| 23. | Risk Management and Trading Activities |
In the normal course of its business, the Corporation is exposed to commodity risks related to changes in the prices of crude oil, natural gas, refined petroleum products and electricity, as well as changes in interest rates and foreign currency values. In the disclosures that follow, risk management activities are referred to as corporate and energy marketing risk management activities. The Corporation also has trading operations, through a 50% voting interest in a consolidated partnership, that trades energy-related commodities, securities and derivatives. These activities are also exposed to commodity price risks primarily related to the prices of crude oil, natural gas, refined petroleum products and electricity as well as foreign currency values. In March 2013, the Corporation announced plans to divest its downstream businesses, which included its energy marketing risk management and trading activities. In November, the Corporation completed the sale of its energy marketing business.
The Corporation maintains a control environment for all of its risk management and trading activities under the direction of its chief risk officer and through its corporate risk policy, which the Corporation’s senior management has approved. Controls include volumetric, term and value at risk limits. The chief risk officer must approve the trading of new instruments and commodities. Risk limits are monitored and reported on a daily basis to business units and senior management. The Corporation’s risk management department also performs independent price verifications (IPV’s) of sources of fair values and validations of valuation models. The Corporation’s treasury department is responsible for administering foreign exchange rate and interest rate hedging programs using similar controls and processes, where applicable.
The Corporation’s risk management department, in performing the IPV procedures, utilizes independent sources and valuation models that are specific to the individual contracts and pricing locations to identify positions that require adjustments to better reflect the market. This review is performed quarterly and the results are presented to the chief risk officer and senior management. The IPV process considers the reliability of the pricing services through assessing the number of available quotes, the frequency at which data is available and, where appropriate, the comparability between pricing sources.
Following is a description of the Corporation’s activities that use derivatives as part of their operations and strategies. Derivatives include both financial instruments and forward purchase and sale contracts. Gross notional amounts of both long and short positions are presented in the volume tables beginning below. These amounts include long and short positions that offset in closed positions and have not reached contractual maturity. Gross notional amounts do not quantify risk or represent assets or liabilities of the Corporation, but are used in the calculation of cash settlements under the contracts.
Corporate Risk Management Activities: Corporate risk management activities include transactions designed to reduce risk in the selling prices of crude oil or natural gas produced by the Corporation or to reduce exposure to foreign currency or interest rate movements. Generally, futures, swaps or option strategies may be used to fix the forward selling price of a portion of the Corporation’s crude oil or natural gas production. Forward contracts may also be used to purchase certain currencies in which the Corporation does business with the intent of reducing exposure to foreign currency fluctuations. These forward contracts comprise various currencies including the British Pound and Thai Baht. Interest rate swaps may be used to convert interest payments on certain long-term debt from fixed to floating rates.
The gross volumes of the Corporate risk management derivative contracts outstanding at December 31, were as follows:
| 2013 | 2012 | |||||||
|
Commodity, primarily crude oil (millions of barrels) |
9 | 1 | ||||||
|
Foreign exchange (millions of U.S. Dollars) |
$ | 220 | $ | 1,285 | ||||
|
Interest rate swaps (millions of U.S. Dollars) |
$ | 865 | $ | 880 | ||||
Crude oil price hedging contracts increased E&P Sales and other operating revenues by $39 million ($25 million after income taxes) in 2013, and reduced E&P Sales and other operating revenues by $688 million ($431 million after income taxes) in 2012 and $517 million ($327 million after income taxes) in 2011. At December 31, 2013, the after-tax deferred gains in Accumulated other comprehensive income (loss) related to Brent crude oil hedges were $5 million, which will be reclassified into earnings during 2014 as the hedged crude oil sales are recognized in earnings. The amount of ineffectiveness from Brent crude oil hedges that was recognized immediately in Sales and other operating revenues was immaterial in 2013, a loss of $9 million in 2012 and a gain of $9 million in 2011.
