Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements and Derivative Instrument

v3.7.0.1
Fair Value Measurements and Derivative Instrument
6 Months Ended
Jun. 30, 2017
Fair Value Disclosures [Abstract]  
Fair Value Measurements and Derivative Instrument
Fair Value Measurements and Derivative Instrument

Recurring Fair Value Measurements
Assets and liabilities measured at fair value on a recurring basis as of June 30, 2017 and December 31, 2016 are as follows (amounts in thousands):
June 30, 2017
Level 1 (1)
 
Level 2 (2)
 
Level 3 (3)
 
Total
Assets:
 
 
 
 
 
 
 
Deferred compensation plan assets (mutual funds)
$
1,354

 

 

 
1,354

Liabilities:
 
 
 
 
 
 
 
Derivative stock appreciation rights
$

 

 
71,400

 
71,400

 
 
 
 
 
 
 
 
December 31, 2016
Level 1 (1)
 
Level 2 (2)
 
Level 3 (3)
 
Total
Assets:
 
 
 
 
 
 
 
Deferred compensation plan assets (mutual funds)
$
1,477

 

 

 
1,477

Liabilities:
 
 
 
 
 
 
 
Derivative stock appreciation rights
$

 

 
29,700

 
29,700

 
 
 
 
 
 
 
 
(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 Instrument" 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 June 30, 2017 and December 31, 2016 are as follows (amounts in thousands):
 
June 30,
2017
 
December 31,
2016
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Current and long-term debt
$
1,387,401

 
1,476,286

 
1,336,772

 
1,393,865



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 Capital, L.P. ("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, holder behavior, and the impact of a change of control (please see Note 11 for additional information regarding a change of control contingency). 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 June 30, 2017:
 
June 30, 2017
Contractual term (in years)
1.8 to 5.8

Volatility
20% to 40%

Risk-free interest rate
1.1% to 2.0%

Stock Price
$
36.64



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 six months ended June 30, 2017 and 2016 (amounts in thousands):
Fair Value Measurement Using Level 3 Inputs
 
Derivative Stock Appreciation Rights
Balance at January 1, 2016
$
32,820

Fair value adjustment at end of period, included in Other Income (Expense)
(11,040
)
Balance at June 30, 2016
$
21,780

 
 
Balance at January 1, 2017
$
29,700

Fair value adjustment at end of period, included in Other Income (Expense)
41,700

Balance at June 30, 2017
$
71,400