Financial Instruments and Fair Value Measurements

Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. A three-tier fair value hierarchy is established as a basis for considering such assumptions and for inputs used in the valuation methodologies in measuring fair value:

Level 1. Quoted prices in active markets for identical assets or liabilities;

Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

Level 3. Unobservable inputs in which there is little or no market data, such as internally-developed valuation models which require the reporting entity to develop its own assumptions.

The financial instruments measured at fair value on a recurring basis at March 31, 2016 were as follows:



	Level 1		Level 2		Level 3		Total Fair Value
Cash equivalents:
Money market funds	$	20,308	$	—	$	—	$	20,308
Commercial paper	158,973		—		—		158,973
Debt securities:
U.S. Treasury securities	184,949		—		—		184,949
Corporate debt securities	—		8,440		—		8,440
Preferred stock	—		148		—		148
Restricted investments:
Money market fund	5,651		—		—		5,651
	$	369,881	$	8,588	$	—	$	378,469

The financial instruments measured at fair value on a recurring basis at December 31, 2015 were as follows:



	Level 1		Level 2		Level 3		Total Fair Value
Cash equivalents:
Money market funds	$	18,233	$	—	$	—	$	18,233
Commercial paper	174,973		—		—		174,973
Debt securities:
U.S. Treasury securities	184,740		—		—		184,740
Corporate debt securities	—		6,292		—		6,292
Preferred stock	—		208		—		208
Restricted investments:
Guaranteed income fund	—		7,072		—		7,072
	$	377,946	$	13,572	$	—	$	391,518

Money market funds, U.S. Treasury securities and commercial paper are measured based on quoted market prices in an active market and categorized within level 1 of the fair value hierarchy. Money market funds and commercial paper with a maturity date of ninety days or less from the date of purchase are classified as cash equivalents in the Company’s condensed consolidated balance sheets.

Corporate debt securities and preferred stock are measured primarily using pricing data from external pricing services that use prices observed for recently executed market transactions for the corporate debt security and the preferred stock that the Company owns. Corporate debt securities and preferred stock are not traded on a nationally recognized exchange but rather are traded in the U.S. over the counter market where there is less trading activity. For these reasons, the Company has determined that the corporate debt securities and preferred stock are categorized as level 2 financial instruments since their fair values were determined from market inputs in an inactive market.

Restricted investments include certain of the surplus assets that were transferred from the Company’s Pension Plan to a suspense account in the Company’s 401(k) Plan in December 2014. The Company has retained the risks and rewards of ownership of these assets; therefore, the assets held in the suspense account are included in the Company’s condensed consolidated financial statements until they are allocated to participants. As of December 31, 2015, the assets held in the suspense account were invested in the Prudential Guaranteed Income Fund, which is a stable value fund designed to provide safety of principal, liquidity, and a rate of return. The Prudential Guaranteed Income Fund is valued based upon the contributions made to the fund, plus earnings at guaranteed crediting rates, less withdrawals and fees and are categorized as level 2 financial instruments. As of March 31, 2016 the assets were transferred to a Vanguard Money Market Fund, which invests in U.S. government securities and seeks to provide current income and preserve shareholders’ principal investment. The Vanguard Money Market Fund is measured based on quoted market prices in an active market and categorized within level 1 of the fair value hierarchy. The Company’s Retirement Plan Investment Committee is responsible for investing decisions and allocation decisions of the suspense account. Refer to Note 15, Employee Benefit Plans.

Fair Value of Financial Instruments


•	The fair value of the Company’s retained interest investments is based on the present value of the expected future cash flows at the effective yield.


•	The fair value of the Investments held by special purpose entities is based on the present value of future cash flows at the current market rate.


•	The fair value of the Investments held by special purpose entities - U.S. Treasury securities are measured based on quoted market prices in an active market.


•	The fair value of the Senior Notes held by special purpose entity is based on the present value of future cash flows at the current market rate.

