Financial Risk Management and Trading Activities | 9 Months Ended |
Sep. 30, 2014 |
Derivative Instruments And Hedging Activities Disclosure [Abstract] | ' |
Financial Risk Management and Trading Activities | ' |
15. Financial 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 and natural gas as well as changes in interest rates and foreign currency values. In the disclosures that follow, risk management activities refer to the mitigation of these risks through hedging activities. The Corporation is also exposed to commodity price risks primarily related to crude oil, natural gas, refined petroleum products and electricity, as well as foreign currency values from a 50% voting interest in a consolidated energy trading joint venture. See also Note 16, Subsequent Events in the Notes to the Consolidated Financial Statements. |
In conjunction with the sale of the energy marketing business in the fourth quarter of 2013, certain derivative contracts, including new transactions following the closing date, (the “delayed transfer derivative contracts”) were not transferred to the acquirer, Direct Energy, a North American subsidiary of Centrica plc (Centrica), as required customer or regulatory consents had not been obtained. However, the agreement entered into between Hess and Direct Energy on the closing date transferred all economic risks and rewards of the energy marketing business, including the ownership of the delayed transfer derivative contracts, to Direct Energy. The transfer of these remaining contracts was completed during 2014. |
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 (IPVs) 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. |
The 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. |
Financial Risk Management Activities: Financial 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, primarily the British Pound and Danish Krone. 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 risk management derivative contracts outstanding were as follows: |
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| | September 30, | | | December 31, | | | | | | | | | | | | | | | | | |
| | 2014 | | | 2013 | | | | | | | | | | | | | | | | | |
Commodity, primarily crude oil (millions of barrels) | | | 15 | | | | 9 | | | | | | | | | | | | | | | | | |
Foreign exchange (millions of USD *) | | $ | 1,197 | | | $ | 220 | | | | | | | | | | | | | | | | | |
Interest rate swaps (millions of USD) | | $ | 1,300 | | | $ | 865 | | | | | | | | | | | | | | | | | |
|
* | Denominated in U.S. dollars (USD). | | | | | | | | | | | | | | | | | | | | | | | |
In the fourth quarter of 2013, the Corporation entered into Brent crude oil fixed-price swap contracts to hedge 25,000 barrels of oil per day (bopd) for calendar year 2014. This 2014 hedging program was extended by 5,000 bopd in the first quarter of 2014 and an additional 10,000 bopd in the second quarter of 2014. These Brent crude oil hedges are at an overall average price of $109.17 per barrel. In addition, during the second quarter of 2014 the Corporation entered into West Texas Intermediate (WTI) crude oil fixed-price swap contracts to hedge 20,000 bopd for the remainder of 2014 at an average price of $100.41 per barrel. In 2013, the Corporation had Brent crude oil fixed-price swap contracts to hedge 90,000 bopd of crude oil sales volumes at an average price of approximately $109.70 per barrel. |
Realized gains from E&P crude oil hedging activities increased E&P Sales and other operating revenues by $27 million and $24 million for the three and nine months ended September 30, 2014, respectively ($17 million and $15 million after income taxes, respectively) and $2 million and $36 million for the three and nine months ended September 30, 2013, respectively ($1 million and $23 million after income taxes, respectively). At September 30, 2014, the after-tax deferred gains in Accumulated other comprehensive income (loss) related to crude oil hedges were $36 million, which will be reclassified into Sales and other operating revenues in the Statement of Consolidated Income during the remainder of 2014 as the hedged crude oil sales are recognized in earnings. Gains from ineffectiveness of crude oil hedges, that were recognized immediately in Sales and other operating revenues, were approximately $6 million and $2 million for the three and nine months ended September 30, 2014, respectively, and a loss of $17 million and a gain of $1 million for the three and nine months ended September 30, 2013, respectively. |
