UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended June 30, 2006

or

o		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 preceeding 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 þ No o

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

Large Accelerated Filer þ       Accelerated Filer o       Non-Accelerated Filer o

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

At June 30, 2006, there were 280,526,337 shares of Common Stock outstanding.

 

 

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in millions of dollars, thousands of shares)

		June 30,
		2006				December 31,
		(Unaudited)				2005
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	486			$	315
Accounts receivable			3,046				3,655
Inventories			1,148				855
Other current assets			313				465
Total current assets			4,993				5,290
INVESTMENTS AND ADVANCES
HOVENSA L.L.C.			1,118				1,217
Other			183				172
Total investments and advances			1,301				1,389
PROPERTY, PLANT AND EQUIPMENT
Total — at cost			21,901				19,464
Less reserves for depreciation, depletion, amortization and lease impairment			10,219				9,952
Property, plant and equipment — net			11,682				9,512
NOTE RECEIVABLE			121				152
GOODWILL			1,249				977
DEFERRED INCOME TAXES			1,591				1,544
OTHER ASSETS			307				251
TOTAL ASSETS		$	21,244			$	19,115
LIABILITIES AND STOCKHOLDERS ‘ EQUITY
CURRENT LIABILITIES
Accounts payable		$	4,864			$	4,995
Accrued liabilities			1,146				1,029
Taxes payable			706				397
Short-term debt and current maturities of long-term debt			95				26
Total current liabilities			6,811				6,447
LONG-TERM DEBT			3,679				3,759
DEFERRED INCOME TAXES			2,011				1,401
ASSET RETIREMENT OBLIGATIONS			866				564
OTHER LIABILITIES			719				658
Total liabilities			14,086				12,829
STOCKHOLDERS’ EQUITY
Preferred stock, par value $1.00, 20,000 shares authorized
7% cumulative mandatory convertible series
Authorized and outstanding - 13,500 shares ($675 million liquidation preference)			14				14
3% cumulative convertible series
Authorized - 330 shares
Outstanding - 324 shares ($16 million liquidation preference)			—				—
Common stock*, par value $1.00
Authorized - 600,000 shares
Outstanding - 280,526 shares at June 30, 2006; 279,197 shares at December 31, 2005			281				279
Capital in excess of par value*			1,649				1,656
Retained earnings			7,094				5,914
Accumulated other comprehensive income (loss)			(1,880	)			(1,526	)
Deferred compensation			—				(51	)
Total stockholders’ equity			7,158				6,286
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	21,244			$	19,115

See accompanying notes to consolidated financial statements.

PART I — FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS (UNAUDITED)
Six Months ended June 30
(in millions of dollars)

		2006				2005
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	1,260			$	518
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation, depletion and amortization			548				515
Exploratory dry hole costs			40				133
Lease impairment			51				36
Pre-tax gain on asset sales			(369	)			(18	)
Provision (benefit) for deferred income taxes			191				(116	)
Distributed (undistributed) earnings of HOVENSA L.L.C., net			99				(46	)
Changes in other operating assets and liabilities			64				45
Net cash provided by operating activities			1,884				1,067
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures			(2,095	)			(959	)
Proceeds from asset sales			444				3
Payment received on note receivable			31				30
Other			11				2
Net cash used in investing activities			(1,609	)			(924	)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in debt with maturities of 90 days or less			68				—
Debt with maturities of greater than 90 days
Borrowings			2				104
Repayments			(81	)			(153	)
Cash dividends paid			(108	)			(107	)
Stock options exercised			15				52
Net cash used in financing activities			(104	)			(104	)
NET INCREASE IN CASH AND CASH EQUIVALENTS			171				39
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR			315				877
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	486			$	916

See accompanying notes to consolidated financial statements.

