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Fair Value Measurements
 9 Months Ended
Sep. 30, 2021
Fair Value Disclosures [Abstract]  
Fair Value Measurements Fair Value Measurements
ASC Topic 820, “Fair Value Measurements and Disclosures,” establishes a hierarchy that prioritizes fair value measurements based on the types of inputs used for the various valuation techniques (market approach, income approach, and cost approach). The levels of the hierarchy are described below:
•Level 1: Observable inputs such as quoted prices in active markets for identical assets or liabilities.
•Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; these include quoted prices for similar assets or liabilities in active markets, such as interest rates and yield curves that are observable at commonly quoted intervals.
•Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions, as there is little, if any, related market activity.
The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of assets and liabilities and their placement within the fair value hierarchy. The following methods and assumptions are used to estimate the fair value of each class of financial instruments for which it is practicable to estimate. The fair value of the Company’s trade accounts receivable and payables approximates the carrying amounts.
Cash and Cash Equivalents
The fair value of the Company’s cash and cash equivalents approximates their carrying amount, due to the short maturity of the cash equivalents.
Equity Securities
As of September 30, 2021, we held $176.8 million in equity securities of ordinary shares which are reported as “Other assets” in our unaudited Consolidated Balance Sheets. During the quarter ended September 30, 2021, all warrants were exercised for ordinary shares which resulted in a loss of $20.1 million included in “Other,” as reported in “Other income (expenses)” within our unaudited Consolidated Statements of Operations and Comprehensive Income (Loss). As of December 31, 2020, we held $143.1 million in equity securities, which included ordinary shares and warrants which are reported as “Other assets” in our unaudited Consolidated Balance Sheets. These equity securities are the result of Penn Interactive entering into multi-year agreements with third-party sports betting operators for online sports betting and related iGaming market access across our portfolio.
During the three and nine months ended September 30, 2021, we recognized a holding gain of $10.1 million, and a holding gain of $28.9 million, respectively, related to these equity securities, compared to a gain of $67.9 million and $75.6 million for three and nine months ended September 30, 2020, respectively, which is included in “Other,” as reported in “Other income (expenses)” within our unaudited Consolidated Statements of Operations and Comprehensive Income (Loss).
The fair value of the equity securities was determined using Level 2 inputs, which use market approach valuation techniques. The primary inputs to those techniques include the quoted market price of the equity securities, foreign currency exchange rates, a discount for lack of marketability (“DLOM”) with respect to the ordinary shares, and a Black-Scholes option pricing model previously associated with the exercised warrants. The DLOM is based on the remaining term of the relevant lock-up periods and the volatility associated with the underlying equity securities. The Black-Scholes option pricing model utilizes the exercise price of the warrants, a risk-free rate, volatility associated with the underlying equity securities and the expected life of the warrants.
Held-to-maturity Securities and Promissory Notes
We have a management contract with Retama Development Corporation (“RDC”), a local government corporation of the City of Selma, Texas, to manage the day-to-day operations of Retama Park Racetrack, located outside of San Antonio, Texas. In addition, we own 1.0% of the equity of Retama Nominal Holder, LLC, which holds a nominal interest in the racing license used to operate Retama Park Racetrack, and a 75.5% interest in Pinnacle Retama Partners, LLC (“PRP”), which owns the contingent gaming rights that may arise if gaming under the existing racing license becomes legal in Texas in the future.
As of September 30, 2021 and December 31, 2020, PRP held $15.1 million in promissory notes issued by RDC and $6.7 million in local government corporation bonds issued by RDC, at amortized cost. The promissory notes and the local government corporation bonds are collateralized by the assets of Retama Park Racetrack. As of September 30, 2021 and December 31, 2020, the promissory notes and the local government corporation bonds were included in “Other assets” within our unaudited Consolidated Balance Sheets.
The contractual terms of these promissory notes include interest payments due at maturity; however, we have not recorded accrued interest on these promissory notes because uncertainty exists as to RDC’s ability to make interest payments. We have the positive intent and ability to hold the local government corporation bonds to maturity and until the amortized cost is recovered. The estimated fair values of such investments are principally based on appraised values of the land associated with Retama Park Racetrack, which are classified as Level 2 inputs.
Long-term Debt
The fair value of our Term Loan A Facility, Term Loan B-1 Facility, 5.625% Notes, 4.125% Notes, and Convertible Notes is estimated based on quoted prices in active markets and is classified as a Level 1 measurement. The fair value of our Revolving Credit Facility approximates its carrying amount as it is revolving, variable-rate debt, which we also classify as a Level 1 measurement.
