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 for identical assets or liabilities in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable, such as quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in markets that are not active; 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

The following assets and liabilities are measured at fair value on a recurring basis:



	December 31, 2013
	Level 1			Level 2			Level 3			Total
	(Thousands of Dollars)
Other current assets:
Product imbalances	$	1,980		$	—		$	—		$	1,980
Commodity derivatives	—			4,948			—			4,948
Other long-term assets, net:
Commodity derivatives	—			6,977			—			6,977
Accrued liabilities:
Product imbalances	(2,190		)	—			—			(2,190		)
Commodity derivatives	(1,433		)	(800		)	—			(2,233		)
Contingent consideration	—			—			(1,318		)	(1,318		)
Other long-term liabilities:
Commodity derivatives	—			(1,575		)	—			(1,575		)
Guarantee liability	—			—			(1,880		)	(1,880		)
Total	$	(1,643	)	$	9,550		$	(3,198	)	$	4,709



	December 31, 2012
	Level 1			Level 2			Level 3			Total
	(Thousands of Dollars)
Other current assets:
Product imbalances	$	1,232		$	—		$	—		$	1,232
Commodity derivatives	1,001			8,357			—			9,358
Other long-term assets, net:
Commodity derivatives	—			9,206			—			9,206
Accrued liabilities:
Product imbalances	(1,686		)	—			—			(1,686		)
Commodity derivatives	—			(19,210		)	—			(19,210		)
Interest rate swaps	—			(40,911		)	—			(40,911		)
Contingent consideration	—			—			(9,600		)	(9,600		)
Total	$	547		$	(42,558	)	$	(9,600	)	$	(51,611	)

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. See Note 18 for a discussion of our derivative instruments.

Contingent Consideration. In connection with the TexStar Asset Acquisition, we could be obligated to pay additional consideration to TexStar. Such obligations are dependent upon the cost of work required to complete certain assets and obtain outstanding real estate rights (collectively, the Contingent Consideration). We estimated the fair value of the Contingent Consideration using a probability-weighted discounted cash flow model, which reflects possible outcomes and our estimates of the probabilities of those outcomes. Our estimate of the fair value is based on significant inputs not observable in the market and thus falls within Level 3 of the fair value hierarchy. The probability-weighted cash flows were discounted using a discount rate of 11%.

Based on our assessment of the costs necessary to complete the assets in accordance with our agreement with TexStar, and considering the probability of possible outcomes, we determined that it is unlikely we would be obligated to pay a portion of the Contingent Consideration. The undiscounted amount of potential future payments that we could be required to make under the applicable agreements is between $0 and $1.3 million.

Guarantees. As of December 31, 2013, we recorded a liability of $1.9 million representing the fair value of guarantees we have issued on behalf of Asphalt JV. We estimated the fair value considering the probability of default by Asphalt JV and an estimate of the amount we would be obligated to pay under the guarantees at the time of default. We calculated the fair value based on the guarantees outstanding as of December 31, 2013, totaling $79.7 million, plus two guarantees that do not specify a maximum amount. Our estimate of the fair value is based on significant inputs not observable in the market and thus falls within Level 3 of the fair value hierarchy. See Note 19 for a discussion of our agreements with Asphalt JV.

In the event we are obligated to perform under these guarantees, that amount paid by us will be added to borrowings under the NuStar JV Facility. As a result, we increased the carrying value of the note receivable from Asphalt JV by the same amount as the liability for the fair value of the guarantees outstanding as of December 31, 2013.

The following table summarizes the activity in our Level 3 liabilities:



	Year Ended December 31, 2013
	(Thousands of Dollars)
Beginning balance	$	9,600
Amounts settled	(1,114		)
Adjustment to guarantee liability	1,880
Changes in fair value recorded in earnings:
Operating expenses	(8,000		)
Interest expense, net	832
Ending balance	$	3,198

Non-recurring Fair Value Measurements

As of December 31, 2013, we reclassified the property, plant and equipment associated with certain terminals as “Assets held for sale” on the consolidated balance sheet and recorded those assets at fair value, less costs to sell. We estimated the fair value of $22.0 million using a weighted-average of values calculated using an income approach and a market approach. The income approach calculates fair value by discounting the estimated net cash flows generated by the related terminal. The market approach involves estimating the fair value measurement on an earnings multiple based on public company transaction data. Our estimate of the fair value is based on significant inputs not observable in the market and thus falls within Level 3 of the fair value hierarchy.

Fair Value of Financial Instruments

We recognize cash equivalents, receivables, the note receivable from Asphalt JV, payables and debt in our consolidated balance sheets at their carrying amount. The fair values of these financial instruments, except for the note receivable from related party and debt, approximate their carrying amounts.

The estimated fair values and carrying amounts of our debt and note receivable from Asphalt JV were as follows:



	December 31,
	2013		2012
	(Thousands of Dollars)
Debt:
Fair value	$	2,636,734	$	2,377,120
Carrying amount	$	2,655,553	$	2,411,004

Note Receivable from Related Party:
Fair value	$	133,416	$	91,705
Carrying amount	$	165,440	$	95,711

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.

The note receivable related to the NuStar JV Facility is recorded at the outstanding principal amount, adjusted for equity losses from our investment in Asphalt JV after the carrying value of our investment in Asphalt JV was reduced to zero and for the fair value of guarantees issued under the NuStar JV Facility. We estimated the fair value of the note receivable using discounted cash flows, which use observable inputs such as time to maturity and market interest rates, and determined the fair value falls in Level 2 of the fair value hierarchy.