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Fair Value Measurements | 9 Months Ended
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Sep. 30, 2020
Fair Value Disclosures [Abstract] |
Fair Value Measurements | Fair Value Measurements Items Measured at Fair Value on a Recurring Basis: The following table sets forth the assets and liabilities measured at fair value on a recurring basis, by input level, in the Consolidated Condensed Balance Sheets at September 30, 2020 and December 31, 2019:
(In millions) | September 30, 2020
Assets: | Level 1 |  | Level 2 |  | Level 3 |  | Total
Restricted cash and investments | $ | 8 |  |  | $ | 3 |  |  | $ | 50 |  |  | $ | 61 |
Marketable securities | 31 |  |  | 12 |  |  | — |  |  | 43 |
Total assets at fair value | $ | 39 |  |  | $ | 15 |  |  | $ | 50 |  |  | $ | 104 |
Liabilities: |  |  |  |  |  |  |
Other liabilities related to restricted investments | $ | — |  |  | $ | — |  |  | $ | 4 |  |  | $ | 4 |
Derivative instruments - 5% Convertible Notes | — |  |  | 575 |  |  | — |  |  | 575 |
Derivative instruments - interest rate swaps and FX forward | — |  |  | 114 |  |  | — |  |  | 114 |
Total liabilities at fair value | $ | — |  |  | $ | 689 |  |  | $ | 4 |  |  | $ | 693 |
| December 31, 2019
Assets: | Level 1 |  | Level 2 |  | Level 3 |  | Total
Restricted cash and investments | $ | 11 |  |  | $ | 2 |  |  | $ | 29 |  |  | $ | 42 |
Marketable securities | 27 |  |  | 8 |  |  | — |  |  | 35 |
Total assets at fair value | $ | 38 |  |  | $ | 10 |  |  | $ | 29 |  |  | $ | 77 |
The change in restricted cash and investments and liabilities valued using Level 3 inputs for the nine months ended September 30, 2020 is as follows:
(In millions) | Level 3 Investments |  | Level 3 Other Liabilities
Fair value of investment and liabilities at December 31, 2019 | $ | 29 |  |  | $ | — |
Value of additional investment received | 5 |  |  | 2 |
Unrealized gain | 16 |  |  | 2 |
Fair value at September 30, 2020 | $ | 50 |  |  | $ | 4 |
There were no transfers in or out of Level 3 investments during the nine months ended September 30, 2020. Restricted Investments The estimated fair values of the Company’s restricted cash and investments are based upon quoted prices available in active markets (Level 1), or quoted prices for similar assets in active and inactive markets (Level 2), or quoted prices available in active markets adjusted for time restrictions related to the sale of the investment (Level 3) and represent the amounts the Company would expect to receive if the Company sold the restricted cash and investments. Restricted investments include shares acquired in conjunction with the Company’s sports betting agreements that contain restrictions related to the ability to liquidate shares within a specified timeframe. In November 2018, the Company entered into a 20-year agreement with The Stars Group Inc. (“TSG”) to provide TSG with options to obtain access to a second skin for online sports wagering and third skin for real money online gaming and poker with respect to the Company’s properties in the United States. Under the terms of the agreement, the Company received 1 million TSG common shares as a revenue share from the operation of the applicable verticals by TSG under the Company’s licenses. The fair value of the shares received has been deferred and is recognized as revenue on a straight-line basis over the 20-year agreement term. All shares are subject to a one year restriction on transfer from the date they are received. On May 5, 2020, Flutter Entertainment PLC (“Flutter”) completed the acquisition of all of the issued and outstanding common shares of TSG in exchange for 0.2253 Flutter shares per common share of TSG. As of September 30, 2020 and December 31, 2019, the fair value of unrestricted shares totaled $19 million and $14 million, respectively, net of cumulative unrealized gains of $9 million and $4 million, respectively, and is included in Prepayments and other current assets on the Consolidated Condensed Balance Sheet. In addition, as of September 30, 2020, the fair value of restricted shares in Flutter totaled $8 million, net of cumulative unrealized gains of $3 million, and is included in restricted cash and investments on the Consolidated Condensed Balance Sheet. The Company recorded unrealized gains of $5 million and $8 million during the three and nine months ended September 30, 2020, respectively, and unrealized loss of $2 million during the three months ended September 30, 2019. For the nine months ended September 30, 2019, the Company recorded an unrealized loss of less than a million. Marketable Securities Marketable securities consist primarily of trading securities held by the Company’s captive insurance subsidiary and unrestricted shares acquired in