FAIR VALUE MEASUREMENTS

The authoritative accounting guidance for fair value measurements specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company's market assumptions. These inputs create the following fair value hierarchy:

Level 1: Quoted prices for identical instruments in active markets.

Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

Level 3: Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Thus, assets and liabilities categorized as Level 3 may be measured at fair value using inputs that are observable (Levels 1 and 2) and unobservable (Level 3). Management'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 levels.

Balances Measured at Fair Value

The following tables show the fair values of certain of our financial instruments:



	September 30, 2015
(In thousands)	Balance		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	125,045	$	125,045	$	—	$	—
Restricted cash	24,734		24,734		—		—
Investment available for sale	17,949		—		—		17,949

Liabilities
Contingent payments	$	3,587	$	—	$	—	$	3,587



	December 31, 2014
(In thousands)	Balance		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	145,341	$	145,341	$	—	$	—
Restricted cash	18,107		18,107		—		—
Investment available for sale	18,357		—		—		18,357

Liabilities
Merger earnout	$	75	$	—	$	—	$	75
Contingent payments	3,792		—		—		3,792

Cash and Cash Equivalents and Restricted Cash

The fair value of our cash and cash equivalents and restricted cash, classified in the fair value hierarchy as Level 1, are based on statements received from our banks at September 30, 2015 and December 31, 2014.

Investment Available for Sale

We have an investment in a single municipal bond issuance of $21.4 million aggregate principal amount of 7.5% Urban Renewal Tax Increment Revenue Bonds, Taxable Series 2007 that is classified as available for sale. We are the only holder of this instrument and there is no quoted market price for this instrument. As such, the fair value of this investment is classified as Level 3 in the fair value hierarchy. The estimate of the fair value of such investment was determined using a combination of current market rates and estimates of market conditions for instruments with similar terms, maturities, and degrees of risk and a discounted cash flows analysis as of September 30, 2015 and December 31, 2014. Unrealized gains and losses on this instrument resulting from changes in the fair value of the instrument are not charged to earnings, but rather are recorded as other comprehensive income (loss) in the stockholders' equity section of the condensed consolidated balance sheets. At both September 30, 2015 and December 31, 2014, $0.4 million of the carrying value of the investment available for sale is included as a current asset in prepaid expenses and other current assets, and at September 30, 2015 and December 31, 2014, $17.5 million and $18.0 million, respectively, is included in other assets on the condensed consolidated balance sheets. The discount associated with this investment of $3.2 million and $3.3 million as of September 30, 2015 and December 31, 2014, respectively, is netted with the investment balance and is being accreted over the life of the investment using the effective interest method. The accretion of such discount is included in interest income on the condensed consolidated statements of operations.

Merger Earnout

Under the terms of the agreement (the "Merger Agreement") under which the Company acquired Peninsula Gaming, LLC ("Peninsula"), Boyd Acquisition II, LLC, an indirect wholly owned subsidiary of Boyd Gaming, is obligated to make an additional payment to Peninsula Gaming Partners, LLC, in 2016 if Kansas Star Casino's ("KSC") EBITDA, as defined in the Merger Agreement, for 2015 exceeds $105.0 million. The additional payment would be equal to 7.5 times the amount by which KSC's 2015 EBITDA exceeds $105.0 million. The actual payout will be determined based on actual EBITDA of KSC for calendar year 2015, and payments are not limited by a maximum value. If the actual 2015 EBITDA of KSC is less than the target, the Company is not required to make any additional consideration payment. The value of this contingency was calculated using a probability-based model. This model requires estimates of forecasted 2015 EBITDA and of the probability of exceeding the threshold at which a payment would be made. We formed our valuation assumptions using historical experience in the gaming industry and observable market conditions. The assumptions will be reviewed periodically and any change in the value of the obligation will be included in the consolidated statements of operations. At December 31, 2014, there were outstanding liabilities of $0.1 million, related to the merger earnout which are included in other liabilities on the condensed consolidated balance sheets. There was no outstanding liability at September 30, 2015.

Contingent Payments

In connection with the development of the Kansas Star Casino, KSC agreed to pay a former casino project developer and option holder 1% of KSC's EBITDA each month for a period of ten years commencing on December 20, 2011. The liability was initially recorded upon consummation of the Merger at the estimated fair value of the contingent payments using a discounted cash flows approach. At both September 30, 2015 and December 31, 2014, there was a current liability of $0.9 million related to this agreement, which is recorded in accrued liabilities on the respective condensed consolidated balance sheets, and long-term obligation at September 30, 2015 and December 31, 2014, of $2.7 million and $2.9 million, respectively, which was included in other liabilities on the respective condensed consolidated balance sheets.

The following table summarizes the changes in fair value of the Company's Level 3 assets and liabilities:



	Three Months Ended
	September 30, 2015
	Assets		Liability
(In thousands)	Investment Available for Sale		Contingent Payments
Balance at July 1, 2015	$	17,276	$	(3,642	)
Total gains (losses) (realized or unrealized):
Included in earnings	31		(156		)
Included in other comprehensive income (loss)	642		—
Transfers in or out of Level 3	—		—
Purchases, sales, issuances and settlements:
Settlements	—		211
Balance at September 30, 2015	$	17,949	$	(3,587	)

Gains (losses) included in earnings attributable to the change in unrealized gains relating to assets and liabilities still held at the reporting date:
Included in interest income	$	31	$	—
Included in interest expense	—		(156		)



