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Price Risk Management Activities | 9 Months Ended
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Sep. 30, 2014
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
PRICE RISK MANAGEMENT ACTIVITIES |
14. | PRICE RISK MANAGEMENT ACTIVITIES
We are exposed to market risks related to the volatility in the price of commodities, interest rates, and foreign currency exchange rates. We enter into derivative instruments to manage some of these risks, including derivative instruments related to the various commodities we purchase or produce, interest rate swaps, and foreign currency exchange and purchase contracts, as described below under “Risk Management Activities by Type of Risk.” These derivative instruments are recorded as either assets or liabilities measured at their fair values (see Note 13), as summarized below under “Fair Values of Derivative Instruments.” In addition, the effect of these derivative instruments on our income is summarized below under “Effect of Derivative Instruments on Income and Other Comprehensive Income.” When we enter into a derivative instrument, it is designated as a fair value hedge, a cash flow hedge, an economic hedge, or a trading derivative. The gain or loss on a derivative instrument designated and qualifying as a fair value hedge, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk, is recognized currently in income in the same period. The effective portion of the gain or loss on a derivative instrument designated and qualifying as a cash flow hedge is initially reported as a component of other comprehensive income and is then recorded into income in the period or periods during which the hedged forecasted transaction affects income. The ineffective portion of the gain or loss on the cash flow derivative instrument, if any, is recognized in income as incurred. For our economic hedges (derivative instruments not designated as fair value or cash flow hedges) and for derivative instruments entered into by us for trading purposes, the derivative instrument is recorded at fair value and changes in the fair value of the derivative instrument are recognized currently in income. The cash flow effects of all of our derivative instruments are reflected in operating activities in our statements of cash flows for all periods presented. We are also exposed to market risk related to the volatility in the price of credits needed to comply with various governmental and regulatory programs. To manage this risk, we enter into contracts to purchase these credits when prices are deemed favorable. Some of these contracts are derivative instruments; however, we elect the normal purchase exception and do not record these contracts at their fair values. Risk Management Activities by Type of Risk Commodity Price Risk We are exposed to market risks related to the volatility in the price of crude oil, refined products (primarily gasoline and distillate), grain (primarily corn), soybean oil, and natural gas used in our operations. To reduce the impact of price volatility on our results of operations and cash flows, we use commodity derivative instruments, including futures, swaps, and options. We use the futures markets for the available liquidity, which provides greater flexibility in transacting our hedging and trading operations. We use swaps primarily to manage our price exposure. Our positions in commodity derivative instruments are monitored and managed on a daily basis by a risk control group to ensure compliance with our stated risk management policy that has been approved by our board of directors. For risk management purposes, we use fair value hedges, cash flow hedges, and economic hedges. In addition to the use of derivative instruments to manage commodity price risk, we also enter into certain commodity derivative instruments for trading purposes. Our objective for entering into each type of hedge or trading derivative is described below.
• | Fair Value Hedges – Fair value hedges are used to hedge price volatility in certain refining inventories and firm commitments to purchase inventories. The level of activity for our fair value hedges is based on the level of our operating inventories, and generally represents the amount by which our inventories differ from our previous year-end LIFO inventory levels. As of September 30, 2014, we had no outstanding commodity derivative instruments that were entered into as fair value hedges.
• | Cash Flow Hedges – Cash flow hedges are used to hedge price volatility in certain forecasted feedstock and refined product purchases, refined product sales, and natural gas purchases. The objective of our cash flow hedges is to lock in the price of forecasted feedstock, refined product, or natural gas purchases or refined product sales at existing market prices that we deem favorable. As of September 30, 2014, we had no outstanding commodity derivative instruments that were entered into as cash flow hedges.
• | Economic Hedges – Economic hedges represent commodity derivative instruments that are not designated as fair value or cash flow hedges and are used to manage price volatility in certain (i) feedstock and refined product inventories, (ii) forecasted feedstock and product purchases, and product sales, and (iii) fixed-price purchase contracts. Our objective for entering into economic hedges is consistent with the objectives discussed above for fair value hedges and cash flow hedges. However, the economic hedges are not designated as a fair value hedge or a cash flow hedge for accounting purposes, usually due to the difficulty of establishing the required documentation at the date that the derivative instrument is entered into that would allow us to achieve “hedge deferral accounting.”
