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, 2014

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

 

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  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its Corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer 

 x

Accelerated Filer 

¨

Non-Accelerated Filer 

 ¨ 

Smaller Reporting Company 

¨

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

At September 30, 2014, there were 298,968,566 shares of Common Stock outstanding.

 

 

 

 

 

 


 

HESS CORPORATION

Form 10-Q

TABLE OF CONTENTS

 

Item No.

 

 

  

Page
Number

 

 

PART I FINANCIAL INFORMATION

  

 

1.

 

Financial Statements

  

 

 

 

Consolidated Balance Sheet at September 30, 2014 and December 31, 2013

  

2

 

 

Statement of Consolidated Income for the three months and
nine months ended September 30, 2014 and 2013

  

3

 

 

Statement of Consolidated Comprehensive Income for the three months and
nine months ended September 30, 2014 and 2013

  

4

 

 

Statement of Consolidated Cash Flows for the nine months ended September 30, 2014 and 2013

  

5

 

 

Statement of Consolidated Equity for the nine months ended September 30, 2014 and 2013

  

6

 

 

Notes to Consolidated Financial Statements

  

7

2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

27

3.

 

Quantitative and Qualitative Disclosures about Market Risk

  

42

4.

 

Controls and Procedures

  

42

 

 

PART II OTHER INFORMATION

  

 

1.

 

Legal Proceedings

  

43

2.

 

Share Repurchase Activities

  

43

6.

 

Exhibits and Reports on Form 8-K

  

44

 

 

Signatures

  

45

 

 

Certifications

  

 

 

 

 

 


 

PART I — FINANCIAL INFORMATION

 

Item 1.

Financial Statements.

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

CONSOLIDATED BALANCE SHEET (UNAUDITED)

 

 

  

September 30,
2014

 

 

December 31,
2013

 

 

  

(In millions,

except share amounts)

 

ASSETS

  

CURRENT ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

4,120

 

 

$

1,814

 

Accounts receivable

 

 

 

 

 

 

 

 

Trade

 

 

2,674

 

 

 

3,093

 

Other

 

 

385

 

 

 

432

 

Inventories

 

 

817

 

 

 

954

 

Other current assets

 

 

869

 

 

 

2,306

 

Total current assets

 

 

8,865

 

 

 

8,599

 

INVESTMENTS IN AFFILIATES

 

 

145

 

 

 

687

 

PROPERTY, PLANT AND EQUIPMENT

 

 

 

 

 

 

 

 

Total — at cost

 

 

46,142

 

 

 

45,950

 

Less: Reserves for depreciation, depletion, amortization and lease impairment

 

 

18,475

 

 

 

17,179

 

Property, plant and equipment — net

 

 

27,667

 

 

 

28,771

 

GOODWILL

 

 

1,858

 

 

 

1,869

 

DEFERRED INCOME TAXES

 

 

1,940

 

 

 

2,319

 

OTHER ASSETS

 

 

500

 

 

 

509

 

TOTAL ASSETS

 

$

40,975

 

 

$

42,754

 

 

LIABILITIES AND EQUITY

  

CURRENT LIABILITIES

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,712

 

 

$

2,109

 

Accrued liabilities

 

 

2,954

 

 

 

3,551

 

Taxes payable

 

 

282

 

 

 

520

 

Short-term debt and current maturities of long-term debt

 

 

67

 

 

 

378

 

Total current liabilities

 

 

5,015

 

 

 

6,558

 

LONG-TERM DEBT

 

 

5,929

 

 

 

5,420

 

DEFERRED INCOME TAXES

 

 

2,316

 

 

 

2,292

 

ASSET RETIREMENT OBLIGATIONS

 

 

2,313

 

 

 

2,249

 

OTHER LIABILITIES AND DEFERRED CREDITS

 

 

1,037

 

 

 

1,451

 

Total liabilities

 

 

16,610

 

 

 

17,970

 

EQUITY

 

 

 

 

 

 

 

 

Hess Corporation stockholders’ equity

 

 

 

 

 

 

 

 

Common stock, par value $1.00

 

 

 

 

 

 

 

 

Authorized — 600,000,000 shares

 

 

 

 

 

 

 

 

Issued — 298,968,566 shares at September 30, 2014;
325,314,177 shares at December 31, 2013

 

 

299

 

 

 

325

 

Capital in excess of par value

 

 

3,417

 

 

 

3,498

 

Retained earnings

 

 

21,020

 

 

 

21,235

 

Accumulated other comprehensive income (loss)

 

 

(487

 

 

(338

Total Hess Corporation stockholders’ equity

 

 

24,249

 

 

 

24,720

 

Noncontrolling interests

 

 

116

 

 

 

64

 

Total equity

 

 

24,365

 

 

 

24,784

 

TOTAL LIABILITIES AND EQUITY

 

$

40,975

 

 

$

42,754

 

See accompanying notes to consolidated financial statements.