At September 30, 2014 and December 31, 2013, the Corporation had interest rate swaps with gross notional amounts of $1,300 million and $865 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 three months ended September 30, 2014 and 2013, the Corporation recorded a decrease of approximately $10 million and an increase of $1 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. For the nine months ended September 30, 2014 and 2013, the Corporation recorded decreases of $5 million and $27 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 Financial Risk Management activities and not designated as hedges amounted to the following: |
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| | Three Months Ended | | | Nine Months Ended | | | | | | | | | |
| | September 30, | | | September 30, | | | | | | | | | |
| | 2014 | | | 2013 | | | 2014 | | | 2013 | | | | | | | | | |
| | (In millions) | | | | | | | | | |
Foreign exchange | | $ | 81 | | | $ | 4 | | | $ | 68 | | | $ | (36 | ) | | | | | | | | |
Commodity | | | 4 | | | | — | | | | 7 | | | | — | | | | | | | | | |
Total | | $ | 85 | | | $ | 4 | | | $ | 75 | | | $ | (36 | ) | | | | | | | | |
Trading Activities: Trading activities are conducted through an energy trading joint venture in which the Corporation has a 50% voting interest. This joint venture generates earnings through various strategies primarily using energy-related commodities, securities and derivatives. The information that follows represents 100% of the energy trading joint venture as well as the Corporation’s proprietary trading activities, which ceased in 2013. |
The gross volumes of derivative contracts outstanding related to trading activities were as follows: |
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| | September 30, | | | December 31, | | | | | | | | | | | | | | | | | |
| | 2014 | | | 2013 | | | | | | | | | | | | | | | | | |
Commodity | | | | | | | | | | | | | | | | | | | | | | | | |
Crude oil and refined petroleum products (millions of barrels) | | | 1,810 | | | | 1,815 | | | | | | | | | | | | | | | | | |
Natural gas (millions of mcf) | | | 2,519 | | | | 2,735 | | | | | | | | | | | | | | | | | |
Electricity (millions of megawatt hours) | | | 1 | | | | 1 | | | | | | | | | | | | | | | | | |
Foreign exchange (millions of USD) | | $ | 55 | | | $ | 52 | | | | | | | | | | | | | | | | | |
Interest rate (millions of USD) | | $ | 29 | | | $ | — | | | | | | | | | | | | | | | | | |
Equity securities (millions of shares) | | | 7 | | | | 11 | | | | | | | | | | | | | | | | | |
Pre-tax unrealized and realized gains (losses) recorded in the Statement of Consolidated Income from trading activities amounted to the following: |
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| | Three Months Ended | | | Nine Months Ended | | | | | | | | | |
| | September 30, | | | September 30, | | | | | | | | | |
| | 2014 | | | 2013 | | | 2014 | | | 2013 | | | | | | | | | |
| | (In millions) | | | | | | | | | |
Commodity | | $ | 52 | | | $ | 6 | | | $ | 147 | | | $ | 53 | | | | | | | | | |
Foreign exchange | | | 2 | | | | (1 | ) | | | 1 | | | | — | | | | | | | | | |
Equity and other | | | 14 | | | | 9 | | | | 34 | | | | 17 | | | | | | | | | |
Total * | | $ | 68 | | | $ | 14 | | | $ | 182 | | | $ | 70 | | | | | | | | | |
|
* | The unrealized pre-tax gains and losses included in earnings were primarily reflected in Sales and other operating revenues. | | | | | | | | | | | | | | | | | | | | | | | |
