Basis of Presentation and Principles of Consolidation

Basis of Presentation and Use of Estimates

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”), which require the use of estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Actual amounts could differ from those estimates.

Certain prior year amounts have been reclassified to conform to the current year’s presentation.

Principles of Consolidation

Our consolidated financial statements include the accounts of Caesars Entertainment and its subsidiaries after elimination of all intercompany accounts and transactions.

We consolidate into our financial statements the accounts of all subsidiaries in which we have a controlling financial interest and VIEs for which we or one of our consolidated subsidiaries is the primary beneficiary. Control generally equates to ownership percentage, (1) whereby 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; and (3) investments in affiliates of 20% or less are generally accounted for using the cost method.

Caesars Growth Partners, LLC

Formation of CGP LLC

CGP LLC was formed in October 2013 through the execution of a series of transactions between subsidiaries of Caesars Entertainment and Caesars Acquisition Company (“CAC”). CAC owns 100% of the voting membership units in CGP LLC.

A summary of the formation transactions (the “Transactions”) is as follows:


(i)	Caesars Entertainment made the Class A common stock of CAC available via a subscription rights offering to its shareholders as of October 17, 2013, the record date, (the “CAC Rights Offering”). Each subscription right entitled its holder to purchase one share of CAC’s Class A common stock or the right to retain such subscription right;


(ii)	Eligible Caesars Entertainment’s shareholders exercised their basic subscription rights in full and purchased $458 million worth of CAC’s Class A common stock at a price of $8.64 per whole share, which CAC used to purchase 100% of the voting units of CGP LLC;


(iii)	CGP LLC used $360 million of the proceeds to purchase the following from CEOC:


a.	the Planet Hollywood Resort & Casino in Las Vegas (“Planet Hollywood”);


b.	the equity interests of the entity that indirectly holds interests in the owner of Horseshoe Baltimore in Maryland (the “Maryland Joint Venture”); and


c.	a 50% interest in the management fee revenues of PHW Manager, LLC, which manages Planet Hollywood, and Caesars Baltimore Management Company LLC, which holds an agreement to manage the Maryland Joint Venture.


(iv)	Caesars Entertainment contributed all of the shares of CIE’s outstanding common stock held by a subsidiary and approximately $1.1 billion in aggregate principal amount of senior notes held by a subsidiary (the “CEOC Notes” and, together with the shares of CIE, the “Contributed Assets”) to CGP LLC, in exchange for all of CGP LLC’s non-voting units.

The closing of the CAC Rights Offering occurred on November 18, 2013. Pursuant to the CAC Rights Offering, CAC distributed a total of 135,771,882 shares of Class A common stock and received aggregate gross proceeds of approximately $1.2 billion.

Also on October 21, 2013, the aggregate fair market value of the subscription rights issued by Caesars Entertainment was restored to Caesars Entertainment from CGP LLC through a return of senior notes issued by CEOC and previously contributed to CGP LLC by CEC. The amount of the restoration was approximately $21 million.

CGP LLC reimbursed Caesars Entertainment and CAC for certain fees and expenses incurred in connection with this transaction.

Subject to the terms and conditions described in the certificate of incorporation of CAC and the operating agreement of CGP LLC, after October 21, 2016, Caesars Entertainment will have the right to acquire all or a portion of the voting units of CGP LLC (or, at the election of CAC, shares of CAC’s Class A common stock) not otherwise owned by Caesars Entertainment at such time. The purchase consideration may be, at Caesars Entertainment’s option, cash or shares of Caesars Entertainment’s common stock valued at market value, net of customary market discount and expenses, provided that the cash portion will not exceed 50% of the total consideration in any exercise of the call right. The purchase price will be the greater of (i) the fair market value of the voting units of CGP LLC (or shares of CAC’s Class A common stock) at such time based on an independent appraisal or (ii) the initial capital contribution in respect of such units plus a 10.5% per annum return on such capital contribution, subject to a maximum return on such capital contribution of 25% per annum, taking into account prior distributions with respect to such units.

Consolidation of CGP LLC as a Variable Interest Entity

Because the equity holders in CGP LLC receive returns disproportionate to their voting interests and substantially all the activities of CGP LLC are related to Caesars, CGP LLC has been determined to be a variable interest entity (“VIE”). CAC is the sole voting member of CGP LLC - neither CAC nor CGP LLC guarantees any of Caesars’ debt. The creditors or beneficial holders of CGP LLC have no recourse to the general credit of Caesars Entertainment. Caesars Entertainment has certain obligations to CGP LLC through the management and services agreements.

We have determined that we are the primary beneficiary of CGP LLC and are required to consolidate them. This conclusion was based upon the weighing of a number of items, including the following: (i) the close association that CGP LLC has with Caesars, including the fact that all of the assets and businesses owned by CGP LLC were acquired from Caesars; and (ii) Caesars has the obligation to absorb losses and the right to receive residual returns that could potentially be significant to CGP LLC. See above for greater detail on the formation of CGP LLC and our related accounting.

