Hess - 10-Q quarterly report FY

     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) consolidated financial position at September 30, 2008 and December 31, 2007, and the consolidated results of operations for the three and nine month periods ended September 30, 2008 and 2007 and the consolidated cash flows for the nine month periods ended September 30, 2008 and 2007. The unaudited results of operations for the interim periods reported are not necessarily indicative of results to be expected for the full year.

     The financial statements were 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 Form 10-K for the year ended December 31, 2007.

     Effective January 1, 2008, the Corporation adopted Financial Accounting Standards Board (FASB) Statement No. 157, Fair Value Measurements (FAS 157) for financial assets and liabilities that are required to be measured at fair value. FAS 157 established a framework for measuring fair value and requires disclosure of a fair value hierarchy (see Note 8, “Fair Value Measurements”). The impact of adopting FAS 157 was not material to the Corporation’s results of operations. Upon adoption, the Corporation recorded a reduction in the net deferred hedge losses reflected in accumulated other comprehensive income, which increased stockholders’ equity by approximately $190 million, after income taxes. 

     In December 2007, the FASB issued FAS No. 160, Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51 (FAS 160). FAS 160 changes the accounting for and reporting of noncontrolling interests in a subsidiary. The Corporation is currently evaluating the impact of adoption on its financial statements and, as required, will adopt the provisions of FAS 160 effective January 1, 2009.

     Inventories consist of the following (in millions):

     The Corporation accounts for its investment in HOVENSA L.L.C. (HOVENSA) using the equity method. Summarized financial information for HOVENSA follows (in millions):

     During the first nine months of 2008 and 2007, the Corporation received cash distributions from HOVENSA of $50 million and $200 million, respectively.

     The following table discloses the net changes in capitalized exploratory well costs pending determination of proved reserves for the nine months ended September 30, 2008 (in millions):

     The preceding table excludes costs related to exploratory dry holes of $83 million which were incurred and subsequently expensed in 2008. Approximately 60% of the capitalized well costs are related to two projects in the deepwater Gulf of Mexico where further appraisal drilling is planned or development plans are being prepared. Capitalized exploratory well costs greater than one year old after completion of drilling were $380 million as of September 30, 2008 and $304 million as of December 31, 2007.

     At September 30, 2008, the Corporation classified an aggregate of $515 million of borrowings under short-term credit facilities as long-term debt, based on the available capacity under its $3 billion syndicated revolving credit facility, substantially all of which is committed through May 2012.

     Capitalized interest on development projects amounted to the following (in millions):

     Foreign currency gains (losses) amounted to the following (in millions):

     The pre-tax amount of foreign currency gains (losses) is included in Other, net within Revenues and non-operating income.

     Components of net periodic pension cost consisted of the following (in millions):

     In 2008, the Corporation expects to contribute approximately $65 million to its funded pension plans and $15 million to the trust established for its unfunded pension plan. Through September 30, 2008, the Corporation contributed $76 million to its pension plans.

     The Corporation adopted the provisions of FAS 157 effective January 1, 2008 (see Note 1, “Basis of Presentation”). FAS 157 establishes a hierarchy for the inputs used to measure fair value based on the source of the input, which generally range from quoted prices for identical instruments in a principal trading market (Level 1) to estimates determined using related market data (Level 3). Multiple inputs may be used to measure fair value, however, the level of fair value for each financial asset or liability presented below is based on the lowest significant input level within this fair value hierarchy. The following table provides the fair value hierarchy of the Corporation’s financial assets and (liabilities) as of September 30, 2008 (in millions):

     Details on the methods and assumptions used to determine the fair values of the financial assets and liabilities are as follows:

     Fair value measurements based on Level 1 inputs:

     Measurements that are most observable are based on quoted prices of identical instruments obtained from the principal markets in which they are traded. Closing prices are both readily available and representative of fair value. Market transactions occur with sufficient frequency and volume to assure liquidity. The fair value of certain of the Corporation’s exchange traded futures and options are considered Level 1. In addition, fair values for the majority of the pension investments are considered Level 1, since they are determined using quotations from national securities exchanges.