PART I — FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.		Basis of Presentation
		On May 3, 2006, Amerada Hess Corporation changed its name to Hess Corporation (the Corporation).
		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 Corporation’s consolidated financial position at June 30, 2006 and December 31, 2005 and the consolidated results of operations and the consolidated cash flows for the three- and six-month periods ended June 30, 2006 and 2005. 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. These statements, therefore, should be read in conjunction with the consolidated financial statements and related notes included in the Corporation’s Form 10-K for the year ended December 31, 2005.
2.		Stock Split
		On May 3, 2006, the Corporation’s shareholders voted to increase the number of authorized common shares from 200 million to 600 million and the board of directors declared a three-for-one stock split. The stock split was completed in the form of a stock dividend that was issued on May 31, 2006 to shareholders of record on May 17, 2006. The common share par value remained at $1.00 per share. All common share and per share amounts in these financial statements and notes are on an after-split basis for all periods presented.
3.		Acquisitions and Divestitures
		In January 2006, the Corporation, in conjunction with its Oasis Group partners, re-entered its former oil and gas production operations in the Waha concessions in Libya, in which the Corporation holds an 8.16% interest. The re-entry terms include a 25-year extension of the concessions and a payment in January 2006 by the Corporation to the Libyan National Oil Corporation of $260 million. The Corporation also accrued $106 million that will be paid in the fourth quarter of 2006, related to certain investments in fixed assets made by the Libyan National Oil Corporation since 1986. This transaction was accounted for as a business combination.
		The following table summarizes the preliminary allocation of the purchase price to assets and liabilities acquired (in millions):

PART I — FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

		The goodwill recorded in this transaction relates to the deferred tax liability recorded for the difference in book and tax bases of the assets acquired. The goodwill is not expected to be deductible for income tax purposes. Production from the Libyan operation averaged 23,000 barrels per day in the six months ended June 30, 2006 and liftings commenced in the second quarter. The primary reason for the Libyan investment was to acquire long-lived crude oil reserves.
		In January 2006, the Corporation acquired a 55% working interest in the deepwater section of the West Mediterranean Block 1 Concession (the West Med Block) in Egypt for $413 million. The Corporation has a 25-year development lease for the West Med Block, which contains four existing natural gas discoveries and additional exploration opportunities. This transaction was accounted for as an acquisition of assets.
		In the first quarter of 2006, the Corporation completed the sale of its interests in certain producing properties located in the Permian Basin in Texas and New Mexico for $358 million. This asset sale resulted in an after-tax gain of $186 million ($289 million before income taxes).
		In June 2006, the Corporation completed the sale of U.S. Gulf Coast onshore oil and gas producing assets for $86 million resulting in an after-tax gain of $50 million ($80 million before income taxes). These assets were producing at a combined net rate of approximately 2,600 barrels of oil equivalent per day.
4.		Inventories
		Inventories consist of the following (in millions):

During the first quarter of 2005, the Corporation liquidated LIFO inventories, which decreased cost of products sold by approximately $11 million.

		During the first half of 2006 and 2005, the Corporation received cash distributions from HOVENSA of $200 million and $112 million, respectively.
6.		Capitalized Exploratory Well Costs
		The following table discloses the net changes in capitalized exploratory well costs pending determination of proved reserves for the six months ended June 30, 2006 (in millions):

PART I — FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

		Capitalized exploratory well costs greater than one year old after completion of drilling were $61 million as of June 30, 2006 and $150 million as of December 31, 2005.
7.		Long-Term Debt
		In May 2006, the Corporation amended and restated its existing syndicated, revolving credit facility to increase the credit line to $3 billion from $2.5 billion and extend the term to May 2011 from December 2009. The facility can be used for borrowings and letters of credit. Current borrowings under the amended facility bear interest at .525% above the London Interbank Offered Rate and a facility fee of .125% per annum is payable on the amount of the credit line. The interest rate and facility fee are subject to adjustment if the Corporation’s credit rating changes. The restrictions on the amount of total borrowings and cash dividends remain unchanged.
		Capitalized interest on development projects amounted to the following (in millions):