During 2013, the Corporation had Brent crude oil fixed-price swap contracts to hedge 90,000 barrels of oil per day (bopd) of crude oil sales volumes at an average price of approximately $109.70 per barrel. In October 2008, the Corporation closed Brent crude oil hedges covering 24,000 bopd through 2012 by entering into offsetting contracts with the same counterparty. The deferred after-tax losses, as of the date the hedge positions were closed, were recorded in earnings as the contracts matured. The Corporation also had Brent crude oil fixed-price swap contracts to hedge 120,000 bopd of crude oil sales volumes for the full year of 2012 at an average price of $107.70 per barrel. The Corporation has entered into Brent crude oil fixed price swap contracts to hedge 25,000 bopd for calendar year 2014 at an average price of $109.12 per barrel.
At December 31, 2013 and 2012, the Corporation had interest rate swaps with gross notional amounts of $865 million and $880 million, respectively, which were designated as fair value hedges. Changes in the fair value of interest rate swaps and the hedged fixed-rate debt are recorded in Interest expense in the Statement of Consolidated Income. For the years ended December 31, 2013 and 2012, the Corporation recorded a decrease of $35 million and an increase of $12 million (excluding accrued interest) respectively, in the fair value of interest rate swaps and a corresponding adjustment in the carrying value of the hedged fixed-rate debt.
Gains or losses on foreign exchange contracts that are not designated as hedges are recognized immediately in Other, net in Revenues and non-operating income in the Statement of Consolidated Income.
Net realized and unrealized pre-tax gains (losses) on derivative contracts used in Corporate Risk Management activities and not designated as hedges amounted to the following:
| 2013 | 2012 | 2011 | ||||||||||
| (In millions) | ||||||||||||
|
Commodity |
$ | — | $ | 1 | $ | 1 | ||||||
|
Foreign exchange |
(39 | ) | 43 | (15 | ) | |||||||
|
|
|
|
|
|
|
|||||||
|
Total |
$ | (39 | ) | $ | 44 | $ | (14 | ) | ||||
|
|
|
|
|
|
|
|||||||
Energy Marketing Risk Management Activities: In November 2013, the Corporation completed the sale of its energy marketing business to Direct Energy, a North American subsidiary of Centrica plc (Centrica). Certain derivative contracts, including new transactions following the closing date, (the “delayed transfer derivative contracts”) have not been transferred to Direct Energy, as required customer or regulatory consents have not been obtained. However, the agreement entered into between Hess and Direct Energy on the closing date transfers all economic risks and rewards of the energy marketing business, including the ownership of the delayed transfer derivative contracts, to Direct Energy. As a result, the assets and liabilities related to the delayed transfer derivative contracts remain on the Corporation’s Consolidated Balance Sheet at December 31, 2013 but changes in their fair value are offset based on the terms of the agreement between Hess and Direct Energy. The Corporation therefore has no market risk related to these delayed transfer derivative contracts and only retains credit risk exposure, which has been guaranteed by Centrica. It is expected that the transfer of these contracts will be substantially complete in the first half of 2014.
The gross volumes of the Corporation’s energy marketing derivative contracts outstanding at December 31, including the delayed derivative transfer contracts were as follows:
| 2013 | 2012 | |||||||
|
Crude oil and refined petroleum products (millions of barrels) |
19 | 26 | ||||||
|
Natural gas (millions of mcf*) |
3,325 | 2,938 | ||||||
|
Electricity (millions of megawatt hours) |
258 | 278 | ||||||
| * |
One mcf represents one thousand cubic feet. |
The changes in fair value of certain energy marketing commodity contracts that are not designated as hedges, as well as revenues from the sales contracts, supply contract purchases and net settlements from financial derivatives related to these energy marketing activities, are presented in Income from discontinued operations in the Statement of Consolidated Income. For contracts that were designated as hedges, the effective portion of changes in the fair value of cash flow hedges was recorded as a component of Accumulated other comprehensive income (loss) in the Consolidated Balance Sheet. Net realized and unrealized pre-tax gains on derivative contracts not designated as hedges amounted to $22 million in 2013, $127 million in 2012 and $65 million in 2011. After-tax deferred losses relating to energy marketing activities recorded in Accumulated other comprehensive income (loss) were $22 million at December 31, 2012, all of which were re-classified into Income from discontinued operations during the year. There were no after-tax deferred gains or losses relating to energy marketing activities recorded in Accumulated other comprehensive income (loss) at December 31, 2013.