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 provide 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): |
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| | | | | Gross Amounts Offset | | | | | | | | | | |
| | | | | in the Consolidated | | | | | | | | | | |
| | | | | Balance Sheet | | | | | | | | | | |
| | | | | Physical | | | | | | Net Amounts | | | Gross Amounts | | | | |
| | | | | Derivative | | | | | | Presented in | | | Not Offset in | | | | |
| | | | | and | | | | | | the | | | the | | | | |
| | Gross | | | Financial | | | Cash | | | Consolidated | | | Consolidated | | | Net | |
| | Amounts | | | Instruments | | | Collateral (a) | | | Balance Sheet | | | Balance Sheet | | | Amounts | |
| | (i) | | | (ii) | | | (iii) | | | (iv)=)+(ii)+(iii) | | | (v) | | | (vi)=v)+(v) | |
| | (In millions) | |
30-Sep-14 | | | | | | | | | | | | | | | | | | | | | | | | |
Assets | | | | | | | | | | | | | | | | | | | | | | | | |
Derivative contracts | | | | | | | | | | | | | | | | | | | | | | | | |
Commodity | | $ | 3,137 | | | $ | (2,797 | ) | | $ | (31 | ) | | $ | 309 | | | $ | (1 | ) | | $ | 308 | |
Interest rate and other | | | 88 | | | | (7 | ) | | | (2 | ) | | | 79 | | | | (2 | ) | | | 77 | |
Counterparty netting | | | — | | | | (57 | ) | | | — | | | | (57 | ) | | | — | | | | (57 | ) |
Total derivative contracts | | $ | 3,225 | | | $ | (2,861 | ) | | $ | (33 | ) | | $ | 331 | | | $ | (3 | ) | | $ | 328 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities |
Derivative contracts | | | | | | | | | | | | | | | | | | | | | | | | |
Commodity | | $ | (3,207 | ) | | $ | 2,797 | | | $ | 98 | | | $ | (312 | ) | | $ | 1 | | | $ | (311 | ) |
Other | | | (13 | ) | | | 7 | | | | — | | | | (6 | ) | | | 2 | | | | (4 | ) |
Counterparty netting | | | — | | | | 57 | | | | — | | | | 57 | | | | — | | | | 57 | |
Total derivative contracts | | $ | (3,220 | ) | | $ | 2,861 | | | $ | 98 | | | $ | (261 | ) | | $ | 3 | | | $ | (258 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2013 (b) |
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 | ) |
Other | | | (12 | ) | | | 10 | | | | — | | | | (2 | ) | | | 3 | | | | 1 | |
Counterparty netting | | | — | | | | 206 | | | | — | | | | 206 | | | | — | | | | 206 | |
Total derivative contracts | | $ | (3,224 | ) | | $ | 2,083 | | | $ | 168 | | | $ | (973 | ) | | $ | 44 | | | $ | (929 | ) |
|
(a) | All cash collateral was offset in the Consolidated Balance Sheet. | | | | | | | | | | | | | | | | | | | | | | | |
(b) | Assets and liabilities in 2013 include amounts relating to the divested energy marketing business. | | | | | | | | | | | | | | | | | | | | | | | |
The net assets and liabilities that were offset in the Consolidated Balance Sheet as reflected in column (iv) of the table above were primarily included in Accounts receivable – Trade and Accounts payable, respectively. Included in these net amounts were the assets and liabilities related to the Corporation’s discontinued operations of approximately $1 million and $4 million, respectively, as of September 30, 2014, and $612 million and $620 million, respectively, as of December 31, 2013. |
The table below reflects the gross and net fair values of the risk management and trading derivative instruments and, at December 31, 2013 also includes energy marketing risk management derivative instruments: |
|
| | Accounts | | | Accounts | | | | | | | | | | | | | | | | | |
| | Receivable | | | Payable | | | | | | | | | | | | | | | | | |
| | (In millions) | | | | | | | | | | | | | | | | | |
September 30, 2014 | | | | | | | | | | | | | | | | | | | | | | | | |
Derivative contracts designated as hedging instruments | | | | | | | | | | | | | | | | | | | | | | | | |
Commodity | | $ | 69 | | | $ | — | | | | | | | | | | | | | | | | | |
Interest rate and other | | | 29 | | | | (4 | ) | | | | | | | | | | | | | | | | |
Total derivative contracts designated as hedging instruments | | | 98 | | | | (4 | ) | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Derivative contracts not designated as hedging instruments (a) | | | | | | | | | | | | | | | | |