As of September 30, 2014, we had the following outstanding commodity derivative instruments that were used as economic hedges, as well as commodity derivative instruments related to the physical purchase of corn at a fixed price. The information presents the notional volume of outstanding contracts by type of instrument and year of maturity (volumes in thousands of barrels, except those identified as corn contracts that are presented in thousands of bushels, and soybean oil contracts that are presented in thousands of pounds).
|  | Notional Contract Volumes by Year of Maturity
Derivative Instrument |  | 2014 |  | 2015 |  | 2016
Crude oil and refined products: |  |  |  |  |  |
Swaps – long |  | 4,074 |  |  | 2,819 |  |  | — |
Swaps – short |  | 4,000 |  |  | 1,630 |  |  | — |
Futures – long |  | 62,038 |  |  | 372 |  |  | — |
Futures – short |  | 72,904 |  |  | 1,130 |  |  | — |
Corn: |  |  |  |  |  |
Futures – long |  | 13,725 |  |  | 30 |  |  | — |
Futures – short |  | 23,970 |  |  | 7,260 |  |  | 115 |
Physical contracts – long |  | 13,893 |  |  | 5,429 |  |  | 113 |
Soybean oil: |  |  |  |  |  |
Futures – long |  | 108,240 |  |  | — |  |  | — |
Futures – short |  | 241,080 |  |  | 15,000 |  |  | — |
• | Trading Derivatives – Our objective for entering into commodity derivative instruments for trading purposes is to take advantage of existing market conditions related to future results of operations and cash flows.
As of September 30, 2014, we had the following outstanding commodity derivative instruments that were entered into for trading purposes. The information presents the notional volume of outstanding contracts by type of instrument and year of maturity (volumes represent thousands of barrels, except those identified as natural gas contracts that are presented in billions of British thermal units).
|  | Notional Contract Volumes by Year of Maturity
Derivative Instrument |  | 2014 |  | 2015
Crude oil and refined products: |  |  |  |
Swaps – long |  | 3,490 |  |  | 240 |
Swaps – short |  | 3,490 |  |  | 240 |
Futures – long |  | 142,619 |  |  | 38,576 |
Futures – short |  | 142,872 |  |  | 38,307 |
Options – long |  | 4,400 |  |  | 250 |
Options – short |  | 3,400 |  |  | 350 |
Natural gas: |  |  |  |
Futures – long |  | 4,100 |  |  | 1,950 |
Futures – short |  | 4,400 |  |  | — |
Options – long |  | 500 |  |  | — |
Interest Rate Risk Our primary market risk exposure for changes in interest rates relates to our debt obligations. We manage our exposure to changing interest rates through the use of a combination of fixed-rate and floating-rate debt. In addition, at times we have used interest rate swap agreements to manage our fixed to floating interest rate position by converting certain fixed-rate debt to floating-rate debt. We had no interest rate derivative instruments outstanding as of September 30, 2014 or December 31, 2013, or during the three and nine months ended September 30, 2014 and 2013. Foreign Currency Risk We are exposed to exchange rate fluctuations on transactions entered into by our international operations that are denominated in currencies other than the local (functional) currencies of those operations. To manage our exposure to these exchange rate fluctuations, we use foreign currency exchange and purchase contracts. These contracts are not designated as hedging instruments for accounting purposes, and therefore they are classified as economic hedges. As of September 30, 2014, we had commitments to purchase $798 million of U.S. dollars. The majority of these commitments matured on or before October 31, 2014, resulting in an immaterial gain in the fourth quarter of 2014. Compliance Program Price Risk We are exposed to market risk related to the volatility in the price of credits needed to comply with various governmental and regulatory programs. The most significant programs impacting our operations are those that require us to blend biofuels into the products we produce, and we are subject to such programs in most of the countries in which we operate. These countries set annual quotas for the percentage of biofuels that must be blended into the motor fuels consumed in these countries. As a producer of motor fuels from petroleum, we are obligated to blend biofuels into the products we produce at a rate that is at least equal to the applicable quota. To the degree we are unable to blend at the applicable rate, we must purchase biofuel credits (primarily RINs in the U.S.). We are exposed to the volatility in the market price of these credits, and we manage that risk by purchasing biofuel credits when prices are deemed favorable. The cost of meeting our obligations under these compliance programs was $82 million and $187 million for the three months ended September 30, 2014 and 2013, respectively, and $265 million and $454 million for the nine months ended September 30, 2014 and 2013, respectively. These amounts are reflected in cost of sales. Fair Values of Derivative Instruments The following tables provide information about the fair values of our derivative instruments as of September 30, 2014 and December 31, 2013 (in millions) and the line items in the balance sheets in which the fair values are reflected. See Note 13 for additional information related to the fair values of our derivative instruments. As indicated in Note 13, we net fair value amounts recognized for multiple similar derivative contracts executed with the same counterparty under master netting arrangements, including cash collateral assets and obligations. The tables below, however, are presented on a gross asset and gross liability basis, which results in the reflection of certain assets in liability accounts and certain liabilities in asset accounts.