	Three Months Ended September 30, 2014
	Assets		Liabilities
(In thousands)	Investment Available for Sale		Merger Earnout			Contingent Payments
Balance at July 1, 2014	$	17,443	$	(450	)	$	(4,278	)
Total gains (losses) (realized or unrealized):
Included in earnings	29		225			(181		)
Included in other comprehensive income (loss)	681		—			—
Transfers in or out of Level 3	—		—			—
Purchases, sales, issuances and settlements:
Settlements	—		—			201
Balance at September 30, 2014	$	18,153	$	(225	)	$	(4,258	)

Gains (losses) included in earnings attributable to the change in unrealized gains relating to assets and liabilities still held at the reporting date:
Included in interest income	$	29	$	—		$	—
Included in interest expense	—		—			(181		)



	Nine Months Ended September 30, 2015
	Assets			Liabilities
(In thousands)	Investment Available for Sale			Merger Earnout			Contingent Payments
Balance at January 1, 2015	$	18,357		$	(75	)	$	(3,792	)
Total gains (losses) (realized or unrealized):
Included in earnings	93			75			(476		)
Included in other comprehensive income (loss)	(121		)	—			—
Transfers in or out of Level 3	—			—			—
Purchases, sales, issuances and settlements:
Settlements	(380		)	—			681
Balance at September 30, 2015	$	17,949		$	—		$	(3,587	)

Gains (losses) included in earnings attributable to the change in unrealized gains relating to assets and liabilities still held at the reporting date:
Included in interest income	$	93		$	—		$	—
Included in interest expense	—			—			(476		)



	Nine Months Ended September 30, 2014
	Assets			Liabilities
(In thousands)	Investment Available for Sale			Merger Earnout			Contingent Payments
Balance at January 1, 2014	$	17,128		$	(1,125	)	$	(4,343	)
Total gains (losses) (realized or unrealized):
Included in earnings	89			900			(549		)
Included in other comprehensive income (loss)	1,291			—			—
Transfers in or out of Level 3	—			—			—
Purchases, sales, issuances and settlements:
Settlements	(355		)	—			634
Balance at September 30, 2014	$	18,153		$	(225	)	$	(4,258	)

Gains (losses) included in earnings attributable to the change in unrealized gains relating to assets and liabilities still held at the reporting date:
Included in interest income	$	89		$	—		$	—
Included in interest expense	—			—			(549		)

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



	Valuation Technique	Unobservable Input	Rate
Investment available for sale	Discounted cash flow	Discount rate	10.2	%
Contingent payments	Discounted cash flow	Discount rate	18.5	%

Balances Disclosed at Fair Value

The following tables provide the fair value measurement information about our obligation under minimum assessment agreements and other financial instruments:



	September 30, 2015
(In thousands)	Outstanding Face Amount		Carrying Value		Estimated Fair Value		Fair Value Hierarchy
Liabilities
Obligation under assessment arrangements	$	35,378	$	27,742	$	28,222	Level 3
Other financial instruments	200		182		182		Level 3



	December 31, 2014
(In thousands)	Outstanding Face Amount		Carrying Value		Estimated Fair Value		Fair Value Hierarchy
Liabilities
Obligation under assessment arrangements	$	36,749	$	28,612	$	29,529	Level 3
Other financial instruments	300		268		268		Level 3

The following tables provide the fair value measurement information about our long-term debt:



	September 30, 2015
(In thousands)	Outstanding Face Amount		Carrying Value		Estimated Fair Value		Fair Value Hierarchy
Boyd Gaming Corporation Debt:
Bank credit facility	$	1,064,725	$	1,061,872	$	1,062,290	Level 2
9.00% senior notes due 2020	350,000		350,000		374,500		Level 1
6.875% senior notes due 2023	750,000		750,000		759,375		Level 1
HoldCo Note	157,810		149,553		149,919		Level 3
	2,322,535		2,311,425		2,346,084

Peninsula Segment Debt:
Bank credit facility	668,950		668,950		667,308		Level 2
8.375% Senior Notes due 2018	350,000		350,000		363,125		Level 2
	1,018,950		1,018,950		1,030,433
Total debt	$	3,341,485	$	3,330,375	$	3,376,517



	December 31, 2014
(In thousands)	Outstanding Face Amount		Carrying Value		Estimated Fair Value		Fair Value Hierarchy
Boyd Gaming Corporation Debt:
Bank credit facility	$	1,387,425	$	1,383,836	$	1,395,595	Level 2
9.125% senior notes due 2018	500,000		495,155		517,500		Level 1
9.00% senior notes due 2020	350,000		350,000		359,625		Level 1
HoldCo Note	151,740		139,997		144,153		Level 3
	2,389,165		2,368,988		2,416,873

Peninsula Segment Debt:
Bank credit facility	742,400		742,400		754,364		Level 2
8.375% senior notes due 2018	350,000		350,000		363,125		Level 2
Other	3		3		3		Level 3
	1,092,403		1,092,403		1,117,492
Total debt	$	3,481,568	$	3,461,391	$	3,534,365

The estimated fair value of the Boyd Gaming Credit Facility is based on a relative value analysis performed on or about September 30, 2015 and December 31, 2014. The estimated fair value of the Peninsula Credit Facility is based on a relative value analysis performed on or about September 30, 2015 and December 31, 2014. The estimated fair values of our senior notes and Peninsula's senior notes are based on quoted market prices as of September 30, 2015 and December 31, 2014. Debt included in the "Other" category is fixed-rate debt that is not traded and does not have an observable market input; therefore, we have estimated its fair value based on a discounted cash flow approach, after giving consideration to the changes in market rates of interest, creditworthiness of both parties, and credit spreads.

There were no transfers between Level 1, Level 2 and Level 3 measurements during the nine months ended September 30, 2015 or 2014.