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 for 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:



	March 31, 2016
	Level 1			Level 2			Level 3			Total
	(Thousands of Dollars)
Assets:
Other current assets:
Product imbalances	$	4,321		$	—		$	—		$	4,321
Commodity derivatives	1,671			69			—			1,740
Total	$	5,992		$	69		$	—		$	6,061
Liabilities:
Accrued liabilities:
Product imbalances	$	(433	)	$	—		$	—		$	(433	)
Commodity derivatives	(751		)	(133		)	—			(884		)
Other long-term liabilities:
Guarantee liability	—			—			(1,400		)	(1,400		)
Interest rate swaps	—			(28,675		)	—			(28,675		)
Total	$	(1,184	)	$	(28,808	)	$	(1,400	)	$	(31,392	)



	December 31, 2015
	Level 1			Level 2			Level 3			Total
	(Thousands of Dollars)
Assets:
Other current assets:
Product imbalances	$	179		$	—		$	—		$	179
Commodity derivatives	11,325			77			—			11,402
Other long-term assets, net:
Interest rate swaps	—			2,755			—			2,755
Total	$	11,504		$	2,832		$	—		$	14,336
Liabilities:
Accrued liabilities:
Product imbalances	$	(419	)	$	—		$	—		$	(419	)
Commodity derivatives	—			(120		)	—			(120		)
Other long-term liabilities:
Guarantee liability	—			—			(1,697		)	(1,697		)
Interest rate swaps	—			(1,452		)	—			(1,452		)
Total	$	(419	)	$	(1,572	)	$	(1,697	)	$	(3,688	)

Product Imbalances. We value our assets and liabilities related to product imbalances using quoted market prices in active markets as of the reporting date. Therefore, we include these product imbalances in Level 1 of the fair value hierarchy.

Commodity Derivatives. We base the fair value of certain of our commodity derivative instruments on quoted prices on an exchange; accordingly, we include these items 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 6 for a discussion of our derivative instruments.

Interest Rate Swaps. We estimate the fair value of our forward-starting interest rate swaps using discounted cash flows, which use observable inputs such as time to maturity and market interest rates. Therefore, we include these interest rate swaps in Level 2 of the fair value hierarchy.

Guarantees. In 2014, we sold our remaining 50% ownership interest in NuStar Asphalt LLC, which then changed its name to Axeon Specialty Products LLC (Axeon). We provide credit support, such as guarantees, letters of credit and cash collateral, as applicable, of up to $125.0 million to Axeon. As of March 31, 2016, we have provided $19.7 million in letters of credit on behalf of Axeon. As of March 31, 2016 and December 31, 2015, we provided guarantees mainly for commodity purchases, lease obligations and certain utilities for Axeon with an aggregate maximum potential exposure of $59.3 million and $71.9 million, respectively, and one guarantee that does not specify a maximum amount. A majority of these guarantees have no expiration date. We estimated the fair value considering the probability of default by Axeon and an estimate of the amount we would be obligated to pay under the guarantees at the time of default based on the guarantees outstanding as of March 31, 2016 and December 31, 2015. 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 following table summarizes the activity in our Level 3 liabilities:



	Three Months Ended March 31, 2016
	(Thousands of Dollars)
Beginning balance	$	1,697
Adjustments to guarantee liability	(297		)
Ending balance	$	1,400

Fair Value of Financial Instruments

We recognize cash equivalents, receivables, note receivables, payables and debt in our consolidated balance sheets at their carrying amounts. The fair values of these financial instruments, except for the $190.0 million term loan to Axeon (the Axeon Term Loan) and long-term debt, approximate their carrying amounts.

The estimated fair values and carrying amounts of the long-term debt and the Axeon Term Loan were as follows:



	March 31, 2016				December 31, 2015
	Fair Value		Carrying Amount		Fair Value		Carrying Amount
	(Thousands of Dollars)
Long-term debt	$	2,980,166	$	3,125,650	$	2,929,438	$	3,055,612
Axeon Term Loan	$	173,197	$	170,055	$	172,123	$	170,352

We estimated the fair value of our publicly-traded senior notes based upon quoted prices in active markets; therefore, we determined that 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 that the fair value falls in Level 2 of the fair value hierarchy.

We estimated the fair value of the Axeon Term Loan using discounted cash flows, which use observable inputs such as time to maturity and market interest rates, and determined that the fair value falls in Level 2 of the fair value hierarchy. The carrying value of the Axeon Term Loan is included in “Other long-term assets, net” on the consolidated balance sheets.

As of March 31, 2016, the carrying amount of the Axeon Term Loan is $170.1 million, consisting of the following: (i) the outstanding principal amount from the Axeon Term Loan of $190.0 million; (ii) plus the fair value of guarantees of $1.4 million as of March 31, 2016; and (iii) less equity losses from our investment in Axeon of $21.3 million incurred prior to the 2014 sale of our remaining ownership interest in Axeon and after the carrying value of our equity investment in Axeon was reduced to zero. The carrying value of the Axeon Term Loan is included in “Other long-term assets, net” on the consolidated balance sheets. We review the financial information of Axeon monthly for possible credit loss indicators. In 2015 and 2014, Axeon failed to make two scheduled principal payments, increasing the interest rate payable by Axeon, until Axeon makes the payments.