| Balance Sheet Location |  | September 30, 2014
|  | Asset Derivatives |  | Liability Derivatives
Derivatives not designated as hedging instruments |  |  |  |  |
Commodity contracts: |  |  |  |  |
Futures | Receivables, net |  | $ | 1,334 |  |  | $ | 1,185 |
Swaps | Receivables, net |  | 41 |  |  | 49 |
Swaps | Accrued expenses |  | 1 |  |  | 1 |
Options | Receivables, net |  | — |  |  | 1 |
Physical purchase contracts | Inventories |  | — |  |  | 17 |
Foreign currency contracts | Receivables, net |  | 8 |  |  | — |
Total |  |  | $ | 1,384 |  |  | $ | 1,253 |
| Balance Sheet Location |  | December 31, 2013
|  | Asset Derivatives |  | Liability Derivatives
Derivatives designated as hedging instruments |  |  |  |  |
Commodity contracts: |  |  |  |  |
Futures | Receivables, net |  | $ | 25 |  |  | $ | 36 |
Derivatives not designated as hedging instruments |  |  |  |  |
Commodity contracts: |  |  |  |  |
Futures | Receivables, net |  | $ | 474 |  |  | $ | 455 |
Swaps | Receivables, net |  | 33 |  |  | 18 |
Swaps | Prepaid expenses and other |  | 3 |  |  | — |
Swaps | Accrued expenses |  | — |  |  | 5 |
Options | Receivables, net |  | 2 |  |  | 2 |
Physical purchase contracts | Inventories |  | — |  |  | 5 |
Foreign currency contracts | Accrued expenses |  | — |  |  | 8 |
Total |  |  | $ | 512 |  |  | $ | 493 |
Total derivatives |  |  | $ | 537 |  |  | $ | 529 |
Market and Counterparty Risk Our price risk management activities involve the receipt or payment of fixed price commitments into the future. These transactions give rise to market risk, which is the risk that future changes in market conditions may make an instrument less valuable. We closely monitor and manage our exposure to market risk on a daily basis in accordance with policies approved by our board of directors. Market risks are monitored by a risk control group to ensure compliance with our stated risk management policy. Concentrations of customers in the refining industry may impact our overall exposure to counterparty risk because these customers may be similarly affected by changes in economic or other conditions. In addition, financial services companies are the counterparties in certain of our price risk management activities, and such financial services companies may be adversely affected by periods of uncertainty and illiquidity in the credit and capital markets. There were no material amounts due from counterparties in the refining or financial services industry as of September 30, 2014 or December 31, 2013. We do not require any collateral or other security to support derivative instruments into which we enter. We also do not have any derivative instruments that require us to maintain a minimum investment-grade credit rating. Effect of Derivative Instruments on Income and Other Comprehensive Income The following tables provide information about the gain or loss recognized in income and other comprehensive income on our derivative instruments and the line items in the financial statements in which such gains and losses are reflected (in millions).