 

 

2


PART I — FINANCIAL INFORMATION (CONT’D.)

 

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

STATEMENT OF CONSOLIDATED INCOME (UNAUDITED)

 

 

  

Three Months Ended

 

 

Nine Months Ended

 

 

  

September 30,

 

 

September 30,

 

 

  

2014

 

 

2013

 

 

2014

 

 

2013

 

 

  

(In millions, except per share amounts)

 

REVENUES AND NON-OPERATING INCOME

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and other operating revenues

  

$

2,745

 

 

$

2,720

 

 

$

8,363

 

 

$

9,257

 

Gains (losses) on asset sales

  

 

31

 

 

 

(5

 

 

820

 

 

 

1,794

 

Other, net

  

 

26

 

 

 

(1

 

 

(89

 

 

(56

Total revenues and non-operating income

  

 

2,802

 

 

 

2,714

 

 

 

9,094

 

 

 

10,995

 

COSTS AND EXPENSES

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of products sold (excluding items shown separately below)

  

 

447

 

 

 

375

 

 

 

1,284

 

 

 

1,392

 

Operating costs and expenses

  

 

487

 

 

 

475

 

 

 

1,475

 

 

 

1,570

 

Production and severance taxes

  

 

69

 

 

 

84

 

 

 

209

 

 

 

311

 

Marketing expenses

  

 

34

 

 

 

27

 

 

 

99

 

 

 

87

 

Exploration expenses, including dry holes and lease impairment

  

 

90

 

 

 

154

 

 

 

669

 

 

 

573

 

General and administrative expenses

  

 

139

 

 

 

152

 

 

 

424

 

 

 

469

 

Interest expense

  

 

75

 

 

 

86

 

 

 

241

 

 

 

309

 

Depreciation, depletion and amortization

  

 

837

 

 

 

681

 

 

 

2,349

 

 

 

1,974

 

Total costs and expenses

  

 

2,178

 

 

 

2,034

 

 

 

6,750

 

 

 

6,685

 

INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES

  

 

624

 

 

 

680

 

 

 

2,344

 

 

 

4,310

 

Provision for income taxes

  

 

237

 

 

 

324

 

 

 

575

 

 

 

1,192

 

INCOME FROM CONTINUING OPERATIONS

  

 

387

 

 

 

356

 

 

 

1,769

 

 

 

3,118

 

INCOME FROM DISCONTINUED OPERATIONS,
NET OF INCOME TAXES

  

 

643

 

 

 

62

 

 

 

612

 

 

 

189

 

NET INCOME

  

 

1,030

 

 

 

418

 

 

 

2,381

 

 

 

3,307

 

Less: Net income (loss) attributable to noncontrolling interests

  

 

22

 

 

 

(2

 

 

56

 

 

 

180

 

NET INCOME ATTRIBUTABLE TO HESS CORPORATION

  

$

1,008

 

 

$

420

 

 

$

2,325

 

 

$

3,127

 

 

NET INCOME ATTRIBUTABLE TO HESS
CORPORATION PER SHARE

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BASIC:

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

  

$

1.21

 

 

$

1.06

 

 

$

5.55

 

 

$

8.66

 

Discontinued operations

  

 

2.14

 

 

 

0.18

 

 

 

1.99

 

 

 

0.56

 

NET INCOME PER SHARE

  

$

3.35

 

 

$

1.24

 

 

$

7.54

 

 

$

9.22

 

 

DILUTED:

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

  

$

1.20

 

 

$

1.05

 

 

$

5.48

 

 

$

8.56

 

Discontinued operations

  

 

2.11

 

 

 

0.18

 

 

 

1.96

 

 

 

0.55

 

NET INCOME PER SHARE

  

$

3.31

 

 

$

1.23

 

 

$

7.44

 

 

$

9.11

 

 

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (DILUTED)

  

 

305.0

 

 

 

343.3

 

 

 

312.7

 

 

 

343.3

 

COMMON STOCK DIVIDENDS PER SHARE

  

$

0.25

 

 

$

0.25

 

 

$

0.75

 

 

$

0.45

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

 

 

3


PART I — FINANCIAL INFORMATION (CONT’D.)

