10. 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 and as such is a Level 1 measurement.

Loans to the Jamul Tribe

The fair value of the Company’s loans to the Jamul Tribe was based on market interest rates for similarly rated observable instruments. Although we determined that these inputs fell within Level 2 of the fair value hierarchy, the Company’s loan is impaired and as such the fair value is estimated based on the present value of expected future cash flows of the facility discounted at the loan’s effective interest rate which is a Level 3 measurement. Therefore, the Company concluded that this instrument should be classified as a Level 3 measurement. See Note 2 for further details.

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 June 30, 2017, included 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.

Other liabilities

Other liabilities at June 30, 2017 is primarily comprised of the contingent purchase price consideration related to the purchases of Plainridge Racecourse and Rocket Speed. The fair value of the Company’s contingent purchase price consideration related to its Plainridge Racecourse acquisition is estimated based on a discounted cash flow model and as such is a Level 3 measurement. The fair value of the Company’s contingent purchase price consideration related to its Rocket Speed acquisition is estimated by applying an option pricing method using a Monte Carlo simulation which is a quantitative technique that estimates the distribution of an outcome variable that depends on probabilistic input variables and as such is a Level 3 measurement. At each reporting period, the Company assesses the fair value of these liabilities and changes in their fair values are recorded in earnings. The amount related to the change in fair value of these obligations resulted in a charge to general and administrative expense of $1.4 million and $3.9 million for the three and six months ended June 30, 2017, respectively, compared to a charge of $0.1 million and a reduction of $1.1 million for the three and six months ended June 30, 2016, respectively.

The carrying amounts and estimated fair values by input level of the Company’s financial instruments at June 30, 2017 and December 31, 2016 are as follows (in thousands):


	June 30, 2017
	Carrying
	Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	224,399	$	224,399	$	224,399	$	—	$	—
Loans to the Jamul Tribe		84,152		84,152		—		—		84,152
Financial liabilities:
Long-term debt
Senior secured credit facility		812,001		847,494		797,494		50,000		—
Senior unsecured notes		399,208		406,000		406,000		—		—
Other long-term obligations		126,573		127,301		—		127,301		—
Other liabilities		52,955		52,955		—		—		52,955


	December 31, 2016
	Carrying
	Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	229,510	$	229,510	$	229,510	$	—	$	—
Loans to the Jamul Tribe		92,100		98,000		—		—		98,000
Financial liabilities:
Long-term debt
Senior secured credit facility		962,703		976,092		785,092		191,000		—
Senior unsecured notes		296,895		312,000		312,000		—		—
Other long-term obligations		154,084		152,132		—		152,132		—
Other liabilities		48,244		48,244		—		—		48,244

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


	Six Months Ended
	June 30, 2017
	Liabilities			Assets
	Contingent			Loans to the
	Purchase Price			Jamul Tribe
Balance at January 1, 2017	$	48,244	$	98,000
Unamortized discount		—		(5,865)
Additions		830		372
Payments		(41)		(2,720)
Included in earnings		3,922		(5,635)
Balance at June 30, 2017	$	52,955	$	84,152

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


	Valuation	Unobservable
	Technique	Input	Discount Rate		Volatility Rate
Contingent purchase price - Plainridge	Discounted cash flow	Discount rate	8.30	%	N/A	%
Contingent purchase price - Rocket Speed	Option pricing method	Discount rate, Volatility rate	11.00	%	70.92	%