     Fair value measurements based on Level 2 inputs:

     Measurements derived indirectly from observable inputs or from quoted prices from markets that are less liquid are considered Level 2. Measurements based on Level 2 inputs include over-the-counter derivative instruments that are priced on an exchange traded curve, but have contractual terms that are not identical to exchange traded contracts. The Corporation utilizes fair value measurements based on Level 2 inputs for certain forwards, swaps and options. The liability related to the Corporation’s crude oil hedging program is classified as Level 2.

     Fair value measurements based on Level 3 inputs:

     Measurements that are least observable are estimated from related market data or determined from sources with little or no market activity for comparable contracts. For example, in its energy marketing business, the Corporation sells natural gas and electricity to customers and economically hedges the price exposure by purchasing forward contracts. The fair value of these sales and purchases may be based on specific prices at less liquid delivered locations, which are classified as Level 3. There may be offsets to these positions that are priced based on more liquid markets, which are, therefore, classified as Level 1 or Level 2.

     The following table provides changes in financial assets and liabilities that are measured at fair value based on Level 3 inputs (in millions):

     The weighted average number of common shares used in the basic and diluted earnings per share computations are as follows (in thousands):

     During the third quarter of 2008, the Corporation’s remaining 284,139 outstanding shares of 3% cumulative convertible preferred shares were converted into common stock at a conversion rate of 1.8783 shares of common stock for each preferred share. The Corporation issued 533,697 shares of common stock for the conversion of these preferred shares and fractional shares were settled by cash payments.

     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 for the three and nine months ended September 30, 2008 by $224 million ($138 million after income taxes) and $610 million ($377 million after income taxes), respectively. For the three and nine months ended September 30, 2007, hedging decreased Exploration and Production results by $101 million ($60 million after income taxes) and $258 million ($155 million after income taxes), respectively.

     At September 30, 2008, accumulated other comprehensive income (loss) included net after-tax unrealized deferred losses of $1,729 million related to crude oil contracts used as hedges of future Exploration and Production sales and derivatives used to manage the risk in its Marketing activities. The pre-tax amount of any deferred hedge losses and gains is reflected in accounts payable and accounts receivable, respectively, and the related income tax impact is recorded as deferred income taxes on the balance sheet. See Note 12, “Subsequent Event” for additional activity related to the crude oil hedge positions after September 30, 2008.

     At September 30, 2008, the Corporation had outstanding Brent crude oil hedge positions on 24,000 barrels per day of production through 2012 at prices ranging from $25.54 to $26.90 per barrel. In October 2008, the Corporation closed its Brent crude oil hedge positions by entering into offsetting contracts with the same counterparty covering 24,000 barrels per day from 2009 through 2012 at a per barrel price of $86.95 each year. The fourth quarter 2008 hedges were not affected by these transactions and are still open. The deferred after-tax loss as of the date the hedge positions were closed will be recorded in earnings as the contracts mature.

     Hess Corporation (the Corporation) is a global integrated energy company that operates in two segments, Exploration and Production (E&P) and Marketing and Refining (M&R). The E&P segment explores for, develops, produces, purchases, transports and sells crude oil and natural gas. The M&R segment manufactures, purchases, transports, trades and markets refined petroleum products, natural gas and electricity. Net income was $775 million for the third quarter of 2008, compared with $395 million in the third quarter of 2007.

