FINANCIAL INSTRUMENTS AND FAIR VALUE

In determining fair value, we use various valuation approaches, including market, income and/or cost approaches. Accounting standards establish a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from independent sources. Unobservable inputs are inputs that reflect our assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs as follows:

Level 1-Valuations based on quoted prices in active markets for identical assets or liabilities that we have the ability to access.

Level 2-Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly. Assets and liabilities utilizing Level 2 inputs include cash flow swap instruments, exchange-traded debt securities that are not actively traded or do not have a high trading volume and mortgage notes payable.

Level 3-Valuations based on inputs that are unobservable and significant to the overall fair value measurement. Asset and liability measurements utilizing Level 3 inputs include those used in estimating fair value of non-financial assets and non-financial liabilities in purchase acquisitions and those used in assessing impairment of manufacturer franchise rights and goodwill.

The availability of observable inputs can vary and is affected by a wide variety of factors. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment required to determine fair value is greatest for instruments categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is disclosed is determined based on the lowest level input that is significant to the fair value measurement.

Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, our assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. We use inputs that are current as of the measurement date, including during periods of significant market fluctuations.

Financial instruments consist primarily of cash and cash equivalents, contracts-in-transit, accounts receivable, cash surrender value of corporate-owned life insurance policies, accounts payable, floor plan notes payable, subordinated long-term debt, mortgage notes payable and interest rate swap agreements. The carrying values of our financial instruments, with the exception of subordinated long-term debt and mortgage notes payable, approximate fair value due to (i) their short-term nature, (ii) recently completed market transactions or (iii) existence of variable interest rates, which approximate market rates. The fair market value of our subordinated long-term debt is based on reported market prices which reflect Level 2 inputs. We estimate the fair value of our mortgage notes payable using a present value technique based on current market interest rates for similar types of financial instruments which reflect Level 2 inputs. A summary of the carrying values and fair values of our 6.0% Notes and our mortgage notes payable is as follows:



	As of
	September 30, 2015		December 31, 2014
	(In millions)
Carrying Value:
6.0% Senior Subordinated Notes due 2024	$	400.0	$	400.0
Mortgage notes payable (a)	358.2		303.8
Total carrying value	$	758.2	$	703.8

Fair Value:
6.0% Senior Subordinated Notes due 2024	$	413.0	$	407.0
Mortgage notes payable (a)	368.0		318.0
Total fair value	$	781.0	$	725.0


(a)	Mortgage notes payable do not include mortgages with a $6.5 million carrying value classified as Liabilities Associated with Assets Held for Sale as of September 30, 2015.

In June 2015, we entered into a new interest rate swap agreement with a notional principal amount of $100.0 million. This swap was designed to provide a hedge against changes in variable rate cash flows through maturity in February 2025. The notional value of this swap was $100.0 million as of September 30, 2015 and is reducing over its remaining term to $53.1 million at maturity.

In November 2013, we entered into an interest rate swap agreement with a notional principal amount of $75.0 million. This swap was designed to provide a hedge against changes in variable rate cash flows through maturity in September 2023. The notional value of this swap was $68.7 million as of September 30, 2015 and is reducing over its remaining term to $38.7 million at maturity.

We are also party to an interest rate swap agreement that had a notional principal amount of $16.2 million as of September 30, 2015. This swap is designed to provide a hedge against changes in variable interest rate cash flows through maturity in October 2015. The notional value of this swap is reducing over the remaining term to $16.1 million at maturity.

All of our interest rate swaps qualify for cash flow hedge accounting treatment and do not, and will not, contain any ineffectiveness.

Information about the effect of derivative instruments on the accompanying Condensed Consolidated Statements of Income, including the impact on Accumulated Other Comprehensive Income ("AOCI") (in millions):



For the Three Months Ended September 30,	Derivative in Cash Flow Hedging Relationships	Results Recognized in AOCI (Effective Portion)			Location of Results Reclassified from AOCI to Earnings	Amount Reclassified from AOCI to Earnings–Active Swaps			Ineffective Results Recognized in Earnings		Location of Ineffective Results
2015	Interest rate swaps	$	(5.0	)	Swap interest expense	$	(1.0	)	$	—	N/A
2014	Interest rate swaps	$	(0.4	)	Swap interest expense	$	(0.5	)	$	—	N/A



For the Nine Months Ended September 30,	Derivative in Cash Flow Hedging Relationships	Results Recognized in AOCI (Effective Portion)			Location of Results Reclassified from AOCI to Earnings	Amount Reclassified from AOCI to Earnings–Active Swaps			Ineffective Results Recognized in Earnings		Location of Ineffective Results
2015	Interest rate swaps	$	(7.0	)	Swap interest expense	$	(2.0	)	$	—	N/A
2014	Interest rate swaps	$	(3.2	)	Swap interest expense	$	(1.5	)	$	—	N/A

On the basis of yield curve conditions as of September 30, 2015 and including assumptions about future changes in fair value, we expect the amount to be reclassified out of AOCI into earnings in the next 12 calendar months will be a loss of $3.3 million.

Fair value estimates reflect a credit adjustment to the discount rate applied to all expected cash flows under the swaps. Other than that assumption, all other inputs reflect Level 2 inputs.



Information about adjustments to AOCI	(In millions)
Accumulated other comprehensive loss—December 31, 2014	$	(1.5	)
Change in fair value of cash flow swaps	(5.0		)
Income tax impact associated with cash flow swaps	1.9
Accumulated other comprehensive loss—September 30, 2015	$	(4.6	)

Market Risk Disclosures as of September 30, 2015:

Instruments entered into for trading purposes—None

Instruments entered into for hedging purposes (in millions)—



Type of Derivative	Notional Size		Underlying Rate	Expiration	Fair Value
Interest Rate Swap*	$	100.0	1 month LIBOR	February 2025	$	(4.2	)
Interest Rate Swap*	$	68.7	1 month LIBOR	September 2023	$	(3.6	)
Interest Rate Swap*	$	16.2	1 month LIBOR	October 2015	$	(0.1	)

____________________________

* The total fair value of our swaps is a $7.9 million net liability, of which $3.4 million is included in Accounts Payable and Accrued Liabilities, $4.5 million is included in Other Long-Term Liabilities on the accompanying Condensed Consolidated Balance Sheet.

Market Risk Disclosures as of December 31, 2014:

Instruments entered into for trading purposes—None

Instruments entered into for hedging purposes (in millions)—



Type of Derivative	Notional Size		Underlying Rate	Expiration	Fair Value
Interest Rate Swap*	$	71.5	1 month LIBOR	September 2023	$	(2.5	)
Interest Rate Swap*	$	17.2	1 month LIBOR	October 2015	$	(0.2	)

____________________________

* The total fair value of our swaps is a $2.7 million net liability, of which $1.8 million is included in Accounts Payable and Accrued Liabilities and $0.9 million is included in Other Long-Term Liabilities on the accompanying Condensed Consolidated Balance Sheet.