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Fair Value Measurements (Notes)

12 Months Ended

Dec. 31, 2018

Our assessment of goodwill and other intangible assets for impairment includes an assessment using various Level 2 (EBITDA multiples and discount rate) and Level 3 (forecasted cash flows) inputs. See Note 7 for more information on the application of the use of fair value methodology to measure goodwill and other intangible assets.

We have not elected the fair value measurement option available under GAAP for any of our assets or liabilities that meet the criteria for this option.

Items Measured at Fair Value on a Recurring Basis

The following table shows the fair value of our financial assets and financial liabilities that are required to be measured at fair value as of the date shown:



(In millions)	Balance		Level 1		Level 2		Level 3
December 31, 2018
Assets
Government bonds	$	15	$	—	$	15	$	—
Derivative instruments - interest rate swaps	6		—		6		—
Total assets at fair value	$	21	$	—	$	21	$	—
Liabilities
Derivative instruments - interest rate swaps	$	22	$	—	$	22	$	—
Derivative instruments - CEC Convertible Notes	324		—		324		—
Disputed claims liability	45		—		45		—
Total liabilities at fair value	$	391	$	—	$	391	$	—

December 31, 2017
Assets
Equity securities	$	8	$	8	$	—	$	—
Government bonds	25		—		25		—
Total assets at fair value	$	33	$	8	$	25	$	—
Liabilities
Derivative instruments - CEC Convertible Notes	$	1,016	$	—	$	—	$	1,016
Disputed claims liability	112		—		—		112
Total liabilities at fair value	$	1,128	$	—	$	—	$	1,128

Changes in Level 3 Fair Value Measurements

(In millions)	CEC Convertible Notes ⁽¹⁾			VICI Call Right ⁽²⁾			Derivative Instruments ⁽¹⁾			Disputed Claims Liability
Balance as of January 1, 2017	$	1,600		$	131		$	—		$	—
Restructuring of CEOC and other	640			46			—			—
Settlement of Restructuring Support and Forbearance Agreement Accrual	(2,240		)	(177		)	1,080			112
Change in fair value recorded in Other income/(loss)	—			—			(64		)	—
Balance as of December 31, 2017	—			—			1,016			112
Change in fair value recorded in Other income/(loss)	—			—			(282		)	(10		)
Change due to resolved claims in Disputed claims liability	—			—			4			(29		)
Transfer to Level 2 on October 1, 2018 ⁽³⁾	—			—			(738		)	(73		)
Balance as of December 31, 2018	$	—		$	—		$	—		$	—

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⁽¹⁾	The CEC Convertible Notes were remeasured at fair value and issued on the Effective Date with a debt component and a derivative liability component. See Note 12 for further details on the debt portion of the CEC Convertible Notes. The derivative portion of the CEC Convertible Notes is a recurring fair value measurement, see below.


⁽²⁾	The VICI Call Right was remeasured at fair value and then transferred to Accrued expenses and other current liabilities on the Balance Sheet upon settlement on the Effective Date because it is an option related to real estate and not a derivative. See Note 9.


⁽³⁾	Due to a change in valuation methodology of the CEC Convertible Notes on October 1, 2018, the derivative liability of the CEC Convertible Notes and the Disputed claims liability were transferred to Level 2.

Equity Securities

Investments in equity securities are traded in active markets and have readily determined market values. These investments were included in Prepayments and other current assets on our Balance Sheets. Gross unrealized gains and losses on marketable securities were not material as of December 31, 2017.

Government Bonds

Investments primarily consist of 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 assets while a portion is included in Prepayments and other current assets in our Balance Sheets.

Derivative Instruments

We do not purchase or hold any derivative financial instruments for trading purposes.

CEC Convertible Notes - Derivative Liability

On the Effective Date, CEC issued $1.1 billion aggregate principal amount of 5.00% convertible senior notes maturing in 2024, see Note 12 for further details.

Management analyzed the conversion features for derivative accounting consideration under ASC Topic 815, Derivatives and Hedging, (“ASC 815”) and determined that the CEC Convertible Notes contains bifurcated derivative features and qualifies for derivative accounting. In accordance with ASC 815, CEC has bifurcated the conversion features of the CEC Convertible Notes and recorded a derivative liability. The CEC Convertible Notes derivative features are not designated as hedging instruments. The derivative features of the CEC Convertible Notes are carried on CEC’s Balance Sheet at fair value in Deferred credits and other liabilities. The derivative liability is marked-to-market each measurement period and the changes in fair value of $697 million and $64 million, respectively, were recorded as a component of Other income/(loss) for the years ended December 31, 2018 and 2017 in the Statements of Operations. The derivative liability associated with the CEC Convertible Notes will remain in effect until such time as the underlying convertible notes are exercised or terminated and the resulting derivative liability will be transitioned from a liability to equity as of such date.

Valuation Methodology

The CEC Convertible Notes have a face value of $1.1 billion, a term of 7 years, a coupon rate of 5%, and are convertible into 156 million shares of CEC common stock, of which 151 million shares are net of amounts held by CEC.

