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Fair Value Measurements
 3 Months Ended
Mar. 31, 2013
Fair Value Disclosures [Abstract]  
FAIR VALUE MEASUREMENTS
12.
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 March 31, 2013 and December 31, 2012.

We have elected to offset the fair value amounts recognized for multiple similar derivative contracts executed with the same counterparty, including any related cash collateral assets or obligations as shown below; however, fair value amounts by hierarchy level are presented on a gross basis in the tables below. We have no derivative contracts that are subject to master netting arrangements that are reflected gross on the balance sheet.
 
March 31, 2013
 
Fair Value Hierarchy
 
 Total
Gross
Fair
Value
 
Effect of
Counter-
party
Netting
 
Effect of
Collateral
Netting
 
Net
Carrying
Value
on
Balance
Sheet
 

Cash
Collateral
Paid or
Received
Not Offset

 
Level 1
 
Level 2
 
Level 3
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity derivative
contracts
$
1,036

 
$
30

 
$
—

 
$
1,066

 
$
(989
)
 
$
—

 
$
77

 
$
—

Physical purchase contracts
—

 
8

 
—

 
8

 
N/A

 
N/A

 
8

 
N/A

RINs fixed-price contracts
—

 
(12
)
 
—

 
(12
)
 
N/A

 
N/A

 
(12
)
 
N/A

Investments of certain benefit plans
91

 
—

 
11

 
102

 
N/A

 
N/A

 
102

 
N/A

Total
$
1,127

 
$
26

 
$
11

 
$
1,164

 
$
(989
)
 
$
—

 
$
175

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 

 
 
 
 
 

 
 
Commodity derivative
contracts
$
983

 
$
30

 
$
—

 
$
1,013

 
$
(989
)
 
$
(17
)
 
$
7

 
$
(82
)
Foreign currency contracts
3

 
—

 
—

 
3

 
N/A

 
N/A

 
3

 
N/A

Total
$
986

 
$
30

 
$
—

 
$
1,016

 
$
(989
)
 
$
(17
)
 
$
10

 
 

 
December 31, 2012
 
Fair Value Hierarchy
 
Total
Gross
Fair
Value
 
Effect of
Counter-
party
Netting
 
Effect of
Collateral
Netting
 
Net
Carrying
Value
on
Balance
Sheet
 
Cash
Collateral
Paid or
Received
Not Offset
 
Level 1
 
Level 2
 
Level 3
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity derivative
contracts
$
1,143

 
$
60

 
$
—

 
$
1,203

 
$
(1,189
)
 
$
—

 
$
14

 
$
—

Physical purchase contracts
—

 
11

 
—

 
11

 
N/A

 
N/A

 
11

 
N/A

Investments of certain benefit plans
87

 
—

 
11

 
98

 
N/A

 
N/A

 
98

 
N/A

Foreign currency contracts
1

 
—

 
—

 
1

 
N/A

 
N/A

 
1

 
N/A

Total
$
1,231

 
$
71

 
$
11

 
$
1,313

 
$
(1,189
)
 
$
—

 
$
124

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity derivative
contracts
$
1,138

 
$
70

 
$
—

 
$
1,208

 
$
(1,189
)
 
$
(13
)
 
$
6

 
$
(114
)
Biofuels blending obligation
—

 
10

 
—

 
10

 
N/A

 
N/A

 
10

 
N/A

Foreign currency contracts
1

 
—

 
—

 
1

 
N/A

 
N/A

 
1

 
N/A

Total
$
1,139

 
$
80

 
$
—

 
$
1,219

 
$
(1,189
)
 
$
(13
)
 
$
17

 
 


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 13, 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 13, 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 or an independent pricing service and are categorized in Level 2 of the fair value hierarchy.
•
RINs fixed-price contracts represent the fair value of fixed-price purchase and sale contracts of RINs. (RINs are defined and described in Note 13 under “Compliance Program Price Risk.”) The fair values of these contracts are measured using a market approach based on quoted prices from an independent pricing service and 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 quoted prices 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.
•
Foreign currency contracts consist of foreign currency exchange and purchase contracts entered into by our international operations to manage our exposure to exchange rate fluctuations on transactions denominated in currencies other than the local (functional) currencies of those operations. These contracts are valued based on quoted prices from the exchange and are categorized in Level 1 of the fair value hierarchy.
•
Our biofuels blending obligation represents a liability for the purchase of RINs and RTFCs, as defined and described in Note 13 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 2 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 three months ended March 31, 2013 and 2012, 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).
 
2013
 
2012
 
Investments
of Certain
Benefit
Plans
 
Investments
of Certain
Benefit
Plans
Three months ended March 31:
 
 
 
Balance as of beginning of period
$
11

 
$
11

Purchases
—

 
—

Total gains (losses) included in
refining operating expenses
—

 
—

Transfers in and/or out of Level 3
—

 
—

Balance as of end of period
$
11

 
$
11

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

 
$
—





Nonrecurring Fair Value Measurements
There were no assets or liabilities that were measured at fair value on a nonrecurring basis during the three months ended March 31, 2013.

The table below presents the fair value (in millions) of our nonfinancial assets measured on a nonrecurring basis during the three months ended March 31, 2012 and categorized according to the fair value hierarchy of the inputs utilized by us to determine the fair values as of March 31, 2012.

 
Fair Value Measurements Using
 
 
 
Total Loss
Recognized
During the
Three Months Ended
March 31,
2012
 
Level 1
 
Level 2
 
Level 3
 
Total
Fair Value
as of
March 31,
2012
 
Assets:
 
 
 
 
 
 
 
 
 
Long-lived assets of
  the Aruba Refinery
$
—

 
$
—

 
$
350

 
$
350

 
$
595

Cancelled capital project
—

 
—

 
2

 
2

 
16



There were no liabilities that were measured at fair value on a nonrecurring basis during the three months ended March 31, 2012.

Aruba Refinery
As discussed in Note 3, we concluded that the Aruba Refinery was impaired as of March 31, 2012. As a result, we were required to determine the fair value of the Aruba Refinery and to write down its carrying value to that amount. We determined that the best measure of the refinery’s fair value at that time was the $350 million offer received and accepted. The fair value of the Aruba Refinery was measured using the market approach and was categorized in Level 3 within the fair value hierarchy. The carrying value of the Aruba Refinery’s long-lived assets as of March 31, 2012 was $945 million; therefore, we recognized an asset impairment loss of $595 million in March 2012.

Cancelled Capital Project
In March 2012, we wrote down the carrying value of equipment associated with a permanently cancelled capital project at one of our refineries and recognized an asset impairment loss of $16 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):

 
March 31, 2013
 
December 31, 2012
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount

 
Fair
Value

Financial assets:
 
 
 
 
 
 
 
Cash and temporary cash investments
$
1,857

 
$
1,857

 
$
1,723

 
$
1,723

Financial liabilities:
 
 
 
 
 
 
 
Debt (excluding capital leases)
6,821

 
8,414

 
7,000

 
8,621



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).