 

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME (UNAUDITED)

 

 

  

Three Months Ended

 

 

Nine Months Ended

 

 

  

September 30,

 

 

September 30,

 

 

  

2014

 

 

2013

 

 

2014

 

 

2013

 

 

  

(In millions)

 

 

 

 

 

NET INCOME

  

$

1,030

 

 

$

418

 

 

$

2,381

 

 

$

3,307

 

 

OTHER COMPREHENSIVE INCOME (LOSS):

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives designated as cash flow hedges

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of hedge (gains) losses reclassified to income

  

 

(8

 

 

(5

 

 

(18

 

 

(46

Income taxes on effect of hedge (gains) losses reclassified to income

  

 

3

 

 

 

2

 

 

 

7

 

 

 

17

 

Net effect of hedge (gains) losses reclassified to income

  

 

(5

 

 

(3

 

 

(11

 

 

(29

Change in fair value of cash flow hedges

  

 

90

 

 

 

(96

 

 

64

 

 

 

69

 

Income taxes on change in fair value of cash flow hedges

  

 

(34

 

 

37

 

 

 

(24

 

 

(26

Net change in fair value of cash flow hedges

  

 

56

 

 

 

(59

 

 

40

 

 

 

43

 

Change in derivatives designated as cash flow hedges, after taxes

  

 

51

 

 

 

(62

 

 

29

 

 

 

14

 

 

Pension and other postretirement plans

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Increase) reduction in unrecognized actuarial losses

  

 

 

 

 

 

 

 

(4

 

 

245

 

Income taxes on actuarial changes in plan liabilities

  

 

 

 

 

 

 

 

2

 

 

 

(89

(Increase) reduction in unrecognized actuarial losses, net

  

 

 

 

 

 

 

 

(2

 

 

156

 

Amortization of net actuarial losses

  

 

19

 

 

 

12

 

 

 

42

 

 

 

46

 

Income taxes on amortization of net actuarial losses

  

 

(7

 

 

(5

 

 

(15

 

 

(17

Net effect of amortization of net actuarial losses

  

 

12

 

 

 

7

 

 

 

27

 

 

 

29

 

Change in pension and other postretirement plans, after taxes

  

 

12

 

 

 

7

 

 

 

25

 

 

 

185

 

 

Foreign currency translation adjustment

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

  

 

(166

 

 

27

 

 

 

(203

 

 

(266

Reclassified to Gains (losses) on asset sales

  

 

 

 

 

 

 

 

 

 

 

119

 

Change in foreign currency translation adjustment

  

 

(166

 

 

27

 

 

 

(203

 

 

(147

TOTAL OTHER COMPREHENSIVE INCOME (LOSS)

  

 

(103

 

 

(28

 

 

(149

 

 

52

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME

  

 

927

 

 

 

390

 

 

 

2,232

 

 

 

3,359

 

Less: Comprehensive income (loss) attributable to noncontrolling interests

  

 

22

 

 

 

(2

 

 

56

 

 

 

186

 

COMPREHENSIVE INCOME ATTRIBUTABLE TO
HESS CORPORATION

  

$

905

 

 

$

392

 

 

$

2,176

 

 

$

3,173

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

 

 

4


PART I — FINANCIAL INFORMATION (CONT’D.)

 

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

STATEMENT OF CONSOLIDATED CASH FLOWS (UNAUDITED)

 

 

  

Nine Months Ended

 

 

  

September 30,

 

 

  

2014

 

 

2013

 

 

  

(In millions)

 

CASH FLOWS FROM OPERATING ACTIVITIES

  

 

 

 

 

 

 

 

Net income

  

$

2,381

 

 

$

3,307

 

Adjustments to reconcile net income to net cash provided by operating activities

  

 

 

 

 

 

 

 

Depreciation, depletion and amortization

  

 

2,349

 

 

 

1,974

 

Exploratory dry hole costs

  

 

297

  

 

 

87

 

Exploration lease impairment

  

 

183

  

 

 

167

 

(Gains) losses on asset sales

  

 

(820

)  

 

 

(1,794

Loss from equity affiliates

  

 

84

 

 

 

  

Stock compensation expense

  

 

65

 

 

 

52

 

Provision for deferred income taxes

  

 

233

 

 

 

392

 

Income from discontinued operations

  

 

(612

)  

 

 

(189

Changes in operating assets and liabilities

  

 

(721

 

 

(966

Cash provided by (used in) operating activities — continuing operations

  

 

3,439

  

 

 

3,030

 

Cash provided by (used in) operating activities — discontinued operations

  

 

(32

 

 

290

 

Net cash provided by (used in) operating activities

  

 

3,407

 

 

 

3,320

 

CASH FLOWS FROM INVESTING ACTIVITIES

  

 

 

 

 

 

 

 

