HESS CORP | 2013 | FY |

15.	Retirement Plans

The Corporation has funded noncontributory defined benefit pension plans for a significant portion of its employees. In addition, the Corporation has an unfunded supplemental pension plan covering certain employees, which provides incremental payments that would have been payable from the Corporation’s principal pension plans, were it not for limitations imposed by income tax regulations. The plans provide defined benefits based on years of service and final average salary. Additionally, the Corporation maintains an unfunded postretirement medical plan that provides health benefits to certain qualified retirees from ages 55 through 65. The measurement date for all retirement plans is December 31.

The following table summarizes the Corporation’s benefit obligations and the fair value of plan assets and shows the funded status of the pension and postretirement medical plans:

 

		Funded Pension Plans								Unfunded Pension Plan								Postretirement Medical Plan
		2013				2012				2013				2012				2013				2012
		(In millions)
Change in benefit obligation
Balance at January 1		$	2,110			$	1,866			$	234			$	227			$	134			$	125
Service cost			61				64				12				10				4				7
Interest cost			82				81				7				7				3				5
Actuarial (gain) loss			(139	)			134				28				13				(4	)			2
Benefit payments			(69	)			(54	)			(20	)			(2	)			(5	)			(5	)
Plan curtailments (a)			(103	)			—				(8	)			—				(35	)			—
Plan settlements (b)			—				—				—				(21	)			—				—
Special termination benefits			5				—				—				—				—				—
Foreign currency exchange rate changes			10				19				—				—				—				—
Balance at December 31			1,957				2,110				253				234				97				134

 

 

		Funded Pension Plans								Unfunded Pension Plan								Postretirement Medical Plan
		2013				2012				2013				2012				2013				2012
		(In millions)
Change in fair value of plan assets
Balance at January 1		$	1,763			$	1,493			$	—			$	—			$	—			$	—
Actual return on plan assets			292				155				—				—				—				—
Employer contributions			146				150				20				23				5				5
Benefit payments			(69	)			(54	)			(20	)			(2	)			(5	)			(5	)
Plan settlements (b)			—				—				—				(21	)			—				—
Foreign currency exchange rate changes			13				19				—				—				—				—
Balance at December 31			2,145				1,763				—				—				—				—
Funded status (plan assets greater (less) than benefit obligations) at December 31			188				(347	)			(253	)			(234	)			(97	)			(134	)
Unrecognized net actuarial (gains) losses			405				850				108				97				(2	)			39
Net amount recognized		$	593			$	503			$	(145	)		$	(137	)		$	(99	)		$	(95	)

 

 

 

(a)	During the first quarter of 2013, the Corporation’s pension and other postretirement plans were impacted by a significant reduction in the expected future service from active participants due to the Corporation’s announced asset sales program.

 

(b)	Plan settlements amounts reported include a charge of $9 million ($5 million after income taxes) due to employee retirements in 2012.

Amounts recognized in the Consolidated Balance Sheet at December 31 consisted of the following:

 

		Funded Pension Plans								Unfunded Pension Plan								Postretirement Medical Plan
		2013				2012				2013				2012				2013				2012
		(In millions)
Pension asset / (accrued benefit liability)		$	188			$	(347	)		$	(253	)		$	(234	)		$	(97	)		$	(134	)
Accumulated other comprehensive loss, pre-tax*			405				850				108				97				(2	)			39
Net amount recognized		$	593			$	503			$	(145	)		$	(137	)		$	(99	)		$	(95	)

 

 

 

*	The after-tax deficit reflected in Accumulated other comprehensive income (loss) for these retirement plans was $342 million at December 31, 2013 and $639 million at December 31, 2012.

The accumulated benefit obligation for the funded defined benefit pension plans decreased to $1,873 million at December 31, 2013 from $1,937 million at December 31, 2012. The accumulated benefit obligation for the unfunded defined benefit pension plan was $222 million at December 31, 2013 and $216 million at December 31, 2012.

