Derivative Instruments (Notes)

6 Months Ended

Jun. 30, 2014

General Discussion of Derivative Instruments and Hedging Activities [Abstract]

DERIVATIVE INSTRUMENTS

DERIVATIVE INSTRUMENTS

The timing, direction and overall change in refined product prices versus crude oil prices has a significant impact on our profit margins, earnings and cash flows. Consequently, we use non-trading derivative instruments to manage exposure to commodity price risks associated with the purchase or sale of feedstocks, refined products and energy supplies to or from our refineries, terminals, retail operations and customers. We also use non-trading derivative instruments to manage price risks associated with inventories above or below our target levels and our exposure for future emission credit requirements. To achieve our objectives, we use derivative instruments such as Forward Contracts, Futures Contracts, OTC Swap Contracts, Options, and OTC Option Contracts. We are also exposed to exchange rate fluctuations on our purchases of Canadian crude oil. We enter into Forward Contracts of Canadian dollars to manage these exchange rate fluctuations.

The accounting for changes in the fair value of a commodity derivative depends on whether we have elected the normal purchases and normal sales exception. Our accounting for derivatives using the normal purchases and normal sales exception follows the accrual method of accounting whereas changes in fair value for all other derivatives are recorded each period using mark-to-market accounting.

The primary derivative instruments that we use have certain characteristics. Forward Contracts are agreements to buy or sell the commodity at a predetermined price at a specified future date. Futures Contracts are standardized agreements, traded on a futures exchange, to buy or sell the commodity at a predetermined price at a specified future date. Options provide the right, but not the obligation to buy or sell the commodity at a specified price in the future. OTC Swap Contracts and OTC Option Contracts require cash settlement for the commodity based on the difference between a contracted fixed or floating price and the market price on the settlement date. Certain of these contracts require cash collateral if our liability position exceeds specified thresholds. We believe that we have minimal credit risk with respect to our counterparties.

The following table presents the fair value (in millions) of our derivative instruments as of June 30, 2014 and December 31, 2013. The fair value amounts below are presented on a gross basis and do not reflect the netting of asset and liability positions permitted under the terms of our master netting arrangements including cash collateral on deposit with, or received from, brokers. We offset the recognized fair value amounts for multiple derivative instruments executed with the same counterparty in our financial statements when a legal right of offset exists. As a result, the asset and liability amounts below will not agree with the amounts presented in our condensed consolidated balance sheets.

		Derivative Assets						Derivative Liabilities
	Balance Sheet Location	June 30, 2014			December 31, 2013			June 30, 2014			December 31, 2013
Commodity Futures Contracts (a)	Prepayments and other current assets	$	260		$	140		$	272		$	158
Commodity OTC Swap Contracts	Accounts payable	—			—			3			—
Commodity Forward Contracts	Receivables	2			—			—			—
Commodity Forward Contracts	Accounts payable	—			—			1			1
Total Gross Mark-to-Market    Derivatives		262			140			276			159
Less: Counterparty Netting and    Cash Collateral (b)		(175		)	(72		)	(249		)	(137		)
Total Net Fair Value of Derivatives		$	87		$	68		$	27		$	22

________________

(a) We had derivative assets totaling $13 million and $3 million at June 30, 2014 and December 31, 2013, respectively, related to corn futures used to manage our biofuel exposure. Additionally, we had derivative liabilities totaling $10 million and $1 million at June 30, 2014 and December 31, 2013, respectively, related to corn futures.

(b) As of June 30, 2014 and December 31, 2013, cash collateral amounts of $74 million and $65 million, respectively, are netted with mark-to-market derivative assets.

Gains (losses) for our mark-to market derivatives for the three and six months ended June 30, 2014 and 2013, were as follows (in millions):

	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Commodity Futures Contracts	$	(77	)	$	10		$	(77	)	$	(16	)
Commodity OTC Swap Contracts	(2		)	—			(3		)	—
Commodity Forward Contracts	3			(2		)	4			(4		)
Foreign Currency Forward Contracts	2			(2		)	—			(4		)
Total Gain (Loss) on Mark-to-Market Derivatives	$	(74	)	$	6		$	(76	)	$	(24	)

The income statement location of gains (losses) for our mark-to market derivatives above were as follows (in millions):

	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Revenues	$	—		$	9		$	1		$	10
Cost of sales	(76		)	2			(77		)	(20		)
Other income, net	2			(2		)	—			(4		)
Net loss from discontinued operations	—			(3		)	—			(10		)
Total Gain (Loss) on Mark-to-Market Derivatives	$	(74	)	$	6		$	(76	)	$	(24	)

Open Long (Short) Positions

The information below presents the net volume of outstanding commodity and other contracts by type of instrument, year of maturity and unit of measure as of June 30, 2014 (units in thousands):

	Contract Volumes by Year of Maturity
Mark-to-Market Derivative Instrument	2014	2015	2016	2017	Unit of Measure
Crude oil and refined products:
Futures - short	(8,946)	—	—	—	Barrels
OTC Swaps - long	2,100	—	—	—	Barrels
Forwards - short	(367)	—	—	—	Barrels
Carbon credit:
Futures - long	—	—	1,000	1,000	Tons
Renewable fuels and blending products:
Futures - long	68,250	—	—	—	Gallons
Futures - short	—	(840)	—	—	Gallons
Corn:
Futures - short	(6,015)	—	—	—	Bushels

At June 30, 2014, we had open Forward Contracts to purchase CAD $40 million that matured on July 25, 2014.