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| PENN > SEC Filings for PENN > Form 10-K on 22-Feb-2013 | All Recent SEC Filings |
22-Feb-2013
Annual Report
Our Operations
We are a leading, diversified, multi-jurisdictional owner and manager of gaming and pari-mutuel properties. As of December 31, 2012, we owned, managed, or had ownership interests in twenty-nine facilities in the following nineteen jurisdictions: Colorado, Florida, Illinois, Indiana, Iowa, Kansas, Louisiana, Maine, Maryland, Mississippi, Missouri, Nevada, New Jersey, New Mexico, Ohio, Pennsylvania, Texas, West Virginia, and Ontario. We believe that our portfolio of assets provides us with diversified cash flow from operations.
We have made significant acquisitions in the past, and expect to continue to pursue additional acquisition and development opportunities in the future. In 1997, we began our transition from a pari-mutuel company to a diversified gaming company with the acquisition of the Charles Town property and the introduction of video lottery terminals in West Virginia. Since 1997, we have continued to expand our gaming operations through strategic acquisitions (including the acquisitions of Hollywood Casino Bay St. Louis and Boomtown Biloxi, CRC Holdings, Inc., Hollywood Casino Corporation, Argosy Gaming Company, Zia Park Casino, Sanford-Orlando Kennel Club and the M Resort), greenfield projects (such as Hollywood Casino at Penn National Race Course, Hollywood Casino Bangor and Hollywood Casino Perryville), and property expansions (such as Hollywood Casino at Charles Town Races and Hollywood Casino Lawrenceburg). Most recently, we, along with our joint venture partner, opened Hollywood Casino at Kansas Speedway on February 3, 2012 and in Ohio, we opened our Hollywood Casino Toledo facility on May 29, 2012 and our Hollywood Casino Columbus facility on October 8, 2012. Finally, on November 2, 2012, we acquired Harrah's St. Louis facility, which we are in the process of rebranding to Hollywood Casino St. Louis.
The vast majority of our revenue is gaming revenue, derived primarily from gaming on slot machines (which represented approximately 84% and 88% of our gaming revenue in 2012 and 2011, respectively) and to a lesser extent, table games, which is highly dependent upon the volume and spending levels of customers at our properties. Other revenues are derived from our management service fee from Casino Rama, our hotel, dining, retail, admissions, program sales, concessions and certain other ancillary activities, and our racing operations. Our racing revenue includes our share of pari-mutuel wagering on live races after payment of amounts returned as winning wagers, our share of wagering from import and export simulcasting, and our share of wagering from our OTWs.
Key performance indicators related to gaming revenue are slot handle and table game drop (volume indicators) and "win" or "hold" percentage. Our typical property slot hold percentage is in the range of 6% to 10% of slot handle, and our typical table game win percentage is in the range of 12% to 25% of table game drop.
Slot handle is the gross amount wagered for the period cited. The win or hold percentage is the net amount of gaming wins and losses, with liabilities recognized for accruals related to the anticipated payout of progressive jackpots. Our slot hold percentages have consistently been in the 6% to 10% range over the past several years. Given the stability in our slot hold percentages, we have not experienced significant impacts to earnings from changes in these percentages.
For table games, customers usually purchase cash chips at the gaming tables. The cash and markers (extensions of credit granted to certain credit worthy customers) are deposited in the gaming table's drop box. Table game win is the amount of drop that is retained and recorded as casino gaming revenue, with liabilities recognized for funds deposited by customers before gaming play occurs and for unredeemed gaming chips. As we are focused on regional gaming markets, our table win percentages are fairly stable as the majority of these markets do not regularly experience high-end play which can lead to volatility in win percentages. Therefore, changes in table game win percentages do not typically
have a material impact to our earnings. However, as discussed in our analysis of gaming revenues in a later section of this management's discussion and analysis of financial condition and results of operations, the introduction of table games in July 2010 at Hollywood Casino at Charles Town Races and Hollywood Casino at Penn National Race Course and in March 2012 at Hollywood Casino Bangor has led to an increase in our gaming revenues and earnings in our East/West segment.