     Exploration and Production: E&P earnings were $699 million for the third quarter of 2008, compared with $414 million in the third quarter of 2007. In the third quarter of 2008, the Corporation’s average worldwide crude oil selling price, including the effect of hedging, was $93.36 per barrel compared with $65.26 per barrel in the third quarter of 2007. The Corporation’s average worldwide natural gas selling price, including the effect of hedging, was $7.60 per Mcf in the third quarter of 2008 compared with $5.38 per Mcf in the third quarter of 2007. Worldwide crude oil and natural gas production was 361,000 barrels of oil equivalent per day (boepd) in the third quarter of 2008 compared with 357,000 boepd in the same period of 2007. Facilities downtime associated with hurricanes in the Gulf of Mexico reduced third quarter production by an average of approximately 11,000 boepd and will also reduce fourth quarter production. As a result, full year production is now expected to be approximately 380,000 boepd.

The following is an update of recent Exploration and Production activities:

     Marketing and Refining: M&R results generated income of $161 million in the third quarter of 2008, compared with income of $46 million in the third quarter of 2007, primarily reflecting higher refining and marketing margins.

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

     The following table reflects the total after-tax impact of items affecting comparability of earnings between periods (in millions):

     In the third quarter of 2007, the Corporation recorded charges totaling $33 million ($64 million before income taxes) for adjustments to prior meter readings at two offshore fields. During the second quarter of 2007, the Corporation recorded a net gain of $15 million ($21 million before income taxes) related to the sale of its interests in the Scott and Telford fields located in the United Kingdom North Sea.

     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 preferable to pre-tax amounts for explaining variances in earnings, since they show the entire effect of a transaction. After-tax amounts are determined by applying the appropriate income tax rate in each tax jurisdiction to pre-tax amounts.

     Following is a summarized income statement of the Corporation’s Exploration and Production operations (in millions):

     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, operating costs, exploration expenses and income taxes, as discussed below.

Selling prices: Higher average realized selling prices of crude oil and natural gas increased Exploration and Production revenues by approximately $800 million and $2,950 million in the third quarter and first nine months of 2008, respectively, compared with the corresponding periods of 2007. The Corporation’s average selling prices were as follows:

     Crude oil and natural gas hedges reduced Exploration and Production earnings by $138 million and $377 million in the third quarter and first nine months of 2008, respectively ($224 million and $610 million before income taxes). Crude oil hedges reduced Exploration and Production earnings by $60 million and $155 million in the third quarter and first nine months of 2007, respectively ($101 million and $258 million before income taxes). See the Non-Trading section of “Market Risk Disclosures” on page 21 for additional activity related to these hedge positions after September 30, 2008.

Sales and production volumes: The Corporation’s crude oil and natural gas production, on a barrel of oil equivalent basis, was 361,000 boepd in the third quarter of 2008 compared with 357,000 boepd in the same period of 2007. Production in the first nine months of 2008 was 382,000 boepd compared with 372,000 boepd in the first nine months of 2007. Facilities downtime associated with hurricanes in the Gulf of Mexico reduced third quarter production by an average of approximately 11,000 boepd. Delays from the hurricanes in bringing back the operations of third-party transportation infrastructure will also reduce fourth quarter production. The Corporation anticipates that its production for the full year of 2008 will average approximately 380,000 boepd and that production impacted by the hurricanes will be fully restored by January 2009.

The Corporation’s net daily worldwide production by region was as follows (in thousands):

          United States: Crude oil production in the United States was higher in the first nine months of 2008, principally due to production from new wells in North Dakota and the deepwater Gulf of Mexico. In the third quarter of 2008, this increased production was offset by the impacts of hurricanes in the Gulf of Mexico.

          Europe: Crude oil production in Europe in the third quarter and first nine months of 2008 was lower than the comparable periods of 2007, due to temporary shut-ins at two North Sea fields, cessation of production at the Fife Field and natural decline. These decreases were partially offset by increased production in Russia. Natural gas production in the third quarter and first nine months of 2008 was higher than in the same periods of 2007, principally reflecting increased production from the Cromarty Field in the United Kingdom, which was shut-in for a portion of 2007 in response to market conditions, partially offset by natural decline. In addition, third quarter 2008 natural gas nominations at certain fields were higher because a third-party pipeline was shut down in the third quarter of 2007.

