Interest: After-tax interest was $173 million in 2003, $165 million in 2002 and $135 million in 2001. The corre- sponding amounts before income taxes were $293 million, $256 million and $194 million in 2003, 2002 and 2001, respectively. Interest incurred in 2003 was lower than in 2002 because of debt reduction; however, the reduction in interest incurred was more than offset by lower capitalized interest in 2003. Capitalized interest in 2003, 2002 and 2001 was $41 million, $101 million and $44 million, respectively. Interest expense was higher in 2002 compared with 2001 reflecting increased borrowings related to acquisitions. After-tax interest expense in 2004 is anticipated to be approximately 20% below the 2003 level. 

Discontinued Operations: In the first quarter of 2003, the Corporation exchanged its crude oil producing properties in Colombia (acquired in 2001 as part of the Triton acquisi- tion), plus $10 million in cash, for an additional 25% interest in Block A-18 in the joint development area of Malaysia and Thailand (JDA). The exchange resulted in an after-tax charge to income of $47 million ($51 million before income taxes). The after-tax loss on this exchange included a $43 million adjustment of the book value of the Colombian assets to fair value. The loss also included $17 million from the recognition in earnings of the value of related hedge contracts at the time of the exchange. These items were partially offset by after-tax earnings in Colombia prior to the exchange of $13 million. The JDA production facilities are complete, but production will not commence until the purchasers of the gas complete the construction of a nat- ural gas pipeline. The Corporation anticipates that produc- tion will begin in the second half of 2005. 

In the second quarter of 2003, the Corporation sold Gulf of Mexico shelf properties, the Jabung Field in Indonesia and several small United Kingdom fields for $445 million. The after-tax gain from these asset sales of $175 million ($248 million before income taxes) was included in discon- tinued operations. Discontinued operations in 2003 also includes $40 million of income from operations prior to the sales of these assets. 

Change in Accounting Principle: The Corporation adopted FAS No. 143, Accounting for Asset Retirement Obligations, effective January 1, 2003. A net after-tax gain of $7 million resulting from the cumulative effect of this accounting change was recorded at the beginning of the year. At the date of adoption, a liability of $556 million representing the estimated fair value of the Corporation’s required dismantlement obliga- tions was recorded on the balance sheet. In addition, a dis- mantlement asset of $311 million was recorded, as well as accumulated depreciation of $203 million. 

Sales and Other Operating Revenues: In 2003, sales and other operating revenues increased by 24% compared with 2002. This increase principally reflects increased sales vol- umes and selling prices of refined products and the higher selling price of purchased natural gas in energy marketing activities. Sales and other operating revenues decreased by 12% in 2002 compared with 2001, due to the sale of the United Kingdom energy marketing business, and lower sales volumes of refined products and purchased natural gas related to U.S. energy marketing. These decreases were partially offset by higher production of crude oil and natural gas. The change in cost of goods sold in each year reflects the change in sales of refined products and pur- chased natural gas. 

## Liquidity and Capital Resources 

Overview: Cash flows from operating activities, including changes in operating assets and liabilities, totaled $1,581 million in 2003. During the year, the Corporation strengthened its financial position through sales of assets and the issuance of preferred stock. At December 31, 2003, the Corporation’s debt to capitalization ratio was 42.5% compared to 54.0% at December 31, 2002. Total debt was $3,941 million at December 31, 2003 and $4,992 million at December 31, 2002. Cash and cash equivalents at the end of 2003 totaled $518 million, an increase of $321 million for the year. Long-term debt totaling $221 million matures over the next three years. 

The Corporation has hedged the selling prices of a signifi- cant portion of its crude oil and natural gas production in 2004 and 2005 to help generate a level of cash flow that will meet operating and capital commitments. 