Our properties generate significant operating cash flow, since most of our revenue is cash-based from slot machines, table games, and pari-mutuel wagering. Our business is capital intensive, and we rely on cash flow from our properties to generate operating cash to repay debt, fund capital maintenance expenditures, fund new capital projects at existing properties and provide excess cash for future development and acquisitions.
We continue to expand our gaming operations through the implementation and execution of a disciplined capital expenditure program at our existing properties, the pursuit of strategic acquisitions and the development of new gaming properties, particularly in attractive regional markets. Current capital projects are ongoing at several of our properties. Additional information regarding our capital projects is discussed in detail in the section entitled "Liquidity and Capital Resources-Capital Expenditures" below.
Proposed Spin-Off of Real Estate Assets through a Real Estate Investment Trust
On November 15, 2012, we announced that we intend to pursue a plan to separate the majority of our gaming operating assets and real property assets into two publicly traded companies, including an operating entity, PNG, and, through a tax-free Spin-Off of our real estate assets to holders of our common stock, a newly formed publicly traded REIT, PropCo, subject to required gaming regulatory body approvals. As a result of the proposed Spin-Off, PropCo will initially own substantially all of the real property assets and will lease back most of those assets to PNG for use by its subsidiaries, under a "triple net" 35 year Master Lease agreement (including extensions). PNG would own the gaming licenses, operate the leased gaming facilities and own and operate other assets, including the Casino Rama casino management contract, the 50% joint venture interest in Hollywood Casino at Kansas Speedway, seven non-casino racetracks and gaming equipment.
Based on the Company's current real estate portfolio, PropCo is expected to initially own the real estate for 17 casino facilities, as well as the two new video lottery terminal facilities to be constructed in Ohio. Through its rent structure, which is partially based on the performance of the facilities, PropCo would expect to grow organically by participating in PNG's growing revenue base. In addition, PropCo would focus on expanding its gaming and leisure sector real estate portfolio through acquisitions, and thereby diversify its asset base and tenant base over time. PropCo will also own and operate Hollywood Casino Perryville and Hollywood Casino Baton Rouge through its taxable REIT subsidiaries.
After the proposed Spin-Off of PropCo shares to the Company's shareholders, PropCo will declare a dividend to its shareholders to distribute any accumulated earnings and profits attributable to any pre-REIT years to comply with certain REIT qualification requirements. We currently estimate that, if PropCo were to elect REIT status as of January 1, 2014, the aggregate amount of the taxable dividend would be approximately $1.4 billion. The dividend will be paid in a combination of cash and PropCo common stock, which will consist of at least 20% in cash with the remainder in PropCo common stock. In addition, going forward, the Company expects that PropCo will distribute at least 90% of its annual taxable income as dividends.
Prior to the Spin-Off, the Company anticipates refinancing its existing debt obligations and PNG and PropCo are expected to enter into new credit facilities.
The Company has received a private letter ruling from the Internal Revenue Service relating to the tax treatment of the separation and the qualification of PropCo as a REIT. The private letter ruling is subject to certain qualifications and based on certain representations and statements made by the Company. If such representations and statements are untrue or incomplete in any material respect (including as a result of a material change in the proposed transaction or other relevant facts), the Company may not be able to rely on the private letter ruling. The Company expects to receive opinions from outside counsel regarding certain aspects of the transaction that are not covered by the private letter ruling.
The completion of the proposed transaction is contingent on receipt of regulatory approvals, which the Company anticipates could occur in the second half of 2013, the receipt of final approval by the Penn National Gaming Board of Directors, the receipt of legal and accounting opinions, and other customary conditions. The Company may, at any time and for any reason until the proposed Spin-Off is complete, abandon the Spin-Off or modify or change the terms of the Spin-Off.