Trading Activities: Trading activities are conducted through a trading partnership in which the Corporation has a 50% voting interest that is currently for sale. This partnership intends to generate earnings through various strategies primarily using energy-related commodities, securities and derivatives. The information that follows represents 100% of the trading partnership and, for 2012, the Corporation’s proprietary trading accounts.
The gross volumes of derivative contracts outstanding related to trading activities at December 31, were as follows:
| 2013 | 2012 | |||||||
|
Commodity |
||||||||
|
Crude oil and refined petroleum products (millions of barrels) |
1,815 | 1,179 | ||||||
|
Natural gas (millions of mcf) |
2,735 | 3,377 | ||||||
|
Electricity (millions of megawatt hours) |
1 | 19 | ||||||
|
Foreign exchange (millions of U.S. Dollars) |
$ | 52 | $ | 412 | ||||
|
Other |
||||||||
|
Interest rate (millions of U.S. Dollars) |
$ | — | $ | 167 | ||||
|
Equity securities (millions of shares) |
11 | 14 | ||||||
Pre-tax unrealized and realized gains (losses) recorded in the Statement of Consolidated Income from trading activities amounted to the following:
| 2013 | 2012 | 2011 | ||||||||||
| (In millions) | ||||||||||||
|
Commodity |
$ | 78 | $ | 104 | $ | 44 | ||||||
|
Foreign exchange |
— | 3 | — | |||||||||
|
Other |
1 | 10 | (28 | ) | ||||||||
|
|
|
|
|
|
|
|||||||
|
Total* |
$ | 79 | $ | 117 | $ | 16 | ||||||
|
|
|
|
|
|
|
|||||||
| * |
The unrealized pre-tax gains and losses included in earnings were reflected in Sales and other operating revenues and Income from discontinued operations in the Statement of Consolidated Income. |
Fair Value Measurements: The Corporation generally enters into master netting arrangements to mitigate legal and counterparty credit risk. Master netting arrangements are generally accepted overarching master contracts that govern all individual transactions with the same counterparty entity as a single legally enforceable agreement. The U.S. Bankruptcy Code provides for the enforcement of certain termination and netting rights under certain types of contracts upon the bankruptcy filing of a counterparty, commonly known as the “safe harbor” provisions. If a master netting arrangement provides for termination and netting upon the counterparty’s bankruptcy, these rights are generally enforceable with respect to “safe harbor” transactions. If these arrangements provide the right of offset and the Corporation’s intent and practice is to offset amounts in the case of such a termination, the Corporation’s policy is to record the fair value of derivative assets and liabilities on a net basis.
In the normal course of business the Corporation relies on legal and credit risk mitigation clauses providing for adequate credit assurance as well as close-out netting, including two-party netting and single counterparty multilateral netting. As applied to the Corporation, “two-party netting” is the right to net amounts owing under safe harbor transactions between a single defaulting counterparty entity and a single Hess entity, and “single counterparty multilateral netting” is the right to net amounts owing under safe harbor transactions among a single defaulting counterparty entity and multiple Hess entities. The Corporation is reasonably assured that these netting rights would be upheld in a bankruptcy proceeding in the U.S. in which the defaulting counterparty is a debtor under the U.S. Bankruptcy Code.