          Africa: Higher crude oil production in the first nine months of 2008 was principally due to the continued development of the Okume Complex in Equatorial Guinea, partially offset by a lower entitlement to Algerian production.

          Asia and other: Crude oil production in Asia was lower in the third quarter and first nine months of 2008, reflecting a reduced entitlement to production in Azerbaijan and production interruptions. Natural gas production increased in the third quarter of 2008 principally due to increased production from Block A-18 of the Joint Development Area of Malaysia and Thailand (JDA). In the third quarter of 2007, operations at Block A-18 of the JDA were impacted by a planned shut-down in order to install facilities required for phase 2 gas sales. In the first nine months of 2008 production also increased as a result of production from the Pangkah Field in Indonesia, which commenced in April 2007.

     Sales volumes: Higher crude oil sales volumes increased revenue by approximately $50 million in the third quarter and $260 million in the first nine months of 2008 compared with the corresponding periods of 2007.

Operating costs and depreciation, depletion and amortization: Cash operating costs, consisting of production expenses and general and administrative expenses, increased by $129 million and $340 million in the third quarter and first nine months of 2008, respectively, compared with the corresponding periods of 2007. The increases principally reflect higher production volumes, increased production taxes (due to higher realized selling prices), higher costs of services and materials and increased employee related costs. Depreciation, depletion and amortization charges were higher in 2008 reflecting higher production volumes and per barrel rates.

Exploration expenses: Exploration expenses were higher in the third quarter and first nine months of 2008 compared with the corresponding periods of 2007, reflecting higher dry hole costs and increased costs of seismic studies.

Income Taxes: The effective income tax rate for Exploration and Production operations in the first nine months of 2008 was 48% compared with 50% in the first nine months of 2007. The effective income tax rate for Exploration and Production operations for the full year of 2008 is expected to be in the range of 47% to 51%.

Other: The after-tax foreign currency loss related to Exploration and Production activities was $8 million in the third quarter of 2008 compared with income of $1 million in the third quarter of 2007. The after-tax foreign currency gain was $3 million for the nine months ended September 30, 2008 and a loss of $8 million for the nine months ended September 30, 2007.

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

     Marketing and Refining income amounted to $161 million and $125 million in the third quarter and first nine months of 2008, respectively, compared with $46 million and $269 million in the third quarter and first nine months of 2007. 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), which is accounted for using the equity method. 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 operations generated income of $46 million in the third quarter and first nine months of 2008 compared with income of $25 million in the third quarter and $166 million in the first nine months of 2007. The Corporation’s share of HOVENSA’s income, after income taxes, was $32 million in the third quarter of 2008 compared with $12 million in the third quarter of 2007. The Corporation’s share of HOVENSA’s income, after income taxes, was $14 million in the first nine months of 2008 compared with $96 million in 2007, principally reflecting lower refining margins.

     At September 30, 2008, the remaining balance of the PDVSA note was $30 million, which is scheduled to be fully repaid by February 2009. Interest income on the PDVSA note, after income taxes, was $2 million in the first nine months of 2008 compared with $5 million in the first nine months of 2007, reflecting a lower outstanding balance.

     Port Reading’s after tax earnings were $14 million and $30 million in the third quarter and first nine months of 2008, respectively, compared with $10 million and $62 million in the corresponding periods of 2007, also reflecting lower margins.

     The following table summarizes refinery capacity and utilization rates:

Marketing: Marketing operations, which consist principally of energy marketing and retail gasoline operations, generated earnings of $110 million in the third quarter of 2008 compared with $21 million in the third quarter of 2007. The increase was primarily due to increased margins in retail gasoline operations and energy marketing activities. Marketing operations had earnings of $102 million in the first nine months of 2008 compared with earnings of $64 million in the first nine months of 2007. Total refined product sales volumes were 470,000 barrels per day in the first nine months of 2008 compared with 447,000 barrels per day in the first nine months of 2007.

