Subsequent Events - CEOC Bankruptcy and Deconsolidation

Description of the CEOC Business

CEOC is a majority owned subsidiary of Caesars Entertainment and its casinos account for approximately two million square feet of gaming space, 40,000 slot machines, and 15,000 hotel rooms. CEOC owns and operates 19 casinos in the United States and 9 internationally, most of which are located in England. In addition to owning and operating its own properties, CEOC managed six casinos for CGP LLC and nine casinos for unrelated third parties. Effective October 2014, substantially all of our properties are managed by CES (and the remaining properties will be transitioned upon regulatory approval).

Restructuring Support and Forbearance Agreement

As a result of CEOC’s highly-leveraged capital structure and the general decline in its gaming results since 2007, CEOC has experienced substantial operating and net losses in recent years. Under the debt structure in existence as of December 31, 2014, CEOC expected to experience operating and net losses for the foreseeable future. As a result of these and other factors, on January 9, 2015, CEOC announced that it would be moving forward to implement a financial restructuring plan to reduce long-term debt and annual interest payments.

During the year ended December 31, 2014, and in January 2015, Caesars Entertainment and CEOC engaged in numerous negotiations with certain holders of CEOC’s indebtedness in an effort to reach a mutual agreement regarding the restructuring of CEOC’s debt (the “Restructuring”). As a result of these negotiations, Caesars Entertainment and CEOC entered into a Third Amended and Restated Restructuring Support and Forbearance Agreement, dated as of January 14, 2015 (as amended or restated, the “RSA”). The RSA has received support of over 80% of the First-Lien Noteholders (the “Consenting Creditors”).

Pursuant to the RSA, the Consenting Creditors have agreed to, among other things, support and vote their claims in favor of the Restructuring and forbear from exercising certain default-related rights and remedies under the indentures governing the First Lien Notes. In addition, any litigation between Caesars Entertainment, CEOC, their respective directors, and any of the Consenting Creditors was adjourned, stayed, and/or dismissed without prejudice after CEOC’s Chapter 11 filing on the January 15, 2015 (the “Petition Date”) in accordance with the RSA. CEOC must meet or comply with various material milestones under the RSA relating to the timing of filing motions and orders with the Court for the Chapter 11 filings as well as the entry of orders with respect to certain aspects of the Chapter 11 process. Subject to certain qualifications and exceptions, the RSA may be amended by Caesars Entertainment, CEOC, and the Consenting Creditors holding greater than two-thirds of the aggregate amount of all First Lien Bond Claims held by the Consenting Creditors.

Restructuring as Real Estate Investment Trust and Separate Operating Company

As part of the RSA, Caesars Entertainment, CEOC, and the Consenting Creditors agreed to a term sheet setting forth the principal terms of the Restructuring (the “Term Sheet”) that include CEOC’s reorganization as a separate operating company (“OpCo”) and two property companies (“CPLV PropCo” and "Non-CPLV PropCo", collectively "PropCo"), with a real estate investment trust (the “REIT”) directly or indirectly owning and controlling PropCo. Upon completion of the Restructuring, there will be two leases under which CPLV PropCo and Non-CPLV PropCo will lease properties to OpCo: (1) for the Caesars Palace Las Vegas (“CPLV”) property (the “CPLV Lease”) and (2) for certain properties currently owned by CEOC other than CPLV (the “Non-CPLV PropCo Lease” and, together with the CPLV Lease, the “Leases”). A subsidiary of Caesars Entertainment will manage the properties and Caesars Entertainment will guarantee OpCo’s payment under the Leases.