conjunction with the Company’s sports betting agreements. These investments also include collateral for several escrow and trust agreements with third-party beneficiaries. The estimated fair values of the Company’s marketable securities are determined on an individual asset basis based upon quoted prices of identical assets available in active markets (Level 1), quoted prices of identical assets in inactive markets, or quoted prices for similar assets in active and inactive markets (Level 2), and represent the amounts the Company would expect to receive if the Company sold these marketable securities. Derivative Instruments The Company does not purchase or hold any derivative financial instruments for trading purposes. 5% Convertible Notes - Derivative Liability On October 6, 2017, Former Caesars issued $1.1 billion aggregate principal amount of 5% Convertible Notes. The 5% Convertible Notes are convertible into the weighted average of the number of shares of Company Common Stock and amount of cash actually received per share by holders of common stock of Former Caesars that made elections for consideration in the Merger. As a result, the 5% Convertible Notes are convertible into a number of shares of Company Common Stock that is equal to approximately 0.014 shares of Company Common Stock and $1.17 of cash per $1.00 principal amount of 5% Convertible Notes. The 5% Convertible Notes are convertible at any time at the option of the holders thereof and, beginning in October 2020, are convertible at the option of the Company if the last reported sale price of Company Common Stock equals or exceeds 140% of the conversion price for the 5% Convertible Notes in effect on each of at least 20 trading days during any 30 consecutive trading day period. As of September 30, 2020, approximately $487 million of the 5% Convertible Notes have been converted into cash and shares resulting in a net gain of approximately $34 million which is recorded within other (loss) income on the Statement of Operations. The outstanding balance of $607 million of which $10 million was held in trust as of September 30, 2020, would result in the issuance of an aggregate of 8.4 million shares of Company Common Stock and payment of $708 million upon conversion of the remaining outstanding 5% Convertible Notes. As of September 30, 2020, the remaining life of the 5% Convertible Notes is approximately 4 years. Management analyzed the conversion features for derivative accounting consideration under ASC Topic 815, Derivatives and Hedging, (“ASC 815”) and determined that the 5% Convertible Notes contain bifurcated derivative features and qualify for derivative accounting. In accordance with ASC 815, the Company has bifurcated the conversion features of the 5% Convertible Notes and recorded a derivative liability. The 5% Convertible Notes derivative features are not designated as hedging instruments. The derivative features of the 5% Convertible Notes are carried on the Company’s Balance Sheet at fair value in Other long-term liabilities. The derivative liability is marked-to-market each measurement period and the changes in fair value as a result of fluctuations in the share price of our common stock resulted in a loss of $87 million for the three month ended September 30, 2020, which was recorded as a component of Other (loss) income in the Statement of Operations. The derivative liability associated with the 5% Convertible Notes will remain in effect until such time as the underlying convertible notes are exercised or terminated and the resulting derivative liability will be transitioned from a liability to equity as of such date. Valuation Methodology The 5% Convertible Notes had an initial face value of $1.1 billion, an initial term of 7 years, and a coupon rate of 5%. As of September 30, 2020 we estimated the fair value of the 5% Convertible Notes using a market-based approach that incorporated the value of both the straight debt and conversion features of the 5% Convertible Notes. The valuation model incorporated actively traded prices of the 5% Convertible Notes as of the reporting date, and assumptions regarding the incremental cost of borrowing for CEI. The key assumption used in the valuation model is the actively traded price of 5% Convertible Notes and the incremental cost of borrowing is an indirectly observable input. The fair value for the conversion features of the 5% Convertible Notes is classified as Level 2 measurement. Key Assumptions as of September 30, 2020: •Actively traded price of 5% Convertible Notes - $193.00 •Incremental cost of borrowing - 6.0% Forward contracts In relation to the proposed acquisition of William Hill plc, on September 28, 2020, the Company entered into a foreign exchange forward contract to hedge the