v2.4.0.6
FAIR VALUE MEASUREMENTS
 6 Months Ended
Jun. 30, 2012
FAIR VALUE MEASUREMENTS [Abstract]  
FAIR VALUE MEASUREMENTS
FAIR VALUE MEASUREMENTS

We segregate the inputs used in measuring fair value into three levels: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists. We consider counterparty credit risk and our own credit risk in the determination of all estimated fair values.

Recurring Fair Value Measurements
Product Imbalances. We value our assets and liabilities related to product imbalances using quoted market prices in active markets as of the reporting date.

Interest Rate Swaps. We estimate the fair value of both our fixed-to-floating and forward-starting interest rate swaps using discounted cash flows, which use observable inputs such as time to maturity and market interest rates.

Commodity Derivatives. We base the fair value of certain of our commodity derivative instruments on quoted prices on an exchange; accordingly, we include these in Level 1 of the fair value hierarchy. We also have derivative instruments for which we determine fair value using industry pricing services and other observable inputs, such as quoted prices on an exchange for similar derivative instruments. Therefore, we include these derivative instruments in Level 2 of the fair value hierarchy. We have consistently applied these valuation techniques in all periods presented. See Note 8. Derivatives and Risk Management Activities for a discussion of our derivative instruments.
The following assets and liabilities are measured at fair value:
 
June 30, 2012
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(Thousands of Dollars)
Other current assets:
 
 
 
 
 
 
 
Product imbalances
$
448

 
$
—

 
$
—

 
$
448

Commodity derivatives
44,605

 
1,270

 
—

 
45,875

Other long-term assets, net:
 
 
 
 
 
 
 
Commodity derivatives
—

 
9,096

 
—

 
9,096

Accrued liabilities:
 
 
 
 
 
 
 
Product imbalances
(450
)
 
—

 
—

 
(450
)
Commodity derivatives
(26,790
)
 
(10,347
)
 
—

 
(37,137
)
Interest rate swaps
—

 
(37,291
)
 
—

 
(37,291
)
Other long-term liabilities:
 
 
 
 
 
 
 
Commodity derivatives
—

 
(1,345
)
 
—

 
(1,345
)
Total
$
17,813

 
$
(38,617
)
 
$
—

 
$
(20,804
)

 
December 31, 2011
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(Thousands of Dollars)
Other current assets:
 
 
 
 
 
 
 
Product imbalances
$
2,117

 
$
—

 
$
—

 
$
2,117

Commodity derivatives
10,282

 
1,830

 
—

 
12,112

Other long-term assets, net:
 
 
 
 
 
 
 
Commodity derivatives
—

 
27,084

 
—

 
27,084

Interest rate swaps
—

 
2,335

 
—

 
2,335

Accrued liabilities:
 
 
 
 
 
 
 
Product imbalances
(1,469
)
 
—

 
—

 
(1,469
)
Commodity derivatives
(5,424
)
 
—

 
—

 
(5,424
)
Interest rate swaps
—

 
(22,009
)
 
—

 
(22,009
)
Other long-term liabilities:
 
 
 
 
 
 
 
Interest rate swaps
—

 
(27,190
)
 
—

 
(27,190
)
Total
$
5,506

 
$
(17,950
)
 
$
—

 
$
(12,444
)

Non-recurring Fair Value Measurements
The following assets are measured at fair value on a non-recurring basis:
 
June 30, 2012
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(Thousands of Dollars)
Long-lived assets held for sale - Asphalt Operations
—

 
—

 
$
227,000

 
$
227,000

Long-lived assets held for sale - other
—

 
—

 
$
2,847

 
$
2,847



We estimated the fair value of the long-lived assets associated with our Asphalt Operations reporting unit as the sum of the purchase price to be paid by Lindsay Goldberg for the Class A Interests of Asphalt JV and the fair value of the Class B Interests of Asphalt JV that we would retain. We determined the fair value of the Class B Interests using a combination of valuation methods, including an income approach method, a market approach method and an option model. The significant inputs used in the income approach method include estimated future cash flows and a discount rate equal to the estimated weighted average cost of capital of 14.0%. Inputs used in the market approach method include observable multiples applied to key financial statistics derived from peer companies. Inputs to the option model include an underlying asset value, a five-year expected date of liquidity, a discount rate of 0.7%, an expected volatility of 62.0% and exercise prices consistent with the distribution and liquidation rights for the Class A Interests and Class B Interests. The other long-lived assets held for sale in the table above represent certain corporate assets that we wrote down to their estimated sales price. See Note 2. Assets Held for Sale and Asset Impairments for additional discussion on our plan to sell 50% of the Asphalt Operations.

Fair Value of Financial Instruments
We recognize cash equivalents, receivables, payables and debt in our consolidated balance sheets at their carrying amount.
The fair values of these financial instruments, except for debt, approximate their carrying amounts. The estimated fair value and carrying amount of our debt was as follows:
 
June 30,
2012
 
December 31,
2011
 
(Thousands of Dollars)
Fair value
$
2,648,915

 
$
2,377,565

Carrying amount
$
2,624,868

 
$
2,293,030



We estimated the fair value of our publicly-traded senior notes based upon quoted prices in active markets; therefore, we determined the fair value of our publicly traded senior notes falls in Level 1 of the fair value hierarchy. For our other debt, for which a quoted market price is not available, we estimated the fair value using a discounted cash flow analysis using current incremental borrowing rates for similar types of borrowing arrangements and determined the fair value falls in Level 2 of the fair value hierarchy.