New Capital Structure

The Restructuring also contemplates that (i) OpCo will issue up to $1.2 billion in principal amount of first lien debt with a six year term and interest at LIBOR plus 4.00% with a 1% LIBOR floor (“New First Lien OpCo Debt”) and up to $547 million in principal amount of second lien debt with a seven year term and interest at 8.5% (“New Second Lien OpCo Debt”) and (ii) PropCo will issue $2.4 billion in principal amount of first lien debt with a five year term and interest at LIBOR plus 3.5% with a 1% LIBOR floor (“New First Lien PropCo Debt”) and $1.4 billion in principal amount of second lien debt with a six year term and interest at 8.0% (“New Second Lien PropCo Debt”). CPLV will issue $2.6 billion in debt, of which no less than $2.0 billion will be sold to third party investors for cash proceeds (“CPLV Market Debt”) and any remaining debt up to $600 million will constitute “CPLV Mezzanine Debt,” with the weighted average yield on the CPLV Market Debt and CPLV Mezzanine Debt capped as set forth in the Term Sheet.

PropCo must also offer and issue up to $300 million of preferred equity (the “PropCo Preferred Equity”), the proceeds of which will be used to: (1) reduce the amount of CPLV Debt issued to holders of First Lien Notes, if any; then (2) reduce the amount of CPLV Market Debt required to meet certain conditions, if required; and ultimately (3) reduce the amount of the New Second Lien PropCo Debt. The PropCo Preferred Equity will be entitled to paid-in-kind dividends at a rate equal to the dividend yield to holders of PropCo’s common stock, provided the rate shall not be less than 5% per annum. The offering of the PropCo Preferred Equity will be fully backstopped.

Recoveries

The Term Sheet from the RSA dated January 14, 2015, contemplates the following approximate recoveries:


•	Each lender under CEOC’s senior secured credit facilities (each, a “First Lien Bank Lender”) will receive its pro rata share of (a) $705 million in cash, (b) $883 million in New First Lien OpCo Debt, (c) $406 million of New Second Lien OpCo Debt, (d) $2.0 billion in New First Lien PropCo Debt, and (e) up to $1.5 billion in additional cash or CPLV Mezzanine Debt.

•

Each First Lien Noteholder will receive its pro rata share of (a) $207 million in cash, (b) $306 million in New First Lien OpCo Debt, (c) $141 million of New Second Lien OpCo Debt, (d) $431 million in New First Lien PropCo Debt, (e) $1.4 billion in New Second Lien PropCo Debt, (f) up to $1.2 billion in additional cash or CPLV Mezzanine Debt, (g) 69.9% directly or indirectly of PropCo equity (or cash as a result of certain put options and equity rights) and (h) 100% of the OpCo equity (or cash as a result of certain put options and equity rights).

•

If they vote as a class to accept the Plan, each Non-First Lien Noteholder (as defined in the Term Sheet) will receive its pro rata share of 30.1% of the equity, directly or indirectly, in PropCo, and have the option to be a participant in certain equity rights. If the Non-First Lien Noteholders do not vote as a class to accept the Plan, each Non-First Lien Noteholder will receive its pro rata share of 17.5% of the equity, directly or indirectly, in PropCo, and the remaining 12.6% of PropCo equity shall be allocated to the equity holders of PropCo, excluding the Non-First Lien Noteholders, based on their pro rata ownership in PropCo.

The Term Sheet contemplates the ability of certain of the creditors to elect to receive cash in lieu of the OpCo and PropCo equity and provides certain non-first lien creditors the right to purchase additional PropCo equity in certain circumstances.

In order to effectuate the Restructuring, Caesars Entertainment has agreed to, among other things, (i) contribute $406 million for the restructuring and forbearance fees; (ii) contribute an additional $75 million to the Debtors (as defined below) if there is insufficient liquidity at closing of the Restructuring; (iii) purchase up to all of OpCo equity for $700 million and 14.8% of PropCo equity for $269 million; (iv) guarantee OpCo’s monetary obligations to PropCo under the Leases as discussed above; and (v) give PropCo a right of first refusal on all new domestic non-Las Vegas opportunities, with Caesars Entertainment or OpCo leasing such properties.

