VALERO ENERGY CORP/TX | 2013 | FY | 3

20.
FAIR VALUE MEASUREMENTS
General
GAAP requires that certain assets and liabilities be measured at fair value on a recurring or nonrecurring basis in our balance sheets, which are presented below under “Recurring Fair Value Measurements” and “Nonrecurring Fair Value Measurements.” Recurring fair value measurements of assets or liabilities are those that GAAP requires or permits in the balance sheet at the end of each reporting period, such as derivative financial instruments. Nonrecurring fair value measurements of assets or liabilities are those that GAAP requires or permits in the balance sheet in particular circumstances, such as the impairment of property, plant, and equipment.

GAAP also requires the disclosure of the fair values of financial instruments when an option to elect fair value accounting has been provided, but such election has not been made. A debt obligation is an example of such a financial instrument. The disclosure of the fair values of financial instruments not recognized at fair value in our balance sheet is presented below under “Other Financial Instruments.”

GAAP provides a framework for measuring fair value and establishes a three-level fair value hierarchy that prioritizes inputs to valuation techniques based on the degree to which objective prices in external active markets are available to measure fair value. Following is a description of each of the levels of the fair value hierarchy.
•
Level 1 - Observable inputs, such as unadjusted quoted prices in active markets for identical assets or liabilities.
•
Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
•
Level 3 - Unobservable inputs for the asset or liability. Unobservable inputs reflect our own assumptions about what market participants would use to price the asset or liability. The inputs are developed based on the best information available in the circumstances, which might include occasional market quotes or sales of similar instruments or our own financial data such as internally developed pricing models, discounted cash flow methodologies, as well as instruments for which the fair value determination requires significant judgment.

Recurring Fair Value Measurements
The tables below present information (in millions) about our assets and liabilities recognized at their fair values in our balance sheets categorized according to the fair value hierarchy of the inputs utilized by us to determine the fair values as of December 31, 2013 and 2012.
We have elected to offset the fair value amounts recognized for multiple similar derivative contracts executed with the same counterparty, including any related cash collateral assets or obligations as shown below; however, fair value amounts by hierarchy level are presented on a gross basis in the tables below. We have no derivative contracts that are subject to master netting arrangements that are reflected gross on the balance sheet.
 
December 31, 2013
 
 
 
 
 
 
 
Total Gross Fair Value
 
Effect of Counter-party Netting
 
Effect of Cash Collateral Netting
 
Net Carrying Value on Balance Sheet
 
Cash Collateral Paid or Received Not Offset
 
Fair Value Hierarchy
 
 
 
 
 
 
Level 1
 
Level 2
 
Level 3
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity derivative contracts
$
499

 
$
38

 
$
—

 
$
537

 
$
(505
)
 
$
(7
)
 
$
25

 
$
—

Investments of certain benefit plans
98

 
—

 
11

 
109

 
n/a

 
n/a

 
109

 
n/a

Total
$
597

 
$
38

 
$
11

 
$
646

 
$
(505
)
 
$
(7
)
 
$
134

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity derivative contracts
$
492

 
$
24

 
$
—

 
$
516

 
$
(505
)
 
$
(6
)
 
$
5

 
$
(76
)
Biofuels blending obligation
—

 
11

 
—

 
11

 
n/a

 
n/a

 
11

 
n/a

Physical purchase contracts
—

 
5

 
—

 
5

 
n/a

 
n/a

 
5

 
n/a

Foreign currency contracts
8

 
—

 
—

 
8

 
n/a

 
n/a

 
8

 
n/a

Total
$
500

 
$
40

 
$
—

 
$
540

 
$
(505
)
 
$
(6
)
 
$
29

 
 
 
December 31, 2012
 
 
 
Total Gross Fair Value
 
Effect of Counter-party Netting
 
Effect of Cash Collateral Netting
 
Net Carrying Value on Balance Sheet
 
Cash Collateral Paid or Received Not Offset
 
Fair Value Hierarchy
 
 
 
 
 
Level 1
 
Level 2
 
Level 3
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity derivative contracts
$
1,143

 
$
60

 
$
—

 
$
1,203

 
$
(1,189
)
 
$
—

 
$
14

 
$
—

Physical purchase contracts
—

 
11

 
—

 
11

 
n/a

 
n/a

 
11

 
n/a

Foreign currency contracts
1

 
—

 
—

 
1

 
n/a

 
n/a

 
1

 
n/a

Investments of certain benefit plans
87

 
—

 
11

 
98

 
n/a

 
n/a

 
98

 
n/a

Total
$
1,231

 
$
71

 
$
11

 
$
1,313

 
$
(1,189
)
 
$
—

 
$
124

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity derivative contracts
$
1,138

 
$
70

 
$
—

 
$
1,208

 
$
(1,189
)
 
$
(13
)
 
$
6

 
$
(114
)
Biofuels blending obligation
—

 
10

 
—

 
10

 
n/a

 
n/a

 
10

 
n/a

Foreign currency contracts
1

 
—

 
—

 
1

 
n/a

 
n/a

 
1

 
n/a

Total
$
1,139

 
$
80

 
$
—

 
$
1,219

 
$
(1,189
)
 
$
(13
)
 
$
17

 
 

