Caesars Entertainment Corporation
CAESARS ENTERTAINMENT Corp (Form: 10-Q, Received: 08/02/2016 17:17:54)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
FORM 10-Q
_________________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2016
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission File No. 1-10410
 _________________________
CAESARS ENTERTAINMENT CORPORATION
(Exact name of registrant as specified in its charter)
 _________________________
 
Delaware
 
62-1411755
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
One Caesars Palace Drive, Las Vegas, Nevada
 
89109
(Address of principal executive offices)
 
(Zip Code)
(702) 407-6000
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
 _________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x      No   o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
o
Accelerated filer
x
 
 
 
 
Non-accelerated filer
o   (Do not check if a smaller reporting company)
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   o     No   x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
Outstanding at August 1, 2016
Common stock, $0.01 par value
146,922,790



CAESARS ENTERTAINMENT CORPORATION
INDEX
 
 
 
Page
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.



2


PART I—FINANCIAL INFORMATION

Item 1. Unaudited Financial Statements

CAESARS ENTERTAINMENT CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)

(In millions)
June 30, 2016

December 31, 2015
Assets
 

 
Current assets
 

 
Cash and cash equivalents ($1,133 and $1,060 attributable to our VIEs)
$
1,525


$
1,338

Restricted cash ($4 and $4 attributable to our VIEs)
56

 
59

Receivables, net ($129 and $123 attributable to our VIEs)
200


193

Due from affiliates ($25 and $32 attributable to our VIEs)
25

 
32

Prepayments and other current assets ($58 and $51 attributable to our VIEs)
126


128

Inventories ($5 and $7 attributable to our VIEs)
16


21

Total current assets
1,948


1,771

Property and equipment, net ($2,576 and $2,620 attributable to our VIEs)
7,511


7,598

Goodwill ($294 and $294 attributable to our VIEs)
1,696


1,696

Intangible assets other than goodwill ($233 and $251 attributable to our VIEs)
500


543

Restricted cash ($5 and $9 attributable to our VIEs)
5


109

Deferred income taxes ($20 and $28 attributable to our VIEs)
20

 
28

Deferred charges and other assets ($250 and $260 attributable to our VIEs)
437


450

Total assets
$
12,117


$
12,195

 
 
 
 
Liabilities and Stockholders’ Equity/(Deficit)
 

 
Current liabilities
 

 
Accounts payable ($116 and $141 attributable to our VIEs)
$
165


$
179

Due to affiliates ($15 and $15 attributable to our VIEs)
17

 
16

Accrued expenses and other current liabilities ($245 and $272 attributable to our VIEs)
631


588

Accrued restructuring and support expenses
3,170

 
905

Interest payable ($36 and $37 attributable to our VIEs)
127


131

Current portion of long-term debt ($23 and $70 attributable to our VIEs)
71

 
187

Total current liabilities
4,181


2,006

Long-term debt ($2,262 and $2,267 attributable to our VIEs)
6,763


6,777

Deferred income taxes ($2 and $4 attributable to our VIEs)
1,004


991

Deferred credits and other liabilities ($218 and $138 attributable to our VIEs)
265


188

Total liabilities
12,213


9,962

Commitments and contingencies (Note 8)


 


Stockholders’ equity/(deficit)
 

 
Caesars stockholders’ equity/(deficit)
(1,394
)

987

Noncontrolling interests
1,298


1,246

Total stockholders’ equity/(deficit)
(96
)

2,233

Total liabilities and stockholders’ equity/(deficit)
$
12,117


$
12,195


See accompanying Notes to Consolidated Condensed Financial Statements.

3




CAESARS ENTERTAINMENT CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)


 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In millions, except per share data)
2016
 
2015
 
2016
 
2015
Revenues
 
 
 
 
 
 
 
Casino
$
545

 
$
543

 
$
1,075

 
$
1,203

Food and beverage
204

 
203

 
410

 
429

Rooms
235

 
221

 
464

 
443

Interactive entertainment
248

 
186

 
476

 
363

Other revenue
130

 
121

 
245

 
246

Less: casino promotional allowances
(132
)
 
(133
)
 
(272
)
 
(289
)
Net revenues
1,230

 
1,141

 
2,398

 
2,395

Operating expenses
 
 
 
 
 
 
 
Direct
 
 
 
 
 
 
 
Casino
279

 
278

 
564

 
634

Food and beverage
100

 
99

 
193

 
202

Rooms
63

 
57

 
122

 
113

Platform fees
68

 
51

 
132

 
100

Property, general, administrative, and other
385

 
305

 
716

 
655

Depreciation and amortization
109

 
96

 
228

 
198

Corporate expense
41

 
45

 
82

 
91

Other operating costs
21

 
24

 
43

 
72

Total operating expenses
1,066

 
955

 
2,080

 
2,065

Income from operations
164

 
186

 
318

 
330

Interest expense
(150
)
 
(147
)
 
(301
)
 
(384
)
Deconsolidation and restructuring of CEOC and other
(2,026
)
 
7

 
(2,263
)
 
7,096

Income/(loss) from continuing operations before income taxes
(2,012
)
 
46

 
(2,246
)
 
7,042

Income tax benefit/(provision)
(31
)
 
4

 
(71
)
 
(188
)
Income/(loss) from continuing operations, net of income taxes
(2,043
)
 
50

 
(2,317
)
 
6,854

Loss from discontinued operations, net of income taxes

 

 

 
(7
)
Net income/(loss)
(2,043
)
 
50

 
(2,317
)
 
6,847

Net income attributable to noncontrolling interests
(34
)
 
(35
)
 
(68
)
 
(60
)
Net income/(loss) attributable to Caesars
$
(2,077
)
 
$
15

 
$
(2,385
)
 
$
6,787

 
 
 
 
 
 
 
 
Earnings/(loss) per share - basic and diluted



 






Basic earnings/(loss) per share from continuing operations
$
(14.25
)

$
0.10


$
(16.39
)

$
46.93

Basic loss per share from discontinued operations






(0.04
)
Basic earnings/(loss) per share
$
(14.25
)
 
$
0.10

 
$
(16.39
)
 
$
46.89

 
 
 
 
 
 
 
 
Diluted earnings/(loss) per share from continuing operations
$
(14.25
)
 
$
0.10

 
$
(16.39
)
 
$
46.31

Diluted loss per share from discontinued operations

 

 

 
(0.04
)
Diluted earnings/(loss) per share
$
(14.25
)
 
$
0.10

 
$
(16.39
)
 
$
46.27

 
 
 
 
 
 
 
 
Weighted-average common shares outstanding - basic
146

 
145

 
146

 
145

Weighted-average common shares outstanding - diluted
146

 
147

 
146

 
147


See accompanying Notes to Consolidated Condensed Financial Statements.

4




CAESARS ENTERTAINMENT CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY/(DEFICIT)
(UNAUDITED)


 
Caesars Stockholders’ Equity/(Deficit)
 
 
 
 
(In millions)
Common
Stock
 
Treasury
Stock
 
Additional
Paid-in-
Capital
 

Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Income/(Loss)
 
Total
Caesars
Stockholders’
Equity/(Deficit)
 
Noncontrolling
Interests
 
Total Equity/(Deficit)
Balance as of December 31, 2014
$
1

 
$
(19
)
 
$
8,140

 
$
(13,104
)
 
$
(15
)
 
$
(4,997
)
 
$
255

 
$
(4,742
)
Net income

 

 

 
6,787

 

 
6,787

 
60

 
6,847

Share-based compensation

 
(2
)
 
31

 

 

 
29

 

 
29

Elimination of CEOC noncontrolling interest and deconsolidation   (1)

 

 

 

 
16

 
16

 
854

 
870

Decrease in noncontrolling interests, net of distributions and contributions

 

 

 

 

 

 
(8
)
 
(8
)
Other

 

 
(4
)
 

 
1

 
(3
)
 
15

 
12

Balance as of June 30, 2015
$
1

 
$
(21
)
 
$
8,167

 
$
(6,317
)
 
$
2

 
$
1,832

 
$
1,176

 
$
3,008

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2015
$
1

 
$
(21
)
 
$
8,191

 
$
(7,185
)
 
$
1

 
$
987

 
$
1,246

 
$
2,233

Net income/(loss)

 

 

 
(2,385
)
 

 
(2,385
)
 
68

 
(2,317
)
Share-based compensation

 
(5
)
 
24

 

 

 
19

 

 
19

CIE stock transactions, net

 

 
(15
)
 

 

 
(15
)
 
(5
)
 
(20
)
Change in noncontrolling interest, net of distributions and contributions

 

 

 

 

 

 
(8
)
 
(8
)
Other

 

 

 

 

 

 
(3
)
 
(3
)
Balance as of June 30, 2016
$
1

 
$
(26
)
 
$
8,200

 
$
(9,570
)
 
$
1

 
$
(1,394
)
 
$
1,298

 
$
(96
)
____________________
(1)  
The effect of the deconsolidation of CEOC. See Note 1 .


See accompanying Notes to Consolidated Condensed Financial Statements.

5




CAESARS ENTERTAINMENT CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)


 
Six Months Ended June 30,
(In millions)
2016
 
2015
Cash flows provided by operating activities
$
366

 
$
101

Cash flows from investing activities
 
 
 
Acquisitions of property and equipment, net of change in related payables
(106
)
 
(227
)
Deconsolidation of CEOC cash

 
(958
)
Increase in restricted cash
(6
)
 
(30
)
Decrease in restricted cash
113

 
41

Proceeds from the sale and maturity of investments
24

 

Payments to acquire investments
(8
)
 

Other
(1
)
 

Cash flows provided by/(used in) investing activities
16

 
(1,174
)
Cash flows from financing activities
 
 
 
Proceeds from long-term debt and revolving credit facilities
80

 
190

Repayments of long-term debt and revolving credit facilities
(221
)
 
(258
)
Payment of contingent consideration

 
(32
)
Repurchase of CIE management shares
(43
)
 
(38
)
Distributions to noncontrolling interest owners
(13
)
 
(15
)
Other
2

 
6

Cash flows used in financing activities
(195
)
 
(147
)
Cash flows from discontinued operations
 
 
 
Cash flows used in operating activities

 
(7
)
Cash used in discontinued operations

 
(7
)
Net increase/(decrease) in cash and cash equivalents
187

 
(1,227
)
Cash and cash equivalents, beginning of period
1,338

 
2,806

Cash and cash equivalents, end of period
$
1,525

 
$
1,579

 
 
 
 
Supplemental Cash Flow Information:
 
 
 
Cash paid for interest
$
290

 
$
403

Cash paid for income taxes
46

 
35

Non-cash investing and financing activities:
 
 
 
Change in accrued capital expenditures
(8
)
 
(11
)

See accompanying Notes to Consolidated Condensed Financial Statements.