CEOC has proposed a plan of reorganization that provides, among other things, mechanisms for settlement of claims against the debtors’ estates, treatment of CEOC’s existing equity and debt holders, and certain corporate governance and administrative matters pertaining to the reorganized company. The Restructuring contemplated by the RSA is subject to numerous conditions and third party approvals and there can be no assurances that the Restructuring will be completed on the terms contemplated by the RSA and the Term Sheet or at all.

Bankruptcy

To implement the restructuring plan for balance sheet deleveraging, on January 15, 2015 (the “Petition Date”), CEOC and certain of its U.S. subsidiaries (the “Debtors”) voluntarily filed for reorganization under Chapter 11 of the Bankruptcy Code. The Debtors will continue to operate their businesses as “debtors-in-possession” under the jurisdiction of the Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Court. Caesars Entertainment, CERP, and CGP LLC are separate entities with independent capital structures and have not filed for bankruptcy relief. In addition, all Caesars Entertainment properties, including those owned by CEOC, are continuing to operate in the ordinary course.

Operations and Implications of Bankruptcy Filing

Subject to certain exceptions under the Bankruptcy Code, the bankruptcy filing automatically stayed the continuation of most judicial or administrative proceedings or filing of other actions against the Debtors or their property to recover, collect, or secure a claim arising prior to the petition date. Although the bankruptcy filing triggered defaults on the Debtors’ debt obligations, creditors are stayed from taking any action against the Debtors as a result of such defaults, subject to certain limited exceptions permitted by the Bankruptcy Code. Absent an order of the Bankruptcy Court or other limited exceptions, all of the Debtors’ pre-petition liabilities are subject to settlement under the Bankruptcy Code.

CEOC submitted “First Day Motions” to the Bankruptcy Court to petition for these and other matters that would ease its entry into Chapter 11, including the ability for CEOC to perform certain activities required to run its business and continue normal operations with minimal disruption and to protect key relationships. On the Petition Date, CEOC received approval from the Bankruptcy Court to continue to pay or otherwise honor certain pre-petition obligations necessary to stabilize its operations, such as customer loyalty programs, employee wages, salaries and benefits, certain taxes and fees, customer obligations, obligations to logistics providers, and pre-petition amounts owed to certain critical vendors. CEOC also expects to honor payments to vendors and other providers in the ordinary course of business for goods and services received after the Petition Date.

The Bankruptcy Court has granted interim orders permitting the Debtors to continue to use their cash management system, existing bank accounts and business forms, and complete intercompany transactions consistent with historical practice. Under the authorization of the Bankruptcy Court, the interim orders permit the Debtors to continue the reimbursement of expenses to CES for services provided under the terms of the Omnibus Agreement between CEOC, CERP, and CGPH. Under the terms of the CES joint venture and the Omnibus Agreement, we presently believe that Caesars Entertainment and its other operating subsidiaries will continue to have access to the services historically provided to us by CEOC and its employees, trademarks, and programs despite the CEOC bankruptcy filing. See Note 2, “Basis of Presentation and Principles of Consolidation.” Cash of CEOC, to the extent it constitutes cash collateral, is also subject to an interim order of the Bankruptcy Court that permits the Debtors to use cash collateral subject to certain terms and conditions, including adhering to certain Chapter 11 case milestones, providing various reporting to their pre-petition secured creditors, spending consistent with a budget governing the use of cash collateral, and providing various forms of adequate protection to their pre-petition secured creditors.

Not all CEOC properties are included in the bankruptcy filing. The table below summarizes CEOC properties based on whether or not they are included in the CEOC Chapter 11 bankruptcy filing.