A description of our assets and liabilities recognized at fair value along with the valuation methods and inputs we used to develop their fair value measurements are as follows:
•
Commodity derivative contracts consist primarily of exchange-traded futures and swaps, and as disclosed in Note 21, some of these contracts are designated as hedging instruments. These contracts are measured at fair value using the market approach. Exchange-traded futures are valued based on quoted prices from the exchange and are categorized in Level 1 of the fair value hierarchy. Swaps are priced using third-party broker quotes, industry pricing services, and exchange-traded curves, with appropriate consideration of counterparty credit risk, but because they have contractual terms that are not identical to exchange-traded futures instruments with a comparable market price, these financial instruments are categorized in Level 2 of the fair value hierarchy.
•
Physical purchase contracts represent the fair value of firm commitments to purchase crude oil feedstocks and the fair value of fixed-price corn purchase contracts, and as disclosed in Note 21, some of these contracts are designated as hedging instruments. The fair values of these firm commitments and purchase contracts are measured using a market approach based on quoted prices from the commodity exchange or an independent pricing service and are categorized in Level 2 of the fair value hierarchy.
•
Investments of certain benefit plans consist of investment securities held by trusts for the purpose of satisfying a portion of our obligations under certain U.S. nonqualified benefit plans. The assets categorized in Level 1 of the fair value hierarchy are measured at fair value using a market approach based on quoted prices from national securities exchanges. The assets categorized in Level 3 of the fair value hierarchy represent insurance contracts, the fair value of which is provided by the insurer.
•
Foreign currency contracts consist of foreign currency exchange and purchase contracts entered into by our international operations to manage our exposure to exchange rate fluctuations on transactions denominated in currencies other than the local (functional) currencies of those operations. These contracts are valued based on quoted prices from the exchange and are categorized in Level 1 of the fair value hierarchy.
•
Our biofuels blending obligation represents a liability for the purchase of biofuel credits (primarily RINs in the U.S.) needed to satisfy our obligation to blend biofuels into the products we produce. To the degree we are unable to blend at percentages required under various governmental and regulatory programs, we must purchase biofuel credits to comply with these programs. These programs are further described in Note 21 under “Compliance Program Risk.” This liability is based on our deficit in biofuel credits as of the balance sheet date, if any, after considering any biofuel credits acquired or under contract, and is equal to the product of the biofuel credits deficit and the market price of these credits as of the balance sheet date. This liability is categorized in Level 2 of the fair value hierarchy and is measured at fair value using the market approach based on quoted prices from an independent pricing service.

There were no transfers between Level 1 and Level 2 for assets and liabilities held as of December 31, 2013 and 2012 that were measured at fair value on a recurring basis.

The following is a reconciliation of the beginning and ending balances (in millions) for fair value measurements developed using significant unobservable inputs (Level 3).
 
Investments of
Certain
Benefit Plans
 
Other Investments
 
2013
 
2012
 
2011
 
2013
 
2012
 
2011
Balance as of beginning of year
$
11

 
$
11

 
$
10

 
$
—

 
$
—

 
$
—

Purchases
—

 
—

 
1

 
—

 
—

 
21

Total losses included in refining operating expense
—

 
—

 
—

 
—

 
—

 
(21
)
Transfers in and/or out of Level 3
—

 
—

 
—

 
—

 
—

 
—

Balance as of end of year
$
11

 
$
11

 
$
11

 
$
—

 
$
—

 
$
—

The amount of total losses included in income attributable to the change in unrealized losses relating to assets still held at end of year
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
(21
)

Nonrecurring Fair Value Measurements
There were no assets or liabilities that were measured at fair value on a nonrecurring basis as of December 31, 2013.
The table below presents the fair value of certain assets that were measured at fair value on a nonrecurring basis as of December 31, 2012 (in millions) and the related impairment losses recognized. See Note 4 for our impairment analysis for these assets.
 
 
 
Total
Fair Value
as of
December 31,
2012
 
Total Losses
Recognized
During the
Year Ended
December 31,
2012
 
Fair Value Hierarchy
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
 
Long-lived assets of
the Aruba Refinery
$
—

 
$
—

 
$
—

 
$
—

 
$
903

Materials and supplies
inventories of
the Aruba Refinery
—

 
—

 
—

 
—

 
25

Cancelled capital projects
—

 
—

 
2

 
2

 
65

Property, plant, and equipment
of convenience stores
—

 
—

 
8

 
8

 
21



There were no liabilities that were measured at fair value on a nonrecurring basis as of December 31, 2012.

Other Financial Instruments
Financial instruments that we recognize in our balance sheets at their carrying amounts are shown in the table below (in millions):

 
December 31, 2013
 
December 31, 2012
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Financial assets:
 
 
 
 
 
 
 
Cash and temporary cash investments
$
4,292

 
$
4,292

 
$
1,723

 
$
1,723

Financial liabilities:
 
 
 
 
 
 
 
Debt (excluding capital leases)
6,525

 
7,659

 
7,000

 
8,621


The methods and significant assumptions used to estimate the fair value of these financial instruments are as follows:
•
The fair value of cash and temporary cash investments approximates the carrying value due to the low level of credit risk of these assets combined with their short maturities and market interest rates (Level 1).
•
The fair value of debt is determined primarily using the market approach based on quoted prices provided by third-party brokers and vendor pricing services (Level 2).

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