Components of net periodic benefit cost for funded and unfunded pension plans and the postretirement medical plan consisted of the following:

 

		Pension Plans												Postretirement Medical Plan
		2013				2012				2011				2013				2012				2011
		(In millions)
Service cost		$	73			$	74			$	58			$	4			$	7			$	6
Interest cost			89				88				89				3				5				5
Expected return on plan assets			(141	)			(116	)			(109	)			—				—				—
Amortization of unrecognized net actuarial losses			61				83				47				1				2				2
Settlement loss			—				9				—				—				—				—
Curtailment loss			1				—				—				—				—				—
Special termination benefit recognized			5				—				—				—				—				—
Net periodic benefit cost		$	88			$	138			$	85			$	8			$	14			$	13

 

 

The Corporation’s 2014 pension and postretirement medical expense is estimated to be approximately $20 million, which includes approximately $28 million related to the amortization of unrecognized net actuarial losses, offset by improved returns on plan assets.

 

The weighted average actuarial assumptions used by the Corporation’s funded and unfunded pension plans were as follows:

 

		2013				2012				2011
Weighted average assumptions used to determine benefit obligations at December 31
Discount rate			4.6	%			3.8	%			4.3	%
Rate of compensation increase			4.4				4.3				4.3
Weighted average assumptions used to determine net benefit cost for the years ended December 31
Discount rate			4.0				4.3				5.3
Expected return on plan assets			7.5				7.5				7.5
Rate of compensation increase			4.3				4.3				4.4

 

 

The actuarial assumptions used by the Corporation’s postretirement medical plan were as follows:

 

		2013				2012				2011
Assumptions used to determine benefit obligations at December 31
Discount rate			3.6	%			3.1	%			3.9	%
Initial health care trend rate			7.1	%			7.3	%			8.0	%
Ultimate trend rate			4.6	%			4.8	%			5.0	%
Year in which ultimate trend rate is reached			2027				2022				2018

 

 

The assumptions used to determine net periodic benefit cost for each year were established at the end of each previous year while the assumptions used to determine benefit obligations were established at each year-end. The net periodic benefit cost and the actuarial present value of benefit obligations are based on actuarial assumptions that are reviewed on an annual basis. The discount rate is developed based on a portfolio of high-quality, fixed income debt instruments with maturities that approximate the expected payment of plan obligations. The overall expected return on plan assets is developed from the expected future returns for each asset category, weighted by the target allocation of pension assets to that asset category.

The Corporation’s investment strategy is to maximize long-term returns at an acceptable level of risk through broad diversification of plan assets in a variety of asset classes. Asset classes and target allocations are determined by the Corporation’s investment committee and include domestic and foreign equities, fixed income, and other investments, including hedge funds, real estate and private equity. Investment managers are prohibited from investing in securities issued by the Corporation unless indirectly held as part of an index strategy. The majority of plan assets are highly liquid, providing ample liquidity for benefit payment requirements. The current target allocations for plan assets are 50% equity securities, 25% fixed income securities (including cash and short-term investment funds) and 25% to all other types of investments. Asset allocations are rebalanced on a periodic basis throughout the year to bring assets to within an acceptable range of target levels.

 

The following tables provide the fair value of the financial assets of the funded pension plans as of December 31, 2013 and 2012 in accordance with the fair value measurement hierarchy described in Note 1, Summary of Significant Accounting Policies in the notes to the Consolidated Financial Statements:

 

		Level 1				Level 2				Level 3				Total
		(In millions)
December 31, 2013
Cash and short-term investment funds		$	3			$	72			$	—			$	75
Equities:
U.S. equities (domestic)			729				—				—				729
International equities (non-U.S.)			81				171				—				252
Global equities (domestic and non-U.S.)			8				208				—				216
Fixed income:
Treasury and government issued (a)			—				169				1				170
Government related (b)			—				9				—				9
Mortgage-backed securities (c)			—				109				1				110
Corporate			2				124				1				127
Other:
Hedge funds			—				—				291				291
Private equity funds			—				—				89				89
Real estate funds			10				—				47				57
Diversified commodities funds			—				20				—				20
		$	833			$	882			$	430			$	2,145
December 31, 2012
Cash and short-term investment funds		$	2			$	37			$	—			$	39
Equities:
U.S. equities (domestic)			534				—				—				534
International equities (non-U.S.)			61				148				—				209
Global equities (domestic and non-U.S.)			5				174				—				179
Fixed income:
Treasury and government issued (a)			—				184				2				186
Government related (b)			—				8				—				8
Mortgage-backed securities (c)			—				96				—				96
Corporate			1				110				—				111
Other:
Hedge funds			—				—				255				255
Private equity funds			—				—				75				75
Real estate funds			9				—				45				54
Diversified commodities funds			—				17				—				17
		$	612			$	774			$	377			$	1,763

 

(a)	Includes securities issued and guaranteed by U.S. and non-U.S. governments.