As of December 31, 2017, we estimated the fair value of the CEC Convertible Notes using a binomial lattice valuation model that incorporated the value of both the straight debt and conversion features of the notes. The valuation model incorporated assumptions regarding the incremental cost of borrowing for CEC, the value of CEC’s equity into which these notes could convert, the expected volatility of such equity, and the risk-free rate. Since the key assumptions used in the valuation model, including CEC’s estimated incremental cost of borrowing and the expected volatility of CEC’s equity, were significant unobservable inputs, the fair value for the conversion features of the CEC Convertible Notes was classified as Level 3.

Key Assumptions as of December 31, 2017 -


•	Incremental cost of borrowing - 4.75%


•	Expected volatility - 30%


•	Risk-free rate - 2.3%

As of December 31, 2018, we estimated the fair value of the CEC Convertible Notes using a market-based approach that incorporated the value of both the straight debt and conversion features of the notes. The valuation model incorporated actively traded prices of the CEC Convertible Notes as of the reporting date, the value of CEC’s equity into which these notes could convert, and assumptions regarding the incremental cost of borrowing for CEC. Since the key assumption used in the valuation model is the actively traded price of CEC Convertible Notes but the incremental cost of borrowing is an unobservable input, the fair value for the conversion features of the CEC Convertible Notes was classified as Level 2.

Key Assumptions as of December 31, 2018 -


•	Actively traded price of CEC Convertible Notes - $122.38


•	Incremental cost of borrowing - 7.0%

Interest Rate Swap Derivatives

We use forward-starting interest rate swaps to manage the mix of our debt between fixed and variable rate instruments. During the years ended December 31, 2018 and 2017, respectively, we entered into six and four interest rate swap agreements to fix the interest rate on $2.0 billion and $1.0 billion of variable rate debt. As of December 31, 2018, we have entered into ten interest rate swap agreements for notional amounts totaling $3.0 billion. The interest rate swaps are designated as cash flow hedging instruments. The difference to be paid or received under the terms of the interest rate swap agreements will be accrued as interest rates change and recognized as an adjustment to interest expense for the related debt beginning on December 31, 2018. Changes in the variable interest rates to be paid or received pursuant to the terms of the interest rate swap agreements will have a corresponding effect on future cash flows.

The major terms of the interest rate swap agreements as of December 31, 2018 are as follows:



Effective Date	Notional Amount (In millions)	Fixed Rate Paid	Variable Rate Received as of December 31, 2018	Maturity Date
12/31/2018	250	2.274%	2.522%	12/31/2022
12/31/2018	200	2.828%	2.522%	12/31/2022
12/31/2018	600	2.739%	2.522%	12/31/2022
1/1/2019	250	2.153%	N/A	12/31/2020
1/1/2019	250	2.196%	N/A	12/31/2021
1/1/2019	400	2.788%	N/A	12/31/2021
1/1/2019	200	2.828%	N/A	12/31/2022
1/2/2019	250	2.172%	N/A	12/31/2020
1/2/2019	200	2.731%	N/A	12/31/2020
1/2/2019	400	2.707%	N/A	12/31/2021

Valuation Methodology

The estimated fair values of our interest rate swap derivative instruments are derived from market prices obtained from dealer quotes for similar, but not identical, assets or liabilities. Such quotes represent the estimated amounts we would receive or pay to terminate the contracts. The interest rate swap derivative instruments are included in either Deferred charges and other assets or Deferred credits and other liabilities on our Balance Sheets. Our derivatives are recorded at their fair values, adjusted for the credit rating of the counterparty if the derivative is an asset, or adjusted for the credit rating of the Company if the derivative is a liability. None of our derivative instruments are offset and all were classified as Level 2.

The effect of derivative instruments designated as hedging instruments on the Balance Sheet for amounts transferred into Accumulated other comprehensive income/(loss) (“AOCI”) was a loss of $16 million for the year ended December 31, 2018 and was immaterial in 2017. The estimated amount of existing losses that are reported in AOCI at the reporting date that are expected to be reclassified into earnings within the next 12 months is approximately $1 million.

Disputed Claims Liability

CEC and CEOC deposited cash, CEC common stock, and CEC Convertible Notes into an escrow trust to be distributed to satisfy certain remaining unsecured claims (excluding debt claims) as they become allowed (see Note 11). We have estimated the fair value of the remaining liability of those claims. As key assumptions used in the valuation model, including assumptions for the conversion features of the CEC Convertible Notes, included significant unobservable inputs, the fair value of the liability was classified as Level 3 as of December 31, 2017. As of December 31, 2018, due to our change in our valuation methodology of the CEC Convertible Notes (see above), the fair value of the Disputed claims liability is now classified as Level 2.

For the years ended December 31, 2018 and 2017, the changes in fair value related to the disputed claims liability was income of $24 million and immaterial, respectively, which were recorded as components of Other income/(loss) in the Statements of Operations.