Fair Value Measurements
 3 Months Ended
Mar. 31, 2018
Fair Value Disclosures [Abstract]  
Fair Value Measurements
Fair Value Measurements
Fair Values—Recurring
The following tables present assets and liabilities accounted for at fair value on a recurring basis as of March 31, 2018 and December 31, 2017 by fair value hierarchy level. We have elected to offset the fair value amounts recognized for multiple derivative contracts executed with the same counterparty, including any related cash collateral as shown below; however, fair value amounts by hierarchy level are presented on a gross basis in the following tables.
 
 
March 31, 2018
 
Fair Value Hierarchy
 
 
 
 
 
 
(In millions)
Level 1
 
Level 2
 
Level 3
 
Netting and Collateral(a)
 
Net Carrying Value on Balance Sheet(b)
 
Collateral Pledged Not Offset
Commodity derivative instruments, assets
$
21

 
$
—

 
$
—

 
$
(21
)
 
$
—

 
$
22

Other assets
3

 
—

 
—

 
 N/A

 
3

 
—

Total assets at fair value
$
24

 
$
—

 
$
—

 
$
(21
)
 
$
3

 
$
22

 
 
 
 
 
 
 
 
 
 
 
 
Commodity derivative instruments, liabilities(c)
$
60

 
$
—

 
$
1

 
$
(60
)
 
$
1

 
$
—

Embedded derivatives in commodity contracts(c)
—

 
—

 
59

 
—

 
59

 
—

Total liabilities at fair value
$
60

 
$
—

 
$
60

 
$
(60
)
 
$
60

 
$
—

 
 
December 31, 2017
 
Fair Value Hierarchy
 
 
 
 
 
 
(In millions)
Level 1
 
Level 2
 
Level 3
 
Netting and Collateral(a)
 
Net Carrying Value on Balance Sheet(b)
 
Collateral Pledged Not Offset
Commodity derivative instruments, assets
$
127

 
$
—

 
$
—

 
$
(118
)
 
$
9

 
$
8

Other assets
3

 
—

 
—

 
 N/A

 
3

 
—

Total assets at fair value
$
130

 
$
—

 
$
—

 
$
(118
)
 
$
12

 
$
8

 
 
 
 
 
 
 
 
 
 
 
 
Commodity derivative instruments, liabilities
$
126

 
$
—

 
$
2

 
$
(126
)
 
$
2

 
$
—

Embedded derivatives in commodity contracts(c)
—

 
—

 
64

 
—

 
64

 
—

Total liabilities at fair value
$
126

 
$
—

 
$
66

 
$
(126
)
 
$
66

 
$
—

(a) 
Represents the impact of netting assets, liabilities and cash collateral when a legal right of offset exists. As of March 31, 2018, cash collateral of $39 million was netted with the mark-to-market derivative liabilities. As of December 31, 2017, $8 million was netted with mark-to-market derivative liabilities.
(b) 
We have no derivative contracts that are subject to master netting arrangements reflected gross on the balance sheet.
(c) 
Level 3 includes $11 million and $12 million classified as current at March 31, 2018 and December 31, 2017, respectively.
Commodity derivatives in Level 1 are exchange-traded contracts for crude oil and refined products measured at fair value with a market approach using the close-of-day settlement prices for the market. Commodity derivatives are covered under master netting agreements with an unconditional right to offset. Collateral deposits in futures commission merchant accounts covered by master netting agreements related to Level 1 commodity derivatives are classified as Level 1 in the fair value hierarchy.
Level 3 instruments are OTC NGL contracts and embedded derivatives in commodity contracts. The embedded derivative liability relates to a natural gas purchase agreement embedded in a keep‑whole processing agreement. The fair value calculation for these Level 3 instruments used significant unobservable inputs including: (1) NGL prices interpolated and extrapolated due to inactive markets ranging from $0.26 to $1.47 per gallon and (2) the probability of renewal of 62.5 percent for the first five-year term and 82 percent for the second five-year term of the natural gas purchase agreement and the related keep-whole processing agreement. For these contracts, increases in forward NGL prices result in a decrease in the fair value of the derivative assets and an increase in the fair value of the derivative liabilities. The forward prices for the individual NGL products generally increase or decrease in a positive correlation with one another. Increases or decreases in forward NGL prices result in an increase or decrease in the fair value of the embedded derivative. An increase in the probability of renewal would result in an increase in the fair value of the related embedded derivative liability.
The following is a reconciliation of the beginning and ending balances recorded for liabilities classified as Level 3 in the fair value hierarchy.
 
Three Months Ended 
 March 31,
(In millions)
2018
 
2017
Beginning balance
$
66

 
$
190

Unrealized and realized losses included in net income
(3
)
 
(12
)
Settlements of derivative instruments
(3
)
 
(3
)
Ending balance
$
60

 
$
175

 
 
 
 
The amount of total losses for the period included in earnings attributable to the change in unrealized losses relating to assets still held at the end of period:
 
 
 
Derivative instruments
$
(3
)
 
$
(13
)
Contingent consideration agreement
—

 
1

Total
$
(3
)
 
$
(12
)


Fair Values – Reported
The following table summarizes financial instruments on the basis of their nature, characteristics and risk at March 31, 2018 and December 31, 2017, excluding the derivative financial instruments and contingent consideration reported above.
 
March 31, 2018
 
December 31, 2017
(In millions)
Fair Value
 
Carrying Value
 
Fair Value
 
Carrying Value
Financial assets:
 
 
 
 
 
 
 
Environmental receivables and misc. deposits
18

 
18

 
17

 
17

Total financial assets
$
18

 
$
18

 
$
17

 
$
17

Financial liabilities:
 
 
 
 
 
 
 
Long-term debt(a)
$
17,893

 
$
17,010

 
$
13,893

 
$
12,642

Deferred credits and other liabilities
118

 
108

 
122

 
109

Total financial liabilities
$
18,011

 
$
17,118

 
$
14,015

 
$
12,751

(a) 
Excludes capital leases and debt issuance costs; includes amount classified as debt due within one year.
Our current assets and liabilities include financial instruments, the most significant of which are trade accounts receivable and payables.
Fair values of our financial assets and of our financial liabilities included in deferred credits and other liabilities are measured primarily 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. Deferred credits and other liabilities primarily consist of a liability resulting from a financing arrangement for the construction of MPLX’s steam methane reformer at the Javelina gas processing and fractionation complex in Corpus Christi, Texas, insurance liabilities and environmental remediation liabilities.
Fair value of fixed-rate long-term debt is measured using Level 3 inputs. Fair value of variable-rate long-term debt approximates the carrying value.