Trading: 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 results from the trading partnership, amounted to earnings of $5 million in the third quarter and a loss of $23 million in the first nine months of 2008 compared with breakeven results in the third quarter of 2007 and income of $39 million in the first nine months of 2007.

     Marketing expenses increased in the third quarter and first nine months of 2008 compared with the corresponding periods of 2007, principally reflecting growth in energy marketing activities, higher credit card fees in retail gasoline operations and increased transportation costs.

     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.

     After-tax corporate expenses were $42 million in the third quarter of 2008 compared with $28 million in the third quarter of 2007. After-tax corporate expenses were $114 million in the first nine months of 2008 compared with $91 million in the first nine months of 2007. The increases principally reflect higher employee related expenses, losses on pension related investments and higher professional fees.

     Interest expense was as follows (in millions):

     The decrease in interest incurred in the first nine months of 2008 principally reflects lower average debt. The decrease in capitalized interest in 2008 reflects the completion of several development projects in 2007.

     Sales and other operating revenues increased by 53% in the third quarter and 52% in the first nine months of 2008 compared with the corresponding periods of 2007, primarily due to higher crude oil and refined product selling prices and increased sales of electricity. The increase in cost of goods sold principally reflects higher refined product costs and increased purchases of electricity.

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

     The following table sets forth a summary of the Corporation’s cash flows (in millions):

     Operating Activities: Net cash provided by operating activities, including changes in operating assets and liabilities, amounted to $4,072 million in the first nine months of 2008 compared with $2,701 million in 2007, reflecting increased earnings. In the first nine months of 2008, the Corporation received cash distributions of $50 million from HOVENSA compared with $200 million in 2007.

     Investing Activities: The following table summarizes the Corporation’s capital expenditures (in millions):

     Financing Activities: In the first nine months of 2008, there was a net decrease in borrowings of $48 million from year-end 2007. Dividends paid were $130 million in the first nine months of 2008 ($127 million in the first nine months of 2007). During the first nine months of 2008, the Corporation received proceeds from the exercise of stock options totaling $111 million ($81 million in the same period of 2007).

     The Corporation anticipates investing a total of approximately $5 billion in capital and exploratory expenditures during 2008. The Corporation expects that it will fund its 2008 operations, including capital expenditures, dividends, pension contributions and required debt repayments, with existing cash on-hand, cash flow from operations and its available credit facilities.

     Commodity prices have decreased considerably subsequent to September 30, 2008. Such decreases will have an impact on the Corporation’s future revenues, earnings and cash flows. As a result, the Corporation will make an appropriate reduction to its 2009 capital and exploratory expenditures.

     At September 30, 2008, the Corporation has $2,683 million of available borrowing capacity under its $3 billion syndicated revolving credit facility (the Revolver), substantially all of which is committed through May 2012. Outstanding borrowings under the Revolver were $317 million at September 30, 2008 compared with $220 million at December 31, 2007. In addition, at September 30, 2008, the Corporation had $315 million in outstanding borrowings and $534 million of outstanding letters of credit under its 364-day asset-backed credit facility (the Asset-backed Facility) compared with $250 million and $534 million, respectively, at December 31, 2007. The borrowings and outstanding letters of credit under the Asset-backed Facility were collateralized by approximately $1,200 million of Marketing and Refining accounts receivable. These receivables are not available to pay the general obligations of the Corporation before satisfaction of the Corporation’s obligations under the Asset-backed Facility. At September 30, 2008, the Corporation classified an aggregate of $515 million of borrowings under short-term credit facilities and the Asset-backed Facility as long-term debt, based on the available capacity under the Revolver. In October 2008, the Corporation renewed its Asset-backed Facility for an additional 364 days with a total capacity of $500 million, subject to available accounts receivable.

     The Corporation also has a shelf registration under which it may issue additional debt securities, warrants, common stock or preferred stock.