6




CAESARS ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)



In this filing, the name “CEC” refers to the parent holding company, Caesars Entertainment Corporation, exclusive of its consolidated subsidiaries and variable interest entities, unless otherwise stated or the context otherwise requires. The words “Company,” “Caesars,” “Caesars Entertainment,” “we,” “our,” and “us” refer to Caesars Entertainment Corporation, inclusive of its consolidated subsidiaries and variable interest entities, unless otherwise stated or the context otherwise requires.
This Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2015 (“ 2015 10-K”).
We also refer to (i) our Consolidated Condensed Financial Statements as our “Financial Statements,” (ii) our Consolidated Condensed Statements of Operations and Comprehensive Income as our “Statements of Operations,” and (iii) our Consolidated Condensed Balance Sheets as our “Balance Sheets.”
Note 1 - Description of Business
Organization
CEC is primarily a holding company with no independent operations of its own. CEC owns 100% of Caesars Entertainment Resort Properties, LLC (“CERP”) and an interest in Caesars Growth Partners, LLC (“CGP”). We also consolidate the results of Caesars Interactive Entertainment, Inc. (“CIE”), a majority owned subsidiary of CGP that operates an online games business and owns the World Series of Poker (“WSOP”) tournaments and brand (see Note 16 ). As of June 30, 2016 , 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% of consolidated net revenues for both the three and six months ended June 30, 2016 .
CEC also holds a majority interest in Caesars Entertainment Operating Company, Inc. (“CEOC”). The results of CEOC and its subsidiaries are no longer consolidated with Caesars subsequent to CEOC and certain of its United States subsidiaries (the “Debtors”) voluntarily filing for reorganization under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) on January 15, 2015 .
Caesars Enterprise Services, LLC
Caesars Enterprise Services, LLC (“CES”) is a services joint venture formed by CERP, CEOC, and Caesars Growth Properties Holdings, LLC (“CGPH”) (collectively, the “Members”). CES provides certain corporate and administrative services for the Members’ casino properties and related entities, including substantially all of the 28 casino properties owned by CEOC, and 7 casinos owned by unrelated third parties (including four Indian tribal casinos). 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, CEC and its operating subsidiaries 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.
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, 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 .
Announced Merger with Caesars Acquisition Company
In 2014, Caesars and Caesars Acquisition Company (“CAC”) entered into a merger agreement, which was amended and restated on July 9, 2016 (the “Merger Agreement”). Pursuant to the Merger Agreement, among other things, CAC will merge with and into Caesars, with Caesars as the surviving company (the “Merger”). Subject to the terms and conditions of the Merger Agreement, upon consummation of the Merger, each share of CAC common stock issued and outstanding immediately prior to the effective date of the Merger will be converted into, and become exchangeable for, shares of CEC common stock in a ratio to ensure that holders of CAC common stock receive shares equal to 27% of the outstanding CEC common stock on a fully diluted basis (prior to the conversion of the CEC Convertible Notes being issued as part of the Restructuring, as defined below) (the “Exchange Ratio”).

7




CAESARS ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)


The Exchange Ratio may be subject to change, and Caesars or CAC may terminate the Merger Agreement under certain circumstances.
We expect the Merger to be accounted for as a transaction among entities under common control, which will result in CAC being consolidated into Caesars at book value as an equity transaction.
Going Concern
Overview
As a result of the following circumstances, we have substantial doubt about CEC’s ability to continue as a going concern:
we have limited cash available to meet the financial commitments of CEC, primarily resulting from significant expenditures made to (1) defend against the litigation matters disclosed below and (2) support a plan of reorganization for CEOC (the “Restructuring”);
we have made material future commitments to support the Restructuring described below; and
we are a defendant in litigation relating to certain CEOC transactions dating back to 2010 and other legal matters (see Note 3 ) that could result in one or more adverse rulings against us.
The completion of the Merger is expected to aid CEC in meeting its previously disclosed financial commitments to support the Restructuring. While the cash forecast at CEC currently contemplates liquidity to be sufficient through the end of the year, the CEC cash balance will be consumed by expenses associated with the Restructuring unless we identify additional sources of liquidity to meet CEC’s ongoing obligations as well as its commitments to support the Restructuring. We are evaluating whether we are able to obtain additional sources of cash. Furthermore, if the Merger is not completed for any reason, CEC would still be liable for many of these obligations.
Under the terms of the Restructuring, all related litigation is expected to be resolved. However, if CEC is unable to obtain additional sources of cash when needed, in the event of a material adverse ruling on one or all of the litigation matters disclosed below, or if CEOC does not emerge from bankruptcy on a timely basis on terms and under circumstances satisfactory to CEC, it is likely that CEC would seek reorganization under Chapter 11 of the Bankruptcy Code.
We believe that CERP and CGP’s cash and cash equivalents, their cash flows from operations, and/or financing available under their separate revolving credit facilities will be sufficient to meet their normal operating requirements, to fund planned capital expenditures, and to fund debt service during the next 12 months and the foreseeable future.
CEOC Reorganization
On June 28, 2016, the Debtors filed an amended plan of reorganization (the “Amended Plan”) with the United States Bankruptcy Court for the Northern District of Illinois in Chicago (the “Bankruptcy Court”) that replaces and provides for different terms than the Initial Plan filed in October 2015. CEC, CAC, the Debtors and multiple CEOC creditor groups have agreed to support and vote in favor of the Amended Plan. The confirmation hearing for the Amended Plan has been scheduled for January 2017.
In connection with the Amended Plan, the following agreements with respect to the CEOC reorganization were either entered into or amended (collectively, the “RSAs”):
(a)
First Amended Restructuring Support and Forbearance Agreement dated June 20, 2016, with certain parties holding claims under CEOC’s first lien credit agreement (the “First Lien Bank RSA”);
(b)
Restructuring Support and Forbearance Agreement dated June 21, 2016, with certain parties holding claims under CEOC’s subsidiary guaranteed notes (the “SGN RSA”);
(c)
First Amended and Restated Restructuring Support, Settlement, and Contribution Agreement dated July 9, 2016, with CEOC (the “CEC RSA”);
(d)
Amended and Restated Restructuring Support Agreement dated July 9, 2016, with CAC and CEOC (the “CAC RSA”);

8




CAESARS ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)


(e)
Restructuring Support and Settlement Agreement dated June 22, 2016, with the unsecured claimholders’ committee in the Chapter 11 cases (the “UCC RSA”); and
(f)
Restructuring Support and Forbearance Agreement dated July 31, 2016, with certain parties holding claims under CEOC’s second lien note agreements (the “Second Lien Note RSA”) (see Note 16 ).
The “Effective Date” of the Restructuring (the material terms of which are contained in the RSAs and the Amended Plan) 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 become effective.
Due to the amount of consensus indicated among the Amended Plan and the RSAs and the status of negotiations with certain of CEOC’s other creditor groups, we believe it is probable that certain obligations described in the Amended Plan and the RSAs will ultimately be settled, and therefore, we have accrued the items described in the table below that are estimable in accrued restructuring and support expenses on the balance sheets. During the second quarter of 2016 , we updated our accruals based on the terms of the Amended Plan and the RSAs and recorded an additional $2.0 billion in deconsolidation and restructuring of CEOC and other in the statement of operations, which increased our total expense to $2.3 billion for the six months ended June 30, 2016 .
To estimate the amount of the restructuring accrual, we allocated the estimated fair value of the total consideration to the acquisition of OpCo (as defined below) with the residual amounts being allocated to the restructuring accrual. We believe our accruals represent the best estimate of our obligations under the Restructuring. However, because (1) negotiations between the various parties are ongoing and (2) the Amended Plan is pending approval by the Bankruptcy Court and the receipt of required gaming regulatory approvals, our accruals are subject to change. Additionally, a substantial amount of the accrual relates to the expected issuance of CEC equity and convertible notes. Although, pursuant to the terms of the Amended Plan, as certain obligations will ultimately be settled in exchange for CEC equity and convertible notes, we have used the estimated current fair value of the CEC equity and convertible notes for accrual purposes. The value of the CEC common stock and convertible notes issuable upon consummation of the Merger and other transactions as contemplated in the Amended Plan are subject to change and will likely differ from the current value of such instruments. As a result, we expect to adjust the fair value of the accrual on a quarterly basis pending the determination of the actual fair value of the securities issued upon the consummation of the Merger and the Amended Plan. See Note 7 for additional information on our fair value measurements.
We are also party to the Fifth Amended and Restated Restructuring Support and Forbearance Agreement dated October 7, 2015, with certain parties holding claims under CEOC’s first lien notes (the “First Lien Bond RSA”) that includes terms different than those included in the Amended Plan and the RSAs listed above, but has not yet been amended or terminated. However, our accruals with respect to such claims have been adjusted based on the more current terms in the Amended Plan, which exceed the amounts contemplated by the First Lien Bond RSA. Additionally, although a majority of the parties holding claims under CEOC second lien notes have not yet agreed to the terms contemplated in the Second Lien Note RSA, we have accrued such amounts, as appropriate, as they exceed the amounts contemplated by the Amended Plan, and our accrual represents our best estimate of our obligations.
.