Segment Information
In 2011, we realigned our reporting structure in connection with the hiring of a senior vice president of regional operations. We now have three senior vice presidents of regional operations who oversee various properties based primarily on their geographic locations and whom report directly to our President and Chief Operating Officer. This event impacted how our Chief Executive Officer, who is the Company's CODM as that term is defined in ASC 280, measures and assesses our business performance and has caused us to conclude that we now have reportable segments. Therefore, we have aggregated our properties into three reportable segments: (i) Midwest, (ii) East/West, and (iii) Southern Plains, consistent with how our CODM reviews and assesses our financial performance.
The Midwest reportable segment consists of the following properties:
Hollywood Casino Lawrenceburg, Hollywood Casino Aurora, Hollywood Casino Joliet,
Argosy Casino Alton, Hollywood Casino Toledo, which opened on May 29, 2012, and
Hollywood Casino Columbus, which opened on October 8, 2012. It also includes our
Casino Rama management service contract and the Mahoning Valley and Dayton
Raceway projects in Ohio which we anticipate completing in 2014.
The East/West reportable segment consists of the following properties:
Hollywood Casino at Charles Town Races, Hollywood Casino Perryville, Hollywood
Casino Bangor, Hollywood Casino at Penn National Race Course, Zia Park Casino,
and the M Resort.
The Southern Plains reportable segment consists of the following properties:
Argosy Casino Riverside, Argosy Casino Sioux City, Hollywood Casino Baton Rouge,
Hollywood Casino Tunica, Hollywood Casino Bay St. Louis, Boomtown Biloxi,
Hollywood Casino St. Louis (formerly Harrah's St. Louis which was acquired from
Caesars Entertainment on November 2, 2012), and includes our 50% investment in
Kansas Entertainment, which owns the Hollywood Casino at Kansas Speedway that
opened on February 3, 2012.
The Other category consists of our standalone racing operations, namely Beulah Park, Raceway Park, Rosecroft Raceway, Sanford-Orlando Kennel Club, and our joint venture interests in Sam Houston Race Park, Valley Race Park and Freehold Raceway. It also included our joint venture interest in the Maryland Jockey Club which was sold in July 2011. If we are successful in obtaining gaming operations at these locations, they would be assigned to one of our regional executives and reported in their respective reportable segment. The Other category also includes our corporate overhead operations which does not meet the definition of an operating segment under ASC 280 and our Bullwhackers property.
Executive Summary
Economic conditions continue to impact the overall domestic gaming industry as well as operating results. We believe that current economic conditions, including, but not limited to, high unemployment
levels, low levels of consumer confidence, increased stock market volatility, and higher taxes, have resulted in reduced levels of discretionary consumer spending compared to historical levels.
We believe our strengths include our relatively low leverage ratios compared to the regional casino companies that we directly compete against and the ability of our operations to generate positive cash flow. These two factors have allowed us to develop what we believe to be attractive future growth opportunities. We have also made investments in joint ventures that we believe may allow us to capitalize on additional gaming opportunities in certain states if legislation or referenda are passed that permit and/or expand gaming in these jurisdictions and we are selected as a licensee.
Financial Highlights:
We reported net revenues and income from operations of $2,899.5 million and $442.6 million, respectively, for the year ended December 31, 2012 compared to $2,742.3 million and $499.6 million, respectively, for the corresponding period in the prior year. The major factors affecting our results for the year ended December 31, 2012, as compared to the year ended December 31, 2011, were:
º •
º The full year impact of the June 1, 2011 acquisition of the M Resort.
º •
º An increase in gaming revenue at Hollywood Casino at Charles Town
Races primarily due to the continued impact from the introduction of
table games in July 2010 coupled with mild weather in the first
quarter of 2012.
