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Fair Value Measurements
 12 Months Ended
Dec. 31, 2012
Fair Value Disclosures [Abstract]  
FAIR VALUE MEASUREMENTS
20.
FAIR VALUE MEASUREMENTS
General
GAAP requires that certain financial instruments, such as derivative instruments, be recognized at their fair values in our balance sheets. However, other financial instruments, such as debt obligations, are not required to be recognized at their fair values, but GAAP provides an option to elect fair value accounting for these instruments. GAAP requires the disclosure of the fair values of all financial instruments, regardless of whether they are recognized at their fair values or carrying amounts in our balance sheets. For financial instruments recognized at fair value, GAAP requires the disclosure of their fair values by type of instrument, along with other information, including changes in the fair values of certain financial instruments recognized in income or other comprehensive income, and this information is provided below under “Recurring Fair Value Measurements.” For financial instruments not recognized at fair value, the disclosure of their fair values is provided below under “Other Financial Instruments.”

Nonfinancial assets, such as property, plant and equipment, and nonfinancial liabilities are recognized at their carrying amounts in our balance sheets. GAAP does not permit nonfinancial assets and liabilities to be remeasured at their fair values. However, GAAP requires the remeasurement of such assets and liabilities to their fair values upon the occurrence of certain events, such as the impairment of property, plant and equipment. In addition, if such an event occurs, GAAP requires the disclosure of the fair value of the asset or liability along with other information, including the gain or loss recognized in income in the period the remeasurement occurred. This information is provided below under “Nonrecurring Fair Value Measurements.”

GAAP provides a framework for measuring fair value and establishes a three-level fair value hierarchy that prioritizes inputs to valuation techniques based on the degree to which objective prices in external active markets are available to measure fair value. Following is a description of each of the levels of the fair value hierarchy.
•
Level 1 - Observable inputs, such as unadjusted quoted prices in active markets for identical assets or liabilities.
•
Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
•
Level 3 - Unobservable inputs for the asset or liability for which there is little, if any, market activity at the measurement date. Unobservable inputs reflect our own assumptions about what market participants would use to price the asset or liability. The inputs are developed based on the best information available in the circumstances, which might include occasional market quotes or sales of similar instruments or our own financial data such as internally developed pricing models, discounted cash flow methodologies, as well as instruments for which the fair value determination requires significant judgment.

The financial instruments and nonfinancial assets and liabilities included in our disclosure of recurring and nonrecurring fair value measurements are categorized according to the fair value hierarchy based on the inputs used to measure their fair values.

Recurring Fair Value Measurements
The tables below present information (in millions) about our financial instruments recognized at their fair values in our balance sheets categorized according to the fair value hierarchy of the inputs utilized by us to determine the fair values as of December 31, 2012 and 2011.
Cash collateral deposits of $127 million and $136 million with brokers under master netting arrangements are included in the fair value of the commodity derivatives reflected in Level 1 as of December 31, 2012 and 2011, respectively. Certain of our commodity derivative contracts under master netting arrangements include both asset and liability positions. We have elected to offset the fair value amounts recognized for multiple similar derivative instruments executed with the same counterparty, including any related cash collateral asset or obligation under the column “Netting Adjustments” below; however, fair value amounts by hierarchy level are presented on a gross basis in the tables below.
 
Fair Value Measurements Using
 
 
 
 
 
Quoted
 Prices in
Active
 Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
 Inputs
(Level 3)
 
Netting
Adjustments
 
Total as of
December 31,
2012
Assets:
 
 
 
 
 
 
 
 
 
Commodity derivative contracts
$
1,270

 
$
60

 
$
—

 
$
(1,195
)
 
$
135

Physical purchase contracts
—

 
11

 
—

 
—

 
11

Investments of certain benefit plans
87

 
—

 
11

 
—

 
98

Foreign currency contracts
1

 
—

 
—

 
—

 
1

Other investments
—

 
—

 
—

 
—

 
—

Liabilities:
 
 
 
 
 
 
 
 
 
Commodity derivative contracts
1,138

 
70

 
—

 
(1,195
)
 
13

Biofuels blending obligation
10

 
—

 
—

 
—

 
10

Foreign currency contracts
1

 
—

 
—

 
—

 
1

 
Fair Value Measurements Using
 
 
 
 
 
Quoted
 Prices in
Active
 Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
 Inputs
(Level 3)
 
Netting
Adjustments
 
Total as of
December 31,
2011
Assets:
 
 
 
 
 
 
 
 
 
Commodity derivative contracts
$
2,038

 
$
78

 
$
—

 
$
(1,940
)
 
$
176

Physical purchase contracts
—

 
(2
)
 
—

 
—

 
(2
)
Investments of certain benefit plans
84

 
—

 
11

 
—

 
95

Other investments
—

 
—

 
—

 
—

 
—

Liabilities:
 
 
 
 
 
 
 
 
 
Commodity derivative contracts
1,864

 
101

 
—

 
(1,940
)
 