		In 2006, the Corporation expects to contribute $40 million to its funded pension plans and $20 million to the trust established for its unfunded pension plan. Through June 30, 2006, the Corporation contributed $24 million to its funded pension plans and $20 million to the trust for its unfunded pension plan.
10.		Stock-based Compensation
		Effective January 1, 2006, the Corporation adopted the provisions of Statement of Financial Accounting Standards No. 123R, Share-Based Payment (FAS 123R). This standard requires that all stock based compensation to employees, including grants of stock options, be expensed over the vesting period. Awards of restricted common stock were expensed over the vesting period under previous accounting requirements and will continue to be expensed under FAS 123R. The Corporation records compensation expense for both stock options and restricted stock on a straight-line basis over the vesting period.
		The Corporation adopted FAS 123R using the modified prospective application method. Under this method, compensation cost includes expense for restricted stock, previously awarded unvested stock options outstanding at January 1, 2006 based on the grant date fair-values used for disclosure purposes under previous accounting requirements, and stock options awarded subsequent to January 1, 2006 determined under the provisions of FAS 123R. For the six months ended June 30, 2006, stock-based compensation expense was $31 million ($20 million after income taxes), of which $14 million ($9 million after income taxes) related to stock options and the remainder related to restricted stock. Stock option expense recorded in the first half of 2006 reduced basic and diluted earnings per share by $.03 per share. The cumulative effect on prior years of this change in accounting principle was immaterial.

		The intrinsic value of outstanding options and exercisable options at June 30, 2006 was $324 million and $234 million, respectively. At June 30, 2006, assuming forfeitures of 2% per year, the number of outstanding options that are expected to vest is 13,516,000 shares with a weighted average exercise price of $29.05 per share. At June 30, 2006 the weighted average remaining term of exercisable options was 6 years and the remaining term of all outstanding options was 7 years.
		The Corporation uses the Black-Scholes model to estimate the fair value of employee stock options. The following weighted average assumptions were utilized for stock options awarded for the six months ended June 30:

		The assumption above for the risk free interest rate is based on the expected terms of the options and is obtained from published sources. The stock price volatility is determined from historical experience using the same period as the expected terms of the options. The expected stock option term is based on historical exercise patterns and the expected future holding period.
		The Corporation’s restricted stock activity in the first half of 2006 consisted of the following:

		Based on restricted stock and stock option awards outstanding at June 30, 2006, unearned compensation expense, before income taxes, will be recognized as follows: remainder of 2006 — $35 million, 2007 — $55 million and 2008 — $32 million.
		If FAS 123R had been adopted on January 1, 2005, pro-forma net income for the first half of 2005 would have been $508 million (compared with reported net income of $518 million) and diluted earnings per share would have been $1.64 per share (compared with reported diluted earnings per share of $1.67).
11.		Provision for Income Taxes
		The provision for income taxes consisted of the following (in millions):

		In the first quarter of 2005, the Corporation recorded an income tax charge of $41 million related to the repatriation of $1.3 billion of foreign earnings under the American Jobs Creation Act of 2004.
12.		Stockholders’ Equity and Weighted Average Common Shares
		At June 30, 2006, the Corporation has outstanding 13,500,000 shares of 7% cumulative mandatory convertible preferred stock (“7% Preferred”). The 7% Preferred have a liquidation preference of $675 million ($50 per share). After adjustment for the stock split, the following conversion terms apply to the 7% Preferred. Each 7% Preferred share will automatically convert on December 1, 2006 into 2.4915 to 3.0897 shares of common stock, depending on the average closing price of the Corporation’s common stock over a 20-day period before conversion. The conversion rate will be 2.4915 shares of common stock for each share of 7% Preferred, if the common stock price is $20.07 or greater, and up to 3.0897 shares of common stock for each preferred share, if the common stock price is lower. Holders of the 7% Preferred have the right to convert their shares at any time prior to December 1, 2006 at the rate of 2.4915 shares of common stock for each preferred share converted.

PART I — FINANCIAL INFORMATION (CONT’D.)