Capital expenditures

  

 

(3,710

 

 

(4,389

Proceeds from asset sales

  

 

2,978

 

 

 

3,802

 

Other, net

  

 

(137

 

 

(165

Cash provided by (used in) investing activities — continuing operations

  

 

(869

)

 

 

(752

Cash provided by (used in) investing activities — discontinued operations

  

 

2,408

 

 

 

(60

Net cash provided by (used in) investing activities

  

 

1,539

 

 

 

(812

CASH FLOWS FROM FINANCING ACTIVITIES

  

 

 

 

 

 

 

 

Net borrowings (repayments) of debt with maturities of 90 days or less

  

 

  

 

 

(1,313

Debt with maturities of greater than 90 days

  

 

 

 

 

 

 

 

Borrowings

  

 

598

  

 

 

535

 

Repayments

  

 

(553

)  

 

 

(1,290

Common stock acquired and retired

  

 

(2,638

)  

 

 

(500

Cash dividends paid

  

 

(232

)  

 

 

(154

Employee stock options exercised, including income tax benefits

  

 

191

  

 

 

84

  

Noncontrolling interests, net

  

 

(4

)  

 

 

(189

Cash provided by (used in) financing activities — continuing operations

  

 

(2,638

)  

 

 

(2,827

Cash provided by (used in) financing activities — discontinued operations

  

 

(2

)  

 

 

(2

Net cash provided by (used in) financing activities

  

 

(2,640

)  

 

 

(2,829

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

  

 

2,306

  

 

 

(321

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR

  

 

1,814

  

 

 

642

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

  

$

4,120

  

 

$

321

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

 

 

5


PART I — FINANCIAL INFORMATION (CONT’D.)

 

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

STATEMENT OF CONSOLIDATED EQUITY (UNAUDITED)

 

 

  

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

Capital in

 

 

 

 

 

Other

 

 

Total Hess

 

 

 

 

 

 

 

 

  

Common

 

 

Excess of

 

 

Retained

 

 

Comprehensive

 

 

Stockholders’

 

 

Noncontrolling

 

 

Total

 

 

  

Stock

 

 

Par

 

 

Earnings

 

 

Income (Loss)

 

 

Equity

 

 

Interests

 

 

Equity

 

 

  

(In millions)

 

BALANCE AT JANUARY 1, 2014

  

$

325

 

 

$

3,498

 

 

$

21,235

 

 

$

(338

)

 

$

24,720

 

 

$

64

 

 

$

24,784

 

Net income

  

 

 

 

 

 

 

 

 

 

2,325

 

 

 

 

 

 

 

2,325

 

 

 

56

 

 

 

2,381

 

Other comprehensive income (loss)

  

 

 

 

 

 

 

 

 

 

 

 

 

 

(149

)

 

 

(149

)

 

 

  

 

 

(149

)

Comprehensive income (loss)

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,176

 

 

 

56

 

 

 

2,232

 

Activity related to restricted common
stock awards, net

  

 

1

 

 

 

46

 

 

 

  

 

 

  

 

 

47

 

 

 

  

 

 

47

 

Employee stock options, including
income tax benefits

  

 

3

 

 

 

190

 

 

 

  

 

 

  

 

 

193

 

 

 

  

 

 

193

 

Performance share units

  

 

  

 

 

14

 

 

 

  

 

 

  

 

 

14

 

 

 

  

 

 

14

 

Cash dividends declared

  

 

 

 

 

  

 

 

(232

)

 

 

  

 

 

(232

)

 

 

  

 

 

(232

)

Common stock acquired and retired

  

 

(30

)

 

 

(331

)

 

 

(2,308

)

 

 

  

 

 

(2,669

)

 

 

  

 

 

(2,669

)

Noncontrolling interests, net

  

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

(4

)

 

 

(4

)

BALANCE AT SEPTEMBER 30, 2014

  

$

299

 

 

$

3,417

 

 

$

21,020

 

 

$

(487

)

 

$

24,249

 

 

$

116

 

 

$

24,365

 

 

 

BALANCE AT JANUARY 1, 2013

  

$

342

 

 

$

3,524

 

 

$

17,717

 

 

$

(493

)

 

$

21,090

 

 

$

113

 

 

$

21,203

 

Net income

  

 

 

 

 

 

 

 

 

 

3,127

 

 

 

 

 

 

 

3,127

 

 

 

180

 

 

 

3,307

 

Other comprehensive income (loss)

  

 

 

 

 

 

 

 

 

 

 

 

 

 

46

 

 

 

46

 

 

 

6

 

 

 

52

 

Comprehensive income (loss)

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,173

 

