Basis of Presentation and Principles of Consolidation

Basis of Presentation and Use of Estimates

The accompanying unaudited consolidated condensed financial statements of Caesars have been prepared under the rules and regulations of the SEC 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 2017 fiscal year.

Reclassifications

For the three and nine months ended September 30, 2016, $4 million and $13 million, respectively, was reclassified from food and beverage revenues to other revenues, and certain other immaterial prior year amounts have also been reclassified to conform to the current year’s presentation.

Cash, Cash Equivalents, and Restricted Cash

We adopted Accounting Standards Update (“ASU”) No. 2016-18, Statement of Cash Flows: Restricted Cash, during the fourth quarter of 2016, and retrospectively applied the amendments. Prior to adopting ASU No. 2016-18, our consolidated statements of cash flows reported changes in restricted cash as investing activities and excluded restricted cash from the beginning and ending balances of cash and cash equivalents. The effect on prior periods of adopting the new guidance includes: (i) increases in cash, cash equivalents, and restricted cash balances to $5.1 billion and $1.4 billion as of September 30, 2016 and December 31, 2015, respectively; and (ii) an increase of $3.3 billion in cash flows provided by investing activities for the nine months ended September 30, 2016.

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported on the Balance Sheets that sum to amounts reported on the consolidated statements of cash flows.



(In millions)	September 30, 2017		December 31, 2016
Cash and cash equivalents	$	1,515	$	1,513
Restricted cash, current portion	2,798		3,113
Restricted cash, non-current portion	101		5
Total cash, cash equivalents, and restricted cash	$	4,414	$	4,631

Other Operating Costs

Other operating costs primarily include write-downs, reserves, and project opening costs, net of recoveries and acquisition and integration costs. During the first quarter of 2017, CEC was reimbursed $19 million for amounts related to the joint venture development in Korea that were deemed uncollectible and written off in 2015.

Consolidation of Subsidiaries and Variable Interest Entities

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

We consolidate 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

Effective in 2013, CGP was determined to be a VIE, and Caesars was determined to be the primary beneficiary. As of September 30, 2017, CAC is the sole voting member of CGP and holds a material noncontrolling interest in CGP. Common control exists between CAC and CEC through the majority beneficial ownership of both by Hamlet Holdings (as defined in Note 15). Neither CAC nor CGP guarantees any of CEC’s debt, and neither the creditors nor the beneficial holders of CGP have recourse to the general credit of CEC. As a result of the Merger, CGP became a wholly owned subsidiary of CEC; therefore, CGP will no longer be a VIE subsequent to September 30, 2017 (see Note 17).

CGP generated net revenues of $407 million and $422 million for the three months ended September 30, 2017 and 2016, respectively, and $1.3 billion for both the nine months ended September 30, 2017 and 2016. Net income attributable to Caesars related to CGP was $17 million and $3.2 billion for the three months ended September 30, 2017 and 2016, respectively, and $12 million and $3.2 billion for the nine months ended September 30, 2017 and 2016, respectively.

Our consolidated restricted cash includes amounts held by CGP of $2.7 billion and $3.0 billion as of September 30, 2017 and December 31, 2016, respectively. As of September 30, 2017, the majority of the balance is restricted under the terms of the CIE Proceeds and Reservation Rights Agreement (the “CIE Proceeds Agreement”) with CIE, CEOC, and CAC, which requires a portion of the proceeds from the sale of the SMG Business be deposited into the CIE escrow account (the "CIE Escrow Account"). Under the terms of the Plan and upon consummation of the Merger, the restricted cash was released from the CIE Escrow Account in order to fund certain of CEC’s obligations on the Effective Date (see Note 17).

CR Baltimore Holdings (“CRBH”)

CGP consolidates into its financial statements the accounts of any variable interest entity for which it is determined to be the primary beneficiary. Caesars Baltimore Investment Company, LLC (“CBIC”) is wholly-owned and consolidated by CGP. CBIC indirectly holds interests in CBAC Borrower, LLC (“CBAC”), owner of the Horseshoe Baltimore Casino, through its ownership interest in CRBH, a variable interest entity. The counterparty that owns the minority interest in CRBH was restricted from transferring its interest in CRBH without prior consent from CBIC. As a result, CBIC was determined to be the primary beneficiary of CRBH, and therefore, consolidated CRBH into its financial statements. Under the terms of the agreement, the transfer restrictions expired in August 2017, at which time CBIC was no longer considered the primary beneficiary and deconsolidated CRBH.

CRBH generated year-to-date net revenues of $188 million and net loss attributable to Caesars of $6 million until its deconsolidation effective August 31, 2017. Upon deconsolidation, we derecognized total assets and liabilities of $350 million and $354 million, respectively, including long-term debt totaling $294 million. CBIC recorded its interest in CRBH at its estimated fair value of $28 million, recognizing a gain on deconsolidation of $30 million, and will account for CRBH as an equity method investment going forward. We estimated the fair value of the interest in CRBH by weighting the results of the discounted cash flow method and the guideline public company method.

Horseshoe Baltimore Casino will continue to be a managed property of New CEOC subsequent to its deconsolidation, and transactions with CRBH will no longer be eliminated in consolidation. These transactions include but are not limited to items such as casino management fees paid to New CEOC, reimbursed management costs, and the allocation of other expenses.

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, we determined that CES was a VIE, and 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 (see Note 15). 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 was a VIE and that we were not the primary beneficiary; therefore, we no longer consolidated CEOC. Subsequent to the deconsolidation, we accounted for our investment in CEOC as a cost method investment of zero due to the negative equity associated with CEOC’s underlying financial position. CEOC’s ownership interest in CES was $26 million and $33 million as of September 30, 2017 and December 31, 2016, respectively, and is accounted for as noncontrolling interest.

Transactions with CEOC were 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.

As described in Note 17, on October 6, 2017, the Debtors consummated their reorganization pursuant to the Plan, and CEC completed the acquisition of all of New CEOC. As a result, New CEOC, as CEOC’s successor, is a wholly owned subsidiary of CEC following the Effective Date, and will no longer be treated as a related party going forward.