Hess 2008 Annual Report Download - page 86

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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 hedges is classified as Level 2.
Fair value measurements based on Level 3 inputs: Measurements that are least observable are estimated
from related market data, determined from sources with little or no market activity for comparable contracts or are
positions with longer durations. For example, in its energy marketing business, the Corporation sells natural gas and
electricity to customers and offsets 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):
Year Ended
December 31,
2008
Balance at January 1 .................................................. $ (4)
Unrealized gains (losses)
Included in earnings(*) .............................................. 634
Included in other comprehensive income ................................. (351)
Purchases, sales or other settlements during the period ......................... (37)
Net transfers in to (out of) Level 3 ....................................... (93)
Balance at December 31 ............................................... $149
* Reflected in Sales and other operating revenue
16. Guarantees and Contingencies
At December 31, 2008, the Corporation’s guarantees include $78 million of HOVENSA’s crude oil purchases
and $15 million of HOVENSA’s senior debt obligations. In addition, the Corporation has $126 million in letters of
credit for which it is contingently liable. As a result, the maximum potential amount of future payments that the
Corporation could be required to make under its guarantees is $219 million at December 31, 2008 ($353 million at
December 31, 2007). The Corporation also has a contingent purchase obligation expiring in April 2010, to acquire
70
HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)