The following table provides information about the effect of netting arrangements on the presentation of the Corporation’s physical and financial derivative assets and (liabilities) that are measured at fair value, with the effect of single counterparty multilateral netting being included in column (v):
| Gross Amounts |
Gross Amounts Offset
in the Consolidated Balance Sheet |
Net
Amounts Presented in the Consolidated Balance Sheet |
Gross Amounts Not Offset in the Consolidated Balance Sheet |
Net Amounts |
||||||||||||||||||||
| Physical Derivative and Financial Instruments |
Cash Collateral* |
|||||||||||||||||||||||
| (i) | (ii) | (iii) | (iv)=(i)+(ii)+(iii) | (v) | (vi)=(iv)+(v) | |||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||
|
December 31, 2013 |
||||||||||||||||||||||||
|
Assets |
||||||||||||||||||||||||
|
Derivative contracts |
||||||||||||||||||||||||
|
Commodity |
$ | 3,086 | $ | (1,867 | ) | $ | (79 | ) | $ | 1,140 | $ | (41 | ) | $ | 1,099 | |||||||||
|
Interest rate and other |
51 | (10 | ) | — | 41 | (3 | ) | 38 | ||||||||||||||||
|
Counterparty netting |
— | (206 | ) | — | (206 | ) | — | (206 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Total derivative contracts |
$ | 3,137 | $ | (2,083 | ) | $ | (79 | ) | $ | 975 | $ | (44 | ) | $ | 931 | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Liabilities |
||||||||||||||||||||||||
|
Derivative contracts |
||||||||||||||||||||||||
|
Commodity |
$ | (3,212 | ) | $ | 1,867 | $ | 168 | $ | (1,177 | ) | $ | 41 | $ | (1,136 | ) | |||||||||
|
Interest rate and other |
(12 | ) | 10 | — | (2 | ) | 3 | 1 | ||||||||||||||||
|
Counterparty netting |
— | 206 | — | 206 | — | 206 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Total derivative contracts |
$ | (3,224 | ) | $ | 2,083 | $ | 168 | $ | (973 | ) | $ | 44 | $ | (929 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
December 31, 2012 |
||||||||||||||||||||||||
|
Assets |
||||||||||||||||||||||||
|
Derivative contracts |
||||||||||||||||||||||||
|
Commodity |
$ | 3,253 | $ | (2,661 | ) | $ | (34 | ) | $ | 558 | $ | (45 | ) | $ | 513 | |||||||||
|
Interest rate and other |
100 | (8 | ) | — | 92 | (6 | ) | 86 | ||||||||||||||||
|
Counterparty netting |
— | (81 | ) | — | (81 | ) | — | (81 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Total derivative contracts |
$ | 3,353 | $ | (2,750 | ) | $ | (34 | ) | $ | 569 | $ | (51 | ) | $ | 518 | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Liabilities |
||||||||||||||||||||||||
|
Derivative contracts |
||||||||||||||||||||||||
|
Commodity |
$ | (3,312 | ) | $ | 2,661 | $ | 5 | $ | (646 | ) | $ | 45 | $ | (601 | ) | |||||||||
|
Other |
(10 | ) | 8 | — | (2 | ) | 6 | 4 | ||||||||||||||||
|
Counterparty netting |
— | 81 | — | 81 | — | 81 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Total derivative contracts |
$ | (3,322 | ) | $ | 2,750 | $ | 5 | $ | (567 | ) | $ | 51 | $ | (516 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| * |
There is no cash collateral that was not offset in the Consolidated Balance Sheet. |
The net assets and liabilities that were offset in the Consolidated Balance Sheet as reflected in column (iv) of the table above were included in Accounts receivable — Trade and Accounts payable, respectively. Included in those amounts were the assets and liabilities related to the Corporation’s discontinued operations of $612 million and $620 million as of December 31, 2013, respectively ($378 million and $376 million as of December 31, 2012).
The table below reflects the gross and net fair values of the corporate and energy marketing risk management and trading derivative instruments:
| Accounts Receivable |
Accounts Payable |
|||||||
| (In millions) | ||||||||
|
December 31, 2013 |
||||||||
|
Derivative contracts designated as hedging instruments |
||||||||
|
Commodity |
$ | 11 | $ | (3 | ) | |||
|
Interest rate and other |
36 | (1 | ) | |||||
|
|
|
|
|
|||||
|
Total derivative contracts designated as hedging instruments |
47 | (4 | ) | |||||
|
|
|
|
|
|||||
|
Derivative contracts not designated as hedging instruments* |
||||||||
|
Commodity |
3,075 | (3,209 | ) | |||||
|
Foreign exchange |
2 | (3 | ) | |||||
|
Other |
13 | (8 | ) | |||||
|