9




CAESARS ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)


Accrued Restructuring and Support Expenses
 
 
 
 
 
Accrued as of
(Dollars in millions)
Initial Plan Terms
 
Amended Plan
 
June 30, 2016
 
December 31, 2015
Cash to Debtors and forbearance fees (“Fixed Payments”) in connection with the Restructuring  (1)
$
406

 
$
406

 
$
320

 
$
320

Contingent payment to CEOC if there is insufficient liquidity at the Effective Date  (2)
75

 

 

 

“Additional Consideration” for the period from February 1, 2016 through the Effective Date   for the benefit of the First Lien Noteholders (2)
$25 per month
 

 

 
162

“Upfront Payments” to certain First Lien Bank Lenders (3)
63

 
63

 
2

 
2

“Bank Guaranty Settlement” to purchase from the Settling First Lien Bank Lenders 100% of their respective First Lien Bank Obligations that survive the Effective Date (4)
460

 
579

 
579

 
386

Issuance of CEC convertible notes for the settlement of litigation claims and potential claims against CEC (5)

 
1,000

 
1,060

 

Issuance of CEC common shares for the settlement of litigation claims and potential claims against CEC (6)

 

 
1,167

 

Professional fees for subsidiary guaranteed note lenders

 
2

 
2

 

Consideration for general unsecured claims

 
5

 
5

 

Total accrued
 
 
 
 
$
3,135

 
$
870

____________________
(1)  
$86 million was paid in fourth quarter of 2015.
(2)  
This provision is included in the First Lien Bond RSA, but has been omitted from the Amended Plan and the other RSAs.
(3)  
$61 million was paid in fourth quarter of 2015.
(4)  
Amount payable is subject to the excess cash projected to be held by CEOC on the Effective Date.
(5)  
Accrual represents the estimated fair value of the $1.0 billion in face value of convertible notes CEC expects to issue as part of the Amended Plan. The convertible notes mature within seven years of issuance, prior to which they can be converted to a number of shares equal to 12.195% of CEC’s fully diluted outstanding shares as of the Effective Date (subject to limitation). See Note 7 for additional information on fair value measurements.
(6)  
Accrual represents the estimated fair value of the portion of CEC common shares expected to be issued as part of the Amended Plan for the settlement of claims. This fair value does not include the value of CEC common shares expected to be issued in exchange for OpCo preferred stock, described below. See Note 7 for additional information on fair value measurements.

10




CAESARS ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)


Other Commitments Under the Amended Plan
The following represents other commitments or potential obligations that CEC has agreed to as part of the Amended Plan and certain of the RSAs, none of which have been accrued as of June 30, 2016.
Purchase 100% of OpCo common stock for $700 million (1)
Issuance of CEC common shares in exchange for OpCo preferred stock
Purchase 5% of PropCo equity for $91 million  (2)
PropCo has right of first refusal on all new domestic non-Las Vegas gaming facility opportunities, with CEC or OpCo leasing such properties
PropCo receives a call right to purchase listed properties: Harrah’s Atlantic City, Harrah’s Laughlin, and Harrah’s New Orleans (subject to the terms of the CERP and CGPH credit agreements)
Guarantee of OpCo’s payment obligations to PropCo under the leases of the CEOC Properties
Guarantee of OpCo debt received by the First Lien Bank Lenders and First Lien Noteholders
____________________
(1)  
“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.
(2)  
“PropCo” refers to the proposed entity resulting from the Restructuring that will own the CEOC Properties as of the Effective Date. This commitment is dependent on the ultimate legal structure of the entities formed as part of the Restructuring.
The acquisitions of OpCo equity and PropCo equity represent future investment transactions and will be recorded when (or if) the transactions are consummated. The PropCo right of refusal and call right to purchase the listed properties are either not estimable or not financial obligations that would require accrual. The guarantee of OpCo payment or debt obligations relate to contracts or debt instruments that do not yet exist, and thus do not give rise to any obligations for CEC as of June 30, 2016.
Payment to CEOC . In addition, and separate from the transactions and agreements described above, because there was 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, the agreement contemplates an additional payment to CEOC of $35 million from CEC, which CEOC has demanded. During the first quarter of 2015, we accrued this liability in accrued restructuring and support expenses on the consolidated balance sheet, and this amount is currently due and payable.
CEC Liquidity
Caesars Entertainment (which includes CEC and its consolidated subsidiaries and VIEs) is a highly-leveraged company and had $7.0 billion in consolidated debt outstanding as of June 30, 2016 . As a result, a significant portion of our liquidity needs are for debt service, including significant interest payments. As detailed in Note 9 , our consolidated estimated debt service (including principal and interest) for the remainder of 2016 is $312 million and $9.4 billion thereafter to maturity. See Note 9 for details of our debt outstanding and related restrictive covenants. This includes, among other information, details of our individual borrowings outstanding and each subsidiary’s annual maturities of long-term debt as of June 30, 2016 .
Cash and Available Revolver Capacity
 
June 30, 2016
(In millions)
CERP
 
CES
 
CGP
 
Other
Cash and cash equivalents
$
191

 
$
104

 
$
1,029

 
$
201

Revolver capacity
270

 

 
160

 

Revolver capacity drawn or committed to letters of credit
(15
)
 

 

 

Total
$
446

 
$
104

 
$
1,189

 
$
201


11




CAESARS ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)


Consolidated cash and cash equivalents, excluding restricted cash, as shown in the table above include amounts held by CERP, CGP, and CES, which are not readily available to CEC. “Other” reflects CEC and certain of its direct subsidiaries, including its insurance captives.
CEC is primarily a holding company with no independent operations, employees, or material debt issuances of its own. Its primary assets as of June 30, 2016 , consist of $201 million in cash and cash equivalents and its ownership interests in CEOC, CERP and CGP. CEC’s cash includes $103 million held by its insurance captives. Provisions included in certain debt arrangements entered into by CERP and CGP (and/or their respective subsidiaries) substantially restrict the ability of CERP, CGP, and 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, including defending itself in the litigation in which it has been named as a defendant (see Note 3 ). 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. In the first quarter of 2016, $100 million in cash that had previously been restricted by management for use in a casino development project became available for CEC’s use in operations.
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 $579 million as an estimate of the liability based on the terms of the Bank Guaranty Settlement 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 3 :
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”).
Report of Bankruptcy Examiner
The Bankruptcy Court previously engaged an examiner to investigate possible claims CEOC might have against CEC and/or other entities and individuals. On March 15, 2016, the examiner released his report, which identifies a variety of potential claims against

12




CAESARS ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)


CEC and certain individuals related to a number of transactions dating back to 2009. Most of the examiner’s findings are premised on his view that CEOC was “insolvent” at the time of the applicable transactions and that CEOC did not receive fair value for assets transferred. The examiner’s report includes his conclusions on the relative strengths of these possible claims, many of which are described in Note 3 . The examiner calculates an estimated range of potential damages for these potential claims from $3.6 billion to $5.1 billion , and such calculation does not account for probability of success, likelihood of collection, or the time or cost of litigation.
While this report was prepared at the request of the Bankruptcy Court, none of the findings included therein are legally binding on the Bankruptcy Court or any party. CEC contests most of the examiner’s findings, including his findings that CEOC was insolvent at relevant times, that there were breaches of fiduciary duty, that CEOC did not receive fair value for assets transferred, that there were fraudulent transfers, and as to the calculation of damages. CEC believes that each of the challenged transactions was undertaken to provide CEOC with the liquidity and resources required to sustain it and provide time to recover from significant market challenges.
CEC believes that the conclusion of the examination and the release of the report was a necessary step to facilitate ongoing settlement discussions in the CEOC bankruptcy proceedings. In April 2016, CEC, CEOC, and various other constituents began mediation with Joseph Farnan, the former chief judge of the United States District Court for the District of Delaware, seeking to reach a mutually agreeable plan of reorganization of CEOC. Despite its disagreements with the examiner’s conclusions, CEC has offered to provide substantial value to creditors in settlement as part of the plan of reorganization for CEOC. The mediation is ongoing, with further sessions scheduled over the next few weeks. CEC has been in regular, direct contact with both of CEOC’s official creditors’ committees, as well as other major creditor constituents, in an ongoing effort to arrive at a consensual plan providing for the timely emergence of CEOC from bankruptcy.
Note 2 Basis of Presentation and Consolidation
Basis of Presentation
The accompanying unaudited consolidated condensed financial statements of Caesars have been prepared under the rules and regulations of the Securities and Exchange Commission applicable for interim periods, and therefore, do not include all information and footnotes necessary for complete financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”). The results for the interim periods reflect all adjustments (consisting primarily of normal recurring adjustments) that management considers necessary for a fair presentation of financial position, results of operations, and cash flows. The results of operations for our interim periods are not necessarily indicative of the results of operations that may be achieved for the entire 2016 fiscal year. All amounts presented in these consolidated condensed financial statements and notes thereto exclude the operating results and cash flows of CEOC subsequent to January 15, 2015 , and the assets, liabilities, and equity of CEOC as of June 30, 2016 and December 31, 2015 .
Consolidation of Subsidiaries and Variable Interest Entities
We consolidate into our financial statements the accounts of all subsidiaries in which we have a controlling financial interest and variable interest entities (“VIEs”) for which we or one of our consolidated subsidiaries is the primary beneficiary. Control generally equates to ownership percentage, whereby (1) affiliates that are more than 50% owned are consolidated; (2) investments in affiliates of 50% or less but greater than 20% are generally accounted for using the equity method where we have determined that we have significant influence over the entities; and (3) investments in affiliates of 20% or less are generally accounted for using the cost method.
Consolidation of CGP
Because the equity holders in CGP receive returns disproportionate to their voting interests and substantially all the activities of CGP are related to Caesars, CGP has been determined to be a VIE. CAC is the sole voting member of CGP. Common control exists between CAC and Caesars through the majority beneficial ownership of both by Hamlet Holdings (as defined in Note 15 ). The assets held by CGP originally came from Caesars and continue to be intrinsically closely associated with Caesars through the nature of the business, as well as ongoing service and management agreements. Additionally, CEC is expected to receive the majority of the benefits or absorb the majority of the losses from its higher economic participation in CGP. Since CEC is more closely associated with CGP than CAC, we have determined that CEC is the primary beneficiary of CGP and is required to