 

 

186

 

 

 

3,359

 

Activity related to restricted common
stock awards, net

  

 

1

 

 

 

38

 

 

 

  

 

 

  

 

 

39

 

 

 

  

 

 

39

 

Employee stock options, including
income tax benefits

  

 

2

 

 

 

93

 

 

 

  

 

 

  

 

 

95

 

 

 

  

 

 

95

 

Performance share units

  

 

  

 

 

12

 

 

 

  

 

 

  

 

 

12

 

 

 

  

 

 

12

 

Cash dividends declared

  

 

  

 

 

  

 

 

(154

)

 

 

  

 

 

(154

)

 

 

  

 

 

(154

)

Common stock acquired and retired

  

 

(7

)

 

 

(68

)

 

 

(425

)

 

 

  

 

 

(500

)

 

 

  

 

 

(500

)

Noncontrolling interests, net

  

 

  

 

 

  

 

 

14

 

 

 

  

 

 

14

 

 

 

(226

)

 

 

(212

)

BALANCE AT SEPTEMBER 30, 2013

  

$

338

 

 

$

3,599

 

 

$

20,279

 

 

$

(447

)

 

$

23,769

 

 

$

73

 

 

$

23,842

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

 

 

6


PART I — FINANCIAL INFORMATION (CONT’D)

 

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

1. Basis of Presentation

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 Hess Corporation’s (the Corporation or Hess) consolidated financial position at September 30, 2014 and December 31, 2013, and the consolidated results of operations and cash flows for the three and nine month periods ended September 30, 2014 and 2013. The unaudited results of operations for the interim periods reported are not necessarily indicative of results to be expected for the full year.

In the first quarter of 2013, the Corporation announced several initiatives to continue its transformation into a focused pure play Exploration and Production (E&P) company. The transformation plan included fully exiting the Corporation’s Marketing and Refining (M&R) businesses, the sale of mature E&P assets and monetizing Bakken midstream assets in 2015. The M&R businesses to be divested included retail, energy marketing, terminal, energy trading and refining operations, as well as the Corporation’s interests in two power plant joint ventures. In February 2013, the Corporation permanently ceased its refining operations at the Port Reading facility, completing its exit from all refining operations. In the fourth quarter of 2013, the Corporation completed the sale of its energy marketing and terminal businesses and in the third quarter of 2014, the Corporation completed the sale of its retail business. The Corporation’s interests in the two power plant joint ventures were sold in 2014. The results of the retail, energy marketing and terminal businesses as well as the Port Reading refining operations have been presented as discontinued operations for all periods in the Statement of Consolidated Income. See also Note 2, Discontinued Operations, Note 4, Dispositions and Note 16, Subsequent Events in the Notes to the Consolidated Financial Statements for additional disclosures related to the divestitures.

These financial statements have been prepared in accordance with the requirements of the Securities and Exchange Commission (SEC) for interim reporting. As permitted under those rules, certain notes or other financial information that are normally required by U.S. generally accepted accounting principles (GAAP) have been condensed or omitted from these interim financial statements. These statements, therefore, should be read in conjunction with the consolidated financial statements and related notes included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2013. Certain information in the financial statements and notes has been reclassified to conform to the current period presentation.

New Accounting Pronouncements: In April 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The ASU amends the criteria for reporting discontinued operations to include only disposals representing a strategic shift in operations. The ASU also requires expanded disclosures regarding the assets, liabilities, income, and expenses of discontinued operations. This ASU is effective for the Corporation in the first quarter of 2015 and early adoption is permitted. The Corporation is currently assessing the impact of the ASU on its consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, as a new Accounting Standards Codification (ASC) Topic ASC 606. This ASU is effective for the Corporation beginning in the first quarter of 2017 and early adoption is not permitted. The Corporation is currently assessing the impact of the ASU on its consolidated financial statements.

 

 

7


PART I — FINANCIAL INFORMATION (CONT’D)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

2. Discontinued Operations

Downstream businesses reported as discontinued operations in the Statement of Consolidated Income include the retail, energy marketing and terminal businesses as well as the Port Reading refining operations.

