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<p style="margin-top: 0px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2"><b><a name="fin121382_37"> </a>12. Financial Instruments and Derivatives </b></font></p>
<p style="margin-top: 6px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2"><b>Financial Instruments.</b> The fair value of financial instruments is determined by reference to observable market data and other valuation techniques as appropriate. The only category of financial instruments where the difference between fair value and recorded book value is notable is long-term debt. The estimated fair value of total long-term debt, including capitalized lease obligations, was $<font class="_mt">12.8</font> billion and $<font class="_mt">7.7</font> billion at December 31, 2010, and 2009, respectively, as compared to recorded book values of $12.2 billion and $<font class="_mt">7.1</font> billion at December 31, 2010, and 2009, respectively. The fair value hierarchy for long-term debt is primarily Level 1 (quoted prices for identical assets in active markets). </font></p>
<p style="margin-top: 12px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2"><b>Derivative Instruments.</b> The Corporation's size, strong capital structure, geographic diversity and the complementary nature of the Upstream, Downstream and Chemical businesses reduce the Corporation's enterprise-wide risk from changes in interest rates, currency rates and commodity prices. As a result, the Corporation makes limited use of derivatives to mitigate the impact of such changes. The Corporation does not engage in speculative derivative activities or derivative trading activities nor does it use derivatives with leveraged features. </font></p>
<p style="margin-top: 12px; text-indent: 4%; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2">When the Corporation does enter into derivative transactions, it is to offset exposures associated with interest rates, foreign currency exchange rates and hydrocarbon prices that arise from existing assets, liabilities and forecasted transactions. For derivatives designated as cash flow hedges, the Corporation's activity is intended to manage the price risk posed by physical transactions. </font></p>
<p style="margin-top: 12px; text-indent: 4%; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2">The estimated fair value of derivative instruments outstanding and recorded on the balance sheet was a net asset of $<font class="_mt">172</font> million at year-end 2010 and a net liability of $<font class="_mt">5</font> million at year-end 2009. This is the amount that the Corporation would have received from, or paid to, third parties if these derivatives had been settled in the open market. Assets and liabilities associated with derivatives are predominantly recorded either in "Other current assets" or "Accounts payable and accrued liabilities." The year-end 2010 net asset balance includes the Corporation's outstanding cash flow hedge position, acquired as a result of the XTO merger, of $<font class="_mt">219</font> million. As the current cash flow hedge positions settle, these programs will be discontinued. </font></p>
<p style="margin-top: 12px; text-indent: 4%; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2">The Corporation's fair value measurement of its derivative instruments uses primarily Level 2 inputs (derivatives that are determined by either market prices on an active market for similar assets or by prices quoted by a broker or other market-corroborated prices). </font></p>
<p style="margin-top: 12px; text-indent: 4%; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2">The Corporation recognized a before-tax gain or (loss) related to derivative instruments of $<font class="_mt">221</font> million, $<font class="_mt">(73)</font> million and $<font class="_mt">154</font> million during 2010, 2009 and 2008, respectively. Income statement effects associated with derivatives are recorded either in "Sales and other operating revenue" or "Crude oil and product purchases." Of the amount stated above for 2010, cash flow hedges resulted in a before-tax gain of $<font class="_mt">218</font> million. The ineffective portion of derivatives designated as hedges is de minimis. </font></p>
<p style="margin-top: 12px; text-indent: 4%; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2">The principal natural gas futures contracts and swap agreements acquired as part of the XTO merger that are in place as of December 31, 2010, will expire by the end of 2011. The associated volume of natural gas is <font class="_mt">250</font> mcfd at a weighted average NYMEX price of $<font class="_mt">7.02</font> per thousand cubic feet. These derivative contracts qualify for cash flow hedge accounting. The Corporation will receive the cash flow related to these derivative contracts at the price indicated above. However, the amount of the income statement gain or loss realized from these contracts will be limited to the change in fair value of the derivative instruments from the acquisition date of XTO. </font></p>
<p style="margin-top: 12px; text-indent: 4%; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2">The Corporation believes that there are no material market or credit risks to the Corporation's financial position, results of operations or liquidity as a result of the derivative activities described above. The fair value of derivatives outstanding at year-end 2010 and the gain recognized during the year are immaterial.</font></p> </div>12. Financial Instruments and Derivatives
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