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

		At June 30, 2006, the Corporation has outstanding 323,715 shares of 3% cumulative convertible preferred stock (“3% Preferred”) which carry a liquidation value of $16 million ($50 per share). After adjustment for the stock split, each share of the 3% Preferred is convertible at the option of the holder into 1.8783 shares of common stock.
		The weighted average number of common shares used in the basic and diluted earnings per share computations are as follows (in thousands):

13.		Comprehensive Income
		Comprehensive income (loss) was as follows (in millions):

		The Corporation reclassifies hedging gains and losses included in other comprehensive income (loss) to earnings at the time the hedged transactions are recognized. Hedging decreased Exploration and Production results by $83 million ($128 million before income taxes) in the second quarter of 2006 and $231 million ($363 million before income taxes) in the second quarter of 2005. Hedging decreased Exploration and Production results by $147 million ($229 million before income taxes) in the six months ended June 30, 2006 and $426 million ($671 million before income taxes) in the six months ended June 30, 2005.
		At June 30, 2006, accumulated other comprehensive income (loss) included after-tax unrealized deferred losses of $1,689 million primarily related to crude oil contracts used as hedges of future Exploration and Production sales. The pre-tax amount of deferred hedge losses is reflected in accounts payable and the related income tax benefits are recorded as deferred tax assets on the balance sheet.

Identifiable assets by operating segment were as follows (in millions):

15.		Subsequent Event
		In July 2006, the United Kingdom enacted an additional 10% supplementary tax on petroleum operations with an effective date of January 1, 2006. As a result, the Corporation will record a charge in the third quarter of approximately $105 million. This charge includes a provision of approximately $60 million representing the incremental tax on earnings for the first half of the year and a charge of approximately $45 million to adjust the deferred tax liability in the U.K.

PART I — FINANCIAL INFORMATION (CONT’D.)

PART I — FINANCIAL INFORMATION (CONT’D.)

Overview (Continued)

      Marketing and Refining: Marketing and Refining earnings were $121 million for the second quarter of 2006, compared with $98 million in the second quarter of 2005.

     In June 2006, the Corporation acquired energy marketing customer accounts and related assets to expand the Corporation’s natural gas and electric sales in the Northeast.

      Corporate: In May 2006, the Corporation amended and restated its existing syndicated, revolving credit facility to increase the facility to $3 billion from $2.5 billion and extend the term to May 2011 from December 2009.

Results of Operations

     The after-tax results by major operating activity were as follows (in millions, except per share data):

Items Affecting Comparability Between Periods

     The following items of income (expense), on an after-tax basis, affect the comparability of earnings between periods (in millions):

PART I — FINANCIAL INFORMATION (CONT’D.)

Results of Operations (Continued)

     The net gain from asset sales in the second quarter of 2006 relates to the sale of U.S. Gulf Coast onshore oil and gas producing assets ($80 million before income taxes). In the second quarter of 2006, the Corporation also recorded an after-tax charge for vacated leased office space ($30 million before income taxes, recorded in general and administrative expenses). The net gain from asset sales for the six months ended June 30, 2006 also reflects the disposition of certain producing properties located in the Permian Basin in Texas and New Mexico ($289 million before income taxes).

     Earnings in the second quarter of 2005 include income tax benefits of $11 million, reflecting the effect on deferred income taxes of a reduction in the income tax rate in Denmark and a tax settlement in the United Kingdom. Second quarter 2005 results also include a charge of $7 million ($10 million before income taxes) for premiums on bond repurchases. The first half of 2005 also includes a net gain of $11 million ($18 million before income taxes) on the disposition of a mature North Sea asset, a net gain of $11 million ($19 million before income taxes) for a legal settlement reflecting the favorable resolution of contingencies on a prior year asset sale, and an income tax charge of $41 million related to the repatriation of $1.3 billion of foreign earnings under the American Jobs Creation Act of 2004.

     In the discussion that follows, the financial effects of certain transactions are disclosed on an after-tax basis. Management reviews segment earnings on an after-tax basis and uses after-tax amounts in its review of variances in segment earnings. Management believes that after-tax amounts are a preferable method of explaining variances in earnings, since they show the entire effect of a transaction rather than only the pre-tax amount. After-tax amounts are determined by applying the appropriate income tax rate in each tax jurisdiction to pre-tax amounts.

After considering the items affecting comparability between periods, the remaining changes in Exploration and Production earnings are primarily attributable to changes in selling prices, sales volumes and operating costs and exploration expenses, as discussed below.

     Crude oil hedges reduced Exploration and Production earnings by $83 million and $147 million in the second quarter and first half of 2006 ($128 million and $229 million before income taxes). Crude oil hedges reduced Exploration and Production earnings by $231 million and $426 million in the second quarter and first half of 2005 ($363 million and $671 million before income taxes).

