter of 1999, the Corporation completed a strategy for developing Year 2000 contingency plans. The Corporation plans to assess risks and write contingency plans by the end of the second quarter of 1999. During the second half of the year, the Corporation will update and enhance the contingency plans as required by changing 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. 15 17 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits 18 - Letter from Ernst & Young LLP dated May 14, 1999 relating to preferability of last-in, first-out (LIFO) inventory method, adopted January 1, 1999. (b) Reports on Form 8-K The Registrant filed no report on Form 8-K during the three months ended March 31, 1999. 16 18 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/ John B. Hess ------------------------------ JOHN B. HESS CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER By /s/ John Y. Schreyer ------------------------------ JOHN Y. SCHREYER EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER Date: May 10, 1999 17 EX-18 2 LETTER FROM ERNST & YOUNG LLP 1 Exhibit 18 [ERNST & YOUNG LLP LETTERHEAD] May 14, 1999 Board of Directors & Shareholders Amerada Hess Corporation 1185 Avenue of the Americas New York, NY 10036 Dear Sirs: Note 2 of Notes to the Consolidated Financial Statements of Amerada Hess Corporation (the "Corporation") included in its Form 10-Q for the quarter ended March 31, 1999 describes a change in the method of accounting for the Corporation's refining and marketing petroleum inventories from the average cost and first-in, first-out methods to the last-in, first-out ("LIFO") method, effective January 1, 1999. You have advised us that you believe the change is to a preferable method in your circumstances because the LIFO method provides for a better matching of costs and revenues for refining and marketing operations by charging the most recent costs incurred against current revenues. Additionally, the LIFO method is widely used within the oil and gas industry. There are no authoritative criteria for determining a preferable method of accounting for inventories based on the particular circumstances; however, we conclude that the change in the method of accounting for petroleum inventories is to an acceptable alternative method which, based on your business judgment to make this change for the reason cited above, is preferable in your circumstances. We have not audited the application of this change to the consolidated financial statements of any period after December 31, 1998. Further, we have not examined and do not express any opinion with respect to your consolidated financial statements for the three months ended March 31, 1999. Very truly yours, /s/ Ernst & Young LLP Ernst & Young LLP is a member of Ernst & Young International, Ltd. EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 54,558 0 1,273,533 0 405,969 1,962,727 11,066,921 6,862,586 7,974,309 1,799,850 2,608,993 0 0 90,368 2,603,265 7,974,309 1,538,693 1,650,064 999,072 999,072 0 0 39,133 94,440 23,860 70,580 0 0 0 70,580 .79 .79
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