 

(b)	Primarily consists of securities issued by governmental agencies and municipalities.

 

(c)	Comprised of U.S. residential and commercial mortgage-backed securities.

Cash and short-term investment funds consist of cash on hand and short-term investment funds that provide for daily investments and redemptions and are valued and carried at a $1 net asset value (NAV) per fund share. Cash on hand is classified as Level 1 and short-term investment funds are classified as Level 2.

Equities consist of equity securities issued by U.S. and non-U.S. corporations as well as commingled investment funds that invest in equity securities. Individually held equity securities, which are traded actively on exchanges and have readily available price quotes, are classified as Level 1. Commingled fund values, which are valued at the NAV per fund share derived from the quoted prices in active markets of the underlying securities, are classified as Level 2.

Fixed income investments consist of securities issued by the U.S. government, non-U.S. governments, governmental agencies, municipalities and corporations, and agency and non-agency mortgage-backed securities. This investment category also includes commingled investment funds that invest in fixed income securities. Individual fixed income securities are generally priced on the basis of evaluated prices from independent pricing services, which are monitored and provided by the third-party custodial firm responsible for safekeeping plan assets. Individual fixed income securities are classified as Level 2 or 3. Fixed income commingled fund values, which reflect the NAV per fund share derived indirectly from observable inputs or from quoted prices in less liquid markets of the underlying securities, are classified as Level 2.

Other investments consist of exchange-traded real estate investment trust securities, as well as commingled fund and limited partnership investments in hedge funds, private equity, real estate and diversified commodities. Exchange-traded securities are classified as Level 1. Commingled fund values reflect the NAV per fund share and are classified as Level 2 or 3. Private equity and real estate limited partnership values reflect information reported by the fund managers, which include inputs such as cost, operating results, discounted future cash flows, market based comparable data and independent appraisals from third-party sources with professional qualifications. Hedge funds, private equity and non-exchange-traded real estate investments are classified as Level 3.

The following tables provide changes in financial assets that are measured at fair value based on Level 3 inputs that are held by institutional funds classified as:

 

		Fixed Income*				Hedge Funds				Private Equity Funds				Real Estate Funds				Total
		(In millions)
Balance at January 1, 2012		$	4			$	211			$	58			$	44			$	317
Actual return on plan assets held at December 31, 2012			—				13				5				1				19
Purchases, sales or other settlements			(1	)			31				12				—				42
Net transfers in (out) of Level 3			(1	)			—				—				—				(1	)
Balance at December 31, 2012			2				255				75				45				377
Actual return on plan assets held at December 31, 2013			—				26				11				2				39
Purchases, sales or other settlements			1				10				3				—				14
Net transfers in (out) of Level 3			—				—				—				—				—
Balance at December 31, 2013		$	3			$	291			$	89			$	47			$	430

 

*	Fixed Income includes treasury and government issued, government related, mortgage-backed and corporate securities.

The Corporation has budgeted contributions of approximately $80 million to its funded pension plans in 2014.

Estimated future benefit payments by the funded and unfunded pension plans and the postretirement medical plan, which reflect expected future service, are as follows (in millions):

 

2014		$	162
2015			106
2016			119
2017			110
2018			117
Years 2019 to 2023			649

 

 

The Corporation also contributes to several defined contribution plans for eligible employees. Employees may contribute a portion of their compensation to the plans and the Corporation matches a portion of the employee contributions. The Corporation recorded expense of $41 million in 2013, $40 million in 2012 and $28 million in 2011 for contributions to these plans.