PART I — FINANCIAL INFORMATION (CONT’D.)

Results of Operations (Continued)

     Crude oil and natural gas production in the United States was lower in the second quarter and first half of 2006 due to asset sales, natural decline and decreased production caused by hurricanes in 2005. Production in Europe was lower due to increased maintenance and natural decline, partially offset by increased production from Russia and the Atlantic and Cromarty natural gas fields in the United Kingdom, which commenced production in June. Increased crude oil production in Africa in the second quarter and first half of 2006 was primarily due to production from Libya. Natural gas production in Asia was higher due to increased production from Block A-18 in the Joint Development Area between Malaysia and Thailand (JDA).

     Lower crude oil and natural gas sales volumes reduced Exploration and Production revenues by approximately $50 million in the second quarter and $110 million in the first half of 2006 compared with the corresponding periods of 2005.

      Operating costs and depreciation, depletion and amortization: Cash operating costs, consisting of production expenses and general and administrative expenses, totaled $345 million and $656 million in the second quarter and first half of 2006, an increase of $68 million and $124 million, respectively, from the corresponding periods of 2005. The increase reflects higher production taxes resulting from higher oil prices, higher maintenance and repair costs and increased costs of services and materials. Depreciation, depletion and amortization charges increased in 2006 reflecting higher per barrel rates.

      Exploration expenses: Exploration expenses were $79 million and $191 million in the second quarter and first half of 2006, a decrease of $8 million and $29 million, from 2005. The decrease principally reflects lower dry hole costs, partially offset by higher seismic expense.

      Income Taxes: The effective income tax rate for Exploration and Production operations in the first half of 2006 was 46% compared with 41% in the first half of 2005. The increase is primarily due to income taxes on sales of Libyan crude oil. In July 2006, the United Kingdom enacted an additional 10% supplementary tax on petroleum operations with an effective date of January 1, 2006. As a result, we will record a charge in the third quarter of approximately $105 million. This charge includes a provision of approximately $60 million representing the incremental tax on earnings for the first half of the year and a charge of approximately $45 million to adjust the deferred tax liability in the U.K. Excluding this special charge for the change in U.K. supplementary tax, we expect the Exploration & Production effective rate for the year to be in the range of 50% to 53%.

PART I — FINANCIAL INFORMATION (CONT’D.)

Results of Operations (Continued)

     The Corporation’s future Exploration and Production earnings may be impacted by external factors, such as political risk, volatility in the selling prices of crude oil and natural gas, reserve and production changes, industry cost inflation, exploration expenses, the effects of weather and changes in foreign exchange and income tax rates.

Marketing and Refining

     Earnings from Marketing and Refining activities amounted to $121 million in the second quarter of 2006 compared with $98 million in the corresponding period of 2005. Earnings from Marketing and Refining activities amounted to $170 million in the first half of 2006 compared with $161 million in the corresponding period of 2005. The Corporation’s downstream operations include HOVENSA L.L.C. (HOVENSA), a 50% owned refining joint venture with a subsidiary of Petroleos de Venezuela S.A. (PDVSA). Additional Marketing and Refining activities include a fluid catalytic cracking facility in Port Reading, New Jersey, as well as retail gasoline stations, energy marketing and trading operations.

      Refining: Refining earnings, which consist of the Corporation’s share of HOVENSA’s results, Port Reading earnings, interest income on the note receivable from PDVSA and other miscellaneous items, were $107 million in the second quarter of 2006 and $127 million in the first half of 2006 compared with $77 million in the second quarter and $119 million in the first half of 2005.

     The Corporation’s share of HOVENSA’s income after income taxes was $63 million in the second quarter of 2006 compared with income of $66 million in the second quarter of 2005. The decrease was primarily due to lower charge rates, resulting from a combination of planned and unplanned maintenance. For the first half of 2006, the Corporation’s share of HOVENSA’s after-tax income was $62 million compared with $97 million in the first half of 2005, reflecting lower charge rates.

     Interest income after income taxes on the PDVSA note was $2 million in the second quarter and $5 million in the first half of 2006 compared with $3 million in the second quarter and $7 million in the first half of 2005. At June 30, 2006, the remaining balance of the PDVSA note was $182 million, which is scheduled to be fully repaid by February 2009.

