Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements and Derivative Instruments

v3.4.0.3
Fair Value Measurements and Derivative Instruments
3 Months Ended
Mar. 31, 2016
Fair Value Disclosures [Abstract]  
Fair Value Measurements and Derivative Instruments
Fair Value Measurements and Derivative Instrument

Recurring Fair Value Measurements
Assets and liabilities measured at fair value on a recurring basis as of March 31, 2016 and December 31, 2015 are as follows (amounts in thousands):
March 31, 2016
Level 1 (1)
 
Level 2 (2)
 
Level 3 (3)
 
Total
Assets:
 
 
 
 
 
 
 
Deferred compensation plan assets (mutual funds)
$
1,483

 

 

 
1,483

Liabilities:
 
 
 
 
 
 
 
Derivative stock appreciation rights
$

 

 
28,290

 
28,290

 
 
 
 
 
 
 
 
December 31, 2015
Level 1 (1)
 
Level 2 (2)
 
Level 3 (3)
 
Total
Assets:
 
 
 
 
 
 
 
Deferred compensation plan assets (mutual funds)
$
1,728

 

 

 
1,728

Liabilities:
 
 
 
 
 
 
 
Derivative stock appreciation rights
$

 

 
32,820

 
32,820

 
 
 
 
 
 
 
 
(1) Quoted prices in active markets for identical assets or liabilities
(2) Observable inputs other than quoted prices in active markets for identical assets and liabilities
(3) Inputs that are generally unobservable and not corroborated by market data


The fair value of our mutual funds is determined using quoted market prices in active markets utilizing market observable inputs.

The fair value of our derivative stock appreciation rights was determined using a lattice-based valuation model (see the section "Derivative Financial Instruments" below for more information).

Current and Long-Term Debt
The carrying amounts and approximate fair values of our current and long-term debt, excluding capital leases, at March 31, 2016 and December 31, 2015 are as follows (amounts in thousands):
 
March 31,
2016
 
December 31,
2015
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Current and long-term debt
$
1,337,989

 
1,393,992

 
1,332,739

 
1,390,743



The following methods and assumptions were used to estimate fair values:
The fair values of the 6.75% Senior Notes due 2021 and the 6.875% Senior Notes due 2025 both issued by GCI, Inc., our wholly owned subsidiary, are based upon quoted market prices for the same or similar issues (Level 2).
The fair value of our Searchlight Note Payable is based on the current rates offered to us for similar remaining maturities plus an additional premium to reflect its subordination to our 2021 and 2025 Notes (Level 3). 
The fair value of our Amended Senior Credit Facility and Wells Fargo note payable are estimated to approximate their carrying value because the instruments are subject to variable interest rates (Level 2).

Derivative Financial Instrument
In connection with the $75.0 million unsecured promissory note issued to Searchlight on February 2, 2015, we entered into a stock appreciation rights agreement pursuant to which we issued to Searchlight three million stock appreciation rights. Each stock appreciation right entitles Searchlight to receive, upon exercise, an amount payable at our election in either cash or shares of GCI's Class A common stock equal in value to the excess of the fair market value of a share of GCI Class A common stock on the date of exercise over the price of $13.00. The instrument is exercisable on the fourth anniversary of the grant date and will expire eight years from the date of grant. We have determined that the stock appreciation rights are required to be separately accounted for as a derivative instrument and subject to fair value liability accounting under ASC 815-10.

We use a lattice based valuation model to value the stock appreciation rights liability at each reporting date. The model incorporates transaction details such as our stock price, instrument term and settlement provisions, as well as highly complex and subjective assumptions about volatility, risk-free interest rates, issuer behavior and holder behavior. The lattice model uses highly subjective assumptions and the use of other reasonable assumptions could provide different results. The following table shows our significant assumptions and inputs used in the lattice-based valuation model to value the stock appreciation right liability at March 31, 2016:

 
March 31, 2016
Expected term (in years)
2.8 - 6.8

Volatility
40
%
Risk-free interest rate
1.5
%


We revalue our derivative liability at each reporting period and recognize gains or losses in our Consolidated Statements of Operations attributable to the change in the fair value of the instruments. The stock appreciation rights liability is included within Other Liabilities in our Consolidated Balance Sheets and are classified as Level 3 within the fair value hierarchy.

The following table summarizes the changes in fair value of our financial instrument measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended March 31, 2016 and 2015:
Fair Value Measurement Using Level 3 Inputs
 
Derivative Stock Appreciation Rights
Balances at January 1, 2015
$

Issuance
21,660

Fair value adjustment at end of period, included in Other Income (Expense)
2,120

Balances at March 31, 2015
23,780

 
 
Balances at January 1, 2016
32,820

Fair value adjustment at end of period, included in Other Income (Expense)
(4,530
)
Balances at March 31, 2016
$
28,290