XML 72 R20.htm IDEA: XBRL DOCUMENT

Fair Value Measurements

9 Months Ended

Sep. 30, 2011

Fair Value Measurements Disclosure [Abstract]

13. Fair Value Measurements

Fair Values - Recurring

As of September 30, 2011, balances related to interest rate swaps accounted for at fair value on a recurring basis were assets of $28 million. The interest rate swaps are in Level 2 of the fair value hierarchy and are measured at fair value with a market approach using market price quotes or a price obtained from third-party services such as Bloomberg L.P. which have been corroborated with data from active markets for similar assets and liabilities. The majority of our 2010 derivatives related to our downstream business. The following table presents assets and liabilities accounted for at fair value on a recurring basis as of December 31, 2010 by fair value hierarchy level.

	December 31, 2010
(In millions)		Level 1		Level 2		Level 3		Collateral		Total
Derivative instruments, assets
Commodity	$	58	$	0	$	1	$	81	$	140
Interest rate		0		32		0		0		32
Derivative instruments, assets		58		32		1		81		172
Derivative instruments, liabilities
Commodity		(102)		0		(3)		0		(105)
Derivative instruments, liabilities	$	(102)	$	0	$	(3)	$	0	$	(105)

At December 31, 2010, commodity derivatives in Level 1 are exchange-traded contracts for crude oil, natural gas and refined products measured at fair value with a market approach using the close-of-day settlement price for the market. Commodity derivatives, interest rate derivatives and foreign currency forwards in Level 2 are measured at fair value with a market approach using broker price quotes or prices obtained from third-party services such as Bloomberg L.P. or Platt's, a Division of McGraw-Hill Corporation (“Platt's”), which have been corroborated with data from active markets for similar assets and liabilities. Collateral deposits related to both Level 1 and Level 2 commodity derivatives are in broker accounts covered by master netting agreements. Commodity derivatives in Level 3 are measured at fair value with a market approach using prices obtained from third-party services such as Platt's and price assessments from other independent brokers.

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(In millions)	2011		2010		2011		2010
Beginning balance	$	-	$	(3)	$	(2)	$	9
Included in net income		-		4		-		23
Included in other comprehensive income		-		-		-		4
Transfers to Level 2		-		-		-		(30)
Purchases		-		-		-		2
Settlements		-		1		-		(6)
Spin-off downstream business		-		-		2		-
Ending balance	$	-	$	2	$	-	$	2

No instruments measured at fair value using Level 3 inputs were held on September 30, 2011. Net income for the third quarter and first nine months of 2010 included unrealized gains of $3 million related to instruments held on September 30, 2010. See Note 14 for the income statement impacts of our derivative instruments.

Fair Values - Nonrecurring

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

		Three Months Ended September 30,
		2011				2010
(In millions)		Fair Value		Impairment		Fair Value		Impairment
Equity method investment		0		0		0		25

		Nine Months Ended September 30,
		2011				2010
(In millions)		Fair Value		Impairment		Fair Value		Impairment
Long-lived assets held for use	$	226	$	282	$	146	$	439
Equity method investment		0		0		0		25
Intangible assets	$	0	$	25	$	0	$	0

In May 2011, significant water production and reservoir pressure declines occurred at our E&P segment's Droshky development in the Gulf of Mexico. Plans for a waterflood have been cancelled and the field will be produced to abandonment pressures, expected in the first half of 2012. Consequently, 3.4 million barrels of oil equivalent of proved reserves were written off and a $273 million impairment of this long-lived asset to fair value was recorded in the second quarter of 2011. The $226 million fair value of the Droshky development was determined using an income approach based upon internal estimates of future production levels, prices and discount rate, all Level 3 inputs.

In the second quarter of 2011, our outlook for U.S. natural gas prices made it unlikely that sufficient U.S. demand for LNG would materialize by 2021, which is when the rights lapse under arrangements at the Elba Island, Georgia regasification facility. Using an income approach based upon internal estimates of gas prices and future deliveries, which are Level 3 inputs, we determined that the contract had no remaining fair value and recorded a full impairment of this intangible asset held in our Integrated Gas segment.

In March 2010, we completed a reservoir study which resulted in a portion of our Powder River Basin field being removed from plans for future development in our E&P segment. The field's fair value was measured at $144 million, using an income approach based upon internal estimates of future production levels, prices and discount rate which are Level 3 inputs. This resulted in an impairment of $423 million.

Impairments of several other long-lived assets held for use in our E&P segment, that were evaluated in the nine months ended September 30, 2011 and 2010 were a result of reduced drilling expectations, reduction of estimated reserves or declining natural gas prices, and are also reported above. The fair values of those assets were measured using an income approach based upon internal estimates of future production levels, prices and discount rate, which are Level 3 inputs.

Fair Values – Reported

The following table summarizes financial instruments, excluding the derivative financial instruments, and their reported fair value by individual balance sheet line item at September 30, 2011 and December 31, 2010:

	September 30, 2011				December 31, 2010
		Fair		Carrying		Fair		Carrying
(In millions)		Value		Amount		Value		Amount
Financial assets
Other current assets	$	223	$	220	$	226	$	220
Other noncurrent assets		273		276		396		231
Total financial assets		496		496		622		451
Financial liabilities
Long-term debt, including current portion^{a}		5,636		4,985		8,364		7,527
Deferred credits and other liabilities		33		35		66		67
Total financial liabilities	$	5,669	$	5,020	$	8,430	$	7,594

(a) Excludes capital leases.

Our current assets and liabilities include financial instruments, the most significant of which are trade accounts receivables 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. Exceptions to this assessment are:

receivables from United States Steel Corporation (“United States Steel”), which are reported in other current assets above and discussed below; and
the current portion of our long-term debt, which is reported with long-term debt above and discussed below.

The current portion of receivables from United States Steel is reported in other current assets, and the long-term portion is included in other noncurrent assets. The fair value of the receivables from United States Steel is measured using an income approach that discounts the future expected payments over the remaining term of the obligations. Because this receivable is not publicly-traded and not easily transferable, a hypothetical market based upon United States Steel's borrowing rate curve is assumed and the majority of inputs to the calculation are Level 3. The industrial revenue bonds are to be redeemed on or before December 31, 2011, the tenth anniversary of the USX Separation.

Fair values of our remaining financial assets included in other noncurrent assets and of our financial liabilities included in deferred credits and other liabilities are measured 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.

Over 90 percent of our long-term debt instruments are publicly-traded. A market approach based upon quotes from major financial institutions is used to measure the fair value of such debt. Because these quotes cannot be independently verified to an active market they are considered Level 3 inputs. The fair value of our debt that is not publicly-traded is measured using an income approach. The future debt service payments are discounted using the rate at which we currently expect to borrow. All inputs to this calculation are Level 3.

- Definition

This item represents the complete disclosure regarding the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments, assets, and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the Company is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risk is are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References+ Details