13




CAESARS ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)


consolidate them. Neither CAC nor CGP guarantees any of CEC’s debt, and the creditors or beneficial holders of CGP have no recourse to the general credit of CEC.
CGP generated net revenues of $672 million and $574 million for the three months ended June 30, 2016 and 2015 , respectively, and $1.3 billion and $1.1 billion for the six months ended June 30, 2016 and 2015 , respectively. Net loss attributable to Caesars related to CGP was $16 million and $12 million for the three and six months ended June 30, 2016 , respectively. Net income attributable to Caesars related to CGP was $8 million and $6 million for the three and six months ended June 30, 2015 , respectively.
CGP was obligated to issue non-voting membership units to CEC in 2016 to the extent that the earnings from CIE’s social and mobile games business exceeded a specified threshold amount as of December 31, 2015 . In April 2016, CGP issued 32 million Class B non-voting units to CEC, resulting in CEC’s economic ownership in CGP increasing from 57.4% to 61.2% . However, there was no effect on our financial statements from this transaction.
Consolidation of CES
A steering committee acts in the role of a board of managers for CES with each Member entitled to appoint one representative to the steering committee. Each Member, through its representative, is entitled to a single vote on the steering committee; accordingly, the voting power of the Members does not equate to their ownership percentages. Therefore, w hen CES was formed, we determined that it was a VIE, and we concluded that CERP was required to consolidate it.
Effective January 1, 2016, we implemented the Financial Accounting Standard Board’s (the “FASB”) Accounting Standard Update (“ASU”) No. 2015-02, which amended Topic 810, Consolidations . Applying the amended guidance had no effect on our consolidated financial statements.
Under the guidance in effect prior to ASU No. 2015-02, CERP was determined to be the primary beneficiary of CES, and we consolidated CES through our consolidation of CERP. Under the amended guidance, in determining whether an entity is the primary beneficiary of a VIE, the entity must evaluate whether it has the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance through both its direct economic interests in the VIE and its indirect economic interests in the VIE held through related parties. Under the new criteria, when a decision maker exists that holds both power and benefits through its related parties and neither related party holds such power and benefits on their own, the decision maker is determined to be the primary beneficiary. Therefore, we concluded that CEC is the primary beneficiary because our combined economic interest in CES, through our subsidiaries, represents a controlling financial interest.
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.
Consolidation Considerations for CEOC
CEOC’s filing for reorganization was a reconsideration event for Caesars Entertainment to reevaluate whether consolidation of CEOC continued to be appropriate. We concluded that CEOC is a VIE and that we are not the primary beneficiary of CEOC; therefore, we no longer consolidate CEOC.
Transactions with CEOC are treated as 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. See Note 15 for additional information on related party transactions and on the carrying amounts and classification of assets and liabilities that relate to our variable interest in CEOC.

14




CAESARS ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)


Note 3 Litigation
Litigation
Noteholder Disputes
On August 4, 2014 , Wilmington Savings Fund Society, FSB, solely in its capacity as successor Indenture Trustee for the 10.00% Second-Priority Senior Secured Notes due 2018 (the “10.00% Second-Priority Notes”), on behalf of itself and, it alleges, derivatively on behalf of CEOC , filed a lawsuit (the “Delaware Second Lien Lawsuit”) in the Court of Chancery in the State of Delaware against CEC and CEOC, CGP, CAC,CERP, CES, Eric Hession, Gary Loveman, Jeffrey D. Benjamin, David Bonderman, Kelvin L. Davis, Marc C. Rowan, David B. Sambur, and Eric Press . The lawsuit alleges claims for breach of contract, intentional and constructive fraudulent transfer, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, and corporate waste. The lawsuit seeks (1) an award of money damages; (2) to void certain transfers, the earliest of which dates back to 2010; (3) an injunction directing the recipients of the assets in these transactions to return them to CEOC; (4) a declaration that CEC remains liable under the parent guarantee formerly applicable to the 10.00% Second-Priority Notes; (5) to impose a constructive trust or equitable lien on the transferred assets; and (6) an award to plaintiffs for their attorneys’ fees and costs. CEC believes this lawsuit is without merit and is defending itself vigorously. A motion to dismiss this action was filed by CEC and other defendants in September 2014, and the motion was argued in December 2014. During the pendency of its Chapter 11 bankruptcy proceedings, the action has been automatically stayed with respect to CEOC. The motion to dismiss with respect to CEC was denied on March 18, 2015. In a Verified Supplemental Complaint filed on August 3, 2015, the plaintiff stated that due to CEOC’s bankruptcy filing, the continuation of all claims was stayed pursuant to the bankruptcy except for Claims II, III, and X. These are claims against CEC only, for breach of contract in respect of the release of the parent guarantee formerly applicable to the CEOC 10.00% Second-Priority Notes, for declaratory relief in respect of the release of this guarantee, and for violations of the Trust Indenture Act in respect of the release of this guarantee. Fact discovery in the case is complete, and cross-motions for summary judgment have been filed by the parties. On June 15, 2016, the Bankruptcy Court granted CEOC’s motion for a temporary stay of this proceeding (and others). The stay will remain in effect until August 29, 2016, unless extended.
On September 3, 2014 , holders of approximately $21 million of CEOC 6.50% Senior Unsecured Notes due 2016 and 5.75% Senior Unsecured Noted due 2017 (collectively, the “Senior Unsecured Notes”) filed suit in federal district court in Manhattan against CEC and CEOC , claiming broadly that an August 12, 2014 Note Purchase and Support Agreement between CEC and CEOC (on the one hand) and certain other holders of the Senior Unsecured Notes (on the other hand) impaired their own rights under the Trust Indenture Act of 1939 and the indentures governing the Senior Unsecured Notes. The lawsuit seeks both declaratory and monetary relief. On October 2, 2014, a holder of CEOC’s 6.50% Senior Unsecured Notes due 2016 purporting to represent a class of all persons who held these Notes from August 11, 2014 to the present filed a substantially similar suit in the same court, against the same defendants, relating to the same transactions. Both lawsuits (the “Senior Unsecured Lawsuits”) were assigned to the same judge. The claims against CEOC have been automatically stayed during its Chapter 11 bankruptcy proceedings. The court denied a motion to dismiss both lawsuits with respect to CEC. The parties have completed fact discovery with respect to both plaintiffs' claims against CEC. On October 23, 2015, plaintiffs in the Senior Unsecured Lawsuits moved for partial summary judgment, and on December 29, 2015, those motions were denied. On December 4, 2015, plaintiff in the action brought on behalf of holders of CEOC’s 6.50% Senior Unsecured Notes moved for class certification and briefing has been completed. The judge presiding over these cases recently retired, and a new judge has been appointed to preside over these lawsuits. That judge set a new summary judgment briefing schedule for May and June of 2016 and had indicated his intention to rule on these summary judgment motions on or before July 22, 2016, while also setting trial of remaining issues for August 22, 2016. On June 15, 2016, the Bankruptcy Court granted CEOC’s motion for a temporary stay of these proceedings (and others). The stay will remain in effect until August 29, 2016, unless extended.
On November 25, 2014 , UMB Bank (“UMB”), as successor indenture trustee for CEOC's 8.50% Senior Secured Notes due 2020 (the “8.50% Senior Secured Notes”) , filed a verified complaint (the “Delaware First Lien Lawsuit”) in Delaware Chancery Court against CEC, CEOC, CERP, CAC, CGP, CES, and against individual past and present Board members Loveman, Benjamin, Bonderman, Davis, Press, Rowan, Sambur, Hession, Colvin, Kleisner, Swann, Williams, Housenbold, Cohen, Stauber, and Winograd , alleging generally that defendants improperly stripped CEOC of certain assets, wrongfully effected a release of CEC’s parent guarantee of the 8.50% Senior Secured Notes and committed other wrongs. Among other things, UMB asked the court to appoint a receiver over CEOC. In addition, the suit pleads claims for fraudulent conveyances/transfers, insider preferences, illegal dividends, declaratory judgment (for breach of contract as regards to the parent guarantee and also as to certain covenants in the bond indenture), tortious interference with contract, breach of fiduciary duty, usurpation of corporate opportunities, and unjust

