XML 34 R24.htm IDEA: XBRL DOCUMENT
v3.10.0.1

Price Risk Management Activities | 9 Months Ended
--- | ---
Sep. 30, 2018
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
PRICE RISK MANAGEMENT ACTIVITIES |
15. | PRICE RISK MANAGEMENT ACTIVITIES
We are exposed to market risks primarily related to the volatility in the price of commodities, and foreign currency exchange rates, and the price of credits needed to comply with various government and regulatory programs. We enter into derivative instruments to manage some of these risks, including derivative instruments related to the various commodities we purchase or produce, 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 14), as summarized below under “Fair Values of Derivative Instruments,” with changes in fair value recognized currently in income. The effect of these derivative instruments on our income is summarized below under “Effect of Derivative Instruments on Income.” 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 petroleum 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 our risk control group to ensure compliance with our stated risk management policy that has been approved by our board of directors. To manage commodity price risk, we use economic hedges, which are not designated as fair value or cash flow hedges, and we use fair value and cash flow hedges from time to time. We also enter into certain commodity derivative instruments for trading purposes. Our objectives for entering into hedges or trading derivatives are described below.
• | Economic Hedges – Economic hedges represent commodity derivative instruments that are used to manage price volatility in certain (i) feedstock and refined petroleum product inventories, (ii) fixed-price purchase contracts, and (iii) forecasted feedstock, refined petroleum product or natural gas purchases and refined petroleum product sales. The objectives of our economic hedges are to hedge price volatility in certain feedstock and refined petroleum product inventories and to lock in the price of forecasted feedstock, refined petroleum product, or natural gas purchases or refined petroleum product sales at existing market prices that we deem favorable. Economic hedges are not designated as fair value or cash flow hedges for accounting purposes, usually due to the difficulty of establishing the required documentation at the date the derivative instrument is entered into for them to qualify as hedging instruments for accounting purposes.
As of September 30, 2018, 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 |  | 2018 |  | 2019 |  | 2020
Crude oil and refined petroleum products: |  |  |  |  |  |
Swaps – long |  | 17,645 |  |  | 560 |  |  | — |
Swaps – short |  | 17,262 |  |  | 180 |  |  | — |
Futures – long |  | 83,979 |  |  | 3,353 |  |  | — |
Futures – short |  | 100,549 |  |  | 3,399 |  |  | — |
Corn: |  |  |  |  |  |
Futures – long |  | 18,540 |  |  | 250 |  |  | — |
Futures – short |  | 38,785 |  |  | 10,230 |  |  | 45 |
Physical contracts – long |  | 22,612 |  |  | 10,004 |  |  | 43 |
Soybean oil: |  |  |  |  |  |
Futures – long |  | 99,899 |  |  | — |  |  | — |
Futures – short |  | 226,317 |  |  | 42,179 |  |  | — |
• | Trading Derivatives – Our objective for entering into commodity derivative instruments for trading purposes is to take advantage of existing market conditions for crude oil and refined petroleum products.
As of September 30, 2018, 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 in thousands of barrels).
|  | Notional Contract Volumes by Year of Maturity
Derivative Instrument |  | 2018 |  | 2019
Crude oil and refined petroleum products: |  |  |  |
Futures – long |  | 62,616 |  |  | 13,896 |
Futures – short |  | 62,161 |  |  | 14,321 |
Options – long |  | 29,227 |  |  | 500 |
Options – short |  | 29,250 |  |  | 500 |