risk of appreciation of the GBP denominated purchase price. Under the agreement, the Company will purchase £1.3 billion at a contracted exchange rate. An unrealized loss of $5 million related to the change in fair value during the period from September 28, 2020 and September 30, 2020 was recorded in the consolidated condensed statement of operations. As of September 30, 2020, the forward derivative liability of $5 million was recorded in Other long-term liabilities. On October 1, 2020 the contract was cancelled. On October 9, 2020, the Company entered into a foreign exchange forward contract to hedge the risk of appreciation of the GBP denominated purchase price. Under the agreement, the Company will purchase £536 million at a contracted exchange rate. The forward term of the contract ends on March 31, 2021. Interest Rate Swap Derivatives We use interest rate swaps to manage the mix of our debt between fixed and variable rate instruments. As of September 30, 2020, Former Caesars has entered into ten interest rate swap agreements to fix the interest rate on $3.0 billion of variable rate debt related to the CRC Credit Agreement. The interest rate swaps are designated as cash flow hedging instruments. The difference to be paid or received under the terms of the interest rate swap agreements is accrued as interest rates change and recognized as an adjustment to interest expense at settlement. Changes in the variable interest rates to be received pursuant to the terms of the interest rate swap agreements will have a corresponding effect on future cash flows. The major terms of the interest rate swap agreements as of September 30, 2020 are as follows:
Effective Date |  | Notional Amount (In millions) |  | Fixed Rate Paid |  | Variable Rate Received as of September 30, 2020 |  |  |  | Maturity Date
12/31/2018 |  | 250 |  | 2.274% |  | 0.156% |  |  |  | 12/31/2022
12/31/2018 |  | 200 |  | 2.828% |  | 0.156% |  |  |  | 12/31/2022
12/31/2018 |  | 600 |  | 2.739% |  | 0.156% |  |  |  | 12/31/2022
1/1/2019 |  | 250 |  | 2.153% |  | 0.156% |  |  |  | 12/31/2020
1/1/2019 |  | 250 |  | 2.196% |  | 0.156% |  |  |  | 12/31/2021
1/1/2019 |  | 400 |  | 2.788% |  | 0.156% |  |  |  | 12/31/2021
1/1/2019 |  | 200 |  | 2.828% |  | 0.156% |  |  |  | 12/31/2022
1/2/2019 |  | 250 |  | 2.172% |  | 0.156% |  |  |  | 12/31/2020
1/2/2019 |  | 200 |  | 2.731% |  | 0.156% |  |  |  | 12/31/2020
1/2/2019 |  | 400 |  | 2.707% |  | 0.156% |  |  |  | 12/31/2021
Valuation Methodology The estimated fair values of our interest rate swap derivative instruments are derived from market prices obtained from dealer quotes for similar, but not identical, assets or liabilities. Such quotes represent the estimated amounts we would receive or pay to terminate the contracts. The interest rate swap derivative instruments are included in either Deferred charges and other assets or Deferred credits and other liabilities on our Balance Sheets. Our derivatives are recorded at their fair values, adjusted for the credit rating of the counterparty if the derivative is an asset, or adjusted for the credit rating of the Company if the derivative is a liability. None of our derivative instruments are offset and all were classified as Level 2. Financial Statement Effect The effect of derivative instruments designated as hedging instruments on the Balance Sheet for amounts transferred into Accumulated other comprehensive income/(loss) (“AOCI”) before tax was a gain of $18 million during the three months ended September 30, 2020. AOCI reclassified to Interest expense on the Statements of Operations was $12 million for the three months ended September 30, 2020. The estimated amount of existing losses that are reported in AOCI at the reporting date that are expected to be reclassified into earnings within the next 12 months is approximately $62 million. As of September 30, 2020, the interest rate swaps derivative liability of $109 million was recorded in Other long-term liabilities. Accumulated Other Comprehensive Income The changes in AOCI by component, net of tax, for the period through September 30, 2020 are shown below.
(In millions) | Unrealized Net Gains on Derivative Instruments |  | Foreign Currency Translation Adjustments |  | Total
Balances as of December 31, 2019 | $ | — |  |  | $ | — |  |  | $ | — |
Other comprehensive income before reclassifications | 2 |  |  | 1 |  |  | 3 |
Amounts reclassified from accumulated other comprehensive income | 12 |  |  | — |  |  | 12 |
Total other comprehensive income, net of tax | 14 |  |  | 1 |  |  | 15 |
Balances as of September 30, 2020 | $ | 14 |  |  | $ | 1 |  |  | $ | 15 |

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=117815213&loc=d3e19207-110258 + Details
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