º •
º The partial opening of a casino complex at the Arundel Mills mall in
Maryland in June 2012 and its second phase opening in mid-September
2012, which negatively impacted Hollywood Casino at Charles Town Races
and Hollywood Casino Perryville.
º •
º An increase in gaming revenue at Zia Park Casino due to strengthening
regional economic conditions.
º •
º The opening of Hollywood Casino Toledo on May 29, 2012, which
generated $129.3 million of net revenues for the year ended
December 31, 2012.
º •
º The opening of Hollywood Casino Columbus on October 8, 2012, which
generated $62.1 million of net revenues for the year ended
December 31, 2012.
º •
º New competition in our Midwest segment, namely a new casino opening in
July 2011 near Hollywood Casino Aurora and Hollywood Casino Joliet, as
well as a recent opening on June 1, 2012 of a new racino in Columbus,
Ohio as well as our Columbus casino, both of which negatively impacted
Hollywood Casino Lawrenceburg. This impact was partially mitigated by
the expiration of the 3% surcharge in July 2011 for Hollywood Casino
Aurora and Hollywood Casino Joliet.
º •
º Pre-tax insurance gain of $18.5 million at Hollywood Casino Joliet for
the year ended December 31, 2011.
º •
º The acquisition of Harrah's St. Louis facility, now known as Hollywood
Casino St. Louis, on November 2, 2012, which contributed $35.9 million
of net revenues for the year-ended December 31, 2012.
º •
º The February 3, 2012 opening of our joint venture, Hollywood Casino at
Kansas Speedway, which negatively impacted the results at our Argosy
Riverside property in our Southern Plains segment.
º •
º The opening of a new casino in Biloxi, Mississippi in late May 2012,
which impacted Boomtown Biloxi, and the opening of a new riverboat
casino and hotel in Baton Rouge, Louisiana on September 1, 2012, which
impacted Hollywood Casino Baton Rouge.
º •
º A pre-tax insurance gain of $7.2 million at Hollywood Casino Tunica
for the year ended December 31, 2012, compared to insurance deductible
charges due to a flood at Hollywood Casino Tunica of $5.2 million for
the year ended December 31, 2011.
º •
º Management's continued focus on cost management that has resulted in
improved operating margins at 9 of our 16 gaming facilities that we
operated in both periods, for the year ended December 31, 2012
compared to the corresponding period in the prior year.
º •
º Lobbying efforts in Maryland related to our opposition to the November
2012 gaming referendum for $45.1 million for the year ended
December 31, 2012, which is included in the Other segment and is
included in general and administrative expense within the consolidated
statement of operations.
º •
º Our Other category for the year ended December 31, 2011 also included
a gain of $20.2 million on the sale of our interest in the Maryland
Jockey Club in July 2011, a $17.8 million debt extinguishment charge
related to debt issuance costs write-offs and a call premium payment
for the early retirement of our $250 million senior subordinated
notes, and a $5.9 million charge for our share of a goodwill
impairment write-down at our New Jersey joint venture.
º •
º Net income decreased by $30.4 million for the year ended December 31,
2012, as compared to the corresponding period in the prior year,
primarily due to the variances explained above, as well as increased
depreciation expense and income taxes and a decrease in interest
expense.
Segment Developments:
The following are recent developments that have had or will have an impact on us by segments:
Midwest
º •
º Hollywood Casino Columbus, a Hollywood-themed casino in Columbus,
Ohio, with a $400 million budget, inclusive of $50 million in
licensing fees, opened on October 8, 2012 and features 3,015 slot
machines, 78 table games and 30 poker tables, structured and surface
parking, as well as various food and beverage outlets and an
entertainment lounge. The opening of our Columbus casino had and will
continue to have an adverse impact on Hollywood Casino Lawrenceburg.