CEOC Properties Included in the Chapter 11 Filing
Bally’s Atlantic City		Harrah’s Reno
Caesars Atlantic City		Harveys Lake Tahoe
Caesars Palace Las Vegas		Horseshoe Bossier City
Harrah's Gulf Coast		Horseshoe Council Bluffs
Harrah’s Council Bluffs		Horseshoe Hammond
Harrah’s Joliet		Horseshoe Southern Indiana
Harrah’s Lake Tahoe		Horseshoe Tunica
Harrah’s Metropolis		Louisiana Downs
Harrah’s North Kansas City		Tunica Roadhouse

CEOC Properties Not Included in the Chapter 11 Filing
Domestic Owned		Managed for Third Parties
Harrah’s Philadelphia		Caesars Cairo
International Owned		Caesars Windsor
Alea Glasgow		Harrah’s Ak-Chin
Alea Nottingham		Harrah’s Cherokee
The Casino at the Empire		Harrah’s Resort Southern California
Emerald Safari		Horseshoe Cincinnati
Manchester235		Horseshoe Cleveland
Playboy Club London		The London Clubs Cairo-Ramses
Rendezvous Brighton		ThistleDown Racino
Rendezvous Southend-on-Sea
The Sportsman

Liquidity

CEOC does not expect to require a debtor-in-possession credit facility as CEOC currently expects to have sufficient cash to fund its operations during the restructuring process.

CEOC’s proposed financial restructuring plan would reduce CEOC’s debt by approximately $10.0 billion, providing for the exchange of approximately $18.4 billion of outstanding debt for $8.6 billion of new debt. Annual interest expense would be reduced by approximately 75%, from approximately $1.7 billion to approximately $450 million. PropCo would lease its real property assets to OpCo in exchange for annual lease payments of $635 million, subject to certain adjustments, with the lease payments guaranteed by Caesars Entertainment.

Under the proposed plan, Caesars Entertainment will make substantial cash and other contributions to support the restructuring. The completion of the previously announced merger of Caesars Entertainment and CAC, as described in Note 1, “Description of Business,” will allow Caesars Entertainment to make these contributions without the need for any significant outside financing.

Second Priority Noteholders

On October 15, 2014, CEOC received a Notice of Default from holders of the 10.00% Second-Priority Senior Secured Noteholders purporting to own at least 30% in principal amount of CEOC’s outstanding second-priority senior secured notes issued under the Indenture, dated December 24, 2008.

CEOC elected not to pay $225 million in interest due on December 15, 2014. This included (a) a $41 million interest payment that was due on CEOC’s 10.00% Second-Priority Senior Secured Notes due 2015 and 10.00% Second-Priority Senior Secured Notes due 2018; and (b) a $184 million interest payment that was due on CEOC’s 10.00% Second-Priority Senior Secured Notes due 2018. The failure to pay such interest did not constitute an event of default under the December 2008 Indenture and the April 2009 Indenture until such failure to pay interest continued for a period of 30 days. There is approximately $4.5 billion in aggregate of second priority notes outstanding under the December 2008 Indenture and the April 2009 Indenture as of December 31, 2014.

On January 12, 2015, certain holders of 10.00% Second-Priority Senior Secured Notes due 2018 filed an involuntary bankruptcy petition against CEOC in the United States Bankruptcy Court for the District of Delaware. On January 28, 2015, a Delaware Court held that the proper venue for the CEOC bankruptcy is the United States Bankruptcy Court for the Northern District of Illinois, which is the forum in which CEOC filed its voluntary bankruptcy petition on January 15, 2014. The validity of the involuntary petition has not been fully adjudicated. The propriety of this involuntary petition remains the subject of pending litigation in CEOC’s bankruptcy proceeding. A determination that the involuntary petition filed on January 12, 2015 was, in fact, valid, could affect, among other things, the scope of the “look back” period with respect to certain claims and causes of action arising under the Bankruptcy Code. In many instances, the look back period with respect to such claims and causes of action are calculated from the date on which a bankruptcy petition is validly filed, including with respect to the ability of a debtor or its creditors to claw back so-called “preferential” transfers made by a debtor in the 90 day or one year period prior to the commencement of a bankruptcy case.

