Fair Value Measurements

Fair Values—Recurring

The following tables present assets and liabilities accounted for at fair value on a recurring basis as of June 30, 2014 and December 31, 2013 by fair value hierarchy level. We have elected to offset the fair value amounts recognized for multiple derivative contracts executed with the same counterparty, including any related cash collateral as shown below; however, fair value amounts by hierarchy level are presented on a gross basis in the following tables.



	June 30, 2014
	Fair Value Hierarchy
(In millions)	Level 1		Level 2		Level 3		Netting and Collateral^(a)			Net Carrying Value on Balance Sheet^(b)		Collateral Pledged Not Offset
Commodity derivative instruments, assets	$	44	$	—	$	—	$	(44	)	$	—	$	60
Other assets	2		—		—		N/A			2		—
Total assets at fair value	$	46	$	—	$	—	$	(44	)	$	2	$	60

Commodity derivative instruments, liabilities	$	91	$	—	$	—	$	(91	)	$	—	$	—
Contingent consideration, liability^(c)	—		—		647		N/A			647		—
Total liabilities at fair value	$	91	$	—	$	647	$	(91	)	$	647	$	—



	December 31, 2013
	Fair Value Hierarchy
(In millions)	Level 1		Level 2		Level 3		Netting and Collateral^(a)			Net Carrying Value on Balance Sheet^(b)		Collateral Pledged Not Offset
Commodity derivative instruments, assets	$	21	$	—	$	—	$	(21	)	$	—	$	61
Other assets	2		—		—		N/A			2		—
Total assets at fair value	$	23	$	—	$	—	$	(21	)	$	2	$	61

Commodity derivative instruments, liabilities	$	53	$	—	$	—	$	(53	)	$	—	$	—
Contingent consideration, liability^(c)	—		—		625		N/A			625		—
Total liabilities at fair value	$	53	$	—	$	625	$	(53	)	$	625	$	—


^(a)	Represents the impact of netting assets, liabilities and cash collateral when a legal right of offset exists. As of June 30, 2014 and December 31, 2013, cash collateral of $47 million and $32 million, respectively, was netted with mark-to-market derivative liabilities.


^(b)	We have no derivative contracts that are subject to master netting arrangements that are reflected gross on the balance sheet.


^(c)	Includes $370 million and $159 million classified as current at June 30, 2014 and December 31, 2013, respectively.

Commodity derivatives in Level 1 are exchange-traded contracts for crude oil and refined products measured at fair value with a market approach using the close-of-day settlement prices for the market. Commodity derivatives are covered under master netting agreements with an unconditional right to offset. Collateral deposits in futures commission merchant accounts covered by master netting agreements related to Level 1 commodity derivatives are classified as Level 1 in the fair value hierarchy.

The contingent consideration represents the fair value as of June 30, 2014 of the amount we expect to pay to BP related to the earnout provision for the Galveston Bay Refinery and Related Assets acquisition. See Note 4. The fair value of the contingent consideration was estimated using an income approach and is therefore a Level 3 liability. The amount of cash to be paid under the arrangement is based on both a market-based crack spread and refinery throughput volumes for the months during which the contract applies, as well as established thresholds that cap the annual and total payment. The earnout payment cannot exceed $200 million per year for the first three years of the arrangement or $250 million per year for the last three years of the arrangement, with the total cumulative payment capped at $700 million over the six-year period. Any excess or shortfall from the annual cap for a current year’s earnout calculation will not affect subsequent years’ calculations. The fair value calculation used significant unobservable inputs, including (1) an estimate of refinery throughput volumes; (2) a range of internal and external crack spread forecasts from $14 to $19 per barrel; and (3) a range of risk-adjusted discount rates from five percent to 10 percent. An increase or decrease in crack spread forecasts or refinery throughput volume expectations may result in a corresponding increase or decrease in the fair value. Increases to the fair value as a result of increasing forecasts for both of these unobservable inputs, however, are limited as the earnout payment is subject to annual thresholds. An increase or decrease in the discount rate may result in a decrease or increase to the fair value, respectively. The fair value of the contingent consideration is reassessed each quarter, with changes in fair value recorded in cost of revenues.

The following is a reconciliation of the beginning and ending balances recorded for liabilities classified as Level 3 in the fair value hierarchy.



	Three Months Ended June 30,				Six Months Ended June 30,
(In millions)	2014		2013		2014		2013
Beginning balance	$	639	$	600	$	625	$	—
Contingent consideration agreement	—		—		—		600
Unrealized losses included in net income	8		11		22		11
Ending balance	$	647	$	611	$	647	$	611

We did not hold any Level 3 derivative instruments during the three and six months ended June 30, 2014 and 2013. See Note 14 for the income statement impacts of our derivative instruments.

Fair Values – Nonrecurring

The following table shows the values of assets, by major category, measured at fair value on a nonrecurring basis in periods subsequent to their initial recognition.



	Six Months Ended June 30,
	2014				2013
(In millions)	Fair Value		Impairment		Fair Value		Impairment
Property, plant and equipment, net	$	—	$	—	$	1	$	8
Other noncurrent assets	—		11		—		—

Based on the financial and operational status of a company in which we have an interest in, we fully impaired our $11 million investment in that company during the second quarter of 2014. Our investment in this company was accounted for using the cost method and was included in our Refining & Marketing segment. The impairment is included in other income on the consolidated statements of income. The fair value of our investment in this cost company was measured using an income approach. This measurement is classified as Level 3.

Due to changing market conditions, we assessed one of our light products terminals for impairment. The terminal is operated by our Refining & Marketing segment. We recorded an impairment charge of $8 million for this terminal in 2013. The impairment is included in depreciation and amortization on the consolidated statements of income. The fair value of the terminal was measured using a market approach based on comparable area property values, which are Level 3 inputs.

Fair Values – Reported

The following table summarizes financial instruments on the basis of their nature, characteristics and risk at June 30, 2014 and December 31, 2013, excluding the derivative financial instruments and contingent consideration reported above.



	June 30, 2014				December 31, 2013
(In millions)	Fair Value		Carrying Value		Fair Value		Carrying Value
Financial assets:
Investments	$	25	$	2	$	336	$	14
Other	31		29		31		30
Total financial assets	$	56	$	31	$	367	$	44
Financial liabilities:
Long-term debt^(a)	$	3,691	$	3,254	$	3,306	$	3,001
Deferred credits and other liabilities	20		20		21		21
Total financial liabilities	$	3,711	$	3,274	$	3,327	$	3,022


^(a)	Excludes capital leases

Our current assets and liabilities include financial instruments, the most significant of which are trade accounts receivable and payables. We believe the carrying values of our current assets and liabilities approximate fair value. Our fair value assessment incorporates a variety of considerations, including (1) the short-term duration of the instruments, (2) our investment-grade credit rating and (3) our historical incurrence of and expected future insignificance of bad debt expense, which includes an evaluation of counterparty credit risk.

Fair values of our financial assets included in investments and other financial assets and of our financial liabilities included in deferred credits and other liabilities are measured primarily using an income approach and most inputs are internally generated, which results in a Level 3 classification. Estimated future cash flows are discounted using a rate deemed appropriate to obtain the fair value. Other financial assets primarily consist of environmental remediation receivables. Deferred credits and other liabilities primarily consist of insurance liabilities and environmental remediation liabilities.

Fair value of fixed-rate long-term debt is measured using a market approach, based upon the average of quotes from major financial institutions and a third-party service for our debt. Because these quotes cannot be independently verified to the market, they are considered Level 3 inputs. Fair value of variable-rate long-term debt approximates the carrying value.