Hollywood Casino Toledo, a Hollywood-themed casino in Toledo, Ohio,
with a $320 million budget ($317.6 million incurred as of December 31,
2012), inclusive of $50 million in licensing fees, opened on May 29,
2012 and features 2,033 slot machines, 60 table games and 20 poker
tables, structured and surface parking, as well as food and beverage
outlets and an entertainment lounge. Additionally, in June 2011, we
preliminarily agreed to pay an additional $110 million over ten years
to the State of Ohio in return for certain clarifications from the
State of Ohio with respect to various financial matters and limits on
competition within the ten year time period. In February 2013, we
decided to remove approximately 500 slot machines in the near term and
add 6 poker tables to better meet market demand for Hollywood Casino
Columbus.
º •
º In March 2012, we announced that we had entered into a non-binding
memorandum of understanding ("MOU") with the State of Ohio that
establishes a framework for relocating our existing racetracks in
Toledo and Grove City to Dayton and Austintown (located in the
Mahoning Valley), respectively, where we intend to develop new
integrated racing and gaming facilities, budgeted at approximately
$257 million and $265 million, inclusive of $50 million in license
fees and $75 million in relocation fees, respectively. Pursuant to
this arrangement, the Ohio Lottery Commission would retain 33.5% of
video lottery terminal revenues (exclusive of the horsemen's share).
In addition, the MOU restricts any other gaming facility from being
located within 50 miles of our Columbus and Toledo casinos, as well as
our relocated racetracks, with certain exceptions. In June 2012, we
announced that we had filed applications with the Ohio Lottery
Commission for Video Lottery Sales Agent Licenses for our Ohio
racetracks, and
with the Ohio State Racing Commission for permission to relocate the
racetracks. The new Austintown facility, which will be a thoroughbred
track, will be located on 184 acres in Austintown's Centrepointe
Business Park near the intersection of Interstate 80 and Ohio Route
46. The Dayton facility, a standardbred track, will be located on 125
acres on the site of an abandoned Delphi Automotive plant near Wagner
Ford and Needmore roads in North Dayton. Both of the new racetrack
facilities will each feature up to 1,500 video lottery terminals, as
well as various restaurants, bars and other amenities. We anticipate
completing these new integrated racing and gaming facilities in 2014.
The opening of our Dayton facility may have an adverse impact on our
Hollywood Casino Columbus facility.
º •
º On October 21, 2011, the Ohio Roundtable filed a complaint in the
Court of Common Pleas in Franklin County, Ohio against a number of
defendants, including the Governor, the Ohio Lottery Commission and
the Ohio Casino Control Commission. The complaint alleges a variety of
substantive and procedural defects relative to the approval and
implementation of video lottery terminals as well as several counts
dealing with the taxation of standalone casinos. We, along with the
other two casinos in Ohio, have filed motions for judgment on the
pleadings. In May 2012, the complaint was dismissed; however, the
plaintiffs filed an appeal and oral arguments were held on January 17,
2013.
º •
º On June 1, 2012, a new racino at Scioto Downs in Columbus, Ohio
opened, which has had a negative impact on Hollywood Casino
Lawrenceburg's financial results and competes in the same market as
Hollywood Casino Columbus. In addition, a proposed casino in
Cincinnati, Ohio is anticipated to open in March 2013. This new
facility will have a significant adverse impact on Hollywood Casino
Lawrenceburg. Additionally, new racinos in Ohio are planned at Lebanon
Raceway, which will start construction soon, and River Downs, which
has started construction, both of which hope to finish in early 2014.
We anticipate the opening of these new racinos will have a further
adverse impact on Hollywood Casino Lawrenceburg.
º •
º In July 2011, we entered into a new interim agreement with the OLGC
for the operation of the Casino Rama facility through March 31, 2012,
which was subsequently extended in January 2012 for an additional six
months through September 30, 2012 and extended in August 2012 on a
month-to-month basis going forward with a 60 days notice period. In
March 2012, the OLGC canceled its process of evaluating bids for a new
five year operating contract for the facility (which included a limit
on operating fees exceeding $5 million per year). Although that
particular bid process has been canceled, there are periodic OLGC
statements about exploring other bids and privatization plans. As a
result, there can be no assurance how long the OLGC will continue to
engage us to manage the property.