|
|
|
|
|||||
|
Total derivative contracts not designated as hedging instruments |
3,090 | (3,220 | ) | |||||
|
|
|
|
|
|||||
|
Gross fair value of derivative contracts |
3,137 | (3,224 | ) | |||||
|
Master netting arrangements |
(2,083 | ) | 2,083 | |||||
|
Cash collateral (received) posted |
(79 | ) | 168 | |||||
|
|
|
|
|
|||||
|
Net fair value of derivative contracts |
$ | 975 | $ | (973 | ) | |||
|
|
|
|
|
|||||
|
December 31, 2012 |
||||||||
|
Derivative contracts designated as hedging instruments |
||||||||
|
Commodity |
$ | 65 | $ | (124 | ) | |||
|
Interest rate and other |
72 | (2 | ) | |||||
|
|
|
|
|
|||||
|
Total derivative contracts designated as hedging instruments |
137 | (126 | ) | |||||
|
|
|
|
|
|||||
|
Derivative contracts not designated as hedging instruments* |
||||||||
|
Commodity |
3,188 | (3,188 | ) | |||||
|
Foreign exchange |
14 | — | ||||||
|
Other |
14 | (8 | ) | |||||
|
|
|
|
|
|||||
|
Total derivative contracts not designated as hedging instruments |
3,216 | (3,196 | ) | |||||
|
|
|
|
|
|||||
|
Gross fair value of derivative contracts |
3,353 | (3,322 | ) | |||||
|
Master netting arrangements |
(2,750 | ) | 2,750 | |||||
|
Cash collateral (received) posted |
(34 | ) | 5 | |||||
|
|
|
|
|
|||||
|
Net fair value of derivative contracts |
$ | 569 | $ | (567 | ) | |||
|
|
|
|
|
|||||
| * |
Includes trading derivatives and derivatives used for risk management. |
The Corporation determines fair value in accordance with the fair value measurements accounting standard (Accounting Standards Codification 820 – Fair Value Measurements and Disclosures), which established a hierarchy that categorizes the sources of inputs, which generally range from quoted prices for identical instruments in a principal trading market (Level 1) to estimates determined using related market data (Level 3). Measurements derived indirectly from observable inputs or from quoted prices from markets that are less liquid are considered Level 2.
When Level 1 inputs are available within a particular market, those inputs are selected for determination of fair value over Level 2 or 3 inputs in the same market. To value derivatives that are characterized as Level 2 and 3, the Corporation uses observable inputs for similar instruments that are available from exchanges, pricing services or broker quotes. These observable inputs may be supplemented with other methods, including internal extrapolation or interpolation, that result in the most representative prices for instruments with similar characteristics. Multiple inputs may be used to measure fair value, however, the level of fair value for each physical derivative and financial asset or liability presented below is based on the lowest significant input level within this fair value hierarchy.
The following table provides the Corporation’s net physical derivative and financial assets and (liabilities) that are measured at fair value based on this hierarchy:
| Level 1 | Level 2 | Level 3 | Counterparty netting |
Collateral | Balance | |||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||
|
December 31, 2013 |
||||||||||||||||||||||||
|
Assets |
||||||||||||||||||||||||
|
Derivative contracts |
||||||||||||||||||||||||
|
Commodity |
$ | 254 | $ | 579 | $ | 494 | $ | (108 | ) | $ | (79 | ) | $ | 1,140 | ||||||||||
|
Interest rate and other |
2 | 37 | 3 | (1 | ) | — | 41 | |||||||||||||||||
|
Collateral and counterparty netting |
(15 | ) | (191 | ) | — | — | — | (206 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Total derivative contracts |
241 | 425 | 497 | (109 | ) | (79 | ) | 975 | ||||||||||||||||
|
Other assets measured
at |
— | — | — | — | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Total assets measured at fair value on a recurring basis |
$ | 241 | $ | 425 | $ | 497 | $ | (109 | ) | $ | (79 | ) | $ | 975 | (a) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Liabilities |
||||||||||||||||||||||||
|
Derivative contracts |
||||||||||||||||||||||||
|
Commodity |
$ | (97 | ) | $ | (1,071 | ) | $ | (285 | ) | $ | 108 | $ | 168 | $ | (1,177 | ) | ||||||||
|
Other |
— | (3 | ) | — | 1 | — | (2 | ) | ||||||||||||||||
|
Collateral and counterparty netting |
