Fair Value Measurements

Investments

(In millions)	Balance		Level 1		Level 2		Level 3
September 30, 2016
Assets:
Equity securities	$	3	$	3	$	—	$	—
Government bonds	43		—		43		—
Total assets at fair value	$	46	$	3	$	43	$	—

December 31, 2015
Assets:
Equity securities	$	4	$	4	$	—	$	—
Government bonds	67		—		67		—
Total assets at fair value	$	71	$	4	$	67	$	—

Investments primarily consist of equity and debt securities held by our captive insurance entities that are traded in active markets, have readily determined market values and have maturity dates of greater than three months from the date of purchase. These investments primarily represent collateral for several escrow and trust agreements with third-party beneficiaries and are recorded in deferred charges and other in the Balance Sheets while a portion is included in prepayments and other current assets. As of September 30, 2016 and December 31, 2015, gross unrealized gains and losses on marketable securities were not material.

Restructuring Commitments

Estimated Fair Value

(In millions)	Balance		Level 1		Level 2		Level 3
September 30, 2016
Liabilities:
Issuance of CEC convertible notes	$	1,500	$	—	$	—	$	1,500
Issuance of CEC common shares	1,741		—		1,712		29
Total liabilities at fair value	$	3,241	$	—	$	1,712	$	1,529

Changes in Level 3 Fair Value Measurements

	Three Months Ended September 30, 2016				Nine Months Ended September 30, 2016
(In millions)	CEC Convertible Notes		CEC Common Stock		CEC Convertible Notes		CEC Common Stock
Balance as of beginning of period	$	1,060	$	—	$	—	$	—
Loss in deconsolidation and restructuring of CEOC and other	440		29		1,500		29
Balance as of end of period	$	1,500	$	29	$	1,500	$	29

As described in Note 1, we recognized certain obligations that we believe will ultimately be settled under the Third Amended Plan or the RSAs. A portion of the obligations we recognized reflect our estimates of the fair value of the consideration CEC has agreed to provide in the form of CEC equity and convertible notes in exchange for the settlement of litigation claims and potential claims against CEC and its affiliates. These obligations are recorded in accrued restructuring and support expenses on the Balance Sheets and will be accounted for at fair value each period until they are ultimately settled as part of the Restructuring.

Valuation Methodologies

CEC Convertible Notes - We estimated the fair value of the CEC convertible notes to be issued using a binomial lattice valuation model that incorporates the value of both the debt and conversion features of the notes. In the Third Amended Plan, the terms of the convertible notes were revised, and the notes currently have a face value of $1.1 billion, a term of 7 years, a coupon rate of 5%, and are convertible into 13.714% of fully-diluted CEC equity. The valuation model incorporates assumptions regarding the incremental cost of borrowing for CEC, the value of CEC’s equity into which these notes could convert, the implied volatility of such equity, and the risk-free rate. The increase in the fair value primarily resulted from the removal of restrictions on the conversion features, the increase in the conversion ratio, and the increase in the face value of the convertible notes in the Third Amended Plan.

Key Assumptions -


•	Incremental cost of borrowing - 5.0%


•	Implied volatility - 40%


•	Risk-free rate - 1.4%

Should CEC’s estimated incremental cost of borrowing or equity value fluctuate over time, it could result in an increase or decrease in the fair value of the notes and the corresponding restructuring accrual. A hypothetical decrease in the incremental borrowing rate of 1.0% would result in a $40 million increase in the restructuring accrual. Similarly, a hypothetical 5.0% increase in the implied volatility of CEC’s equity would result in an increase to the restructuring accrual of $30 million. Since the key assumptions used in the valuation model, including CEC’s current estimated incremental cost of borrowing and the implied volatility of CEC’s equity, are significant unobservable inputs, the fair value for the convertible notes is classified as Level 3.

CEC Common Stock - CEC will issue CEC common shares for the settlement of claims and potential claims and is obligated to repurchase at least $1.0 billion worth of the issued shares at a fixed price. The value of the purchase obligation is not subject to change; therefore, the estimated fair value primarily represents the net shares that we expect to issue after satisfying the repurchase obligation. We have used the fair value of CEC’s common stock to estimate this portion of the restructuring accrual.

The CEC common equity value is subject to market fluctuations and does not necessarily reflect the final value of completing the transactions contemplated in the Third Amended Plan and the related RSAs. The valuation models used to estimate the fair value of CEC’s common stock expected to be issued do not require significant judgment and inputs can be observed in a liquid market, such as the current trading price of CEC common stock. However, the valuation model includes inputs other than quoted prices in active markets, such as adjustments related to the dilutive effects of other transactions, including equity issuances in connection with the Restructuring and the Merger; therefore, this portion of the restructuring accrual is classified as Level 2.

Additionally, we have accrued a liability of $29 million for the fair value associated with the creditors’ right to require CEC to repurchase up to $200 million worth of the newly-issued CEC common shares. We determined the estimate fair value of this potential obligation using the Black-Scholes Option Valuation Model, which incorporates assumptions regarding the value of CEC’s equity, implied volatility of CEC common equity, and the risk-free rate.

Key Assumptions -


•	Historical volatility - 80%


•	Risk-free rate - 0.2%

Should CEC’s equity value fluctuate over time, it could result in an increase or decrease in the fair value of the repurchase obligation and the corresponding restructuring accrual. A hypothetical 5.0% increase in the historical volatility of CEC’s equity would result in an increase to the restructuring accrual of $2 million. Since the historical volatility of CEC’s equity is a significant unobservable input, the fair value for the convertible notes is classified as Level 3.

Derivative Instruments

CEOC had eight interest rate swap agreements that expired, which we settled for $17 million during the first quarter of 2015. Interest expense related to the derivatives was $7 million in the first quarter of 2015. We have not entered into any additional derivative transactions since these swaps expired.