     Outstanding letters of credit were as follows (in millions):

          A loan agreement covenant based on the Corporation’s debt to equity ratio allows the Corporation to borrow up to an additional $16.5 billion for the construction or acquisition of assets at September 30, 2008. The Corporation has the ability to borrow up to an additional $3.1 billion of secured debt at September 30, 2008 under the loan agreement covenants.

     The Corporation has leveraged leases not included in its balance sheet, primarily related to retail gasoline stations that the Corporation operates. The net present value of these leases is $491 million at September 30, 2008. The Corporation’s September 30, 2008 debt to capitalization ratio would increase from 24.3% to 26.6% if the leases were included as debt.

     The Corporation guarantees the payment of up to 50% of HOVENSA’s crude oil purchases from suppliers other than PDVSA. At September 30, 2008, the guarantee amounted to $342 million. This amount fluctuates based on the volume of crude oil purchased and related prices. In addition, the Corporation has agreed to provide funding up to a maximum of $15 million to the extent HOVENSA does not have funds to meet its senior debt obligations.

     Effective January 1, 2008, the Corporation adopted Financial Accounting Standards Board (FASB) Statement No. 157, Fair Value Measurements (FAS 157) for financial assets and liabilities that are required to be measured at fair value. FAS 157 established a framework for measuring fair value and requires disclosure of a fair value hierarchy (see Note 8, “Fair Value Measurements”). The impact of adopting FAS 157 was not material to the Corporation’s results of operations. Upon adoption, the Corporation recorded a reduction in the net deferred hedge losses reflected in accumulated other comprehensive income, which increased stockholders’ equity by approximately $190 million, after income taxes. 

     In December 2007, the FASB issued FAS No. 160, Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51 (FAS 160). FAS 160 changes the accounting for and reporting of noncontrolling interests in a subsidiary. The Corporation is currently evaluating the impact of adoption on its financial statements and, as required, will adopt the provisions of FAS 160 effective January 1, 2009.

     In the normal course of its business, the Corporation is exposed to commodity risks related to changes in the prices of crude oil, natural gas, refined products and electricity, as well as to changes in interest rates and foreign currency values. In the disclosures that follow, these operations are referred to as non-trading activities. The Corporation also has trading operations, principally through a 50% voting interest in a trading partnership. These activities are also exposed to commodity risks primarily related to the prices of crude oil, natural gas and refined products.

Instruments: The Corporation primarily uses forward commodity contracts, foreign exchange forward contracts, futures, swaps, options and energy commodity based securities in its non-trading and trading activities. Generally, these contracts are widely traded instruments with standardized terms.

Value-at-Risk: The Corporation uses value-at-risk to monitor and control commodity risk within its trading and non-trading activities. The value-at-risk model uses historical simulation and the results represent the potential pre-tax loss in fair value over one day at a 95% confidence level. The model captures both first and second order sensitivities for options. The potential change in fair value based on commodity price risk is presented in the non-trading and trading sections below.

Non-Trading: The Corporation’s Exploration and Production segment uses futures and swaps to fix the selling prices of a portion of its future production and the related gains or losses are a component of its selling prices. Following is a summary of the Corporation’s outstanding Brent crude oil hedges at September 30, 2008:

     Accumulated other comprehensive income (loss) at September 30, 2008 included net after-tax unrealized deferred losses of $1,729 million related to crude oil contracts used as hedges of future Exploration and Production sales and derivatives used to manage risk in its Marketing activities. The pre-tax amount of any deferred hedge losses and gains is reflected in accounts payable and accounts receivable, respectively, and the related income tax impact is recorded as deferred income taxes on the balance sheet. The Corporation estimates that at September 30, 2008, the value-at-risk for commodity related derivatives used in non-trading activities was $139 million compared with $72 million at December 31, 2007.