Sales and other operating revenues and Income from discontinued operations were as follows:

 

 

  

Three Months Ended

 

  

Nine Months Ended

 

 

  

September 30,

 

  

September 30,

 

 

  

2014

 

 

2013

 

  

2014

 

 

2013

 

 

  

(In millions)

 

Sales and other operating revenues

  

$

3,029

 

 

$

5,354

 

  

$

9,163

 

 

$

18,359

 

 

Income from discontinued operations before income taxes

  

$

1,024

 

 

$

96

 

  

$

979

 

 

$

292

 

Provision for income taxes

  

 

381

 

 

 

34

 

  

 

367

 

 

 

103

 

Income from discontinued operations, net of income taxes

  

$

643

 

 

$

62

 

  

$

612

 

 

$

189

 

In September 2014, the Corporation completed the sale of its retail business for cash proceeds of approximately $2.8 billion. This transaction resulted in a pre-tax gain of $954 million ($602 million after income taxes) after deducting the net book value of assets, including $115 million of goodwill. The Corporation recorded pre-tax gains of $183 million ($114 million after income taxes) and $228 million ($143 million after income taxes) in the third quarter of 2014 and 2013, respectively relating to the liquidation of last‑in, first‑out (LIFO) inventories. In addition, the Corporation recorded charges totaling $173 million pre-tax ($110 million after income taxes) in the third quarter of 2014 and $191 million pre‑tax ($120 million after income taxes) in the third quarter of 2013 for impairment, environmental, severance and exit-related activities associated with the divestiture of downstream operations.

During the nine months ended September 30, 2014 and 2013, the Corporation recognized pre-tax gains of $247 million ($154 million after income taxes) and $446 million pre-tax ($280 million after income taxes), respectively, relating to the liquidation of LIFO inventories. Total charges for impairment, environmental, Port Reading refinery shutdown costs, severance, and exit-related activities associated with the divestiture of downstream operations for the nine month periods ended September 30, 2014 and 2013, were $254 million pre-tax ($161 million after income taxes) and $390 million pre-tax ($245 million after income taxes), respectively. In addition, the Corporation recognized a pre-tax charge of $115 million ($72 million after income taxes) in the second quarter of 2014, related to the termination of lease contracts and the purchase of 180 retail gasoline stations.

In January 2014, the Corporation’s retail business acquired its partners’ 56% interest in WilcoHess, a retail gasoline joint venture, for approximately $290 million and the settlement of liabilities. In connection with this business combination, the Corporation recorded a pre-tax gain of $39 million ($24 million after income taxes) to remeasure the carrying value of the Corporation’s equity interest in WilcoHess to fair value and recorded goodwill of $115 million. Effective from the acquisition date, Hess consolidated the results of WilcoHess’ operations, which have been included in the results of the discontinued operations reported above. The assets and liabilities acquired from WilcoHess were included in the sale of the retail business in September 2014.

 

8


PART I — FINANCIAL INFORMATION (CONT’D)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

3. Exit and Disposal Costs

The following table provides the components of and changes in the Corporation’s restructuring accruals:

 

 

  

Exploration

 

 

 

 

 

 

 

 

 

 

 

  

and

 

 

Corporate

 

 

Discontinued

 

 

 

 

 

  

Production

 

 

and Other

 

 

Operations

 

 

Total

 

 

  

(In millions)

 

Employee Severance

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2014

  

$

32

 

 

$

32

 

 

$

107

 

 

$

171

 

Provision

  

 

19

 

 

 

17

 

 

 

41

 

 

 

77

 

Payments

  

 

(32

 

 

(20

 

 

(60

 

 

(112

Balance at September 30, 2014

  

 

19

 

 

 

29

 

 

 

88

 

 

 

136

 

 

Facility and Other Exit Costs

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2014

  

 

53

 

 

 

17

 

 

 

48

 

 

 

118

 

Provision

  

 

(16

)* 

 

 

13

 

 

 

47

 

 

 

44

 

Payments, settlements and other

  

 

(36

 

 

(12

 

 

(86

 

 

(134

Balance at September 30, 2014

  

 

1

 

 

 

18

 

 

 

9

 

 

 

28

 

 

Total accruals at September 30, 2014

  

$

20

 

 

$

47

 

 

$

97

 

 

$

164

 

 

*

Represents the release from certain leased office space obligations.

The following table provides the classification of costs and expense reversals associated with the Corporation’s restructuring program:

 

 

  

Three Months Ended

 

  

Nine Months Ended

 

 

  

September 30,

 

  

September 30,

 

 

  

2014

 

 

2013

 

  

2014

 

 

2013

 

 

  

(In millions)

 

Employee Severance

  

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

Operating costs and expenses

  

$

1

 

 

$

1

 

  

$

3

 

 

$

45

 

Marketing expenses

  

 

1

 

 

 

  

  

 

2

 

 

 

5

 

Exploration expenses, including dry holes and lease impairment

  

 

1

 

 

 

1

 

  

 

5

 

 

 

16

 

General and administrative expenses

  

 

2

 

 

 

9

 

  

 

26

 

 

 

52

 

Income from discontinued operations

  

