12. Fair Value Measurements

ASC 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:

Cash and cash equivalents

The fair value of the Company’s cash and cash equivalents approximates the carrying value of the Company’s cash and cash equivalents, due to the short maturity of the cash equivalents.

Long-term debt

The fair value of the Company’s Term Loan A and B components of its senior secured credit facility and senior unsecured notes is estimated based on quoted prices in active markets and as such is a Level 1 measurement. The fair value of the remainder of the Company’s senior secured credit facility approximates its carrying value as it is revolving, variable rate debt and as such is a Level 2 measurement.

Other long term obligations at September 30, 2015 include the relocation fees for Hollywood Gaming at Dayton Raceway and Hollywood Gaming at Mahoning Valley Race Course, and the repayment obligation of a hotel and event center located near Hollywood Casino Lawrenceburg. The fair value of the relocation fees for Hollywood Gaming at Dayton Raceway and Hollywood Gaming at Mahoning Valley Race Course approximates its carrying value as the discount rate of 5.0% approximates the market rate of similar debt instruments and as such is a Level 2 measurement. Finally, the fair value of the repayment obligation for the hotel and event center is estimated based on a rate consistent with comparable municipal bonds and as such is a Level 2 measurement. See Note 7 for further details regarding the Company’s other long term obligations.

Other Liabilities

Other liabilities at September 30, 2015, include the contingent purchase price consideration related to the purchase of Plainridge Racecourse. The fair value of the Company’s contingent purchase price consideration related to its Plainridge Racecourse acquisition is estimated based on an income approach using a discounted cash flow model and as such is a Level 3 measurement. At each reporting period, the Company assesses the fair value of this obligation and changes in its value are recorded in earnings. The amount related to the change in fair value of this obligation resulted in a reduction to general and administrative expense of $6.7 million and $5.9 million for the three and nine months ended September 30, 2015, respectively.

The carrying amounts and estimated fair values by input level of the Company’s financial instruments at September 30, 2015 and December 31, 2014 are as follows (in thousands):

	September 30, 2015
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	223,489	$	223,489	$	223,489	$	—	$	—
Financial liabilities:
Long-term debt
Senior secured credit facility	1,214,633		1,230,292		840,292		390,000		—
Senior unsecured notes	296,091		303,000		303,000		—		—
Other long-term obligations	146,992		145,644		—		145,644		—
Other Liabilities	13,245		13,245		—		—		13,245

	December 31, 2014
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	208,673	$	208,673	$	208,673	$	—	$	—
Financial liabilities:
Long-term debt
Senior secured credit facility	785,683		799,556		714,556		85,000		—
Senior unsecured notes	295,610		276,000		276,000		—		—
Other long-term obligations	135,000		135,000		—		135,000		—
Other Liabilities	19,189		19,189		—		—		19,189

The following table summarizes the changes in fair value of the Company’s Level 3 liabilities (in thousands):

	Nine Months Ended September 30, 2015
	Liabilities
	Contingent Purchase Price

Balance at January 1, 2015	$	19,189
Total (gains) (realized or unrealized):
Included in earnings	(5,944		)

Balance at September 30, 2015	$	13,245

The following table summarizes the significant unobservable inputs used in calculating fair value for our Level 3 liabilities:

	Valuation	Unobservable
	Technique	Input	Rate
Contingent purchase price	Discounted cash flow	Discount rate	8.30	%