Other long-term obligations as of September 30, 2021 and December 31, 2020 included a financing arrangement entered in February of 2021, the relocation fees for Dayton and Mahoning Valley, and the repayment obligation of the hotel and event center located near Hollywood Casino Lawrenceburg. See Note 8, “Long-term Debt” for details. The fair values of the Dayton and Mahoning Valley relocations fees and the Lawrenceburg repayment obligation are estimated based on rates consistent with the Company’s credit rating for comparable terms and debt instruments and are classified as Level 2 measurements.
Additionally, in February 2021, we entered into a financing arrangement providing the Company with upfront cash proceeds while permitting us to participate in future proceeds on certain claims. The financing obligation has been classified as a non-current liability and the fair value of the financing obligation is based on what we expect to be settled in a future period of which the principal is contingent and predicated on other events, plus accreted period interest using an effective interest rate of 27.0% until the claims and related obligation is settled. The financing obligation has been classified as a Level 3 measurement and is included within our unaudited Consolidated Balance Sheets in “Long-term debt, net of current maturities, debt discount and debt issuance costs.” See Note 8, “Long-term Debt.”
Other Liabilities
Other liabilities as of September 30, 2021 and December 31, 2020 includes contingent purchase price liabilities related to Plainridge Park Casino and Hitpoint, of which Hitpoint was acquired on May 11, 2021. The Hitpoint contingent purchase price liability is payable in $1.0 million installments in the form of cash and equity, on the first three anniversaries of the acquisition close date (May 11, 2021) and is based on the achievement of mutual goals established by the Company and Hitpoint. The
Plainridge Park Casino contingent purchase price liability is calculated based on earnings of the gaming operations over the first ten years of operations, which commenced on June 24, 2015. As of September 30, 2021, we were contractually obligated to make four additional annual payments. The fair value of the Plainridge Park Casino contingent purchase price liability is estimated based on an income approach using a discounted cash flow model. These contingent purchase price liabilities have been classified as a Level 3 measurement and are included within our unaudited Consolidated Balance Sheets in “Accrued expenses and other current liabilities” or “Other long-term liabilities,” depending on the timing of the next payment.
The carrying amounts and estimated fair values by input level of the Company’s financial instruments were as follows:
September 30, 2021
(in millions)Carrying AmountFair ValueLevel 1Level 2Level 3
Financial assets:
Cash and cash equivalents$2,729.3 $2,729.3 $2,729.3 $— $— 
Equity securities$176.8 $176.8 $— $176.8 $— 
Held-to-maturity securities$6.7 $6.7 $— $6.7 $— 
Promissory notes$15.1 $15.1 $— $15.1 $— 
Puts and calls related to certain Barstool Sports shares$1.5 $1.5 $— $1.5 $— 
Financial liabilities:
Long-term debt
Senior Secured Credit Facilities$1,558.5 $1,575.6 $1,575.6 $— $— 
5.625% Notes
$399.6 $413.5 $413.5 $— $— 
4.125% Notes
$392.7 $393.5 $393.5 $— $— 
Convertible Notes$250.0 $1,058.8 $1,058.8 $— $— 
Other long-term obligations$148.7 $146.6 $— $62.0 $84.6 
Other liabilities$13.3 $13.3 $— $2.8 $10.5 
December 31, 2020
(in millions)Carrying AmountFair ValueLevel 1Level 2Level 3
Financial assets:
Cash and cash equivalents$1,853.8 $1,853.8 $1,853.8 $— $— 
Equity securities$143.1 $143.1 $— $143.1 $— 
Held-to-maturity securities$6.7 $6.7 $— $6.7 $— 
Promissory notes$15.1 $15.1 $— $15.1 $— 
Financial liabilities:
Long-term debt
Senior Secured Credit Facilities$1,600.3 $1,609.3 $1,609.3 $— $— 
5.625% Notes
$399.5 $418.0 $418.0 $— $— 
Convertible notes$239.8 $1,274.5 $1,274.5 $— $— 
Other long-term obligations$73.0 $72.8 $— $72.8 $— 
Other liabilities$10.1 $10.1 $— $2.8 $7.3 
Puts and calls related to certain Barstool Sports shares$0.3 $0.3 $— $0.3 $— 
The following table summarizes the changes in fair value of our Level 3 liabilities measured on a recurring basis:
(in millions)Other Liabilities
Balance as of January 1, 2021$7.3 
Additions75.5 
Interest12.1 
Payments(1.7)
Included in earnings (1)
1.9 
Balance as of September 30, 2021$95.1 
(1)The expense is included in “General and administrative” within our unaudited Consolidated Statements of Operations and Comprehensive Income (Loss).
The following table summarizes the significant unobservable inputs used in calculating fair value for our Level 3 liabilities on a recurring basis as of September 30, 2021:
 Valuation TechniqueUnobservable InputDiscount Rate
Other long-term obligationDiscounted cash flowDiscount rate27.0%
Contingent purchase price - Plainridge Park CasinoDiscounted cash flowDiscount rate3.4%