25

Foreign currency contracts
3

 
—

 
—

 
—

 
3


A description of our financial instruments and the valuation methods used to measure those instruments at fair value are as follows:
•
Commodity derivative contracts consist primarily of exchange-traded futures and swaps, and as disclosed in Note 21, some of these contracts are designated as hedging instruments. These contracts are measured at fair value using the market approach. Exchange-traded futures are valued based on quoted prices from the exchange and are categorized in Level 1 of the fair value hierarchy. Swaps are priced using third-party broker quotes, industry pricing services, and exchange-traded curves, with appropriate consideration of counterparty credit risk, but because they have contractual terms that are not identical to exchange-traded futures instruments with a comparable market price, these financial instruments are categorized in Level 2 of the fair value hierarchy.
•
Physical purchase contracts to purchase inventories represent the fair value of firm commitments to purchase crude oil feedstocks and the fair value of fixed-price corn purchase contracts, and as disclosed in Note 21, some of these contracts are designated as hedging instruments. The fair values of these firm commitments and purchase contracts are measured using a market approach based on quoted prices from the commodity exchange, but because these commitments have contractual terms that are not identical to exchange-traded futures instruments with a comparable market price, they are categorized in Level 2 of the fair value hierarchy.
•
Investments of certain benefit plans consist of investment securities held by trusts for the purpose of satisfying a portion of our obligations under certain U.S. nonqualified benefit plans. The assets categorized in Level 1 of the fair value hierarchy are measured at fair value using a market approach based on quotations from national securities exchanges. The assets categorized in Level 3 of the fair value hierarchy represent insurance contracts, the fair value of which is provided by the insurer.
•
Other investments consist of (i) equity securities of private companies over which we do not exercise significant influence nor whose financial statements are consolidated into our financial statements and (ii) debt securities of a private company whose financial statements are not consolidated into our financial statements. We have elected to account for these investments at their fair values. These investments are categorized in Level 3 of the fair value hierarchy as the fair values of these investments are determined using the income approach based on internally developed analyses.
•
Our biofuels blending obligation represents a liability for the purchase of RINs and RTFCs, as defined and described in Note 21 under “Compliance Program Price Risk,” to satisfy our obligation to blend biofuels into the products we produce. Our obligation is based on our deficiency in RINs and RTFCs and the price of these instruments as of the balance sheet date. Our obligation is categorized in Level 1 of the fair value hierarchy and is measured at fair value using the market approach based on quoted prices from an independent pricing service.

During the years ended December 31, 2012, 2011, and 2010 there were no transfers between assets classified as Level 1 and Level 2.

The following is a reconciliation of the beginning and ending balances (in millions) for fair value measurements developed using significant unobservable inputs (Level 3).
 
Investments of
Certain
Benefit Plans
 
Other Investments
 
2012
 
2011
 
2010
 
2012
 
2011
 
2010
Balance as of beginning of year
$
11

 
$
10

 
$
10

 
$
—

 
$
—

 
$
—

Purchases
—

 
1

 
—

 
—

 
21

 
1

Total losses included in refining operating expense
—

 
—

 
—

 
—

 
(21
)
 
(1
)
Transfers in and/or out of Level 3
—

 
—

 
—

 
—

 
—

 
—

Balance as of end of year
$
11

 
$
11

 
$
10

 
$
—

 
$
—

 
$
—

The amount of total losses included in income attributable to the change in unrealized losses relating to assets still held at end of year
$
—

 
$
—

 
$
—

 
$
—

 
$
(21
)
 
$
(1
)

Nonrecurring Fair Value Measurements
The table below presents the fair value (in millions) of our nonfinancial assets measured on a nonrecurring basis during the year ended December 31, 2012.
 
Fair Value Measurements Using
 
 
 
Total Loss
Recognized
During the
Year Ended
December 31,
2012
 
Quoted
Prices in
Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
Fair Value
as of
December 31,
2012
 
Assets:
 
 
 
 
 
 
 
 
 
Long-lived assets of
the Aruba Refinery
$
—

 
$
—

 
$
—

 
$
—

 
$
903

Materials and supplies
inventories of
the Aruba Refinery
—

 
—

 
—

 
—

 
25

Cancelled capital projects
—

 
—

 
2

 
2

 
65

Property, plant and equipment of
convenience stores
—

 
—

 
8

 
8

 
21


As of December 31, 2012, there were no liabilities that were measured at fair value on a nonrecurring basis. As of December 31, 2011, there were no assets or liabilities that were measured at fair value on a nonrecurring basis.

Aruba Refinery
As more fully described in Note 4, in September 2012, we decided to reorganize the Aruba Refinery into a crude oil and refined products terminal in response to the August 2012 withdrawal of a non-binding offer to purchase the refinery. As a result, we evaluated the refining assets for potential impairment as of September 30, 2012. We concluded that these refining assets were impaired and determined that their carrying value was not recoverable through the future operations and disposition of the refinery. We determined that these refining assets had no value after considering estimated salvage costs. We also recognized an asset impairment loss related to materials and supplies inventories that supported the refining operations.

Cancelled Capital Projects
During 2012 and 2010, we wrote down the carrying value of equipment associated with permanently cancelled capital projects at several of our refineries and recognized asset impairment losses of $65 million and $2 million, respectively.

Retail Stores
During 2012, we evaluated certain of our convenience stores operated by our retail segment for potential impairment and concluded that they were impaired, and we wrote down the carrying values of these stores to their estimated fair values and recognized asset impairment losses of $21 million.

Other Financial Instruments
Financial instruments that we recognize in our balance sheets at their carrying amounts are shown in the table below (in millions):

 
December 31, 2012
 
December 31, 2011
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Financial assets:
 
 
 
 
 
 
 
Cash and temporary cash investments
$
1,723

 
$
1,723

 
$
1,024

 
$
1,024

Financial liabilities:
 
 
 
 
 
 
 
Debt (excluding capital leases)
7,000

 
8,621

 
7,690

 
9,298


The methods and significant assumptions used to estimate the fair value of these financial instruments are as follows:
•
The fair value of cash and temporary cash investments approximates the carrying value due to the low level of credit risk of these assets combined with their short maturities and market interest rates (Level 1).
•
The fair value of debt is determined primarily using the market approach based on quoted prices provided by third-party brokers and vendor pricing services, but are not exchange-traded (Level 2).