Commodity | | | 3,068 | | | | (3,207 | ) | | | | | | | | | | | | | | | | |
Foreign exchange | | | 49 | | | | (1 | ) | | | | | | | | | | | | | | | | |
Equity and other | | | 10 | | | | (8 | ) | | | | | | | | | | | | | | | | |
Total derivative contracts not designated as hedging instruments | | | 3,127 | | | | (3,216 | ) | | | | | | | | | | | | | | | | |
| | | 3,225 | | | | (3,220 | ) | | | | | | | | | | | | | | | | |
Gross fair value of derivative contracts | | | | | | | | | | | | | | | | |
Master netting arrangements | | | (2,861 | ) | | | 2,861 | | | | | | | | | | | | | | | | | |
Cash collateral (received) posted | | | (33 | ) | | | 98 | | | | | | | | | | | | | | | | | |
Net fair value of derivative contracts | | $ | 331 | | | $ | (261 | ) | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2013 (b) | | | | | | | | | | | | | | | | |
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 (a) | | | | | | | | | | | | | | | | |
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 | ) | | | | | | | | | | | | | | | | |
|
(a) | Includes trading derivatives and derivatives used for risk management. | | | | | | | | | | | | | | | | | | | | | | | |
(b) | Assets and liabilities in 2013 include amounts relating to the divested energy marketing business. | | | | | | | | | | | | | | | | | | | | | | | |
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: |
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| | | | | | | | | | | Counterparty | | | | | | | |
| | Level 1 | | | Level 2 | | | Level 3 | | | netting | | | Collateral | | | Balance | |
| | (In millions) | |
September 30, 2014 | | | | | | | | | | | | | | | | | | | | | | | | |
Assets | | | | | | | | | | | | | | | | | | | | | | | | |
Derivative contracts | | | | | | | | | | | | | | | | | | | | | | | | |
Commodity | | $ | 210 | | | $ | 187 | | | $ | 120 | | | $ | (177 | ) | | $ | (31 | ) | | $ | 309 | |
Interest rate and other | | | 5 | | | | 77 | | | | — | | | | (1 | ) | | | (2 | ) | | | 79 | |
Collateral and counterparty netting | | | (53 | ) | | | (4 | ) | | | — | | | | — | | | | — | | | | (57 | ) |
Total derivative contracts | | | 162 | | | | 260 | | | | 120 | | | | (178 | ) | | | (33 | ) | | | 331 | |
Other assets measured at fair value on a | | | 33 | | | | — | | | | — | | | | — | | | | — | | | | 33 | |
recurring basis |
Total assets measured at fair value | | $ | 195 | | | $ | 260 | | | $ | 120 | | | $ | (178 | ) | | $ | (33 | ) | | $ | 364 | (a) |
on a recurring basis |
| | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities |
Derivative contracts | | | | | | | | | | | | | | | | | | | | | | | | |
Commodity | | $ | (226 | ) | | $ | (346 | ) | | $ | (15 | ) | | $ | 177 | | | $ | 98 | | | $ | (312 | ) |
Other | | | (2 | ) | | | — | | | | (5 | ) | | | 1 | | | | — | | | | (6 | ) |
Collateral and counterparty netting | | | 53 | | | | 4 | | | | — | | | | — | | | | — | | | | 57 | |
Total derivative contracts | | | (175 | ) | | | (342 | ) | | | (20 | ) | | | 178 | | | | 98 | | | | (261 | ) |
Other liabilities measured at | | | (31 | ) | | | — | | | | — | | | | — | | | | — | | | | (31 | ) |
fair value on a recurring basis |
Total liabilities measured at | | $ | (206 | ) | | $ | (342 | ) | | $ | (20 | ) | | $ | 178 | | | $ | 98 | | | $ | (292 | )(b) |
fair value on a recurring basis |
Other fair value measurement disclosures | | $ | — | | | $ | (7,307 | ) | | $ | — | | | $ | — | | | $ | — | | | $ | (7,307 | ) |
Long-term debt (c) |
|
| | | | | | | | | | | Counterparty | | | | | | | |
| | Level 1 | | | Level 2 | | | Level 3 | | | netting | | | Collateral | | | Balance | |
| | (In millions) | |
December 31, 2013 (d) | | | | | | | | | | | | | | | | | | | | | | | | |
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 fair value on a | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
recurring basis |
Total assets measured at fair value | | $ | 241 | | | $ | 425 | | | $ | 497 | | | $ | (109 | ) | | $ | (79 | ) | | $ | 975 | |