 

16.    Income Taxes

The provision (benefit) for income taxes from continuing operations consisted of:

 

		2013				2012				2011
		(In millions)
United States
Federal
Current		$	8			$	30			$	202
Deferred			67				(419	)			(653	)
State			4				34				6
			79				(355	)			(445	)
Foreign
Current			941				2,019				1,185
Deferred			187				(220	)			(60	)
			1,128				1,799				1,125
Total			1,207				1,444				680
Adjustment of deferred taxes for foreign income tax law changes*			(682	)			115				29
Total provision for income taxes		$	525			$	1,559			$	709

 

 

*

In 2013, amount reflects $674 million for the effect of the Denmark hydrocarbon income tax law change to the Chapter 3A regime from the Chapter 3 regime in December 2013 and $8 million for the effect of a change in Norway’s hydrocarbon and base corporate income tax rates in December 2013. In 2012, amount reflects the effect of the UK supplementary income tax rate change in July 2012. In 2011, amount reflects the July 2011 increase in the supplementary tax on petroleum operations in the UK.

Income from continuing operations before income taxes consisted of the following:

 

		2013				2012				2011
		(In millions)
United States (a)		$	473			$	(520	)		$	14
Foreign (b)			4,020				3,946				2,226
Total income from continuing operations before income taxes		$	4,493			$	3,426			$	2,240

 

(a)	Includes substantially all of the Corporation’s interest expense and the results of hedging activities.

 

(b)	Foreign income includes the Corporation’s Virgin Islands and other operations located outside of the U.S.

The components of deferred tax liabilities and deferred tax assets at December 31 were as follows:

 

		2013				2012
		(In millions)
Deferred tax liabilities
Property, plant and equipment		$	(5,581	)		$	(5,345	)
Other			(155	)			(105	)
Total deferred tax liabilities			(5,736	)			(5,450	)
Deferred tax assets
Net operating loss carryforwards			2,726				1,985
Tax credit carryforwards			161				373
Property, plant and equipment and investments			2,643				2,796
Accrued compensation, deferred credits and other liabilities			982				976
Asset retirement obligations			1,516				1,340
Other			216				313
Total deferred tax assets			8,244				7,783
Valuation allowances			(1,519	)			(1,282	)
Total deferred tax assets, net of valuation allowances			6,725				6,501
Net deferred tax assets		$	989			$	1,051

 

 

 

At December 31, 2013, the Corporation has recognized a gross deferred tax asset related to net operating loss carryforwards of $2,726 million before application of the valuation allowances. The deferred tax asset is comprised of $2,390 million attributable to foreign net operating losses which begin to expire in 2020, $71 million attributable to U.S. federal operating losses which begin to expire in 2020 and $265 million attributable to losses in various U.S. states which begin to expire in 2014. The deferred tax asset attributable to foreign net operating losses, net of valuation allowances, is $1,704 million, substantially all of which relates to loss carryforwards in Denmark, Norway and Malaysia. At December 31, 2013, the Corporation has federal, state and foreign alternative minimum tax credit carryforwards of $110 million which can be carried forward indefinitely, and approximately $1 million of other business credit carryforwards. Foreign tax credit carryforwards, which begin to expire in 2016, total $50 million.

In the Consolidated Balance Sheet, deferred tax assets and liabilities are netted by taxing jurisdiction and are recorded at December 31 as follows:

 

		2013				2012
		(In millions)
Other current assets		$	963			$	596
Deferred income taxes (long-term asset)			2,319				3,126
Accrued liabilities			(1	)			(9	)
Deferred income taxes (long-term liability)			(2,292	)			(2,662	)
Net deferred tax assets		$	989			$	1,051

 

 

A net deferred tax liability of $157 million, primarily relating to fixed asset basis differences and net operating losses of the Corporation’s subsidiaries in Thailand and Indonesia, is included in current liabilities associated with assets held for sale in the Consolidated Balance Sheet at December 31, 2013.

The difference between the Corporation’s effective income tax rate from continuing operations and the U.S. statutory rate is reconciled below:

 

		2013				2012				2011
U.S. statutory rate			35.0	%			35.0	%			35.0	%
Effect of foreign operations*			7.2				12.5				(4.1	)
State income taxes, net of Federal income tax			0.1				0.6				0.1
Change in enacted tax laws			(15.2	)			3.3				1.3
Gains on asset sales, net			(16.0	)			(5.3	)			(5.5	)
Effect of equity loss and operations related to HOVENSA L.L.C.			—				—				3.1
Other			0.6				(0.6	)			1.8
Total			11.7	%			45.5	%			31.7	%

 

 

 

*	The variance in effective income tax rates attributable to the effect of foreign operations primarily resulted from the suspension of operations in Libya for most of 2011 and part of 2013.