Derivatives in Fair Value Hedging Relationships |  | Location of Gain (Loss) Recognized in Income on Derivatives |  | Three Months Ended September 30, |  | Nine Months Ended September 30,
2014 |  | 2013 | 2014 |  | 2013
Commodity contracts: |  |  |  |  |  |  |  |  |  |
Loss recognized in income on derivatives |  | Cost of sales |  | $ | (16 | ) |  | $ | (17 | ) |  | $ | (42 | ) |  | $ | (38 | )
Gain recognized in income on hedged item |  | Cost of sales |  | 17 |  |  | 19 |  |  | 42 |  |  | 41 |
Gain recognized in income on derivatives (ineffective portion) |  | Cost of sales |  | 1 |  |  | 2 |  |  | — |  |  | 3 |
For fair value hedges, no component of the derivative instruments’ gains or losses was excluded from the assessment of hedge effectiveness for the three and nine months ended September 30, 2014 and 2013. There were no amounts recognized in income for hedged firm commitments that no longer qualified as fair value hedges during the three and nine months ended September 30, 2014 and 2013.
Derivatives in Cash Flow Hedging Relationships |  | Location of Gain (Loss) Recognized in Income on Derivatives |  | Three Months Ended September 30, |  | Nine Months Ended September 30,
|  | 2014 |  | 2013 |  | 2014 |  | 2013
Commodity contracts: |  |  |  |  |  |  |  |  |  |
Gain (loss) recognized in OCI on derivatives (effective portion) |  |  |  | $ | (5 | ) |  | $ | 3 |  |  | $ | (1 | ) |  | $ | (6 | )
Gain (loss) reclassified from accumulated OCI into income (effective portion) |  | Cost of sales |  | (5 | ) |  | 6 |  |  | (2 | ) |  | 1 |
Gain (loss) recognized in income on derivatives (ineffective portion) |  | Cost of sales |  | — |  |  | 16 |  |  | (1 | ) |  | 13 |
For cash flow hedges, no component of the derivative instruments’ gains or losses was excluded from the assessment of hedge effectiveness for the three and nine months ended September 30, 2014 and 2013. For the three and nine months ended September 30, 2014, cash flow hedges primarily related to forward purchases of crude oil, with no cumulative after-tax gains or losses on cash flow hedges remaining in accumulated other comprehensive income. For the three and nine months ended September 30, 2014 and 2013, there were no amounts reclassified from accumulated other comprehensive income into income as a result of the discontinuance of cash flow hedge accounting.
Derivatives Designated as Economic Hedges and Other Derivative Instruments |  | Location of Gain (Loss) Recognized in Income on Derivatives |  | Three Months Ended September 30, |  | Nine Months Ended September 30,
2014 |  | 2013 | 2014 |  | 2013
Commodity contracts |  | Cost of sales |  | $ | 354 |  |  | $ | (76 | ) |  | $ | 222 |  |  | $ | 205 |
Foreign currency contracts |  | Cost of sales |  | 43 |  |  | (22 | ) |  | 20 |  |  | 14 |
Total |  |  |  | $ | 397 |  |  | $ | (98 | ) |  | $ | 242 |  |  | $ | 219 |
Trading Derivatives |  | Location of Gain (Loss) Recognized in Income on Derivatives |  | Three Months Ended September 30, |  | Nine Months Ended September 30,
2014 |  | 2013 | 2014 |  | 2013
Commodity contracts |  | Cost of sales |  | $ | 11 |  |  | $ | 11 |  |  | $ | 14 |  |  | $ | 16 |
RINs fixed-price contracts |  | Cost of sales |  | — |  |  | — |  |  | — |  |  | (20 | )
Total |  |  |  | $ | 11 |  |  | $ | 11 |  |  | $ | 14 |  |  | $ | (4 | )

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=35736893&loc=d3e80748-113994 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4A -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5618551-113959 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4K -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5708775-113959 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 25 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6886632&loc=d3e76258-113986 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4E -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5624181-113959 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 45 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6441202&loc=d3e80720-113993 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4H -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5624258-113959 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4B -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5624163-113959 Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(n)) -URI http://asc.fasb.org/extlink&oid=26873400&loc=d3e23780-122690 Reference 10: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4J -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5708773-113959 Reference 11: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=35736893&loc=d3e80784-113994 Reference 12: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4D -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5624177-113959 Reference 13: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=35706170&loc=d3e41620-113959 Reference 14: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1A -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5579245-113959 Reference 15: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1B -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5580258-113959 Reference 16: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5579240-113959 Reference 17: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 5 -URI http://asc.fasb.org/extlink&oid=35706170&loc=d3e41641-113959 Reference 18: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=35706170&loc=d3e41638-113959 Reference 19: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4C -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5624171-113959 + Details
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