Organization

CEC is primarily a holding company with no independent operations of its own. It owns Caesars Entertainment Resort Properties, LLC (“CERP”) and an interest in Caesars Growth Partners, LLC (“CGP”). As of September 30, 2015, CERP and CGP owned a total of 12 casino properties in the United States, eight of which are in Las Vegas. These eight casino properties represented 53% and 52% of consolidated net revenues for the three and nine months ended September 30, 2015, respectively.

CEC also holds a majority interest in Caesars Entertainment Operating Company, Inc. (“CEOC”). As described in Note 4, the results of CEOC and its subsidiaries are no longer consolidated with Caesars subsequent to CEOC’s voluntarily filing for reorganization under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) on January 15, 2015.

Caesars Enterprise Services, LLC

In 2014, CERP, CEOC and Caesars Growth Properties Holdings, LLC (“CGPH” and, collectively, the “Members”) formed Caesars Enterprise Services, LLC (“CES”), a services joint venture. CES provides certain corporate and administrative services for the Members’ casino properties, including substantially all of the 28 casino properties owned by CEOC, and ten casinos owned by unrelated third parties (including four Indian tribes). CES manages certain assets for the casinos to which it provides services and the other assets it owns, licenses or controls, and employs certain of the corresponding employees. Under the terms of the joint venture and the Omnibus License and Enterprise Services Agreement, we believe that CEC and its operating subsidiaries will continue to have access to the services historically provided to us by CEOC and its employees, its trademarks, and its programs despite the CEOC bankruptcy filing. Expenses incurred by CES are allocated to the casino properties directly or to the Members according to their allocation percentages, subject to annual review. Therefore, CES is a "pass-through" entity that serves as an agent on behalf of the Members at a cost-basis, and is contractually required to fully allocate its costs. CES is designed to have no operating cash flows of its own, and any net income or loss is generally immaterial and is typically subject to allocation to the Members in the subsequent period.

Caesars Interactive Entertainment, Inc. (“CIE”)

We also consolidated the results of CIE, a majority owned subsidiary of CGP that operates an online games business providing social games on Facebook and other social media websites and mobile application platforms; certain real money games in Nevada and New Jersey; and “play for fun” offerings in other jurisdictions. CIE also owns the World Series of Poker (“WSOP”) tournaments and brand and licenses trademarks for a variety of products and businesses related to this brand.

Reportable Segments

We view each casino property and CIE as operating segments and currently aggregate all such casino properties and CIE into three reportable segments based on management’s view of these casino properties, which aligns with their ownership and underlying credit structures: CERP, Caesars Growth Partners Casino Properties and Developments (“CGP Casinos”), and CIE. CGP Casinos is comprised of all subsidiaries of CGP excluding CIE. CEOC remained a reportable segment until its deconsolidation effective January 15, 2015.

Going Concern

Overview

The circumstances described in “CEC Liquidity” and “Litigation” below raise substantial doubt as to CEC’s ability to continue as a going concern. The accompanying consolidated condensed financial statements have been prepared assuming that Caesars will continue as a going concern and do not include any adjustments that might result from the outcome of any uncertainties related to our going concern assessment. The following provides our analysis and the factors that were considered in reaching this conclusion.

Financial Condition as of December 31, 2014

Over the three-year period ended December 31, 2014, we incurred cumulative net losses totaling $7.2 billion, primarily due to $7.0 billion of interest expense resulting from our highly-leveraged capital structure. As of December 31, 2014, we had a total accumulated deficit of $13.1 billion and long term debt totaled $23.0 billion, including current portion of $15.8 billion. Our cumulative cash flows from operating activities were negative $772 million over the three-year period, primarily due to total cash paid for interest of $5.7 billion.

The substantial majority of the preceding negative financial factors occurred in our largest operating subsidiary, CEOC, which incurred cumulative net losses totaling $7.1 billion resulting from interest expense of $6.2 billion over the three-year period ended December 31, 2014. As of December 31, 2014, CEOC had a total accumulated deficit of $11.4 billion, and long term debt totaled $15.9 billion, including current portion of $15.8 billion. CEOC had experienced negative cash flows from operating activities over the three-year period, primarily due to cash paid for interest.

CEOC Reorganization

All of the foregoing factors raised substantial doubt about CEOC’s ability to continue as a going concern as of December 31, 2014, and contributed to the decision for CEOC and certain of its United States subsidiaries (the “Debtors”) to voluntarily file for reorganization under Chapter 11 of the Bankruptcy Code on January 15, 2015, in the United States Bankruptcy Court for Northern District of Illinois in Chicago (the “Bankruptcy Court”) (see Note 4).