     Port Reading’s after tax earnings were $40 million in the second quarter and $59 million in the first half of 2006 compared with $7 million in the second quarter and $14 million in the first half of 2005. The increase reflects higher margins and sales volumes. In the first quarter of 2005, the Port Reading facility was shutdown for planned maintenance.

PART I — FINANCIAL INFORMATION (CONT’D.)

Results of Operations (Continued)

     The following table summarizes refinery capacity and utilization rates:

						Refinery utilization
		Refinery				Three months								Six months
		capacity				ended June 30								ended June 30
		(thousands of				2006				2005				2006				2005
		barrels per day)
HOVENSA
Crude			500				85.9	%			100.1	%			85.0	%			95.0	%
Fluid catalytic cracker			150				87.3	%			93.3	%			76.9	%			75.3	%
Coker			58				73.2	%			100.9	%			79.4	%			96.9	%
Port Reading			65				96.9	%			89.2	%			97.8	%			72.8	%

      Marketing: Marketing earnings, which consist principally of retail gasoline and energy marketing activities, were $15 million in the second quarter of 2006 and $28 million in the first half of 2006 compared with $14 million in the second quarter and $27 million in the first half of 2005. Retail gasoline operations generated losses in the second quarter and first half of 2006 as wholesale prices rose more quickly than retail prices. Retail gasoline operations were slightly profitable in the second quarter of 2005, but generated a loss in the first half of 2005. Earnings from energy marketing activities increased slightly in the second quarter and first half of 2006 compared with the corresponding periods of 2005. Total refined product sales volumes were 466,000 barrels per day in the first half of 2006 and 448,000 barrels per day in the first half of 2005.

     The Corporation has a 50% voting interest in a consolidated partnership that trades energy commodities and energy derivatives. The Corporation also takes trading positions for its own account. The Corporation’s after-tax results from trading activities, including its share of the earnings of the trading partnership, amounted to a loss of $1 million in the second quarter of 2006 and income of $15 million in the first half of 2006 compared with earnings of $7 million in the second quarter and $15 million in the first half of 2005.

     The Corporation’s future Marketing and Refining earnings may be impacted by volatility in marketing and refining margins, competitive industry conditions, government regulatory changes, credit risk and supply and demand factors, including the effects of weather.

Corporate

     After-tax corporate expenses were $29 million in the second quarter of 2006 and $52 million in the first half of 2006 compared with $28 million in the second quarter and $97 million in the first half of 2005. Results for the second quarter of 2005 include net expenses of $7 million ($10 million before income taxes) for premiums on bond repurchases. The results for the first half of 2005 also include an income tax charge of $41 million related to repatriation of foreign earnings under the American Jobs Creation Act of 2004. Excluding these items, the increase in corporate expenses in 2006 compared to 2005 reflects the expensing of stock options commencing January 1, 2006 and increases in the costs of insurance and other employee benefit costs.

PART I — FINANCIAL INFORMATION (CONT’D.)

Results of Operations (Continued)

Interest

     Interest expense was as follows (in millions):

		Three months								Six months
		ended June 30								ended June 30
		2006				2005				2006				2005
Total interest incurred		$	70			$	76			$	151			$	151
Less capitalized interest			26				22				50				36
Interest expense before income taxes			44				54				101				115
Less income taxes			16				20				36				43
After-tax interest expense		$	28			$	34			$	65			$	72

     After-tax interest expense for the full year of 2006 is anticipated to be lower than the 2005 amount, primarily due to increased capitalized interest and lower average interest rates on outstanding borrowings.

Sales and Other Operating Revenues

     Sales and other operating revenues increased by 35% in the second quarter and 40% in the first half of 2006 compared with the corresponding periods of 2005. This increase principally reflects increased selling prices of crude oil, natural gas and refined products and reduced crude oil hedge positions. The increase in cost of goods sold reflects the increased costs of refined products purchased.

Liquidity and Capital Resources

     The following table sets forth certain relevant measures of the Corporation’s liquidity and capital resources (in millions, except ratios):