The carrying amount and fair value of the Company’s financial instruments were as follows:



	March 31, 2016					December 31, 2015
	Carrying value		Fair value		Level	Carrying value		Fair value		Level
Assets
Retained interest investments	$	10,316	$	13,257	3	$	10,246	$	13,333	3
Investments held by special purpose entities:
Time deposit	$	200,000	$	200,000	3	$	200,000	$	200,000	3
U.S. Treasury securities and cash equivalents	$	8,414	$	8,952	1	$	8,785	$	9,033	1
Liabilities
Senior Notes held by special purpose entity	$	176,147	$	208,525	3	$	176,094	$	178,035	3

Retained Interest Investments

The Company has a beneficial interest in certain bankruptcy remote qualified special purpose entities (the “SPEs”) used in the installment sale monetization of certain sales of timberlands in 2007 and 2008. The SPEs’ assets are not available to satisfy the Company’s liabilities or obligations and the liabilities of the SPEs are not the Company’s liabilities or obligations. In the event that proceeds from the financial instruments are insufficient to settle all of the liabilities of the SPEs, the Company is not obligated to contribute any funds to the SPEs. The Company has determined that it is not the primary beneficiary of the SPEs, since the Company is not the primary decision maker with respect to activities that could significantly impact the economic performance of the SPEs, nor does the Company perform any service activity related to the SPEs. Therefore, the SPEs’ assets and liabilities are not consolidated in the Company’s condensed consolidated financial statements as of March 31, 2016 and December 31, 2015.

At the time of monetization the initial retained interest recorded was an estimate based on the present value of future excess cash flows expected to be received over the life of the retained interest, using management’s best estimate of underlying assumptions, including credit risk and discount rates. The Company’s continuing involvement with the SPEs is the receipt of the net interest payments and the remaining principal of approximately $15.1 million to be received at the end of the installment notes’ fifteen year maturity period, in 2022 through 2024.

The Company has a beneficial or retained interest investment related to these SPEs of $10.3 million and $10.2 million as of March 31, 2016 and December 31, 2015, respectively, recorded in other assets on the Company’s condensed consolidated balance sheets. The Company has classified its retained interest investment as held-to-maturity because the Company has both the intent and the ability to hold its interest in the SPEs to maturity. Accordingly, the Company has recorded the retained interest investment at cost, adjusted for the accretion of investment income over the life of the retained interest using the effective yield method with rates ranging from 3.7% to 11.4%. The Company continues to update the expectation of cash flows to be collected over the term of the retained interest. Changes to the previously projected cash flows are accounted for prospectively, unless based on management’s assessment of current information and events, it is determined that there is an other-than-temporary impairment. The Company has not recorded an other-than-temporary impairment related to its retained interest investments during the three months ended March 31, 2016 and 2015.

In the event of a failure and liquidation of the counterparties involved in the installment sales, the Company could be required to write-off the remaining retained interest recorded on its condensed consolidated balance sheets in connection with the installment sale monetization transactions in 2007 and 2008.

Investments and Senior Notes Held by Special Purpose Entities

In connection with a real estate sale in 2014, the Company received consideration consisting of (i) cash, (ii) a $200.0 million fifteen-year installment note (the “Timber Note”) issued by Panama City Timber Finance Company, LLC, a buyer-sponsored special purpose entity (“AgReserves SPE”) and (iii) an Irrevocable Standby Letter of Credit issued by JPMorgan Chase Bank, N.A. (the “Letter of Credit”) at the request of AgReserves SPE, in favor of the Company. In 2014, the Company contributed the Timber Note and assigned its rights as a beneficiary under the Letter of Credit to Northwest Florida Timber Finance, LLC (“NFTF”), a bankruptcy-remote, qualified special purpose entity wholly-owned by the Company. NFTF monetized the Timber Note by issuing $180.0 million aggregate principal amount of its 4.8% Senior Secured Notes due in 2029 (the “Senior Notes”) at an issue price of 98.5% of face value to third party investors. AgReserves SPE and NFTF are VIEs, which the Company consolidates as the primary beneficiary of each entity. The investments held by special purpose entities consist of a $200.0 million time deposit that, subsequent to April 2, 2014, pays interest at 4.0% and matures in March 2029, U.S. Treasuries of $8.1 million, and cash of $0.3 million. The Senior Notes issued by NFTF consist of $176.1 million net of the $3.9 million discount and debt issuance costs.