Commitments Under the First Lien RSAs. As previously disclosed in Current Reports on Form 8-K, CEC and the Debtors are party to the (a) Fourth Amended and Restated Restructuring Support and Forbearance Agreement dated July 31, 2015, with certain holders of claims in respect of claims under CEOC’s first lien notes (the “First Lien Bond RSA”) (see also Note 19) and (b) Restructuring Support and Forbearance Agreement dated August 21, 2015, with certain holders of claims in respect of claims under CEOC’s first lien credit agreement (the “First Lien Bank RSA” and, together with the First Lien Bond RSA, the “First Lien RSAs”).

The Effective Date of the CEOC’s plan of reorganization (the “Restructuring”) (the material terms of which are contained in the First Lien RSAs as they may be modified by their terms) is the date upon which all required conditions of the Restructuring have been satisfied or waived and on which the CEOC reorganization and related transactions will become effective.

CEOC filed a plan of reorganization on October 7, 2015, with the Bankruptcy Court (the “Plan”) that reflects the terms of the First Lien RSAs. Under the Plan, CEC has agreed to pay the following amounts and take other actions:


•	$406 million for forbearance fees in connection with the Restructuring, general corporate purposes and to fund sources and uses (“Fixed Payments”);


•	$75 million to CEOC if there is insufficient liquidity as of the Effective Date;


•	$25 million per month for the period from February 1, 2016 through the Effective Datefor the benefit of the First Lien Noteholders (“Additional Consideration”);


•	Up to $63 million in upfront payments to certain First Lien Bank Lenders (“Upfront Payments”);


•	Purchase from the Settling First Lien Bank Lenders 100% of their respective First Lien Bank Obligations that survive the Effective Date (“Bank Guaranty Settlement”);

•

Purchase up to all of OpCo equity for $700 million pursuant to the put rights, where holders of over 85% of the First Lien Notes have already indicated their intent to put their OpCo equity to CEC once received (“OpCo” refers to the proposed entity resulting from the Restructuring that will operate the CEOC Properties under a lease with PropCo. CEOC Properties refers to those properties owned by CEOC as of the Petition Date. See Note 4.);


•	Purchase up to 14.8% of PropCo equity for $269 million pursuant to the put rights (“PropCo” refers to the proposed entity resulting from the Restructuring that will own the CEOC Properties as of the Effective Date.);


•	Give PropCo a right of first refusal on all new domestic non-Las Vegas opportunities, with CEC or OpCo leasing such properties;


•	Give PropCo a call right to purchase Harrah’s Atlantic City and Harrah’s Laughlin;


•	Guarantee OpCo’s monetary obligations to PropCo under the leases; and


•	Enter into a guaranty of collection of the OpCo debt received by the First Lien Bank Lenders and First Lien Noteholders.

The Restructuring is subject to approval by the Bankruptcy Court and the receipt of required gaming regulatory approvals. Because more than a majority of the first lienholders have approved the First Lien RSAs, we believe it is probable that the contingent obligations will be paid and, therefore, we have accrued the items below in Deconsolidation and Restructuring of CEOC and Other in the consolidated condensed statements of operations:



Description (in millions)	Amount
Fixed payments ⁽¹⁾	$	406
Additional consideration ⁽²⁾	138
Upfront payments ⁽³⁾	63
Bank guaranty settlement	359
Total accrued restructuring and support expenses	$	966

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⁽¹⁾	$85 million was paid in fourth quarter of 2015


⁽²⁾	For the purposes of determining this amount, the Effective Date is estimated to be in the third quarter of 2016; however this date is outside of our control and is highly subject to change.


⁽³⁾	$57 million was paid in fourth quarter of 2015

Additional Potential Commitments. In addition to terms described above relative to the First Lien RSAs, under the terms of the Plan, CEC will pay the following if certain classes of CEOC’s unsecured creditors vote in favor of the Plan and if the Plan is approved by the Court:


•	Up to $450 million in principal amount of 5% convertible notes to be issued by CEC;


•	Up to 9.8% of PropCo equity purchased pursuant to the PropCo put rights and/or cash in an amount equal to the shortfall from 9.8% of PropCo equity (at Plan value) if the PropCo put rights are not fully exercised;


•	The consideration CAC would have received under the Plan on account of CEOC’s unsecured notes held by CAC; and


•	Give PropCo a call right to purchase Harrah’s New Orleans.

Payment to CEOC. In addition, and separate from the transactions and agreements described above, if there is not a comprehensive out of court restructuring of CEOC's debt securities or a prepackaged or prearranged in-court restructuring with requisite voting support from each of the first and second lien secured creditor classes by February 15, 2016, CEC will be obligated upon demand to make an additional payment to CEOC of $35 million. During the first quarter of 2015, we accrued this liability in Accrued Restructuring and Support Expenses on the consolidated condensed balance sheet.