Below is a reconciliation of the beginning and ending amounts of unrecognized tax benefits:

 

		2013				2012
		(In millions)
Balance at January 1		$	523			$	415
Additions based on tax positions taken in the current year			161				132
Additions based on tax positions of prior years			2				45
Reductions based on tax positions of prior years			(96	)			(33	)
Reductions due to settlements with taxing authorities			(19	)			(30	)
Reductions due to lapses in statutes of limitation			(1	)			(6	)
Balance at December 31		$	570			$	523

 

 

 

 

The December 31, 2013 balance of unrecognized tax benefits includes $503 million that, if recognized, would impact the Corporation’s effective income tax rate. Over the next 12 months, it is reasonably possible that the total amount of unrecognized tax benefits could decrease by $15 million to $25 million due to settlements with taxing authorities or other resolutions, as well as lapses in statutes of limitation. The Corporation had accrued interest and penalties related to unrecognized tax benefits of $52 million and $60 million as of December 31, 2013 and 2012, respectively.

The Corporation has not recognized deferred income taxes on the portion of undistributed earnings of foreign subsidiaries expected to be indefinitely reinvested in foreign operations. The Corporation had undistributed earnings from foreign subsidiaries that it expects to be indefinitely reinvested in foreign operations of approximately $7.5 billion as of December 31, 2013. If these earnings were not indefinitely reinvested, a deferred tax liability of approximately $2.6 billion would be recognized, not accounting for the utilization of foreign tax credits in the U.S.

The Corporation and its subsidiaries file income tax returns in the U.S. and various foreign jurisdictions. The Corporation is no longer subject to examinations by income tax authorities in most jurisdictions for years prior to 2005.

Income taxes paid (net of refunds) in 2013, 2012 and 2011 amounted to $1,353 million, $1,822 million and $1,384 million, respectively.

 

17.    Outstanding

and Weighted Average Common Shares

The following table provides the changes in the Corporation’s outstanding common shares:

 

		2013				2012				2011
		(In millions)
Balance at January 1			341.5				340.0				337.7
Activity related to restricted common stock awards, net			0.8				1.3				0.6
Stock options exercised			2.3				0.2				1.7
Shares repurchased*			(19.3	)			—				—
Balance at December 31			325.3				341.5				340.0

 

 

 

*	See Note 18, Share Repurchase Plan in the notes to the Consolidated Financial Statements.

The following table presents the calculation of basic and diluted earnings per share:

 

		2013				2012				2011
		(In millions)
Income from continuing operations, net of income taxes		$	3,968			$	1,867			$	1,531
Less: Net income (loss) attributable to noncontrolling interests			170				38				(27	)
Net income from continuing operations attributable to Hess Corporation			3,798				1,829				1,558
Income from discontinued operations, net of income taxes			1,254				196				145
Net income attributable to Hess Corporation		$	5,052			$	2,025			$	1,703
Weighted average common shares outstanding:
Basic			336.6				338.4				336.9
Effect of dilutive securities
Restricted common stock			1.4				1.1				1.4
Stock options			1.7				0.8				1.6
Performance share units			1.2				—				—
Diluted			340.9				340.3				339.9

 

 

 

		2013				2012				2011
Net income attributable to Hess Corporation per share:
Basic:
Continuing operations		$	11.28			$	5.40			$	4.62
Discontinued operations			3.73				0.58				0.43
Net income per share		$	15.01			$	5.98			$	5.05
Diluted:
Continuing operations		$	11.14			$	5.37			$	4.58
Discontinued operations			3.68				0.58				0.43
Net income per share		$	14.82			$	5.95			$	5.01

 

 

The weighted average common shares used in the diluted earnings per share calculations exclude the effect of approximately 4.4 million, 9.2 million and 3.5 million out-of-the-money stock options for 2013, 2012 and 2011, respectively. Based on the Corporation’s TSR, the diluted earnings per share calculations also exclude the effects of 414,175 PSUs for 2012. Cash dividends declared on common stock totaled $0.70 per share ($0.10 per share for the first two quarters and $0.25 per share commencing in the third quarter) during 2013. Cash dividends were $0.40 per share ($0.10 per quarter) for both 2012 and 2011.