We had no commodity derivative contracts outstanding as of September 30, 2018 and 2017 or during the three and nine months ended September 30, 2018 and 2017 that were designated as fair value or cash flow hedges. 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 are classified as economic hedges. As of September 30, 2018, we had forward contracts to purchase $569 million of U.S. dollars. All of these commitments matured on or before October 31, 2018. Environmental 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 environmental compliance 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. Certain of these programs 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 $94 million and $230 million for the three months ended September 30, 2018 and 2017, respectively, and $431 million and $631 million for the nine months ended September 30, 2018 and 2017, respectively. These amounts are reflected in cost of materials and other. We are subject to additional requirements under greenhouse gas (GHG) emission programs, including the cap-and-trade systems, as discussed in Note 14. Under these cap-and-trade systems, we purchase various GHG emission credits available on the open market. Therefore, we are exposed to the volatility in the market price of these credits. The cost to implement certain provisions of the cap-and-trade systems are significant; however, we recovered the majority of these costs from our customers for the three and nine months ended September 30, 2018 and 2017 and expect to continue to recover the majority of these costs in the future. For the three and nine months ended September 30, 2018 and 2017, the net cost of meeting our obligations under these compliance programs was immaterial. Fair Values of Derivative Instruments The following tables provide information about the fair values of our derivative instruments as of September 30, 2018 and December 31, 2017 (in millions) and the line items in the balance sheets in which the fair values are reflected. See Note 14 for additional information related to the fair values of our derivative instruments. As indicated in Note 14, 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 following tables, 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, 2018
|  | Asset Derivatives |  | Liability Derivatives
Derivatives not designated as hedging instruments |  |  |  |  |
Commodity contracts: |  |  |  |  |
Futures | Receivables, net |  | $ | 2,072 |  |  | $ | 2,108 |
Swaps | Receivables, net |  | 11 |  |  | 10 |
Options | Receivables, net |  | 1 |  |  | 1 |
Physical purchase contracts | Inventories |  | — |  |  | 11 |
Foreign currency contracts | Accrued expenses |  | — |  |  | 3 |
Total |  |  | $ | 2,084 |  |  | $ | 2,133 |
| Balance Sheet Location |  | December 31, 2017
|  | Asset Derivatives |  | Liability Derivatives
Derivatives not designated as hedging instruments |  |  |  |  |
Commodity contracts: |  |  |  |  |
Futures | Receivables, net |  | $ | 875 |  |  | $ | 955 |
Swaps | Receivables, net |  | 11 |  |  | 11 |
Options | Receivables, net |  | 8 |  |  | 3 |
Physical purchase contracts | Inventories |  | — |  |  | 6 |
Foreign currency contracts | Accrued expenses |  | — |  |  | 7 |
Total |  |  | $ | 894 |  |  | $ | 982 |
Market 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 our risk control group to ensure compliance with our stated risk management policy. 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 The following tables provide information about the gain or loss recognized in income on our derivative instruments and the line items in the statements of income in which such gains and losses are reflected (in millions).
Derivatives Designated as Economic Hedges |  | Location of Gain (Loss) Recognized in Income on Derivatives |  | Three Months Ended September 30, |  | Nine Months Ended September 30,
2018 |  | 2017 | 2018 |  | 2017
Commodity contracts |  | Cost of materials and other |  | $ | (108 | ) |  | $ | (86 | ) |  | $ | (222 | ) |  | $ | (158 | )
Foreign currency contracts |  | Cost of materials and other |  | (7 | ) |  | (16 | ) |  | 7 |  |  | (42 | )
Trading Derivatives |  | Location of Gain Recognized in Income on Derivatives |  | Three Months Ended September 30, |  | Nine Months Ended September 30,
2018 |  | 2017 | 2018 |  | 2017
Commodity contracts |  | Cost of materials and other |  | $ | 10 |  |  | $ | 31 |  |  | $ | 97 |  |  | $ | 29 |

X
- References No definition available. + Details
Name: | us-gaap_DerivativeInstrumentsAndHedgingActivitiesDisclosureAbstract
Namespace Prefix: | us-gaap_
Data Type: | xbrli:stringItemType
Balance Type: | na
Period Type: | duration

X
- 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://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 + Details
Name: | us-gaap_DerivativeInstrumentsAndHedgingActivitiesDisclosureTextBlock
Namespace Prefix: | us-gaap_
Data Type: | nonnum:textBlockItemType
Balance Type: | na
Period Type: | duration