15




CAESARS ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)


enrichment, and seeks monetary, equitable and declaratory relief. The lawsuit has been automatically stayed with respect to CEOC during its Chapter 11 bankruptcy process. Pursuant to the First Lien Bond RSA, the lawsuit also has been stayed in its entirety, with the consent of all of the parties to it. The consensual stay will expire upon the termination of the First Lien Bond RSA.
On February 13, 2015, Caesars Entertainment received a Demand For Payment of Guaranteed Obligations (the “February 13 Notice”) from Wilmington Savings Fund Society, FSB, in its capacity as successor Trustee for CEOC’s 10.00% Second-Priority Notes. The February 13 Notice alleges that CEOC’s commencement of its voluntary Chapter 11 bankruptcy case constituted an event of default under the indenture governing the 10.00% Second-Priority Notes; that all amounts due and owing on the 10.00% Second-Priority Notes therefore immediately became payable; and that Caesars Entertainment is responsible for paying CEOC’s obligations on the 10.00% Second-Priority Notes, including CEOC’s obligation to timely pay all principal, interest, and any premium due on these notes, as a result of a parent guarantee provision contained in the indenture governing the notes that the February 13 Notice alleges is still binding. The February 13 Notice accordingly demands that Caesars Entertainment immediately pay Wilmington Savings Fund Society, FSB, cash in an amount of not less than $3.7 billion, plus accrued and unpaid interest (including without limitation the $184 million interest payment due December 15, 2014 that CEOC elected not to pay) and accrued and unpaid attorneys’ fees and other expenses. The February 13 Notice also alleges that the interest, fees and expenses continue to accrue.
On February 18, 2015, Caesars Entertainment received a Demand For Payment of Guaranteed Obligations (the “February 18 Notice”) from BOKF, N.A. (“BOKF”), in its capacity as successor Trustee for CEOC’s 12.75% Second-Priority Senior Secured Notes due 2018 (the “12.75% Second-Priority Notes”). The February 18 Notice alleges that CEOC’s commencement of its voluntary Chapter 11 bankruptcy case constituted an event of default under the indenture governing the 12.75% Second-Priority Notes; that all amounts due and owing on the 12.75% Second-Priority Notes therefore immediately became payable; and that CEC is responsible for paying CEOC’s obligations on the 12.75% Second-Priority Notes, including CEOC’s obligation to timely pay all principal, interest and any premium due on these notes, as a result of a parent guarantee provision contained in the indenture governing the notes that the February 18 Notice alleges is still binding. The February 18 Notice therefore demands that CEC immediately pay BOKF cash in an amount of not less than $750 million, plus accrued and unpaid interest, accrued and unpaid attorneys’ fees, and other expenses. The February 18 Notice also alleges that the interest, fees and expenses continue to accrue.
In accordance with the terms of the applicable indentures, CEC is not subject to the above-described guarantees. As a result, we believe the demands for payment are meritless.
On March 3, 2015, BOKF filed a lawsuit (the “New York Second Lien Lawsuit”) against CEC in federal district court in Manhattan, in its capacity as successor trustee for CEOC’s 12.75% Second-Priority Notes. On June 15, 2015, UMB filed a lawsuit (the “New York First Lien Lawsuit”) against CEC, also in federal district court in Manhattan, in its capacity as successor trustee for CEOC’s 11.25% Senior Secured Notes due 2017, 8.50% Senior Secured Notes due 2020, and 9.00% Senior Secured Notes due 2020. Plaintiffs in these actions allege that CEOC’s filing of its voluntary Chapter 11 bankruptcy case constitutes an event of default under the indentures governing these notes, causing all principal and interest to become immediately due and payable, and that CEC is obligated to make those payments pursuant to parent guarantee provisions in the indentures governing these notes that plaintiffs allege are still binding. Both plaintiffs bring claims for violation of the Trust Indenture Act of 1939, breach of contract, breach of duty of good faith and fair dealing and for declaratory relief and BOKF brings an additional claim for intentional interference with contractual relations. The cases were both assigned to the same judge presiding over the other Parent Guarantee Lawsuits (as defined below) that are taking place in Manhattan. CEC filed its answer to the BOKF complaint on March 25, 2015, and to the UMB complaint on August 10, 2015. On June 25, 2015, and June 26, 2015, BOKF and UMB, respectively, moved for partial summary judgment, specifically on their claims alleging a violation of the Trust Indenture Act of 1939, seeking both declaratory relief and damages. On August 27, 2015, those motions were denied. The court, on its own motion, certified its order with respect to the interpretation of the Trust Indenture Act for interlocutory appeal to the United States Court of Appeals for the Second Circuit, and on December 22, 2015, the appellate court denied our motion for leave to appeal. On November 20, 2015, BOKF and UMB again moved for partial summary judgment. These motions likewise were denied. The judge presiding over these cases recently retired, and a new judge has been appointed to preside over these lawsuits. That judge set a new summary judgment briefing schedule for May and June of 2016 and had indicated his intention to rule on these summary judgment motions on or before July 22, 2016, while also setting trial of remaining issues for August 22, 2016. On June 15, 2016, the Bankruptcy Court granted CEOC’s motion for a temporary stay of the BOKF proceedings (and others). UMB has consented to application of the temporary stay to its lawsuit as well. The stay will remain in effect until August 29, 2016, unless extended.

16




CAESARS ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)


On October 20, 2015, Wilmington Trust, National Association (“Wilmington Trust”), filed a lawsuit (the “New York Senior Notes Lawsuit” and, together with the Delaware Second Lien Lawsuit, the Delaware First Lien Lawsuit, the Senior Unsecured Lawsuits, the New York Second Lien Lawsuit, and the New York First Lien Lawsuit, the “Parent Guarantee Lawsuits”) against CEC in federal district court in Manhattan in its capacity as successor indenture trustee for CEOC’s 10.75% Senior Notes due 2016 (the “10.75% Senior Notes”). Plaintiff alleges that CEC is obligated to make payment of amounts due on the 10.75% Senior Notes pursuant to a parent guarantee provision in the indenture governing those notes that plaintiff alleges is still in effect. Plaintiff raises claims for violations of the Trust Indenture Act of 1939, breach of contract, breach of the implied duty of good faith and fair dealing, and for declaratory judgment, and seeks monetary and declaratory relief. CEC filed its answer to the complaint on November 23, 2015. As with the other parent guaranty lawsuits taking place in Manhattan, the judge presiding over these cases recently retired, and a new judge has been appointed to preside over these lawsuits. That judge set a new summary judgment briefing schedule for May and June of 2016 and had indicated his intention to rule on these summary judgment motions on or before July 22, 2016, while also setting trial of remaining issues for August 22, 2016. On June 15, 2016, the Bankruptcy Court granted CEOC’s motion for a temporary stay of many of the Parent Guarantee Lawsuits. Wilmington Trust has consented to application of the temporary stay to this lawsuit. The stay will remain in effect until August 29, 2016, unless extended.
We believe that the claims and demands described above against CEC are without merit and we intend to defend the Company vigorously. The claims against CEOC have been stayed due to the Chapter 11 process and, except as described above, the actions against CEC have been allowed to continue. See additional disclosure relating to CEOC’s Chapter 11 filing in Note 1. We believe that the Noteholder Disputes and the Parent Guarantee Lawsuits have a reasonably possible likelihood of an adverse outcome. Should these matters ultimately be resolved through litigation outside of the financial restructuring of CEOC (the “Financial Restructuring”), and should a court find in favor of the claimants in some or all of the Noteholder Disputes, such determination would likely lead to a CEC reorganization under Chapter 11 of the Bankruptcy Code (see Note 1). We are not able to estimate a range of reasonably possible losses should any of the Noteholder Disputes ultimately be resolved against us, although they could potentially exceed $11 billion.
CEC-CAC Merger Litigation
On December 30, 2014 , Nicholas Koskie, on behalf of himself and, he alleges, all others similarly situated , filed a lawsuit (the “Merger Lawsuit”) in the Clark County District Court in the State of Nevada against CAC, CEC and members of the CAC board of directors Marc Beilinson, Philip Erlanger, Dhiren Fonseca, Don Kornstein, Karl Peterson, Marc Rowan, and David Sambur (the individual defendants collectively, the “CAC Directors”) . The Merger Lawsuit alleges claims for breach of fiduciary duty against the CAC Directors and aiding and abetting breach of fiduciary duty against CAC and CEC. It seeks (1) an order directing the CAC Directors to fulfill alleged fiduciary duties to CAC in connection with the proposed merger between CAC and CEC announced on December 22, 2014, specifically by announcing their intention to (a) cooperate with bona fide interested parties proposing alternative transactions, (b) ensure that no conflicts exist between the CAC Directors’ personal interests and their fiduciary duties to maximize shareholder value in the Merger, or resolve all such conflicts in favor of the latter, and (c) act independently to protect the interests of the shareholders; (2) an order directing the CAC Directors to account for all damages suffered or to be suffered by plaintiff and the putative class as a result of the Merger; and (3) an award to plaintiff for his costs and attorneys’ fees. It is unclear whether the Merger Lawsuit also seeks to enjoin the Merger. CEC believes that this lawsuit is without merit and will defend itself vigorously. The deadline to respond to the Merger Lawsuit has been adjourned without a date by agreement of the parties.
Employee Benefit Obligations
In December 1998, Hilton Hotels Corporation (“Hilton”) spun-off its gaming operations as Park Place Entertainment Corporation (“Park Place”). In connection with the spin-off, Hilton and Park Place entered into various agreements, including an Employee Benefits and Other Employment Allocation Agreement dated December 31, 1998 (the “Allocation Agreement”) whereby Park Place assumed or retained, as applicable, certain liabilities and excess assets, if any, related to the Hilton Hotels Retirement Plan (the “Hilton Plan”) based on the benefits of Hilton employees and Park Place employees. CEOC is the ultimate successor to this Allocation Agreement. In 2013, a lawsuit was settled related to the Hilton Plan, which retroactively and prospectively increased total benefits to be paid under the Hilton Plan. In 2009, we received a letter from Hilton, notifying us of a lawsuit related to the Hilton Plan that alleged that CEC had a potential liability for the additional claims under the terms of the Allocation Agreement.
On December 24, 2014, Hilton sued CEC and CEOC in federal court in Virginia primarily under the Employee Retirement Income Security Act (“ERISA”), and also under state contract and unjust enrichment law theories, for monetary and equitable relief in connection with this ongoing dispute.

