Fair Value Measurements (Notes)

6 Months Ended

Jun. 30, 2019

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:

Estimated Fair Value

(In millions)	Balance		Level 1		Level 2		Level 3
June 30, 2019
Assets
Government bonds	$	17	$	—	$	17	$	—
Total assets at fair value	$	17	$	—	$	17	$	—
Liabilities
Derivative instruments - interest rate swaps	$	77	$	—	$	77	$	—
Derivative instruments - CEC Convertible Notes	784		—		784		—
Disputed claims liability	51		—		51		—
Total liabilities at fair value	$	912	$	—	$	912	$	—

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	$	—

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 October 6, 2017, CEC issued $1.1 billion aggregate principal amount of 5.00% convertible senior notes maturing in 2024 (the “CEC Convertible Notes”) pursuant to the Indenture, dated as of October 6, 2017.

The CEC Convertible Notes are convertible at the option of holders into a number of shares of CEC common stock that is equal to approximately 0.139 shares of CEC common stock per $1.00 principal amount of CEC Convertible Notes, which is equal to an initial conversion price of $7.19 per share. If all the shares were issued on October 6, 2017, they would have represented approximately 17.9% of the shares of CEC common stock outstanding on a fully diluted basis. The holders of the CEC Convertible Notes can convert them at any time after issuance. CEC can convert the CEC Convertible Notes beginning in October 2020 if the last reported sale price of CEC common stock equals or exceeds 140% of the conversion price for the CEC Convertible Notes in effect on each of at least 20 trading days during any 30 consecutive trading day period. As of June 30, 2019, an immaterial amount of the CEC Convertible Notes were converted into shares of CEC common stock. An aggregate of 156 million shares of CEC common stock are issuable upon conversion of the CEC Convertible Notes, of which 151 million shares are net of amounts held by CEC. As of June 30, 2019, the remaining life of the CEC Convertible Notes is 5.30 years.

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 contain bifurcated derivative features and qualify 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 Sheets 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 a loss of $298 million and $460 million for the three and six months ended June 30, 2019, respectively, and income of $25 million and $185 million for the three and six months ended June 30, 2018, respectively, were recorded as components of Other income/(loss) 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, an initial term of 7 years, and a coupon rate of 5%.

As of June 30, 2019 and 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 June 30, 2019 and December 31, 2018:


•	Actively traded price of CEC Convertible Notes - $171.61 and $122.38, respectively


•	Incremental cost of borrowing - 5.5% and 7.0%, respectively

Interest Rate Swap Derivatives

We use interest rate swaps to manage the mix of our debt between fixed and variable rate instruments. As of June 30, 2019, we have entered into a total of ten interest rate swap agreements for notional amounts totaling $3.0 billion to fix the interest rate on variable rate debt. The interest rate swaps are designated as cash flow hedging instruments.

The major terms of the interest rate swap agreements as of June 30, 2019 are as follows:



Effective Date	Notional Amount (In millions)	Fixed Rate Paid	Variable Rate Received as of June 30, 2019	Maturity Date
12/31/2018	250	2.274%	2.439%	12/31/2022
12/31/2018	200	2.828%	2.439%	12/31/2022
12/31/2018	600	2.739%	2.439%	12/31/2022
1/1/2019	250	2.153%	2.439%	12/31/2020
1/1/2019	250	2.196%	2.439%	12/31/2021
1/1/2019	400	2.788%	2.439%	12/31/2021
1/1/2019	200	2.828%	2.439%	12/31/2022
1/2/2019	250	2.172%	2.439%	12/31/2020
1/2/2019	200	2.731%	2.439%	12/31/2020
1/2/2019	400	2.707%	2.439%	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.

Financial Statement Impact

The effect of derivative instruments designated as hedging instruments on the Balance Sheets for amounts transferred into Accumulated other comprehensive income/(loss) (“AOCI”) before tax was a loss of $40 million and $61 million during the three and six months ended June 30, 2019, respectively, and a gain of $12 million and $17 million during the three and six months ended June 30, 2018, respectively. The effect of derivative instruments reclassified from AOCI to Interest expense on the Statements of Operations was $1 million for each of the three and six months ended June 30, 2019, respectively, and zero for each of the three and six months ended June 30, 2018. 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 $22 million.

Accumulated Other Comprehensive Income/(Loss)

The changes in AOCI by component, net of tax, for the three and six months ended June 30, 2019 and 2018 are shown below.



(In millions)	Unrealized Net Gains/(Losses) on Derivative Instruments			Foreign Currency Translation Adjustments			Other			Total
Balances as of December 31, 2017	$	—		$	9		$	(3	)	$	6
Other comprehensive income before reclassifications	4			1			4			9
Total other comprehensive income, net of tax	4			1			4			9
Balances as of March 31, 2018	$	4		$	10		$	1		$	15
Other comprehensive income/(loss) before reclassifications	9			(17		)	(3		)	(11		)
Total other comprehensive income/(loss), net of tax	9			(17		)	(3		)	(11		)
Balances as of June 30, 2018	$	13		$	(7	)	$	(2	)	$	4

Balances as of December 31, 2018	$	(13	)	$	(9	)	$	(2	)	$	(24	)
Other comprehensive income/(loss) before reclassifications	(17		)	2			2			(13		)
Total other comprehensive income/(loss), net of tax	(17		)	2			2			(13		)
Balances as of March 31, 2019	$	(30	)	$	(7	)	$	—		$	(37	)
Other comprehensive loss before reclassifications	(36		)	(5		)	—			(41		)
Amounts reclassified from accumulated other comprehensive loss	1			—			—			1
Total other comprehensive loss, net of tax	(35		)	(5		)	—			(40		)
Balances as of June 30, 2019	$	(65	)	$	(12	)	$	—		$	(77	)

Disputed Claims Liability

CEC and Caesars Entertainment Operating Company, Inc. (“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 8). We have estimated the fair value of the remaining liability of those claims. Based on the valuation methodology of the CEC Convertible Notes (see above), the fair value of the Disputed claims liability is classified as Level 2.

The changes in fair value related to the disputed claims liability was a loss of $9 million and $15 million for the three and six months ended June 30, 2019, respectively, and income of $16 million and $26 million for the three and six months ended June 30, 2018, respectively, which were recorded as components of Other income/(loss) in the Statements of Operations.