15 | 191 | — | — | — | 206 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Total derivative contracts |
(82 | ) | (883 | ) | (285 | ) | 109 | 168 | (973 | ) | ||||||||||||||
|
Other liabilities measured
at |
(31 | ) | — | — | — | — | (31 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Total liabilities measured
at fair value |
$ | (113 | ) | $ | (883 | ) | $ | (285 | ) | $ | 109 | $ | 168 | $ | (1,004 | ) (b) | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Other fair value measurement disclosures |
||||||||||||||||||||||||
|
Long-term debt (c) |
$ | — | $ | (6,641 | ) | $ | — | $ | — | $ | — | $ | (6,641 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
December 31, 2012 |
||||||||||||||||||||||||
|
Assets |
||||||||||||||||||||||||
|
Derivative contracts |
||||||||||||||||||||||||
|
Commodity |
$ | 94 | $ | 445 | $ | 243 | $ | (190 | ) | $ | (34 | ) | $ | 558 | ||||||||||
|
Interest rate and other |
6 | 86 | 1 | (1 | ) | — | 92 | |||||||||||||||||
|
Collateral and counterparty netting |
(23 | ) | (54 | ) | (4 | ) | — | — | (81 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Total derivative contracts |
77 | 477 | 240 | (191 | ) | (34 | ) | 569 | ||||||||||||||||
|
Other assets measured
at |
5 | 49 | — | (2 | ) | — | 52 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Total assets measured at fair value on a recurring basis |
$ | 82 | $ | 526 | $ | 240 | $ | (193 | ) | $ | (34 | ) | $ | 621 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Liabilities |
||||||||||||||||||||||||
|
Derivative contracts |
||||||||||||||||||||||||
|
Commodity |
$ | (83 | ) | $ | (657 | ) | $ | (101 | ) | $ | 190 | $ | 5 | $ | (646 | ) | ||||||||
|
Other |
(1 | ) | (2 | ) | — | 1 | — | (2 | ) | |||||||||||||||
|
Collateral and counterparty netting |
23 | 54 | 4 | — | — | 81 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Total derivative contracts |
(61 | ) | (605 | ) | (97 | ) | 191 | 5 | (567 | ) | ||||||||||||||
|
Other liabilities measured
at |
(40 | ) | (2 | ) | (2 | ) | 2 | — | (42 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Total liabilities measured
at fair value on |
$ | (101 | ) | $ | (607 | ) | $ | (99 | ) | $ | 193 | $ | 5 | $ | (609 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Other fair value measurement disclosures |
||||||||||||||||||||||||
|
Long-term debt (c) |
$ | — | $ | (8,887 | ) | $ | — | $ | — | $ | — | $ | (8,887 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| (a) |
Includes a total of $239 million of Level 1, $180 million of Level 2 and $51 million of Level 3 assets that relate to the Corporation’s continuing operations. |
| (b) |
Includes a total of $79 million of Level 1, $447 million of Level 2 and $32 million of Level 3 liabilities that relate to the Corporation’s continuing operations. |
| (c) |
Long-term debt, including current maturities, had a carrying value of $5,798 million and $7,361 million at December 31, 2013 and 2012, respectively. |
In addition to the financial assets and (liabilities) disclosed in the tables above, the Corporation had other short-term financial instruments, primarily cash equivalents and accounts receivable and payable, for which the carrying value approximated their fair value at December 31, 2013 and 2012.
The following table provides total net transfers into and out of each level of the fair value hierarchy:
| 2013 | 2012 | |||||||
| (In millions) | ||||||||
|
Transfers into Level 1 |
$ | 3 | $ | 251 | ||||
|
Transfers out of Level 1 |
76 | 210 | ||||||
|
|
|
|
|
|||||
| $ | 79 | $ | 461 | |||||
|
|
|
|
|
|||||
|
Transfers into Level 2 |
$ | (113 | ) | $ | (234 | ) | ||
|
Transfers out of Level 2 |
88 | (293 | ) | |||||
|
|
|
|
|
|||||
| $ | (25 | ) | $ | (527 | ) | |||
|
|
|
|
|
|||||
|
Transfers into Level 3 |
$ | (85 | ) | $ | 99 | |||
|
Transfers out of Level 3 |
31 | (33 | ) | |||||
|
|
|
|
|
|||||
| $ | (54 | ) | $ | 66 | ||||
|
|
|
|
|
|||||
The Corporation’s policy is to recognize transfers in and transfers out as of the end of the reporting period. Transfers between levels result from the passage of time as contracts move closer to their maturities, fluctuations in the market liquidity for certain contracts and/or changes in the level of significance of fair value measurement inputs.