Deconsolidation of CEOC

CEOC’s bankruptcy filing was a reconsideration event for Caesars Entertainment to reevaluate whether consolidation of CEOC continues to be appropriate. We reevaluated whether CEOC was a VIE, and we concluded that CEOC was a VIE. Generally, when an entity files for bankruptcy, the holders of equity at risk as a group lose the power to make decisions that have a significant impact on the economic performance of the entity because such power is typically transferred to the Bankruptcy Court. We have concluded that this is the case with CEOC and that the equity owners, including Caesars Entertainment, only possess non-substantive voting rights. We have also concluded that Caesars Entertainment is not the primary beneficiary of CEOC, since the Bankruptcy Court now controls its key activities, including determining operating budgets, payment of obligations, and management of assets. CEOC management cannot carry on activities necessary for the ordinary course of business without Bankruptcy Court approval. As a result, we have concluded that Caesars Entertainment should deconsolidate CEOC upon the bankruptcy filing. For similar reasons, we determined that we do not have significant influence over CEOC. As a result, Caesars Entertainment will account for the investment in CEOC as a cost method investment prospectively from the Petition Date.

Pro Forma Financial Information (Unaudited)

The following unaudited pro forma financial information is based upon the historical consolidated financial statements of Caesars Entertainment, adjusted to reflect the deconsolidation of CEOC and its consolidated subsidiaries, as described above.



	Pro Forma Financial Information (Unaudited) As of and for the Year Ended December 31, 2014

	CEC, as reported			CEOC deconsolidation adjustment			CEC pro forma for CEOC deconsolidation
(In millions, except loss per share)

Net revenues	$	8,516		$	(4,871	)	$	3,645
Net loss	(2,866		)	2,220			(646		)
Net loss attributable to Caesars	(2,783		)	2,056			(727		)
Loss per share - basic & diluted	(19.53		)	14.43			(5.10		)
Total assets	23,535			(11,122		)	12,413
Long-term debt (current and non-current)	23,213			(16,100		)	7,113
Total liabilities	28,277			(18,733		)	9,544
Total stockholders’ equity/(deficit)	(4,742		)	7,611			2,869

The unaudited pro forma financial information gives effect to the deconsolidation of CEOC as of January 1, 2014. The pro forma adjustments are based on the best available information including certain assumptions that Caesars Entertainment management believes are reasonable, appropriate, and directly attributable to the deconsolidation of CEOC. Pro forma adjustments on data derived from the statement of operations reflect only those adjustments that are recurring in nature. The pro forma adjustments assume that all Caesars Entertainment properties, including those owned by CEOC, are open for business and are continuing to operate in the ordinary course.

The pro forma adjustments do not include any adjustments to reflect the RSA, including the reorganization of the CEOC corporate structure. Accordingly, actual results could differ materially from the pro forma presentation included herein depending on these factors, among others.

The unaudited pro forma financial information is provided for illustrative purposes only and is not indicative of the operating results or financial position that would have occurred had the deconsolidation of CEOC occurred as of January 1, 2014. Readers should not rely on the unaudited pro forma financial information as being indicative of the historical operating results that Caesars Entertainment would have achieved if the deconsolidation had occurred on such dates or for such periods or indicative of any future operating results or financial position that it will experience after the Petition Date, including the final result and effect of any potential outcome resulting from the planned restructuring of CEOC.

Related Party

As described above, subsequent to the Petition Date, CEOC will continue to fund all expenses related to its operations that are being provided by CES and can continue to perform on its intercompany obligations to all Caesars entities. However, upon filing for bankruptcy and the subsequent deconsolidation, transactions with CEOC will no longer be eliminated in consolidation and will be considered related party transactions for Caesars Entertainment. These transactions include items such as casino management fees paid to CEOC, insurance expenses related to insurance coverage provided to CEOC by Caesars Entertainment, and rent payments by CEOC to CERP under the Octavius Tower lease agreement.