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CAESARS ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)


On June 9, 2016, CEC, CEOC and the applicable Hilton parties entered into a settlement of the Hilton claims. Under the settlement, Hilton will receive a claim in CEOC’s bankruptcy case for an amount equal to $51 million plus 31.75% for amounts paid by Hilton to the retirement plan due after July 16, 2016. For periods following the effective date of CEOC’s plan of reorganization, CEC shall assume all of CEOC’s obligation under the Allocation Agreement. In exchange, Hilton shall turn over to CEC the distributions on account of $24.5 million of Hilton’s claim in the CEOC bankruptcy. The settlement amount is fully accrued in liabilities subject to compromise at CEOC, and the settlement is subject to Bankruptcy Court approval and the effectiveness of CEOC’s plan of reorganization.
National Retirement Fund
In January 2015, a majority of the Trustees of the National Retirement Fund (“NRF”), a multi-employer defined benefit pension plan, voted to expel the five indirect subsidiaries of CEC which were required to make contributions to the legacy plan of the NRF (the “Five Employers”). The NRF contended that the financial condition of the Five Employers’ controlled group (the “CEC Controlled Group”) and CEOC’s then-potential bankruptcy presented an “actuarial risk” to the plan because, depending on the outcome of any CEOC bankruptcy proceedings, CEC might no longer be liable to the plan for any partial or complete withdrawal liability. As a result, the NRF claimed that the expulsion of the Five Employers constituted a complete withdrawal of the CEC Controlled Group from the plan. CEOC, in its bankruptcy proceedings, has to date not rejected the contribution obligations to the NRF of any of its subsidiary employers. The NRF has advised the CEC Controlled Group (which includes CERP) that the expulsion of the Five Employers has triggered a joint and several withdrawal liability with a present value of approximately $360 million, payable in 80 quarterly payments of about $6 million.
Prior to the NRF’s vote to expel the Five Employers, the Five Employers reiterated their commitments to remain in the plan and not seek rejection of any collective bargaining agreement in which the obligation to contribute to NRF exists. The Five Employers were current with respect to pension contributions at the time of their expulsion, and are current with respect to pension contributions as of today pursuant to the Standstill Agreement referred to below.
We have opposed the various NRF expulsion actions.
On January 8, 2015, prior to the NRF’s vote to expel the Five Employers, CEC filed an action in the United States District Court for the Southern District of New York (the “S.D.N.Y.”) against the NRF and its Board of Trustees, seeking a declaratory judgment that they did not have the authority to expel the Five Employers and thus allegedly trigger withdrawal liability for the CEC Controlled Group (the “CEC Action”). On December 25, 2015, the District Judge entered an order dismissing the CEC Action on the ground that CEC’s claims in this action must first be arbitrated under ERISA. CEC has appealed this decision to the United States Court of Appeals for the Second Circuit.
On March 6 and March 27, 2015, CEOC and certain of its subsidiaries filed in the CEOC bankruptcy proceedings two motions to void (a) the purported expulsion of the Five Employers and based thereon the alleged triggering of withdrawal liability for the non-debtor members of the CEC Controlled Group, and (b) a notice and payment demand for quarterly payments of withdrawal liability subsequently made by the NRF to certain non-debtor members of the CEC Controlled Group, respectively, on the ground that each of these actions violated the automatic stay (the “362 Motions”). On November 12, 2015, Bankruptcy Judge Goldgar issued a decision denying the 362 Motions on the ground that the NRF’s actions were directed at non-debtors and therefore did not violate the automatic stay. CEOC has appealed this decision to the federal district court in Chicago.
On March 6, 2015, CEOC commenced an adversary proceeding against the NRF and its Board of Trustees in the Bankruptcy Court (the “Adversary Proceeding”). On March 11, 2015, CEOC filed a motion in that Adversary Proceeding to extend the automatic stay in the CEOC bankruptcy proceedings to apply to the NRF’s expulsion of the Five Employers (the “105 Motion”). Judge Goldgar has not yet decided the 105 Motion.
On March 20, 2015, CEC, CEOC and CERP, on behalf of themselves and others, entered into a Standstill Agreement with the NRF and its Board of Trustees that, among other things, stayed each member of the CEC Controlled Group’s purported obligation to commence making quarterly payments of withdrawal liability and instead required the Five Employers to continue making monthly contribution payments to the NRF, unless and until each of the 362 Motions and the 105 Motion had been denied. As the 105 Motion has not yet been decided, the Standstill Agreement remains in effect.
If both the 105 Motion and CEC’s appeal of the CEC Action are denied, then CEC could be required to pay to the NRF joint and several withdrawal liability with a present value of approximately $360 million , payable in 80 quarterly payments of about $6

18




CAESARS ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)


million, while CEC simultaneously arbitrates whether the NRF and its Board of Trustees had the authority to expel the Five Employers and trigger withdrawal liability for the CEC Controlled Group.
Also, on March 18, 2015, the NRF and its fund manager commenced a collection action in the S.D.N.Y. against CEC, CERP and all non-debtor members of the CEC Controlled Group for the payment of the first quarterly payment of withdrawal liability, which the NRF contended was due on March 15, 2015 (the “NRF Action”). On December 25, 2015, the District Judge denied the defendants’ motion to dismiss the NRF Action on the ground that the arguments raised by the defendants must first be arbitrated under ERISA. On February 26, 2016, the NRF and its fund manager filed a motion for summary judgment against CEC and CERP for payment of the first quarterly payment of withdrawal liability and for interest, liquidated damages, attorneys’ fees and costs. On May 5, 2016, the Magistrate Judge recommended that the NRF Action plaintiffs’ motion for summary judgment be granted on the ground that the further arguments raised by CEC and CERP must first be arbitrated under ERISA. On May 19, 2016, CEC and CERP filed their objections to the Report and Recommendation (the “Objections”). On June 2, 2016, the NRF Action plaintiffs filed their response to the Objections. The District Judge has not yet ruled on the Objections. If the District Judge adopts the Magistrate Judge’s Report and Recommendation, then a judgment could be entered against CEC and CERP for approximately $8 million comprising the first quarterly payment of withdrawal liability referred to above, interest and liquidated damages under ERISA, which amount would be paid or bonded pending an appeal.
We believe our legal arguments against the actions undertaken by NRF are strong and will pursue them vigorously, and will defend vigorously against the claims raised by the NRF in the NRF Action. Because legal proceedings with respect to this matter are at the preliminary stages, we cannot currently provide assurance as to the ultimate outcome of the matters at issue.
Other Matters
In recent years, governmental authorities have been increasingly focused on anti-money laundering (“AML”) policies and procedures, with a particular focus on the gaming industry. In October 2013, CEOC’s subsidiary, Desert Palace, Inc. (the owner of and referred to herein as Caesars Palace), received a letter from the Financial Crimes Enforcement Network of the United States Department of the Treasury (“FinCEN”), stating that FinCEN was investigating Caesars Palace for alleged violations of the Bank Secrecy Act to determine whether it is appropriate to assess a civil penalty and/or take additional enforcement action against Caesars Palace. Caesars Palace responded to FinCEN’s letter in January 2014. Additionally, we were informed in October 2013 that a federal grand jury investigation regarding anti-money laundering practices of the Company and its subsidiaries had been initiated. CEC and Caesars Palace have been cooperating with FinCEN, the Department of Justice and the Nevada Gaming Control Board (the “GCB”) on this matter. On September 8, 2015, FinCEN announced a settlement pursuant to which Caesars Palace agreed to an $8 million civil penalty for its violations of the Bank Secrecy Act, which penalty shall be treated as a general unsecured claim in Caesars Palace’s bankruptcy proceedings. In addition, Caesars Palace agreed to conduct periodic external audits and independent testing of its AML compliance program, report to FinCEN on mandated improvements, adopt a rigorous training regime, and engage in a “look-back” for suspicious transactions. The terms of the FinCEN settlement were approved by the Bankruptcy Court on October 19, 2015.
CEOC and the GCB reached a settlement on the same facts as above, wherein CEC agreed to pay $1.5 million and provide to the GCB the same information that is reported to FinCEN and to resubmit its updated AML policies. On September 17, 2015, the settlement agreement was approved by the Nevada Gaming Commission. CEOC continues to cooperate with the Department of Justice in its investigation of this matter.
Caesars is party to other ordinary and routine litigation incidental to our business. We do not expect the outcome of any such litigation to have a material effect on our consolidated financial position, results of operations, or cash flows, as we do not believe it is reasonably possible that we will incur material losses as a result of such litigation.
Note 4 Recently Issued Accounting Pronouncements
During 2016, we adopted ASU No. 2015-02, Consolidation: Amendments to the Consolidation Analysis (see Note 2 ) and ASU No. 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting (see Note 12 ).
The FASB issued the following authoritative guidance amending the FASB Accounting Standards Codification.
Revenue Recognition - May 2014 (amended May 2016) : Created a new Topic 606, Revenue from Contracts with Customers . The new guidance is intended to clarify the principles for recognizing revenue and to develop a common revenue standard for United

19




CAESARS ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)


States GAAP applicable to revenue transactions. This guidance provides that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Existing industry guidance will be eliminated, including revenue recognition guidance specific to the gaming industry. In addition, interim and annual disclosures will be substantially revised. This guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those reporting periods. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. We currently anticipate adopting this standard effective January 1, 2018. We are currently assessing the impact the adoption of this standard will have on our financial statements; however, we expect that the accounting for the Total Rewards customer loyalty program and casino promotional allowances will be affected.
Going Concern - August 2014 : Amended the existing requirements for disclosing information about an entity’s ability to continue as a going concern. This guidance explicitly requires management to assess an entity’s ability to continue as a going concern and to provide related footnote disclosure in certain circumstances. This guidance is effective for annual reporting periods ending after December 15, 2016, and for annual and interim reporting periods thereafter. Early adoption is permitted. We do not believe the adoption of this standard will have any effect on our financial statements, as we have concluded that we have substantial doubt regarding our ability to continue as a going concern, irrespective of the new requirements.
Recognition and Measurement of Financial Instruments - January 2016 : Amended certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Among other things, they require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation) to be measured at fair value with any changes in fair value recognized in net income and simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted on certain provisions. We are currently assessing the effect the adoption of this standard will have on our financial statements.
Leases - February 2016 : The new guidance requires lease obligations to be recognized on the balance sheet. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. We are currently assessing the effect the adoption of this standard will have on our financial statements.
Financial Instruments-Credit Losses - June 2016 : Amended guidance replaces the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of broader range of reasonable and supportable information to inform credit loss estimates. Amendments affect entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables and any other financial assets not excluded from the scope that have the contractual right to receive cash. Amendments are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. We are currently assessing the effect the adoption of this standard will have on our financial statements.

