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Fair Value Measurements | 3 Months Ended
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Mar. 31, 2017
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, 2017 and December 31, 2016 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, 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 | $ | 390 |  |  | $ | — |  |  | $ | 2 |  |  | $ | (391 | ) |  | $ | 1 |  |  | $ | 78 |
Other assets | 2 |  |  | — |  |  | — |  |  | N/A |  |  | 2 |  |  | — |
Total assets at fair value | $ | 392 |  |  | $ | — |  |  | $ | 2 |  |  | $ | (391 | ) |  | $ | 3 |  |  | $ | 78 |
Commodity derivative instruments, liabilities(c) | $ | 416 |  |  | $ | — |  |  | $ | 2 |  |  | $ | (419 | ) |  | $ | (1 | ) |  | $ | — |
Embedded derivatives in commodity contracts(c) | — |  |  | — |  |  | 44 |  |  | — |  |  | 44 |  |  | — |
Contingent consideration, liability(d) | — |  |  | — |  |  | 131 |  |  | N/A |  |  | 131 |  |  | — |
Total liabilities at fair value | $ | 416 |  |  | $ | — |  |  | $ | 177 |  |  | $ | (419 | ) |  | $ | 174 |  |  | $ | — |
| December 31, 2016
| 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 | $ | 688 |  |  | $ | — |  |  | $ | — |  |  | $ | (688 | ) |  | $ | — |  |  | $ | 126 |
Other assets | 2 |  |  | — |  |  | — |  |  | N/A |  |  | 2 |  |  | — |
Total assets at fair value | $ | 690 |  |  | $ | — |  |  | $ | — |  |  | $ | (688 | ) |  | $ | 2 |  |  | $ | 126 |
Commodity derivative instruments, liabilities | $ | 712 |  |  | $ | — |  |  | $ | 6 |  |  | $ | (712 | ) |  | $ | 6 |  |  | $ | — |
Embedded derivatives in commodity contracts(c) | — |  |  | — |  |  | 54 |  |  | — |  |  | 54 |  |  | — |
Contingent consideration, liability(d) | — |  |  | — |  |  | 130 |  |  | N/A |  |  | 130 |  |  | — |
Total liabilities at fair value | $ | 712 |  |  | $ | — |  |  | $ | 190 |  |  | $ | (712 | ) |  | $ | 190 |  |  | $ | — |
(a) | Represents the impact of netting assets, liabilities and cash collateral when a legal right of offset exists. As of March 31, 2017, cash collateral of $28 million was netted with the mark-to-market derivative liabilities. As of December 31, 2016, $24 million was netted with mark-to-market derivative liabilities.
(b) | We have no derivative contracts which are subject to master netting arrangements reflected gross on the balance sheet.
(c) | Level 3 includes $6 million and $13 million classified as current at March 31, 2017 and December 31, 2016, respectively.
(d) | Includes $131 million and $130 million classified as current at March 31, 2017 and December 31, 2016, 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 include 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 $0.24 to $1.16 per gallon and (2) the probability of renewal of 50 percent for the first five-year term and 75 percent for the second five-year term of the 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 contingent consideration represents the fair value as of March 31, 2017 and December 31, 2016 of the remaining amount we expect to pay to BP related to the earnout provision associated with our 2013 acquisition of BP’s refinery in Texas City, Texas and related logistics and marketing assets. We refer to these assets as the “Galveston Bay Refinery and Related Assets.” The amount of cash to be paid under the arrangement is based on both a market-based crack spread and refinery throughput volumes for the months during which the earnout applies, as well as established thresholds that cap the annual and total payment. The earnout payment cannot exceed $250 million per year for the last three years of the arrangement, with the total cumulative payment capped at $700 million over the six-year period commencing in 2014. Any excess or shortfall from the annual cap for a current year’s earnout calculation will not affect subsequent years’ calculations. The fair value of the remaining contingent consideration as of March 31, 2017 and December 31, 2016 was estimated using an income approach and is therefore a Level 3 liability. The fair value calculation at December 31, 2016 used significant unobservable inputs including: (1) an estimate of forecasted monthly refinery throughput volumes; (2) an internal and external monthly crack spread forecast; and (3) a range of risk-adjusted discount rates. An increase or decrease in forecasts for the crack spread or refinery throughput volumes may result in a corresponding increase or decrease in the fair value of the contingent consideration liability. Increases to the fair value as a result of increasing forecasts for both of these unobservable inputs, however, are limited as the earnout payment is subject to annual caps. An increase or decrease in the discount rate may result in a decrease or increase to the fair value of the contingent consideration liability, respectively. The fair value of the contingent consideration liability is reassessed each quarter, with changes in fair value recorded in cost of revenues. The fair value of the remaining contingent consideration as of March 31, 2017 was calculated using actual crack spread and refinery throughput data resulting in a value of $131 million when capped by the maximum total payout of $700 million. The balance of $131 million was paid on April 12, 2017. 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) | 2017 |  | 2016
Beginning balance | $ | 190 |  |  | $ | 342 |
Unrealized and realized (gains) losses included in net income | (12 | ) |  | 12 |
Settlements of derivative instruments | (3 | ) |  | 4 |
Ending balance | $ | 175 |  |  | $ | 358 |
The amount of total (gains) losses for the period included in earnings attributable to the change in unrealized (gains) losses relating to assets still held at the end of period: |  |  |
Derivative instruments | $ | (13 | ) |  | $ | 5 |
Contingent consideration agreement | 1 |  |  | 7 |
Total | $ | (12 | ) |  | $ | 12 |
Fair Values - Nonrecurring The following table shows the values of assets, by major category, measured at fair value on a nonrecurring basis in periods subsequent to their initial recognition.