 

11

 

 

 

33

 

  

 

41

 

 

 

117

 

Total employee severance

  

$

16

 

 

$

44

 

  

$

77

 

 

$

235

 

 

Facility and Other Exit Costs

  

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

Marketing expenses

 

$

3

 

 

$

 

 

$

3

 

 

$

 

General and administrative expenses

  

 

2

 

 

 

 

  

 

(3

 

 

9

 

Depreciation, depletion and amortization

  

 

 

 

 

  

  

 

(3

 

 

  

Income from discontinued operations

  

 

15

 

 

 

13

 

  

 

47

 

 

 

48

 

Total facility and other exit costs

  

$

20

 

 

$

13

 

  

$

44

 

 

$

57

 

 


9


PART I — FINANCIAL INFORMATION (CONT’D)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

The employee severance charges primarily resulted from the Corporation’s divestiture program announced in March 2013. The severance charges were based on probable amounts incurred under ongoing severance arrangements or other statutory requirements, plus amounts earned through September 30, 2014 under enhanced benefit arrangements. The expense associated with the enhanced benefits is recognized ratably over the estimated service period required for the employee to earn the benefit upon termination.

The Corporation expects to incur additional enhanced severance benefit charges of approximately $1 million beyond the amounts accrued at September 30, 2014. The Corporation’s estimate of employee severance costs could change due to a number of factors, including the number of employees that work through the requisite service date and the timing of when each remaining divestiture occurs.

For the accrued employee severance at September 30, 2014 totaling $136 million, the Corporation expects to pay approximately 60% in 2014, 35% in 2015 and the remainder in 2016. For the accrued facility and other exit costs totaling $28 million, the Corporation expects to pay approximately 30% in 2014 and the remainder in 2015 and beyond.

 

4. Dispositions

 

In the third quarter of 2014, the Corporation completed the sale of its interest in an exploration asset in the United Kingdom North Sea for $53 million which resulted in a pre-tax gain of $33 million ($33 million gain after income taxes) and its joint venture interest in the Bayonne Energy complex for $79 million, which did not result in a gain or loss. In June 2014, the Corporation completed the sale of its joint venture interest in an electric generating facility in Newark, New Jersey for cash proceeds of $320 million, resulting in a pre-tax gain of approximately $13 million ($8 million gain after income taxes). Also in the first six months of 2014, the Corporation completed the sale of a total of approximately 77,000 net acres in the dry gas area of the Utica shale play including related wells and facilities, for total cash proceeds of approximately $1,075 million and recorded a pre-tax gain of $62 million ($35 million gain after income taxes) after deducting the net book value of assets, including allocated goodwill of $11 million.  In April 2014, the Corporation completed the sale of its E&P interests in Thailand for cash proceeds of approximately $805 million.  This transaction resulted in a pre-tax gain of $706 million ($706 million gain after income taxes) after deducting the net book value of assets, including allocated goodwill of $76 million. In the first quarter of 2014, the Corporation completed the sale of its interest in the Pangkah asset, offshore Indonesia for cash proceeds of approximately $650 million. This transaction resulted in a pre-tax gain of $31 million ($10 million loss after income taxes) after deducting the net book value of assets, including allocated goodwill of $56 million. In addition, the Corporation sold an exploration block in Indonesia for a pre-tax loss of $20 million ($11 million gain after income taxes).

 

In the second quarter of 2013, the Corporation sold its Russian subsidiary, Samara-Nafta, for cash proceeds of $2.1 billion after working capital and other adjustments. Net proceeds to Hess were approximately $1.9 billion. This transaction resulted in a pre-tax gain of $1,119 million ($1,119 million gain after income taxes). After reduction of the noncontrolling interest holder’s share of $168 million, which was reflected in Net income (loss) attributable to noncontrolling interests, the net gain attributable to the Corporation was $951 million. In March 2013, the Corporation sold its interests in the Azeri-Chirag-Guneshli (ACG) fields (Hess 3%), offshore Azerbaijan in the Caspian Sea, and the associated Baku-Tbilisi-Ceyhan (BTC) oil transportation pipeline company (Hess 2%) for cash proceeds of $884 million. The transaction resulted in a pre-tax gain of $360 million ($360 million after income taxes). In January 2013, the Corporation completed the sale of its interests in the Beryl fields and the Scottish Area Gas Evacuation System (SAGE) in the United Kingdom North Sea for cash proceeds of $442 million. The transaction resulted in a pre-tax gain of $328 million ($323 million after income taxes).