20

CAESARS ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)

Note 5 Property and Equipment
(In millions)
June 30, 2016
 
December 31, 2015
Land and land improvements
$
3,584

 
$
3,584

Buildings, riverboats, and improvements
4,178

 
4,134

Furniture, fixtures, and equipment
1,369

 
1,326

Construction in progress
65

 
59

Total property and equipment
9,196

 
9,103

Less: accumulated depreciation
(1,685
)
 
(1,505
)
Total property and equipment, net
$
7,511

 
$
7,598

Depreciation Expense and Capitalized Interest
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In millions)
2016
 
2015
 
2016
 
2015
Depreciation expense (1)
$
85

 
$
72

 
$
182

 
$
148

Capitalized interest

 
6

 

 
9

____________________
(1)  
Included in depreciation and amortization and corporate expense.
Note 6 Goodwill and Other Intangible Assets
Changes in Carrying Value of Goodwill and other Intangible Assets
 
Amortizing Intangible Assets
 
Non-Amortizing Intangible Assets
(In millions)
 
Goodwill
 
Other
Balance as of December 31, 2015
$
395

 
$
1,696

 
$
148

Amortization
(43
)
 

 

Balance as of June 30, 2016
$
352

 
$
1,696

 
$
148


21




CAESARS ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)


Gross Carrying Value and Accumulated Amortization of Intangible Assets Other Than Goodwill
 
June 30, 2016
 
December 31, 2015
(Dollars in millions)
Weighted
Average
Remaining
Useful Life
(in years)
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Amortizing
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
4.9
 
$
917

 
$
(622
)
 
$
295

 
$
917

 
$
(589
)
 
$
328

Contract rights
8.5
 
3

 
(1
)
 
2

 
3

 
(1
)
 
2

Developed technology
1.7
 
86

 
(57
)
 
29

 
86

 
(49
)
 
37

Gaming rights
7.8
 
52

 
(26
)
 
26

 
52

 
(24
)
 
28

 
 
 
$
1,058

 
$
(706
)
 
352

 
$
1,058

 
$
(663
)
 
395

Non-amortizing
 
 
 
 
 
 
 
 
 
 
 
 
Gaming rights
 
22

 
 
 
 
 
22

Trademarks
 
126

 
 
 
 
 
126

 
 
 
 
 
 
 
148

 
 
 
 
 
148

Total intangible assets other than goodwill
 
$
500

 
 
 
 
 
$
543

Note 7 Fair Value Measurements
Investments
(In millions)
Balance 
 
Level 1
 
Level 2
 
Level 3
June 30, 2016
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Equity securities
$
3

 
$
3

 
$

 
$

Government bonds
50

 

 
50

 

Total assets at fair value
$
53


$
3

 
$
50

 
$

 


 


 


 


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 our balance sheets while a portion is included in prepayments and other current assets. As of June 30, 2016 and December 31, 2015 , gross unrealized gains and losses on marketable securities were not material.

22




CAESARS ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)


Restructuring Commitments
Estimated Fair Value
(In millions)
Balance 
 
Level 1
 
Level 2
 
Level 3
June 30, 2016
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Issuance of CEC convertible notes
$
1,060

 
$

 
$

 
$
1,060

Issuance of CEC common shares
1,167

 

 
1,167

 

Total liabilities at fair value
$
2,227

 
$

 
$
1,167

 
$
1,060

Changes in Fair Value
(In millions)
 
CEC Convertible Notes
Balance as of December 31, 2015
 
$

Initial loss recognized in net loss
 
1,060

Balance as of June 30, 2016
 
$
1,060

As described in Note 1 , we recognized certain obligations that we believe will ultimately be settled under the 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 sheet 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. The notes have a face value of $1.0 billion , a term of 7 years, a coupon rate of 5% , and are convertible into 12.195% 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.
Key Assumptions -
Incremental cost of borrowing - 5.5%
Implied volatility - 35%
Risk-free rate - 1.3%
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 CEC’s equity value would result in an increase to the restructuring accrual of $20 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 - We have used the fair value of CEC’s common stock to estimate a portion of the restructuring accrual. The CEC common equity value is subject to market fluctuations and does not necessarily reflect the value of completing the transactions contemplated in the 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.

23




CAESARS ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)


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.
Note 8 Contractual Commitments and Contingent Liabilities
Contractual Commitments
Except as described in Note 1 , during the six months ended June 30, 2016 , we have not entered into any material contractual commitments outside of the ordinary course of business that have materially changed our contractual commitments as compared to December 31, 2015 .
Contingent Liabilities
Self-Insurance
We are self-insured for workers compensation and other risk insurance with a total estimated self-insurance liability of $154 million , and estimated employee medical insurance claims of $14 million have been funded through CEOC as of June 30, 2016 .
Deferred Compensation and Employee Benefits
Deferred Compensation Plans
As of June 30, 2016 , certain current and former employees of Caesars, and our subsidiaries and affiliates, have balances under the Harrah’s Entertainment, Inc. Executive Supplemental Savings Plan (“ESSP”), the Harrah’s Entertainment, Inc. Executive Supplemental Savings Plan II (“ESSP II”), the Park Place Entertainment Corporation Executive Deferred Compensation Plan, the Harrah’s Entertainment, Inc. Deferred Compensation Plan, and the Harrah’s Entertainment, Inc. Executive Deferred Compensation Plan (“EDCP”). These plans are deferred compensation plans that allow certain employees an opportunity to save for retirement and other purposes.
Each of the plans is now frozen and is no longer accepting contributions. However, participants may still earn returns on existing plan balances based upon their selected investment alternatives, which are reflected in their deferral accounts.
Plan obligations in respect of all of these plans were included in Caesars’ financial statements as liabilities prior to the deconsolidation of CEOC. As of June 30, 2016 , Caesars has recorded in the accompanying financial statements $42 million in liabilities, representing the estimate of its obligations under the ESSP and ESSP II and for certain former directors and employees who had employment agreements with Harrah’s Entertainment, Inc. (the predecessor to CEC) and participated in the EDCP. The additional liability in respect of the other plans described above that Caesars has not recorded is approximately $30 million , as we determined that this portion of the liability was attributable to CEOC.
Trust Assets
CEC is a party to a trust agreement and an escrow agreement, each structured as so-called “rabbi trust” arrangements, which hold assets that may be used to satisfy obligations under the deferred compensation plans above. Amounts held pursuant to the trust agreement and the escrow agreement were approximately $64 million and $55 million , respectively, as of June 30, 2016 .
The assets held pursuant to the trust agreement have been reflected as long-term restricted assets on the accompanying balance sheets. The assets held pursuant to the escrow agreement have not been reflected on the accompanying balance sheets as we continue to assess the escrow agreement and the propriety of the funds that were contributed in accordance with the agreement.
The amounts recorded as assets and liabilities are based upon Caesars’ current conclusions regarding ownership of assets and obligation to pay liabilities in respect of the plans and trust assets described above. These amounts may change as a result of many factors, including but not limited to the following: further analyses by Caesars, events occurring in connection with discussions with CEOC creditors, and CEOC’s Chapter 11 cases. Such changes, if they occur, could eliminate or reduce the assets or liabilities recorded on Caesars’ balance sheet, increase the asset for all or some portion of the assets held pursuant to the escrow agreement,

24




CAESARS ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)


or increase the liabilities not recorded. Caesars believes that it may have claims to all or some portion of the assets held pursuant to the escrow agreement.
Note 9 Debt
 
June 30, 2016
 
December 31, 2015
(In millions)
Face Value
 
Book Value
 
Book Value
CERP
$
4,611

 
$
4,549

 
$
4,627

CGP
2,344

 
2,285

 
2,337

Total Debt
6,955

 
6,834

 
6,964

Current Portion of Long-Term Debt
(71
)
 
(71
)
 
(187
)
Long-Term Debt
$
6,884

 
$
6,763

 
$
6,777

 
 
 
 
 
 
Unamortized discounts and deferred finance charges
 
 
$
121

 
$
132

Fair value
$
6,712

 
 
 
 
Current Portion of Long-Term Debt
The current portion of long-term debt is $71 million as of June 30, 2016 . For CERP, the current portion of long-term debt is $48 million , which includes the $15 million outstanding under CERP’s revolving credit facility as well as principal payments on its senior secured loan, other unsecured borrowings, and capitalized lease obligations. For CGP, the current portion of long-term debt is $23 million , which includes principal payments on term loans, special improvement district bonds, and various capital lease obligations. There is no outstanding amount under the CGPH revolving credit facility as the balance was paid during the second quarter 2016.
Borrowings under the revolving credit facilities are each subject to separate note agreements executed based on the provisions of the applicable credit facility agreements, and each note has a contractual maturity of less than one year. The applicable credit facility agreements each have a contractual maturity of greater than one year, and we have the ability to rollover the outstanding principal balances on a long-term basis; however, we currently intend to repay the principal balances within the following 12 months. Amounts borrowed under the revolving credit facilities are intended to satisfy short term liquidity needs and are classified as current.
Fair Value
We estimated the fair value of debt based on borrowing rates available as of June 30, 2016 for debt with similar terms and maturities, and based on market quotes of our publicly traded debt. We classify the fair value of debt within level 1 and level 2 in the fair value hierarchy.