The following table provides changes in physical derivatives and financial assets and (liabilities) that are measured at fair value based on Level 3 inputs:
| 2013 | 2012 | |||||||
| (In millions) | ||||||||
|
Balance at January 1 |
$ | 141 | $ | (143 | ) | |||
|
Unrealized pre-tax gains (losses) |
||||||||
|
Included in earnings (a) |
175 | (78 | ) | |||||
|
Included in other comprehensive income (b) |
— | 44 | ||||||
|
Purchases (c) |
45 | 247 | ||||||
|
Sales (c) |
(34 | ) | (266 | ) | ||||
|
Settlements (d) |
(61 | ) | 271 | |||||
|
Transfers into Level 3 |
(85 | ) | 99 | |||||
|
Transfers out of Level 3 |
31 | (33 | ) | |||||
|
|
|
|
|
|||||
|
Balance at December 31 |
$ | 212 | $ | 141 | ||||
|
|
|
|
|
|||||
| (a) |
The unrealized pre-tax gains and losses included in earnings were reflected in Sales and other operating revenues and Income from discontinued operations in the Statement of Consolidated Income. |
| (b) |
The unrealized pre-tax gains (losses) included in the other comprehensive income (loss) are reflected in the Change in fair value of cash flow hedges in the Statement of Consolidated Comprehensive Income. |
| (c) |
Purchases and sales primarily represent option premiums paid or received, respectively, during the reporting period and were reflected in Sales and other operating revenues and Income from discontinued operations in the Statement of Consolidated Income. |
| (d) |
Settlements represent realized gains (losses) on derivatives settled during the reporting period and were reflected in Sales and other operating revenues and Income from discontinued operations in the Statement of Consolidated Income. |
The significant unobservable inputs used in Level 3 fair value measurements for the Corporation’s physical commodity contracts and derivative instruments primarily include less liquid delivered locations for physical commodity contracts or volatility assumptions for out-of-the-money options. The following table provides information about the Corporation’s significant recurring unobservable inputs used in the Level 3 fair value measurements. Natural gas contracts are usually quoted and transacted using basis pricing relative to an active pricing location (e.g., Henry Hub), for which price inputs represent the approximate value of differences in geography and local market conditions. All other price inputs in the table beginning below represent full contract prices. Significant changes in any of the inputs, independently or correlated, may result in a different fair value.
|
Unit
of |
Range / Weighted Average | |||
|
December 31, 2013 |
||||
|
Assets |
||||
|
Commodity contracts with a fair value of $494 million |
||||
|
Contract prices |
||||
|
Crude oil and refined petroleum products |
$ / bbl (a) | $78.45 - 228.86 / 118.68 | ||
|
Electricity |
$ / MWH (b) | $19.52 - 165.75 / 45.76 | ||
|
|
||||
|
Basis prices |
||||
|
Natural gas |
$ / MMBTU (c) | $(4.99) - 18.10 / 0.23 | ||
|
|
||||
|
Contract volatilities |
||||
|
Crude oil and refined petroleum products |
% | 16.00 - 18.00 / 17.00 | ||
|
Natural gas |
% | 17.00 - 35.00 / 22.00 | ||
|
Electricity |
% | 16.00 - 36.00 / 23.00 | ||
|
|
||||
|
Liabilities |
||||
|
Commodity contracts with a fair value of $285 million |
||||
|
Contract prices |
||||
|
Crude oil and refined petroleum products |
$ / bbl (a) | $57.45 - 183.89 / 122.54 | ||
|
Electricity |
$ / MWH (b) | $26.48 - 155.33 / 43.12 | ||
|
|
||||
|
Basis prices |
||||
|
Natural gas |
$ / MMBTU (c) | $(1.90) - 18.00 / (0.62) | ||
|
|
||||
|
Contract volatilities |
||||
|
Crude oil and refined petroleum products |
% | 16.00 - 17.00 / 17.00 | ||
|
Natural gas |
% | 34.00 - 35.00 / 35.00 | ||
|
Electricity |
% | 16.00 - 36.00 / 22.00 | ||
|
|
||||
|
Unit
of |
Range / Weighted Average | |||
|
December 31, 2012 |
||||
|
Assets |
||||
|
Commodity contracts with a fair value of $243 million |
||||
|
Contract prices |
||||
|