 

10


PART I — FINANCIAL INFORMATION (CONT’D)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

5. Inventories

 

Inventories consisted of the following:

 

 

 

September 30,

 

 

December 31,

 

 

 

2014

 

 

2013

 

 

 

(In millions)

 

Crude oil

 

$

326

 

 

$

291

 

Refined petroleum products and natural gas

 

 

217

 

 

 

618

 

Less: LIFO adjustment

 

 

(44

)

 

 

(339

)

 

 

 

499

 

 

 

570

 

Merchandise, materials and supplies

 

 

318

 

 

 

384

 

Total inventories

 

$

817

 

 

$

954

 

 

Inventories related to the E&P segment were $629 million at September 30, 2014 and $599 million at December 31, 2013.

 

6. Property, Plant and Equipment

Assets Held for Sale: At December 31, 2013, E&P assets totaling $1,097 million, primarily consisting of the net property, plant and equipment balances as well as allocated goodwill of $76 million, for the Corporation’s assets in Thailand and the Pangkah Field, offshore Indonesia (Hess 75%) were classified as held for sale and are reported within Other current assets in the Consolidated Balance Sheet. In addition, liabilities related to these properties totaling $286 million, primarily consisting of asset retirement obligations and deferred income taxes, are reported within Accrued liabilities. In 2014, the Corporation completed the sale of its interests in Thailand and Pangkah. See Note 4, Dispositions, in the Notes to the Consolidated Financial Statements.

Capitalized Exploratory Well Costs:  The following table discloses the net changes in capitalized exploratory well costs pending determination of proved reserves for the nine months ended September 30, 2014 (in millions):

 

Balance at January 1

  

$

2,045

 

Additions to capitalized exploratory well costs pending the determination of proved reserves

  

 

184

 

Reclassifications to wells, facilities and equipment based on the determination of proved reserves

 

 

(28

)

Capitalized exploratory well costs charged to expense

  

 

(236

Dispositions and other

  

 

(57

)  

Balance at September 30, 2014

  

$

1,908

 

The preceding table excludes exploratory dry hole costs of $61 million which were incurred and subsequently expensed in 2014. Capitalized exploratory well costs charged to expense in the second quarter of 2014 included $169 million to write-off a previously capitalized exploration well in the western half of Green Canyon Block 469 in the Gulf of Mexico as further explained below.

Capitalized exploratory well costs greater than one year old after completion of drilling were $1,737 million at September 30, 2014. Approximately 48% of the capitalized well costs in excess of one year relates to Block WA-390-P, offshore Western Australia, where development planning and commercial activities, including negotiations with potential liquefaction partners, are ongoing. Successful negotiation with a third party liquefaction partner is necessary before the Corporation can negotiate a gas sales agreement and sanction development of the project. Approximately 29% relates to the Stampede Project in the Gulf of Mexico where Hess is operator and owns a 25% working interest. An application to unitize Blocks 468, 512, the western half of 469 and the eastern half of 511 was filed with the Bureau of Safety and Environmental Enforcement in the first quarter of 2014. During the second quarter of 2014, the Corporation received approval to unitize Blocks 468, 512 and the eastern half of 511. As Block 469 was not accepted in the unitized development area, the Corporation expensed the capitalized well on this block in the second quarter.  See also Note 16, Subsequent Events in the Notes to the Consolidated Financial Statements. Approximately 21% relates to offshore Ghana where the Corporation has drilled seven successful exploration wells. Appraisal plans for the seven wells on the block were submitted to the Ghanaian government in June 2013

11


PART I — FINANCIAL INFORMATION (CONT’D)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

for approval. Four of the plans were approved and discussions continue with the government on the three remaining appraisal plans. In the third quarter of 2014, the Corporation completed a three well appraisal program in Ghana.  Well results are being evaluated and development planning is progressing.  The remaining 2% of the capitalized well costs in excess of one year relates to projects where further drilling is planned or development planning and other assessment activities are ongoing to determine the economic and operating viability of the projects.

 

7. Goodwill

The changes in the carrying amount of goodwill are as follows (in millions):

 

Balance at January 1, 2014

  

$

1,869

 

Acquisitions

  

 

115

 

Dispositions

  

 

(126

Balance at September 30, 2014

  

$

1,858

 

 

The increase in goodwill resulted from the Corporation’s first quarter 2014 purchase of WilcoHess, which was subsequently disposed of as part of the sale of the Corporation’s retail business. See Note 2, Discontinued Operations, in the Notes to the Consolidated Financial Statements.

 

 

8.  Asset Retirement Obligations

 

The following table describes changes to the Corporation’s asset retirement obligations for the nine months ended September 30, 2014 and year ended December 31, 2013:

 

 

  

September 30,

 

  

December 31,