| Three Months Ended March 31,
| 2017 |  | 2016
(In millions) | Fair Value |  | Impairment |  | Fair Value |  | Impairment
Goodwill | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 129 |
During the first quarter of 2016, MPLX, our consolidated subsidiary, determined that an interim impairment analysis of the goodwill recorded in connection with the MarkWest Merger was necessary based on consideration of a number of first quarter events and circumstances, including i) continued deterioration of near term commodity prices as well as longer term pricing trends, ii) recent guidance on reductions to forecasted capital spending, the slowing of drilling activity and the resulting reduced production growth forecasts released or communicated by MPLX’s producer customers and iii) increases in the cost of capital. The combination of these factors was considered to be a triggering event requiring an interim impairment test. Based on the first step of the interim goodwill impairment analysis, the fair value for three of the reporting units to which goodwill was assigned in connection with the MarkWest Merger was less than their respective carrying value. In step two of the impairment analysis, the implied fair values of the goodwill were compared to the carrying values within those reporting units. Based on this assessment, it was determined that goodwill was impaired in two of the reporting units. Accordingly, MPLX recorded an impairment charge of approximately $129 million in the first quarter of 2016. In the second quarter of 2016, we completed our purchase price allocation, which resulted in an additional $1 million of impairment expense that would have been recorded in the first quarter of 2016 had the purchase price allocation been completed as of that date. This adjustment to the impairment expense was the result of completing an evaluation of the deferred tax liabilities associated with the MarkWest Merger and their impact on the resulting goodwill that was recognized. The fair value of the reporting units for the first quarter 2016 interim goodwill impairment analysis was determined based on applying the discounted cash flow method, which is an income approach, and the guideline public company method, which is a market approach. The discounted cash flow fair value estimate was based on known or knowable information at the interim measurement date. The significant assumptions that were used to develop the estimates of the fair values under the discounted cash flow method include management’s best estimates of the expected future results and discount rates, which ranged from 10.5 percent to 11.5 percent. Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors. As a result, there can be no assurance that the estimates and assumptions made for purposes of the interim goodwill impairment test will prove to be an accurate prediction of the future. Fair Values – Reported The following table summarizes financial instruments on the basis of their nature, characteristics and risk at March 31, 2017 and December 31, 2016, excluding the derivative financial instruments and contingent consideration reported above.
| March 31, 2017 |  | December 31, 2016
(In millions) | Fair Value |  | Carrying Value |  | Fair Value |  | Carrying Value
Financial assets: |  |  |  |  |  |  |
Investments | $ | 22 |  |  | $ | 2 |  |  | $ | 25 |  |  | $ | 2 |
Other | 22 |  |  | 22 |  |  | 21 |  |  | 21 |
Total financial assets | $ | 44 |  |  | $ | 24 |  |  | $ | 46 |  |  | $ | 23 |
Financial liabilities: |  |  |  |  |  |  |
Long-term debt(a) | $ | 13,114 |  |  | $ | 12,350 |  |  | $ | 10,892 |  |  | $ | 10,297 |
Deferred credits and other liabilities | 122 |  |  | 110 |  |  | 121 |  |  | 109 |
Total financial liabilities | $ | 13,236 |  |  | $ | 12,460 |  |  | $ | 11,013 |  |  | $ | 10,406 |
(a) | Excludes capital leases and debt issuance costs, however, 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. 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. Fair values of our financial assets included in investments and other 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. Other financial assets primarily consist of environmental remediation receivables. Deferred credits and other liabilities primarily consist of a liability resulting from a financing arrangement for the construction of MPLX’s steam methane reformer (“SMR”) 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 a market approach, based upon the average of quotes for our debt from major financial institutions and a third-party valuation service. Because these quotes cannot be independently verified to the market, they are considered Level 3 inputs. Fair value of variable-rate long-term debt approximates the carrying value.

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial 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 entity 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 risks 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 Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=66048111&loc=d3e19207-110258 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 30 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14172-108612 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 28 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14064-108612 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 21 -URI http://asc.fasb.org/extlink&oid=73719730&loc=d3e13537-108611 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 16 -URI http://asc.fasb.org/extlink&oid=73719730&loc=d3e13504-108611 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 10 -URI http://asc.fasb.org/extlink&oid=73719730&loc=d3e13433-108611 + Details
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