<PAGE> 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 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.
================================================================================
<PAGE> 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)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
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
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE> 3
PART I - FINANCIAL INFORMATION (CONT'D.)
AMERADA HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
ASSETS
MARCH 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
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
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 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)
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
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
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 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:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
-------------- --------------
<S> <C> <C>
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
============== ==============
</TABLE>
4
<PAGE> 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
<TABLE>
<S> <C>
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
===========
</TABLE>
Summarized Income Statement Information
For the three months ended March 31,1999
<TABLE>
<S> <C>
Total revenues $ 538,623
Costs and expenses (536,672)
Inventory market value changes 31,999
----------
Net income $ 33,950*
==========
</TABLE>
* The Corporation's share of HOVENSA's net income was $16,462.
Note 5 - The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
Three months
ended March 31
---------------------------
1999 1998
--------- ---------
<S> <C> <C>
Current $ 53,782 $ 52,265
Deferred (29,922) (6,768)
--------- ---------
Total $ 23,860 $ 45,497
========= =========
</TABLE>
5
<PAGE> 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:
<TABLE>
<CAPTION>
Three months
ended March 31
----------------
1999 1998
------- -------
<S> <C> <C>
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
======= =======
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
Three months
ended March 31
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
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)
=========== ===========
</TABLE>
(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
<PAGE> 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):
<TABLE>
<CAPTION>
Three months
ended March 31
--------------
1999 1998
----- -----
<S> <C> <C>
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)
===== =====
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
Three months
ended March 31
-------------------
1999 1998
------- -------
<S> <C> <C>
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
</TABLE>
The Corporation's net daily worldwide production was as
follows:
<TABLE>
<CAPTION>
Three months
ended March 31
--------------------
1999 1998
-------- --------
<S> <C> <C>
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
======== ========
</TABLE>
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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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.
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