     In October 2008, the Corporation closed its Brent crude oil hedge positions by entering into offsetting contracts with the same counterparty covering 24,000 barrels per day from 2009 through 2012 at a per barrel price of $86.95 each year. The fourth quarter 2008 hedges were not affected by these transactions and are still open. The deferred after-tax loss as of the date the hedge positions were closed will be recorded in earnings as the contracts mature. As a result of entering into the offsetting contracts, the value-at-risk for commodity related derivatives used in non-trading activities as of September 30, 2008 would have been reduced to approximately $20 million.

Trading: In trading activities, the Corporation is exposed to changes in crude oil, natural gas and refined product prices. The trading partnership, in which the Corporation has a 50% voting interest, trades energy commodities and derivatives. The accounts of the partnership are consolidated with those of the Corporation. The Corporation also takes trading positions for its own account. The information that follows represents 100% of the trading partnership and the Corporation’s proprietary trading accounts.

          Total net realized losses for the first nine months of 2008 amounted to $97 million ($358 million of realized gains for the first nine months of 2007). The following table provides an assessment of the factors affecting the changes in fair value of trading activities (in millions):

          The Corporation uses observable market values for determining the fair value of its trading instruments. In cases where actively quoted prices are not available, other external sources are used which incorporate information about commodity prices in actively quoted markets, quoted prices in less active markets and other market fundamental analysis. Internal estimates are based on internal models incorporating underlying market information such as commodity volatilities and correlations. The Corporation’s risk management department regularly compares valuations to independent sources and models. The following table summarizes the sources of fair values of derivatives used in the Corporation’s trading activities at September 30, 2008 (in millions):

          The Corporation estimates that at September 30, 2008, the value-at-risk for trading activities, including commodities, was $12 million compared with $10 million at December 31, 2007. The value-at-risk for trading activities may vary from time to time as strategies change to capture potential market rate movements and market conditions change.

          The following table summarizes the fair values of net receivables relating to the Corporation’s trading activities and the credit ratings of counterparties at September 30, 2008 (in millions):

          Certain sections of Management’s Discussion and Analysis of Results of Operations and Financial Condition, including references to the Corporation’s future results of operations and financial position, liquidity and capital resources, capital expenditures, oil and gas production, tax rates, debt repayment, hedging, derivative and market risk disclosures and off-balance sheet arrangements include forward-looking information. Forward-looking disclosures are based on the Corporation’s current understanding and assessment of these activities and reasonable assumptions about the future. Actual results may differ from these disclosures because of changes in market conditions, government actions and other factors.

The information required by this item is presented under Item 2, “Management’s Discussion and Analysis of Results of Operations and Financial Condition – Market Risk Disclosure.”

Based upon their evaluation of the Corporation’s disclosure controls and procedures (as defined in Exchange Act Rules 13a - 15(e) and 15d - 15(e)) as of September 30, 2008, John B. Hess, Chief Executive Officer, and John P. Rielly, Chief Financial Officer, concluded that these disclosure controls and procedures were effective as of September 30, 2008.

There was no change in internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 or 15d-15 in the quarter ended September 30, 2008 that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting.

The Registrant, along with many other companies engaged in refining and marketing of gasoline, has been a party to lawsuits and claims related to the use of methyl tertiary butyl ether (MTBE) in gasoline. Various state and local government entities and water authorities filed a series of similar lawsuits in jurisdictions across the United States against producers of MTBE and petroleum refiners who produce gasoline containing MTBE, including the Registrant. These cases have been consolidated for pre-trial proceedings in the Southern District of New York. In the fourth quarter of 2007, the Registrant recorded a pre-tax charge of $40 million related to the Registrant’s MTBE litigation.

In October 2008, 31 of these cases have been settled and dismissed, but the Registrant remains a defendant in over 20 cases. The principal allegation in all cases is that gasoline containing MTBE is a defective product and that defendants are strictly liable for damage to groundwater resources. The plaintiffs seek substantial compensatory and punitive damages in addition to injunctive relief.