
13.	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, and we enter into derivative instruments to manage those risks. We also enter into derivative instruments to manage the price risk on other contractual derivatives into which we have entered. The only types of derivative instruments we enter into are those related to the various commodities we purchase or produce, interest rate swaps, and foreign currency exchange and purchase contracts, as described below. All derivative instruments are recorded as either assets or liabilities measured at their fair values (See Note 12).

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, are 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 in 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 the consolidated statements of cash flows for all periods presented.

Commodity Price Risk

We are exposed to market risks related to the price of crude oil, refined products (primarily gasoline and distillate), grain (primarily corn), 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 swaps, futures, 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, 2011, we had the following outstanding commodity derivative instruments that were entered into to hedge crude oil and refined product inventories and commodity derivative instruments related to the physical purchase of crude oil and refined products 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).



		Notional Contract Volumes by Year of Maturity
Derivative Instrument		2011
Crude oil and refined products:
Futures – long		3,025
Futures – short		16,453
Physical purchase contracts – long		13,428

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, product or natural gas purchases or refined product sales at existing market prices that we deem favorable.

As of September 30, 2011, we had the following outstanding commodity derivative instruments that were entered into to hedge forecasted purchases or sales of crude oil and refined products. 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		2012
Crude oil and refined products:
Swaps – long		5,241
Swaps – short		5,241

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) refinery feedstock, refined product, and corn inventories, (ii) forecasted refinery feedstock, refined product, and corn purchases, and refined product sales, and (iii) fixed-price corn purchase contracts. Our objective in 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, 2011, we had the following outstanding commodity derivative instruments that were entered into as economic hedges and 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).



	Notional Contract Volumes by Year of Maturity
Derivative Instrument	2011	2012	2013
Crude oil and refined products:
Swaps – long	34,708	65,040	—
Swaps – short	33,890	65,040	—
Futures – long	200,076	40,388	—
Futures – short	192,292	41,219	—
Options – long	606	10	—
Options – short	600	—	—
Corn:
Futures – long	22,325	8,405	—
Futures – short	41,300	23,980	260
Physical purchase contracts – long	12,166	10,991	265

Trading Derivatives

Our objective in 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, 2011, 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 and corn contracts that are presented in thousands of bushels).



	Notional Contract Volumes by Year of Maturity
Derivative Instrument	2011	2012
Crude oil and refined products:
Swaps – long	6,196	3,240
Swaps – short	6,196	3,240
Futures – long	66,365	15,868
Futures – short	66,389	15,831
Options – short	75	—
Natural gas:
Futures – long	5,050	—
Futures – short	5,050	—
Corn:
Swaps – long	—	1,050
Swaps – short	—	1,050
Futures – long	3,850	60
Futures – short	2,350	1,060

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.

Foreign Currency Risk

We are exposed to exchange rate fluctuations on transactions entered into by our Canadian and European 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, 2011, we had commitments to purchase $475 million of U.S. dollars. These commitments matured on or before October 28, 2011.

Fair Values of Derivative Instruments

The following tables provide information about the fair values of our derivative instruments as of September 30, 2011 and December 31, 2010 (in millions) and the line items in the consolidated balance sheet in which the fair values are reflected. See Note 12 for additional information related to the fair values of our derivative instruments.

As indicated in Note 12, we net fair value amounts recognized for multiple similar derivative instruments executed with the same counterparty under master netting arrangements. 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. In addition, in Note 12, we included cash collateral on deposit with or received from brokers in the fair value of the commodity derivatives; these cash amounts are not reflected in the tables below.



	Consolidated Balance Sheet Location	September 30, 2011
	Consolidated Balance Sheet Location	Asset Derivatives		Liability Derivatives
Derivatives designated as hedging instruments
Commodity contracts:
Futures	Receivables, net	$	360	$	237
Swaps	Receivables, net	46		40
Swaps	Accrued expenses	4		3
Total		$	410	$	280

Derivatives not designated as hedging instruments
Commodity contracts:
Futures	Receivables, net	$	6,170	$	6,266
Swaps	Receivables, net	6		5
Swaps	Prepaid expenses and other	2		1
Swaps	Accrued expenses	181		268
Options	Receivables, net	5		—
Options	Accrued expenses	—		21
Physical purchase contracts	Inventories	—		81
Total		$	6,364	$	6,642
Total derivatives		$	6,774	$	6,922