25




CAESARS ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)


Annual Estimated Debt Service Requirements
(In millions)
Remaining
2016
 
2017
 
2018
 
2019
 
2020
 
Thereafter
 
Total
Principal
 
 
 
 
 
 
 
 
 
 
 
 
 
CERP
$
20

 
$
41

 
$
25

 
$
25

 
$
3,350

 
$
1,150

 
$
4,611

CGP
12

 
21

 
25

 
200

 
300

 
1,786

 
2,344

Total principal
32

 
62

 
50

 
225

 
3,650

 
2,936

 
6,955

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Estimated Interest
 
 
 
 
 
 
 
 
 
 
 
 
 
CERP
190

 
380

 
380

 
380

 
380

 
120

 
1,830

CGP
90

 
180

 
180

 
180

 
150

 
150

 
930

Total interest
280

 
560

 
560

 
560

 
530

 
270

 
2,760

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Principal and Interest
 
 
 
 
 
 
 
 
 
 
 
 
 
CERP
210

 
421

 
405

 
405

 
3,730

 
1,270

 
6,441

CGP
102

 
201

 
205

 
380

 
450

 
1,936

 
3,274

Total principal and interest
$
312

 
$
622

 
$
610

 
$
785

 
$
4,180

 
$
3,206

 
$
9,715

CERP Debt
 
June 30, 2016
 
December 31, 2015
(Dollars in millions)
Final
Maturity
 
Rate(s) (1)
 
Face Value
 
Book Value
 
Book Value
CERP Credit Facility
 
 
 
 
 
 
 
 
 
CERP Term Loan (2)
2020
 
7.00%
 
$
2,438

 
$
2,395

 
$
2,403

CERP Revolving Credit Facility  (3)
2018
 
variable
 
15

 
15

 
80

CERP Notes
 
 
 
 
 
 
 
 
 
CERP First Lien Notes
2020
 
8.00%
 
1,000

 
992

 
992

CERP Second Lien Notes
2021
 
11.00%
 
1,150

 
1,139

 
1,138

Capital lease obligations and other
2016 to 2017
 
various
 
8

 
8

 
14

Total CERP Debt
 
4,611

 
4,549

 
4,627

Current Portion of CERP Long-Term Debt
 
(48
)
 
(48
)
 
(117
)
CERP Long-Term Debt
 
$
4,563

 
$
4,501

 
$
4,510

____________________
(1)  
Interest rate is fixed, except where noted.
(2)  
Variable interest rate calculated as a fixed rate plus the greater of LIBOR or a 1% floor. The rate is set at the 1% floor as of June 30, 2016.
(3)  
Variable interest rate for amounts currently borrowed is determined by adding LIBOR to a base rate of 6.00%.

26




CAESARS ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)


CGP Debt
 
June 30, 2016
 
December 31, 2015
(Dollars in millions)
Final
Maturity
 
Rate(s) (1)
 
Face Value
 
Book Value
 
Book Value
CGPH Credit Facilities
 
 
 
 
 
 
 
 
 
CGPH Senior Secured Term Loan (2)
2021
 
6.25%
 
$
1,151

 
$
1,122

 
$
1,126

CGPH Senior Secured Revolving Credit Facility (3)
2019
 
variable
 

 

 
45

CGPH Notes
2022
 
9.38%
 
675

 
661

 
660

Horseshoe Baltimore Credit and FF&E Facilities
 
 
 
 
 
 
 
 
 
Horseshoe Baltimore Credit Facility (4)
2020
 
8.25%
 
299

 
287

 
288

Horseshoe Baltimore Revolving Facility Loan (5)
2018
 
variable
 

 

 

Horseshoe Baltimore FF&E Facility  (4)(6)
2019
 
8.75%
 
24

 
25

 
27

Cromwell Credit Facility (4)
2019
 
11.00%
 
174

 
169

 
169

Other Secured Debt
2018
 
8.00%
 
4

 
4

 
4

Special Improvement District Bonds
2037
 
5.30%
 
14

 
14

 
14

Capital lease obligations and other
2016 to 2017
 
various
 
3

 
3

 
4

Total CGP Debt
 
2,344

 
2,285

 
2,337

Current Portion of CGP Long-Term Debt
 
(23
)
 
(23
)
 
(70
)
CGP Long-Term Debt
 
$
2,321

 
$
2,262

 
$
2,267

____________________
(1)  
Interest rate is fixed, except where noted.
(2)  
Variable interest rate calculated as a fixed rate plus the greater of LIBOR or a 1% floor. The rate is set at the 1% floor as of June 30, 2016.  
(3)  
Variable interest rate calculated as LIBOR plus 5.00%.  
(4)  
Variable interest rate calculated as a fixed rate plus the greater of LIBOR or a 1.25% floor. The rate is set at the 1.25% floor as of June 30, 2016.  
(5)  
Variable interest rate calculated as LIBOR plus 7.00%.  
(6)  
This represents an equipment financing term loan facility.
Terms of Outstanding Debt
Restrictive Covenants
The CERP Notes, CERP Credit Facility, CGPH Senior Secured Term Loan, CGPH Notes, Horseshoe Baltimore Credit and FF&E Facilities, and Cromwell Credit Facility all include negative covenants, subject to certain exceptions, and contain affirmative covenants and events of default, subject to exceptions, baskets and thresholds (including equity cure provisions in the case of the CERP Credit Facility, Horseshoe Baltimore Credit and FF&E Facilities, and the Cromwell Credit Facility), all of the preceding being customary in nature.
The restrictive covenants also require that we maintain Senior Secured Leverage Ratios (“SSLR”) as shown in the table below. SSLR is defined as the ratio of first lien senior secured net debt to earnings before interest, taxes, depreciation and amortization, adjusted as defined.

27




CAESARS ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)


Credit Facility
 
Covenant Type
 
Effective Period
 
Requirement
CERP Credit Facility
 
CERP Maximum SSLR
 
From inception
 
8.00
to 1.00
CGPH Senior Secured Term Loan
 
CGPH Maximum SSLR
 
From inception
 
6.00
to 1.00
Horseshoe Baltimore Credit and FF&E Facilities  (1)
 
CBAC Maximum SSLR
 
Q1 - Q4 2016
 
7.50
to 1.00
 
CBAC Maximum SSLR
 
Q1 - Q4 2017
 
6.00
to 1.00
 
CBAC Maximum SSLR
 
Q1 2018 and thereafter
 
4.75
to 1.00
Cromwell Credit Facility (2)
 
Cromwell Maximum SSLR
 
Q2 2015 - Q1 2016
 
5.25
to 1.00
 
Cromwell Maximum SSLR
 
Q2 2016 - Q1 2017
 
5.00
to 1.00
 
Cromwell Maximum SSLR
 
Q2 2017 and thereafter
 
4.75
to 1.00
____________________
(1)  
CBAC Borrower, LLC (“CBAC”) is a joint venture in which Caesars Baltimore Investment Company, LLC (“CBIC”) holds an interest. CBIC is a wholly owned subsidiary of CGP.
(2)  
As of June 30, 2016 , the Cromwell’s SSLR was 4.90 to 1.00.
Guarantees
CERP has pledged a significant portion of its assets as collateral under the notes and facilities. The CERP Notes are co-issued, as well as fully and unconditionally guaranteed, jointly and severally, by Caesars Entertainment Resort Properties, LLC (parent entity) and each of its wholly-owned subsidiaries on a senior secured basis.
The CGPH Senior Secured Term Loan is guaranteed by the direct parent of CGPH and certain subsidiaries of CGPH, and is secured by the direct parent’s equity interest in CGPH and substantially all of the existing and future assets of CGPH and the subsidiary guarantors.
The CGPH Notes are secured by substantially all of the existing and future property and assets of CGPH and the subsidiary guarantors (subject to exceptions), and are guaranteed by CGPH and certain subsidiaries (subject to exceptions).
The Horseshoe Baltimore Credit Facility is secured by substantially all material assets of CBAC and its wholly-owned domestic subsidiaries.
The Horseshoe Baltimore FF&E Facility is secured by the FF&E that was purchased with the proceeds.
The Cromwell Credit Facility is secured by the assets of the Cromwell and allows the right to cure provided that (i) in each eight-fiscal-quarter period there shall be no more than five fiscal quarters in which the cure right is exercised and (ii) the cure right may not be exercised in any fiscal quarter that immediately follows two consecutive fiscal quarters in which it was exercised.
Note 10 Earnings Per Share
Basic earnings per share is computed by dividing the applicable income amounts by the weighted-average number of common shares outstanding. Diluted earnings per share is computed by dividing the applicable income amounts by the sum of weighted-average number of shares of common shares outstanding and dilutive potential common shares.
For periods in which Caesars generated net losses, the weighted-average basic shares outstanding was used in calculating diluted loss per share because using diluted shares would be anti-dilutive to loss per share.


28




CAESARS ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)


Basic and Dilutive Net Earnings Per Share Reconciliation
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In millions, except per share data)
2016
 
2015
 
2016
 
2015
Income/(loss) from continuing operation, net of income taxes
$
(2,077
)
 
$
15

 
$
(2,385
)
 
$
6,794

Loss from discontinued operation, net of income taxes

 

 

 
(7
)
Net income/(loss) attributable to Caesars
$
(2,077
)
 
$
15

 
$
(2,385
)
 
$
6,787

 
 
 
 
 
 
 
 
Weighted average common share outstanding
146

 
145

 
146

 
145

Dilutive potential common shares: Stock options

 
2

 

 
2

Weighted average common shares and dilutive potential common shares
146

 
147

 
146

 
147

 
 
 
 
 
 
 
 
Basic income/(loss) per share from continuing operations
$
(14.25
)
 
$
0.10

 
$
(16.39
)
 
$
46.93

Basic loss per share from discontinued operations

 

 

 
(0.04
)
Basic income/(loss) per share
$
(14.25
)
 
$
0.10

 
$
(16.39
)
 
$
46.89

 
 
 
 
 
 
 
 
Diluted income/(loss) per share from continuing operations
$
(14.25
)
 
$
0.10

 
$
(16.39
)
 
$
46.31

Diluted loss per share from discontinued operations

 

 

 
(0.04
)
Diluted income/(loss) per share
$
(14.25
)
 
$
0.10

 
$
(16.39
)
 
$
46.27

Weighted-Average Number of Anti-Dilutive Shares Excluded from Calculation of EPS
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In millions)
2016
 
2015
 
2016
 
2015
Stock options
10

 
4

 
10

 
4

Restricted stock units and awards
10

 
1

 
8

 

Total anti-dilutive common shares
20

 
5

 
18

 
4