We account for the noncontrolling interest in CGP LLC using the hypothetical liquidation at book value (“HLBV”) method to attribute the earnings and losses of CGP LLC between the controlling and noncontrolling interest. Under this method, the noncontrolling interest in the CGP LLC entity is based upon the noncontrolling interest holders’ contractual claims on CGP LLC’s accounting balance sheet pursuant to the mandatory liquidation provisions of the operating agreement, adjusted for certain common control tax distributions and the bond restoration described above. Caesars’ resulting net income from the controlling interest is the residual net income from the consolidation of the VIE less the HLBV calculated net income attributable to the noncontrolling interest holder. Due to certain mandatory liquidation provisions of the operating agreement, this could result in a net loss to Caesars consolidated results in periods in which CGP LLC reports net income.

CGP LLC generated net revenues of $1.6 billion and $142 million for the years ended December 31, 2014 and 2013, respectively. Net loss attributable to Caesars related to CGP LLC was $405 million and $4 million for the years ended December 31, 2014 and 2013, respectively. The noncontrolling interest balance attributable to CGP LLC at December 31, 2014 was $1.1 billion.

In addition to CGP LLC, we also hold immaterial variable interests in other VIEs that are not consolidated because we are not the primary beneficiary. We continually monitor both consolidated and non-consolidated VIEs to determine if any events have occurred that could cause the primary beneficiary to change.

Property Transaction between CEOC and CGP LLC

In May 2014, CEOC sold to CGP LLC (hereafter collectively referred to as the “CEOC-CGP LLC Property Transaction”):


(i)	its subsidiaries that own the assets comprising The Cromwell, The LINQ Hotel, Bally’s Las Vegas, and Harrah’s New Orleans (collectively the “Properties”);


(ii)	50% of the ongoing management fees and any termination fees payable under property management agreements to be entered between a CEOC subsidiary and the owners of each of the Properties; and


(iii)	certain intellectual property that is specific to each of the Properties.

In May 2014, CEOC completed the CEOC-CGP LLC Property Transaction for an aggregate purchase price of $2.0 billion, minus assumed debt and other customary closing adjustments. The debt assumed consisted of the $185 million Cromwell Credit Facility described in Note 10, “Debt.”

Under the terms of the agreements governing the CEOC-CGP LLC Property Transaction, each property is managed by CEOC. In addition, each property licenses enterprise-wide intellectual property from Caesars Licensing Company, LLC (“CLC”). Upon implementation of CES, as described below, CEOC assigned the management agreements to CES, and CLC granted to CES licenses with respect to the enterprise-wide intellectual property. CEOC receives ongoing management fees during the term of the related property management agreement consisting of a (i) base management fee of 2% of monthly net operating revenues and (ii) an incentive management fee in an amount equal to 5% of EBITDA for each operating year.

In addition to the above, the agreements governing the CEOC-CGP LLC Property Transaction also provide that CEC and CEOC will indemnify CGP LLC for:


(i)	the failure of CEC and CEOC to perform or fulfill any of their covenants or breach any of their representations and warranties under the agreements;


(ii)	new construction and renovation of The LINQ Hotel of up to 15% of amounts in excess of $223 million; and


(iii)	certain other agreed upon matters.

Related Financing Agreement. As disclosed in greater detail in Note 10, “Debt,” in April 2014, CGP LLC entered into a First Lien Credit Agreement providing for a $1.2 billion term loan and a $150 million revolving facility, and completed the offering of $675 million aggregate principal amount of its subsidiaries’ 9.375% second-priority senior secured notes due 2022.

Contingently Issuable Non-Voting Membership Units

Pursuant to the terms of the Transactions, CGP LLC is obligated to issue additional non-voting membership units to Caesars Entertainment to the extent that the earnings from CIE’s social and mobile games business exceeds a specified threshold amount in 2015. The number of units to be received is capped at a value of $225 million divided by the value of the non-voting units at the date of the Transactions.

CGP LLC recorded a liability of $168 million, representing the fair value of the additional non-voting membership units contingently issuable to Caesars Entertainment during 2016 under the CIE earnout liability described above. The contingently issuable membership units’ fair value is based upon a multiple of EBITDA for the calendar year 2015 in excess of a specified minimum threshold and includes a maximum payout threshold. The fair value of the CIE earnout liability as of December 31, 2014 was $347 million. Such liability is eliminated in our consolidation of CGP LLC.

CIE Unsecured Intercompany Loan

CIE has entered into an unsecured credit facility with CEC (the “CEC Credit Facility”) whereby CEC provided to CIE unsecured intercompany loans, as approved by CIE, on an individual transaction basis. In connection with the purchase of Playtika in 2011 and the December 2012 Buffalo Studios acquisition, CIE borrowed $126 million for Playtika and $42 million for Buffalo Studios under the CEC Credit Facility. The outstanding CIE balance on the CEC Credit Facility as of December 31, 2014, was $40 million. No principal payments are required under the Credit Facility until its maturity date of November 29, 2016. The unsecured intercompany loans bear interest on the unpaid principal amounts at a rate per annum equal to LIBOR plus 5%. The CEC Credit Facility does not have any restrictive or affirmative covenants. The CEC Credit Facility eliminates with the consolidation of CGP LLC.