Caesars’ Financial Condition

During the nine months ended September 30, 2015, we recognized net income of $6.0 billion, which includes a $7.1 billion gain recognized upon the deconsolidation of CEOC, and generated operating cash flows of $250 million, which includes $220 million of negative operating cash flow attributable to CEOC prior its deconsolidation. As of September 30, 2015, subsequent to the deconsolidation of CEOC, we had a total accumulated deficit of $7.1 billion and long term debt totaled $7.0 billion, including current portion of $189 million.

CEC Liquidity

CEC is primarily a holding company with no independent operations, employees, or material debt issuances of its own. Its primary assets at September 30, 2015, consist of $349 million in cash and cash equivalents and its ownership interests in CEOC, CERP and CGP. The restrictions included in certain debt arrangements entered into by CERP and CGP (and/or their respective subsidiaries) generally do not allow for CERP, CGP, or their subsidiaries to provide dividends to CEC. In addition, CEC does not receive any financial benefit from CEOC during CEOC’s bankruptcy, as all earnings and cash flows are retained by CEOC for the benefit of its creditors.

CEC has no requirement to fund the operations of CERP, CGP, or their subsidiaries. Accordingly, CEC cash outflows are primarily used for corporate development opportunities and other corporate-level activity. CEC is generally limited to raising additional capital through borrowings or equity transactions because it has no operations of its own and the restrictions on its subsidiaries under lending arrangements generally prevent the distribution of cash from the subsidiaries to CEC, except for certain restricted payments that CERP and CGPH are authorized to make in accordance with their lending arrangements.

While we do have sufficient liquidity at present to meet existing obligations and continue operations, we made material commitments under the Restructuring described above that have been accrued as of September 30, 2015. The completion of the previously announced merger of Caesars and CAC is expected to aid CEC in meeting these commitments; however, based on our current forecasts, we estimate that CEC will require additional sources of funding to meet its commitments because CEC has no operations of its own or through its subsidiaries that contribute to its liquidity. We are evaluating additional sources of liquidity that will ensure that CEC can meet its commitments under the Restructuring, but have not yet secured additional funding. Furthermore, if the merger with CAC is not completed for any reason, CEC would still be liable for these contributions.

Guarantee of Collection

In 2014, CEOC amended its senior secured credit facilities (the “Bank Amendment”) resulting in, among other things, a modification of CEC’s guarantee under the senior secured credit facilities such that CEC’s guarantee was limited to a guarantee of collection (“CEC Collection Guarantee”) with respect to obligations owed to the lenders who consented to the Bank Amendment. The CEC Collection Guarantee requires the creditors to exhaust all rights and remedies at law and in equity that the creditors or their agents may have against CEOC or any of its subsidiaries and its and their respective property to collect, or obtain payment of, the guaranteed amounts. As part of the Bank Guaranty Settlement disclosed above, the CEOC creditors have agreed to eliminate the CEC Collection Guarantee, and we recorded $359 million as an estimate of the liability based on the terms of the agreement.

Litigation

In addition to financial commitments described above, we have the following outstanding uncertainties for which we have not accrued any amounts, all of which are described in Note 5:


•	Litigation commenced by Wilmington Savings Fund Society, FSB on August 4, 2014 (the “Delaware Second Lien Lawsuit”);


•	Litigation commenced by parties on September 3, 2014 and October 2, 2014 (the “Senior Unsecured Lawsuits”);


•	Litigation commenced by UMB Bank on November 25, 2014 (the “Delaware First Lien Lawsuit”);


•	Demands for payment made by Wilmington Savings Fund Society, FSB on February 13, 2015 (the “February 13 Notice”);


•	Demands for payment made by BOKF, N.A., on February 18, 2015 (see “February 18 Notice”);


•	Litigation commenced by BOKF, N.A. on March 3, 2015 (the “New York Second Lien Lawsuit”);


•	Litigation commenced by UMB Bank on June 15, 2015 (the “New York First Lien Lawsuit”);


•	Litigation commenced by Wilmington Trust, National Association on October 20, 2015 (the “New York Senior Notes Lawsuit”); and


•	Litigation commenced by Trustees of the National Retirement Fund in January 2015 (“NRF Litigation”).

Summary

The circumstances described in “CEC Liquidity” above raise substantial doubt as to CEC’s ability to continue as a going concern beyond the Effective Date while continuing to meet its commitments under the Restructuring. Additionally, in each of the litigation matters, claims have been made or could be made against CEC that, if resolved against us, raise substantial doubt about CEC’s ability to continue as a going concern. Under the terms of the Plan that was filed with the Bankruptcy Court, all of the above litigation should be resolved. However, in the event of a material adverse ruling on one or all of the litigation matters set forth above, it is likely that a reorganization under Chapter 11 of the Bankruptcy Code would be necessary.