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Fair Value Measurements
 3 Months Ended
Mar. 31, 2018
Fair Value Disclosures [Abstract]  
Fair Value Measurements
Fair Value Measurements

Fair Values – Recurring

Fair value measurements and disclosures relate primarily to the Partnership’s derivative positions as discussed in Note 14. The following table presents the financial instruments carried at fair value on a recurring basis as of March 31, 2018 and December 31, 2017 by fair value hierarchy level. The Partnership has elected to offset the fair value amounts recognized for multiple derivative contracts executed with the same counterparty.
 
March 31, 2018
 
December 31, 2017
(In millions)
Assets
 
Liabilities
 
Assets
 
Liabilities
Significant unobservable inputs (Level 3)
 
 
 
 
 
 
 
Commodity contracts
$
—

 
$
(1
)
 
$
—

 
$
(2
)
Embedded derivatives in commodity contracts
—

 
(59
)
 
—

 
(64
)
Total carrying value in Consolidated Balance Sheets
$
—

 
$
(60
)
 
$
—

 
$
(66
)


Level 3 instruments include all NGL transactions 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 and (2) the probability of renewal of 62.50 percent for the first five year term and 82 percent for the second five year term of the gas purchase agreement and 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 derivative liabilities. The forward prices for NGL products generally increase or decrease in 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. Increases or decreases in the frac spread result in an increase or decrease in the fair value of the embedded derivative liability. An increase in the probability of renewal would result in an increase in the fair value of the related embedded derivative liability.

Changes in Level 3 Fair Value Measurements

The following table is a reconciliation of the net beginning and ending balances recorded for net assets and liabilities classified as Level 3 in the fair value hierarchy.
 
Three Months Ended March 31, 2018
 
Three Months Ended March 31, 2017
(In millions)
Commodity Derivative Contracts (net)
 
Embedded Derivatives in Commodity Contracts (net)
 
Commodity Derivative Contracts (net)
 
Embedded Derivatives in Commodity Contracts (net)
Fair value at beginning of period
$
(2
)
 
$
(64
)
 
$
(6
)
 
$
(54
)
Total gains (losses) (realized and unrealized) included in earnings(1)
—

 
3

 
5

 
8

Settlements
—

 
3

 
1

 
2

Fair value at end of period
$
(2
)
 
$
(58
)
 
$
—

 
$
(44
)
The amount of total losses for the period included in earnings attributable to the change in unrealized losses relating to liabilities still held at end of period
$
—

 
$
3

 
$
5

 
$
8


(1)
Gains and losses on Commodity Derivative Contracts classified as Level 3 are recorded in “Product sales” in the accompanying Consolidated Statements of Income. Gains and losses derivatives embedded in commodity contracts are recorded in “Purchased product costs” and “Cost of revenues.”

Fair Values – Reported

The Partnership’s primary financial instruments are cash and cash equivalents, receivables, receivables from related parties, accounts payable, payables to related parties and long-term debt. The Partnership’s fair value assessment incorporates a variety of considerations, including (1) the short-term duration of the instruments, (2) MPC’s investment-grade credit rating and (3) the historical incurrence of and expected future insignificance of bad debt expense, which includes an evaluation of counterparty credit risk. The Partnership believes the carrying values of its current assets and liabilities approximate fair value. The recorded value of the amounts outstanding under the bank revolving credit facility, if any, approximates fair value due to the variable interest rate that approximates current market rates. Derivative instruments are recorded at fair value, based on available market information (see Note 14).

The fair value of the Partnership’s long-term debt is estimated based on recent market non-binding indicative quotes. The fair value of the SMR liability is estimated using a discounted cash flow approach based on the contractual cash flows and the Partnership’s unsecured borrowing rate. The long-term debt and SMR liability fair values are considered Level 3 measurements. The following table summarizes the fair value and carrying value of the long-term debt, excluding capital leases, and SMR liability:
 
March 31, 2018
 
December 31, 2017
(In millions)
Fair Value
 
Carrying Value
 
Fair Value
 
Carrying Value
Long-term debt
$
12,442

 
$
11,934

 
$
7,718

 
$
6,966

SMR liability
100

 
90

 
104

 
91