Distribution of CEOC Notes

In August 2014, CGP LLC effectuated a distribution of 100% of its remaining investment in certain CEOC notes as a dividend to its members, CEC and Caesars Acquisition Company ("CAC"), pro rata based upon each member’s ownership percentage in CGP LLC (the "Notes Distribution"). In connection with the Notes Distribution, CEC received $187 million in aggregate principal amount of the 6.50% Senior Notes and $206 million in aggregate principal amount of the 5.75% Senior Notes and CAC received $138 million in aggregate principal amount of the 6.50% Senior Notes and $151 million in aggregate principal amount of the 5.75% Senior Notes.

Because CGP LLC is a consolidated VIE, the CEOC notes held by CGP LLC prior to the Notes Distribution were eliminated in consolidation and were not reflected as part of CEOC's outstanding debt disclosed in Note 10, "Debt." The CEOC notes received by CEC were subsequently contributed to CEOC for cancellation, as described in Note 10, "Debt - Note Purchase and Support Agreement," which resulted in no impact on the consolidated financial statements of CEC. The CEOC notes received by CAC resulted in an increase in the face value and book value reported for CEOC debt because CAC is not a consolidated entity. In addition, the Notes Distribution resulted in a $160 million decrease in noncontrolling interest (which represents the fair value of the CEOC notes) and an $89 million increase to the discount on long-term debt. The decrease in noncontrolling interest represents CGP LLC's reported fair value of the CEOC notes at the time of the Notes Distribution, while the increase to the discount represents the difference between CGP LLC's fair value for the CEOC notes and the book value reported by CEOC. The Notes Distribution to CAC is being accounted for as a new issuance of debt by CEC for accounting purposes. As a result of this transaction, CEC now reflects the $289 million in face value of notes distributed by CGP LLC to CAC as outstanding, with a total discount of $129 million, resulting in an increase to net book value of debt outstanding equal to the fair value of the related notes, which was $160 million.

Caesars Enterprise Services

Formation of Caesars Enterprise Services, LLC

On May 20, 2014, CEOC, CERP, and CGPH (together with CERP and CEOC, the “Members” and each a “Member”) entered into a services joint venture, CES. CES manages certain Enterprise Assets (as defined hereafter) and the other assets it owns, licenses or controls, and employs certain of the corresponding employees and other employees who previously provided services to CEOC, CERP and CGPH, their affiliates and their respective properties and systems under each property’s corresponding property management agreement. Corporate expenses that are not allocated to the properties directly are allocated by CES to CEOC, CERP, and CGPH according to their allocation percentages (initially 70.0%, 24.6%, and 5.4%, respectively), subject to annual review. Operating expenses are allocated to each Member with respect to their respective properties serviced by CES in accordance with historical allocation methodologies, subject to annual revisions and certain prefunding requirements. On October 1, 2014, CES began operations in Nevada, New Jersey and certain other jurisdictions in which regulatory approval had been received or was not required, including through the commencement of direct employment by CES of certain designated Enterprise-wide employees. The enhancement of CES operations described above in other jurisdictions may be subject to regulatory and other approvals in such jurisdictions.

Omnibus License and Enterprise Services Agreement

On May 20, 2014, the Members entered into an Omnibus License and Enterprise Services Agreement (the “Omnibus Agreement”), which granted licenses to the Members and certain of their affiliates in connection with the implementation of CES. In October 2014, initial contributions by the Members included cash contributions by CERP of $43 million and by CGP LLC for CGPH of $23 million. On October 1, 2014 and January 1, 2015, the Members transitioned certain executives and employees to CES and the services of such employees will be available as part of CES’s provision of services to the Members and certain of their affiliates that own properties that require CES services under the Omnibus Agreement.

Under the Omnibus Agreement, CEOC, CLC, Caesars World, Inc. (“CWI”) and certain of our subsidiaries that are the owners of our properties granted CES a non-exclusive, irrevocable, world-wide, royalty-free license in and to all intellectual property owned or used by such licensors, including all intellectual property (a) currently used, or contemplated to be used, in connection with the properties owned by the Members and their respective affiliates, including any and all intellectual property related to the Total Rewards program, and (b) necessary for the provision of services contemplated by the Omnibus Agreement and by the applicable management agreement for any such property (collectively, the “Enterprise Assets”). CERP also granted CES non-exclusive licenses to certain other intellectual property, including intellectual property that is specific to properties controlled by CERP or its subsidiaries.

CES granted to the properties owned or controlled by the Members and their respective affiliates non-exclusive licenses to the Enterprise Assets. CES granted to CEOC, CLC, CWI and the properties owned or controlled by the Members, including us, licenses to any intellectual property that CES develops or acquires in the future that is not derivative of the intellectual property licensed to it. CES also granted to CEOC, CLC and CWI a non-exclusive license to intellectual property specific to the properties controlled by CGPH, CERP and their subsidiaries for any uses consistent with the uses made by CEOC, CLC and CWI with respect to such intellectual property prior to the date of the Omnibus Agreement.