on a recurring basis |
| | | | | | | | | | | | | | | | | | | | | | | | |
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 | ) |
fair value on a recurring basis |
Total liabilities measured at | | $ | (113 | ) | | $ | (883 | ) | | $ | (285 | ) | | $ | 109 | | | $ | 168 | | | $ | (1,004 | ) |
fair value on a recurring basis |
Other fair value measurement disclosures | | $ | — | | | $ | (6,641 | ) | | $ | — | | | $ | — | | | $ | — | | | $ | (6,641 | ) |
Long-term debt (c) |
|
(a) | Includes a total of $162 million of Level 1, $260 million of Level 2 and $119 million of Level 3 assets that relate to the Corporation’s continuing operations. | | | | | | | | | | | | | | | | | | | | | | | |
(b) | Includes a total of $174 million of Level 1, $341 million of Level 2 and $18 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 $5,996 million and $5,798 million at September 30, 2014 and December 31, 2013, respectively. | | | | | | | | | | | | | | | | | | | | | | | |
(d) | Assets and liabilities in 2013 include amounts relating to the divested energy marketing business. | | | | | | | | | | | | | | | | | | | | | | | |
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 September 30, 2014 and December 31, 2013. |
The following table provides net transfers into and out of each level of the fair value hierarchy: |
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| | Three Months Ended | | | Nine Months Ended | | | | | | | | | |
| | September 30, | | | September 30, | | | | | | | | | |
| | 2014 | | | 2013 | | | 2014 | | | 2013 | | | | | | | | | |
| | (In millions) | | | | | | | | | |
Transfers into Level 1 | | $ | 40 | | | $ | 18 | | | $ | 30 | | | $ | (1 | ) | | | | | | | | |
Transfers out of Level 1 | | | 2 | | | | 15 | | | | 1 | | | | 77 | | | | | | | | | |
| | $ | 42 | | | $ | 33 | | | $ | 31 | | | $ | 76 | | | | | | | | | |
| | $ | (6 | ) | | $ | (11 | ) | | $ | (22 | ) | | $ | (103 | ) | | | | | | | | |
Transfers into Level 2 | | | | | | | | |
Transfers out of Level 2 | | | (106 | ) | | | (2 | ) | | | (102 | ) | | | 16 | | | | | | | | | |
| | $ | (112 | ) | | $ | (13 | ) | | $ | (124 | ) | | $ | (87 | ) | | | | | | | | |
Transfers into Level 3 | | $ | 67 | | | $ | (14 | ) | | $ | 74 | | | $ | (12 | ) | | | | | | | | |
Transfers out of Level 3 | | | 3 | | | | (6 | ) | | | 19 | | | | 23 | | | | | | | | | |
| | $ | 70 | | | $ | (20 | ) | | $ | 93 | | | $ | 11 | | | | | | | | | |
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) primarily related to commodities that are measured at fair value based on Level 3 inputs: |
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| | Three Months Ended | | | Nine Months Ended | | | | | | | | | |
| | September 30, | | | September 30, | | | | | | | | | |
| | 2014 | | | 2013 | | | 2014 | | | 2013 | | | | | | | | | |
| | (In millions) | | | | | | | | | |
Balance at beginning of period | | $ | 40 | | | $ | 107 | | | $ | 212 | | | $ | 141 | | | | | | | | | |
Unrealized pre-tax gains (losses) included in earnings (a) | | | (10 | ) | | | (61 | ) | | | (310 | ) | | | (122 | ) | | | | | | | | |
Purchases (b) | | | 7 | | | | 4 | | | | 18 | | | | 44 | | | | | | | | | |
Sales (b) | | | (7 | ) | | | (1 | ) | | | (17 | ) | | | (32 | ) | | | | | | | | |
Settlements (c) | | | — | | | | (7 | ) | | | 104 | | | | (20 | ) | | | | | | | | |
Transfers into Level 3 | | | 67 | | | | (14 | ) | | | 74 | | | | (12 | ) | | | | | | | | |
Transfers out of Level 3 | | | 3 | | | | (6 | ) | | | 19 | | | | 23 | | | | | | | | | |
Balance at end of period | | $ | 100 | | | $ | 22 | | | $ | 100 | | | $ | 22 | | | | | | | | | |
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(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) | 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. | | | | | | | | | | | | | | | | | | | | | | | |
(c) | Settlements represent realized gains and (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 below represent full contract prices. Significant changes in any of the inputs, independently or correlated, may result in a different fair value. |
