Derivative Financial Instruments, Investments and Fair Value Measurements

3 Months Ended

Mar. 31, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments, Investments and Fair Value Measurements

(10) Derivative Financial Instruments, Investments and Fair Value Measurements

Derivative Financial Instruments

Our segments are subject to price fluctuations caused by supply conditions, weather, economic conditions, interest rate fluctuations, and other factors. To manage price risk on crude oil and other inventories and to fix margins on certain future production, the Petroleum Segment from time to time enters into various commodity derivative transactions. On a regular basis, the Company enters into commodity contracts with counterparties for the purchases or sale of crude oil, blendstocks, various finished products, and RINs. The contracts usually qualify for the normal purchase normal sale exception and follow the accrual method of accounting. All other derivative instruments are recorded at fair value using mark-to-market accounting on a periodic basis utilizing third-party pricing.

The Petroleum Segment holds derivative instruments, such as exchange-traded crude oil futures and over-the-counter forward swap agreements, which it believes provide an economic hedge on future transactions, but such instruments are not designated as hedges under GAAP. There are no premiums paid or received at inception of the derivative contracts or upon settlement. The Petroleum Segment may enter into forward purchase or sale contracts associated with RINs. As of March 31, 2020, the Petroleum Segment had open fixed-price commitments to purchase 71 million RINs.

Commodity derivatives include commodity swaps and forward purchase and sale commitments. There were no outstanding commodity swap positions as of March 31, 2020. There were approximately 3 million forward purchase commitments and 1 million forward sale commitments as of March 31, 2020.

The following outlines the gains (losses) recognized on the Company’s derivative activities, all of which are recorded in Cost of materials and other on the condensed consolidated statements of operations:


Gain (Loss) on Derivatives
	Three Months Ended March 31,
(in millions)	2020		2019
Forward purchases and sales, net	$	36	$	17

Futures	10		(1)
Total gain on derivatives, net	$	46	$	16

The following outlines our open commodity derivative instruments, which are classified as Prepaid expenses and other current assets and Other current liabilities on the condensed consolidated balance sheets:

Open Commodity Derivative Instruments

(in millions of barrels)

March 31, 2020

December 31, 2019

Future Contracts:

Crude oil

—

Forward Contracts:

Canadian crude oil

Offsetting Assets and Liabilities

The Company elected to offset the fair value amounts recognized for multiple derivative contracts executed with the same counterparty. These amounts are recognized as current assets and current liabilities within the Prepaid expenses and other current assets and Other current liabilities financial statement line items, respectively, in the condensed consolidated balance sheets as follows:


	Derivative Assets						Derivative Liabilities
(in millions)	March 31, 2020		December 31, 2019		March 31, 2020		December 31, 2019
Commodity Derivatives	$	7	$	3	$	(4)	$	(11)

Less: Counterparty Netting	(4)		(3)		4		3
Total Net Fair Value of Derivatives	$	3	$	—	$	—	$	(8)

Investments

Investments consist of equity securities, which are reported at fair value in our condensed consolidated balance sheets. These investments are considered trading securities. Investment income from marketable securities consists of the following:


	Three Months Ended March 31,
(in millions)	2020		2019
Dividend income	$	1	$	—
Unrealized Gain	30		—
Investment income from marketable securities	$	31	$	—

Fair Value Measurements

In accordance with FASB ASC Topic 820 — Fair Value Measurements and Disclosures (“ASC 820”), the Company utilizes the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets, liabilities or a group of assets or liabilities, such as a business.

ASC 820 utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

•Level 1 — Quoted prices in active markets for identical assets or liabilities

•Level 2 — Other significant observable inputs (including quoted prices in active markets for similar assets or liabilities)

•Level 3 — Significant unobservable inputs (including the Company’s own assumptions in determining the fair value)

The following tables set forth the assets and liabilities measured or disclosed at fair value on a recurring basis, by input level, as of March 31, 2020 and December 31, 2019:


	March 31, 2020
(in millions)	Level 1		Level 2		Level 3		Total
Location and Description

Prepaid expenses and other current assets (investments)	$	170	$	—	$	—	$	170
Prepaid expenses and other current assets (commodity derivatives)	—		10		—		10

Total Assets	170		10		—		180


Other current liabilities (RFS obligation)	—		(6)		—		(6)
Long-term debt and finance lease obligations (senior notes)	—		(1,226)		—		(1,226)
Total Liabilities	$	—	$	(1,232)	$	—	$	(1,232)


	December 31, 2019
(in millions)	Level 1		Level 2		Level 3		Total
Location and Description





Other current liabilities (commodity derivatives)	$	—	$	(8)	$	—	$	(8)

Other current liabilities (RFS obligation)	—		(7)		—		(7)
Long-term debt and finance lease obligations (senior notes)	—		(1,180)		—		(1,180)
Total Liabilities	$	—	$	(1,195)	$	—	$	(1,195)

As of March 31, 2020 and December 31, 2019, the only financial assets and liabilities that are measured at fair value on a recurring basis are the Company’s cash equivalents, investments, derivative instruments, long-term debt, and the RFS obligation. The Petroleum Segment’s commodity derivative contracts and RFS obligation, which use fair value measurements and are valued using broker quoted market prices of similar instruments, are considered Level 2 inputs. The Company had no transfers of assets or liabilities between any of the above levels during the three months ended March 31, 2020.