analysis” approach to Value-at-Risk (VaR). The major reason for the change is that VaR allows estimation of a portfolio’s aggregate market risk exposure and takes into account correlations between trading assets. Therefore, it reflects risk reduction due to diversification or hedging activities. Most of the company’s market positions are time and commodity spreads, and the company believes that VaR is a more accurate tool to measure this type of exposure than the sensitivity analysis model. The company fully developed and tested its VaR model during 2007.

     VaR is the maximum loss not to be exceeded within a given probability or confidence level over a given period of time. The company’s VaR model uses the Monte Carlo simulation method that involves generating hypothetical scenarios from the specified probability distribution and constructing a full distribution of a potential portfolio’s values.

     The VaR model utilizes an exponentially-weighted moving average for computing historical volatilities and correlations, a 95 percent confidence level, and one-day holding period. That is, the company’s 95 percent, one-day VaR corresponds to the unrealized loss in portfolio value that would not be exceeded on average more than one in every 20 trading days, if the portfolio were held constant for one day.

     The one-day holding period is based on the assumption that market-risk positions can be liquidated or hedged within one day. For hedging and risk management, the company uses conventional exchange-traded instruments such as futures and options, as well as non-exchange-traded swaps, most of which can be liquidated or hedged effectively within one day. The table below presents 95 percent/one-day VaR for each of the company’s primary risk exposures in the area of commodity derivative instruments at December 31, 2007:

     Sensitivity analysis for the company’s open commodity derivative instruments at December 31, 2007, and December 31, 2006, based on a hypothetical 10 percent increase in commodity prices, is provided in the following table:

Incremental Increase (Decrease) in Fair Value of Open Commodity

Derivative Contracts Assuming a Hypothetical Increase in

Year-End Commodity Prices of 10 Percent

     The same hypothetical decrease in prices of these commodities would result in approximately the same opposite effects on the fair values of the contracts. The hypothetical effect on these contracts was estimated by calculating the fair value of the contracts as the difference between the hypothetical and current market prices multiplied by the contract amounts.

     The change in the amounts between years in the table above for crude oil and refined products is associated with an increase in commodity prices, volumes hedged and the use of longer-term contracts.

     Foreign Currency  The company enters into forward exchange contracts, generally with terms of 180 days or less, to manage some of its foreign currency exposures. These exposures include revenue and anticipated purchase transactions, including foreign currency capital expenditures and lease commitments, forecasted to occur within 180 days. The forward exchange contracts