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| | Unit of | | Range / | | | | | | | | | | | | | | | | | | | | |
| | Measurement | | Weighted Average | | | | | | | | | | | | | | | | | | | | |
30-Sep-14 | | | | | | | | | | | | | | | | | | | | | | | | |
Assets | | | | | | | | | | | | | | | | | | | | | | | | |
Commodity contracts with a fair value of $120 million | | | | | | | | | | | | | | | | | | | | | | | | |
Contract prices | | | | | | | | | | | | | | | | | | | | | | | | |
Crude oil and refined petroleum products | | $ / bbl (a) | | $73.58 - 119.76 / 95.97 | | | | | | | | | | | | | | | | | | | | |
Basis prices | | | | | | | | | | | | | | | | | | | | | | | | |
Natural gas | | $ / MMBTU (c) | | $(0.65) - 4.01 / 3.57 | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Contract volatilities | | | | | | | | | | | | | | | | | | | | |
Crude oil and refined petroleum products | | % | | 16.00 - 19.00 / 17.00 | | | | | | | | | | | | | | | | | | | | |
Natural gas | | % | | 18.00 - 39.00 / 29.00 | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | | | | | | | | |
Commodity contracts with a fair value of $15 million | | | | | | | | | | | | | | | | | | | | | | | | |
Contract prices | | | | | | | | | | | | | | | | | | | | | | | | |
Crude oil and refined petroleum products | | $ / bbl (a) | | $82.54 - 122.95 / 102.77 | | | | | | | | | | | | | | | | | | | | |
Contract volatilities | | | | | | | | | | | | | | | | | | | | | | | | |
Crude oil and refined petroleum products | | % | | 16.00 - 20.00 / 19.00 | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2013 (d) | | | | | | | | | | | | | | | | | | | | | | | | |
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 | | | | | | | | | | | | | | | | | | | | |
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(a) | Price per barrel. | | | | | | | | | | | | | | | | | | | | | | | |
(b) | Price per megawatt hour. | | | | | | | | | | | | | | | | | | | | | | | |
(c) | Price per million British thermal unit. | | | | | | | | | | | | | | | | | | | | | | | |
(d) | Assets and liabilities in 2013 include amounts relating to the divested energy marketing business. | | | | | | | | | | | | | | | | | | | | | | | |
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 September 30, 2014, the Corporation’s net Accounts receivable – Trade related to continuing operations were concentrated with the following counterparty industry segments: Integrated Oil Companies—32%, Financial Institutions—22%, Trading Companies—15%, Refiners—12% and Government Entities—9%. As of December 31, 2013, the Corporation’s net Accounts receivable—Trade were concentrated as follows: Integrated Oil Companies—45%, Refiners—18%, Financial Institutions—14%, Government Entities—8% and Trading Companies—7%. 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 September 30, 2014 and December 31, 2013, the Corporation held cash from counterparties of $33 million and $79 million, respectively. The Corporation posted cash to counterparties at September 30, 2014 and December 31, 2013, of $98 million and $168 million, respectively. |
The Corporation had outstanding letters of credit totaling $169 million and $410 million at September 30, 2014 and December 31, 2013, 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 September 30, 2014, the net liability related to both realized and unrealized derivative contracts with contingent collateral provisions was approximately $52 million ($281 million at December 31, 2013). There was no cash collateral posted on those derivatives at September 30, 2014 ($31 million at December 31, 2013). At September 30, 2014 and at December 31, 2013, 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 to below investment grade, the Corporation would be required to post additional collateral of approximately $52 million at September 30, 2014 and $134 million at December 31, 2013. |
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