v2.4.0.6
Fair Value Measurement
 9 Months Ended
Sep. 30, 2012
Fair Value Measurement [Abstract]  
Fair Value Measurement

Note 15—Fair Value Measurement

 

We carry a portion of our assets and liabilities at fair value that are measured at a reporting date using an exit price (i.e., the price that would be received to sell an asset or paid to transfer a liability) and disclosed according to the quality of valuation inputs under the following hierarchy:

 

  • Level 1: Quoted prices (unadjusted) in an active market for identical assets or liabilities.
  • Level 2: Inputs other than quoted prices that are directly or indirectly observable.
  • Level 3: Unobservable inputs that are significant to the fair value of assets or liabilities.

 

The classification of an asset or liability is based on the lowest level of input significant to its fair value. Those that are initially classified as Level 3 are subsequently reported as Level 2 when the fair value derived from unobservable inputs is inconsequential to the overall fair value, or if corroborated market data becomes available. Assets and liabilities that are initially reported as Level 2 are subsequently reported as Level 3 if corroborated market data is no longer available. There were no material transfers in or out of Level 1.

Recurring Fair Value Measurement

Financial assets and liabilities reported at fair value on a recurring basis primarily include derivative instruments and certain investments to support nonqualified deferred compensation plans. The deferred compensation investments are measured at fair value using unadjusted prices available from national securities exchanges; therefore, these assets are categorized as Level 1 in the fair value hierarchy. Level 1 derivative assets and liabilities primarily represent exchange-traded futures and options that are valued using unadjusted prices available from the underlying exchange. Level 2 derivative assets and liabilities primarily represent OTC swaps, options and forward purchase and sale contracts that are valued using adjusted exchange prices, prices provided by brokers or pricing service companies that are all corroborated by market data. Level 3 derivative assets and liabilities consist of OTC swaps, options and forward purchase and sale contracts that are long term in nature and where a significant portion of fair value is calculated from underlying market data that is not readily available. The derived value uses industry standard methodologies that may consider the historical relationships among various commodities, modeled market prices, time value, volatility factors and other relevant economic measures. The use of these inputs results in management's best estimate of fair value. As reflected in the table below, Level 3 activity was not material.

The following table summarizes the fair value hierarchy for gross financial assets and liabilities (i.e., unadjusted where the right of setoff exists for commodity derivatives accounted for at fair value on a recurring basis):
                  
  Millions of Dollars
  September 30, 2012 December 31, 2011
  Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
Assets                
Deferred compensation                
 investments$ 309  -  -  309  336  -  -  336
Commodity derivatives  1,788  803  18  2,609  2,807  1,947  72  4,826
Total assets$ 2,097  803  18  2,918  3,143  1,947  72  5,162
                  
Liabilities                
Commodity derivatives$ 1,749  814  7  2,570  2,970  1,722  10  4,702
Total liabilities$ 1,749  814  7  2,570  2,970  1,722  10  4,702
                  

Non-Recurring Fair Value Measurement

There were no significant non-recurring fair value measurements as of September 30, 2012.

 

Reported Fair Value of Financial Instruments

The following are the valuation techniques and methods used to estimate the fair value of financial assets and liabilities reported on the balance sheet:

 

  • Cash and cash equivalents, restricted cash and short-term investments: The carrying amount reported on the balance sheet approximates fair value.
  • Accounts and notes receivable (including long-term and related parties): The carrying amount reported on the balance sheet approximates fair value. The valuation technique and methods used to estimate the fair value of the current portion of fixed-rate related party loans is consistent with Loans and advances—related parties.
  • Loans and advances—related parties: The carrying amount of floating-rate loans approximates fair value. The fair value of fixed-rate loan activity is measured using market observable data and is categorized as Level 2 in the fair value hierarchy. See Note 6—Investments, Loans and Long-Term Receivables, for additional information.
  • Accounts payable (including related parties) and floating-rate debt: The carrying amount of accounts payable and floating-rate debt reported on the balance sheet approximates fair value. The valuation technique and methods used to estimate the fair value of the current portion of the joint venture acquisition obligation reported in accounts payable is consistent with the methodology below.
  • Fixed-rate debt: The estimated fair value of fixed-rate debt is measured using prices available from a pricing service that is corroborated by market data; therefore, these liabilities are categorized as Level 2 in the fair value hierarchy.
  • Joint venture acquisition obligation—related party: Fair value is estimated based on the net present value of the future cash flows as a Level 2 fair value, discounted at September 30, 2012, and December 31, 2011, effective yield rates of 0.76 percent and 1.24 percent, respectively, based on yields of U.S. Treasury securities of similar average duration adjusted for our average credit risk spread and the amortizing nature of the obligation principal. See Note 10—Joint Venture Acquisition Obligation, for additional information.

The following table summarizes the net fair value of financial instruments (i.e., adjusted where the right of setoff exists for commodity derivatives):
         
 Millions of Dollars
 Carrying Amount Fair Value
 September 30 December 31 September 30 December 31
201220112012 2011
Financial assets        
Deferred compensation investments$ 309  336  309  336
Commodity derivatives  295  814  295  814
Total loans and advances—related parties  1,710  1,793  1,914  1,994
Financial liabilities        
Total debt, excluding capital leases  21,100  22,592  26,012  27,065
Total joint venture acquisition obligation  3,769  4,314  4,192  4,820
Commodity derivatives  237  446  237  446
         

At September 30, 2012, commodity derivative assets and liabilities appear net of $31 million of obligations to return cash collateral and $50 million of rights to reclaim cash collateral, respectively. At December 31, 2011, commodity derivative assets and liabilities appear net of no obligations to return cash collateral and $244 million of rights to reclaim cash collateral.