HOVENSA L.L.C., owned 50% by the Corporation and 50% by Petroleos de Venezuela, S.A. (PDVSA), owns and operates a refinery in the Virgin Islands. Although there have in the past been political disruptions in Venezuela that reduced the avail- ability of Venezuelan crude oil used in refining operations, these disruptions did not have a material adverse effect on the Corporation’s financial position. The Corporation also has a note receivable of $334 million at December 31, 2003 from a subsidiary of PDVSA. The Corporation anticipates collection of the remaining balance. In the normal course of its business, the Corporation is exposed to commodity risks related to changes in the price of crude oil, natural gas, refined products and electricity, as well as to changes in interest rates and foreign currency values. In the disclosures which 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. The following describes how these risks are controlled and managed. Controls: The Corporation maintains a control environ- ment under the direction of its chief risk officer and through its corporate risk policy, which the Corporation’s senior management has approved. Controls include volumetric, term and value-at-risk limits. In addition, the chief risk offi- cer must approve the use of new instruments or commodi- ties. Risk limits are monitored daily and exceptions are reported to business units and to senior management. The Corporation’s risk management department also performs independent verifications of sources of fair values and vali- dations of valuation models. These controls apply to all of the Corporation’s non-trading and trading activities, includ- ing the consolidated trading partnership. The Corporation’s treasury department administers foreign exchange rate and interest rate hedging programs. Instruments: The Corporation uses forward commodity contracts, foreign exchange forward contracts, futures, swaps and options in the Corporation’s non-trading and trading activities. These contracts are widely traded instru- ments mainly with standardized terms. The following describes these instruments and how the Corporation uses them: Quantitative Measures: 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 his- torical simulation and the results represent the potential 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 com- modity price risk is presented in the non-trading and trading sections below. ¥ Forward Commodity Contracts: The forward purchase and sale of commodities is performed as part of the Cor- poration’s normal activities. At title date, the notional value of the contract is exchanged for physical delivery of the commodity. Forward contracts that are designated as nor- mal purchase and sale contracts under FAS No. 133 are excluded from the quantitative market risk disclosures. ¥ Forward Foreign Exchange Contracts: Forward con- tracts include forward purchase contracts for both the British pound sterling and the Danish kroner. These foreign currency contracts commit the Corporation to purchase a fixed amount of pound sterling and kroner at a predeter- mined exchange rate on a certain date. ¥ Futures: The Corporation uses exchange traded futures contracts on a number of different underlying energy commodities. These contracts are settled daily with the relevant exchange and are subject to exchange position limits. ¥ Swaps: The Corporation uses financially settled swap contracts with third parties as part of its hedging and trading activities. Cash flows from swap contracts are determined based on underlying commodity prices and are typically settled over the life of the contract. ¥ Options: Options on various underlying energy commodi- ties include exchange traded and third party contracts and have various exercise periods. As a seller of options, the Corporation receives a premium at the outset and bears the risk of unfavorable changes in the price of the commodity underlying the option. As a purchaser of options, the Corporation pays a premium at the outset and has the right to participate in the favorable price move- ments in the underlying commodities. 25 Market Risk Disclosure