Crude oil and refined petroleum products |
$ / bbl (a) | $79.35 - 144.27 / 113.06 | ||
|
Electricity |
$ / MWH (b) | $23.37 - 79.27 / 40.81 | ||
|
|
||||
|
Basis prices |
||||
|
Natural gas |
$ / MMBTU (c) | $(0.47) - 6.66 / 0.39 | ||
|
|
||||
|
Contract volatilities |
||||
|
Crude oil and refined petroleum products |
% | 23.00 - 27.00 / 26.00 | ||
|
Natural gas |
% | 21.00 - 36.00 / 25.00 | ||
|
Electricity |
% | 18.00 - 40.00 / 28.00 | ||
|
|
||||
|
Liabilities |
||||
|
Commodity contracts with a fair value of $101 million |
||||
|
Contract prices |
||||
|
Crude oil and refined petroleum products |
$ / bbl (a) | $83.49 - 133.38 / 109.94 | ||
|
Electricity |
$ / MWH (b) | $25.01 - 72.60 / 40.38 | ||
|
|
||||
|
Basis prices |
||||
|
Natural gas |
$ / MMBTU (c) | $(0.72) - 6.66 / 1.26 | ||
|
|
||||
|
Contract volatilities |
||||
|
Crude oil and refined petroleum products |
% | 24.00 - 27.00 / 26.00 | ||
|
Natural gas |
% | 21.00 - 28.00 / 22.00 | ||
|
|
||||
| (a) |
Price per barrel. |
| (b) |
Price per megawatt hour. |
| (c) |
Price per million British thermal unit. |
| Note: |
Fair value measurement for all recurring inputs was performed using a combination of income and market approach techniques. |
Credit Risk: The Corporation is exposed to credit risks that may at times be concentrated with certain counterparties, groups of counterparties or customers. Accounts receivable are generated from a diverse domestic and international customer base. As of December 31, 2013, the Corporation’s net Accounts receivable — Trade related to continuing operations were concentrated with the following counterparty industry segments: Integrated Oil Companies — 45%, Refiners — 18%, Financial Institutions — 14%, Government Entities — 8% and Trading Companies — 7%. As of December 31, 2012, the Corporation’s net Accounts receivable — Trade, which included the receivables for the downstream businesses, were concentrated as follows: Integrated Oil Companies — 23%, Refiners — 15%, Government Entities — 11%, Real Estate — 8%, Services — 8% and Manufacturing — 6%. The Corporation reduces its risk related to certain counterparties by using master netting arrangements and requiring collateral, generally cash or letters of credit. The Corporation records the cash collateral received or posted as an offset to the fair value of derivatives executed with the same counterparty. At December 31, 2013 and December 31, 2012, the Corporation held cash from counterparties of $79 million and $34 million, respectively. The Corporation posted cash to counterparties at December 31, 2013 and December 31, 2012, of $168 million and $5 million, respectively.
The Corporation had outstanding letters of credit totaling $410 million and $746 million at December 31, 2013 and December 31, 2012, respectively, primarily issued to satisfy margin requirements (approximately $196 million and $357 million related to discontinued operations at December 31, 2013 and December 31, 2012, respectively). Certain of the Corporation’s agreements also contain contingent collateral provisions that could require the Corporation to post additional collateral if the Corporation’s credit rating declines. As of December 31, 2013 and 2012, the net liability related to both realized and unrealized derivative contracts with contingent collateral provisions was $281 million and approximately $435 million, respectively. As of December 31, 2013, the cash collateral posted on those derivatives was $31 million and there was no cash collateral posted as of December 31, 2012. At December 31, 2013 and 2012, all three major credit rating agencies that rate the Corporation’s debt had assigned an investment grade rating. If one of the three agencies were to downgrade the Corporation’s rating below investment grade, the Corporation would be required to post additional collateral of $134 million at December 31, 2013 and approximately $275 million at December 31, 2012.