	Consolidated Balance Sheet Location	December 31, 2010
	Consolidated Balance Sheet Location	Asset Derivatives		Liability Derivatives
Derivatives designated as hedging instruments
Commodity contracts:
Futures	Receivables, net	$	120	$	183
Swaps	Prepaid expenses and other	55		39
Swaps	Accrued expenses	31		32
Total		$	206	$	254

Derivatives not designated as hedging instruments
Commodity contracts:
Futures	Receivables, net	$	2,717	$	2,914
Swaps	Prepaid expenses and other	287		277
Swaps	Accrued expenses	116		148
Options	Accrued expenses	—		6
Physical purchase contracts	Inventories	17		—
Total		$	3,137	$	3,345
Total derivatives		$	3,343	$	3,599

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.

As of September 30, 2011, we had net receivables related to derivative instruments of $1 million from counterparties in the refining industry and no amount of net receivables from counterparties in the financial services industry. As of December 31, 2010, we had net receivables related to derivative instruments of $4 million from counterparties in the refining industry and $21 million from counterparties in the financial services industry. These amounts represent the aggregate amount payable to us by companies in those industries, reduced by payables from us to those companies under master netting arrangements that allow for the setoff of amounts receivable from and payable to the same party. 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 Consolidated Statements of 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 consolidated financial statements in which such gains and losses are reflected (in millions).



Derivatives in Fair Value Hedging Relationships	Location	Gain or (Loss) Recognized in Income on Derivatives				Gain or (Loss) Recognized in Income on Hedged Item						Gain or (Loss) Recognized in Income for Ineffective Portion of Derivative
Derivatives in Fair Value Hedging Relationships	Location	2011		2010		2011			2010			2011			2010
Three months ended September 30:
Commodity contracts	Cost of sales	$	170	$	54	$	(161	)	$	(56	)	$	9		$	(2	)
Nine months ended September 30:
Commodity contracts	Cost of sales	219		253		(222		)	(247		)	(3		)	6

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, 2011 and 2010. No amounts were recognized in income for hedged firm commitments that no longer qualify as fair value hedges for the three and nine months ended September 30, 2011 and 2010.



Derivatives in Cash Flow Hedging Relationships	Gain or (Loss) Recognized in OCI on Derivatives (Effective Portion)					Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)					Gain or (Loss) Recognized in Income on Derivatives (Ineffective Portion)
Derivatives in Cash Flow Hedging Relationships	2011		2010			Location	2011		2010		Location	2011		2010
Three months ended September 30:
Commodity contracts	$	20	$	—		Cost of sales	$	—	$	37	Cost of sales	$	4	$	—
Nine months ended September 30:
Commodity contracts	20		(2		)	Cost of sales	—		135		Cost of sales	4		—

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, 2011 and 2010. For the three and nine months ended September 30, 2011, cash flow hedges primarily related to forward sales of gasoline and distillates, and associated forward purchases of crude oil, with $13 million of cumulative after-tax gains on cash flow hedges remaining in accumulated other comprehensive income as of September 30, 2011. We estimate that $10 million of the deferred gains as of September 30, 2011 will be reclassified into cost of sales over the next 12 months as a result of hedged transactions that are forecasted to occur. For the three and nine months ended September 30, 2011 and 2010, 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 or (Loss) Recognized in Income on Derivatives	Gain or (Loss) Recognized in Income on Derivatives
		2011			2010
Three months ended September 30:
Commodity contracts	Cost of sales	$	9		$	22
Foreign currency contracts	Cost of sales	41			(5		)
Other contract	Cost of sales	29			—
Total		$	79		$	17
Nine months ended September 30:
Commodity contracts	Cost of sales	$	(362	)	$	(93	)
Foreign currency contracts	Cost of sales	32			(2		)
Other contract	Cost of sales	29			—
Total		$	(301	)	$	(95	)

The gain of $29 million on the other contract for the three and nine months ended September 30, 2011 is related to the difference between the fair value of inventories acquired in connection with the Pembroke Acquisition and the amount paid for such inventories based on the terms of the purchase agreement. The loss of $362 million on commodity contracts for the nine months ended September 30, 2011 includes a $542 million loss related to forward sales of refined products.



Trading Derivatives	Location of Gain or (Loss) Recognized in Income on Derivatives	Gain or (Loss) Recognized in Income on Derivatives
Trading Derivatives		2011		2010
Three months ended September 30:
Commodity contracts	Cost of sales	$	3	$	2
Nine months ended September 30:
Commodity contracts	Cost of sales	17		7