º •
º On July 18, 2011, the tenth licensed casino in Illinois opened in the
city of Des Plaines. This facility was a new source of competition for
Hollywood Casino Aurora and Hollywood Casino Joliet and had a negative
impact on these properties' financial results. However, the 3%
surcharge Hollywood Casino Aurora and Hollywood Casino Joliet paid to
subsidize local horse racing interests is no longer required with the
opening of the Des Plaines facility.
East/West
º •
º In our East/West segment, Hollywood Casino at Charles Town Races and
Hollywood Casino Perryville faced increased competition and their
results have been and will continue to be negatively impacted by the
opening of a casino complex at the Arundel Mills mall in Anne Arundel,
Maryland. The casino opened on June 6, 2012 with approximately 3,200
slot machines and significantly increased its slot machine offerings
by mid-September 2012 to approximately 4,750 slot machines. We
anticipate the Anne Arundel facility will add table games in spring of
2013 which will further negatively impact our Hollywood Casino at
Charles Town Races facility.
º •
º In November 2012, voters approved legislation authorizing a sixth
casino in Prince George's County and the ability to add table games to
Maryland's five existing and planned casinos. The new law also changes
the tax rate casino operators pay the state, varying from casino to
casino, allows all casinos in Maryland to be open 24 hours per day for
the entire year, and permits casinos to directly purchase slot
machines in exchange for gaming tax reductions. For our Hollywood
Casino Perryville facility, the tax rate would decrease from
67 percent to 61 percent with an option for an additional 5 percent
reduction if an independent commission agrees, and table games would
be expected to be implemented at Perryville in spring of 2013. A
separate state commission is expected to take bids for the Prince
George's casino in May 2013. Though we intend to participate in the
bidding process, we believe another operator could be selected, and as
a result our financial results would be adversely impacted as it would
create additional competition for Hollywood Casino at Charles Town
Races and Hollywood Casino Perryville.
º •
º Hollywood Casino Bangor introduced table games on March 16, 2012 with
the addition of six blackjack tables, a roulette table and seven poker
tables. However, on June 5, 2012, a new casino opened in Oxford,
Maine, approximately 120 miles from our facility, which has and will
continue to have a negative impact on Hollywood Casino Bangor.
Southern Plains
º •
º On November 2, 2012, we closed on the agreement to acquire 100% of the
equity of Harrah's St. Louis gaming and lodging facility from Caesars
Entertainment for a purchase price of $617.9 million. While the
acquisition was a stock transaction, it was treated as an asset
transaction for tax purposes. This enables us to amortize the goodwill
and other fair value adjustments for tax purposes. The acquisition
reflects the continuing efforts of the Company to expand its regional
operating platform with a facility in a large metropolitan market. We
are currently in the process of transitioning the property to our
Hollywood Casino-brand name. The purchase price of the transaction was
funded through an add-on to our senior secured credit facility. The
St. Louis facility is located adjacent to the Missouri River in
Maryland Heights, Missouri, directly off I-70 and approximately 22
miles northwest of downtown St. Louis. The facility is situated on 248
acres along the Missouri River and features approximately 109,000
square feet of gaming space with 2,164 slot machines, 57 table games,
21 poker tables, a 502 guestroom hotel, nine dining and entertainment
venues and structured and surface parking.
º •
º Kansas Entertainment opened its Hollywood-themed facility on
February 3, 2012. The facility features a 95,000 square foot casino
with approximately 2,000 slot machines, 40 table games and 12 poker
tables, a 1,253 space parking structure, as well as a variety of
dining and entertainment facilities. We and International Speedway
Corporation shared equally in the cost of developing and constructing
Hollywood Casino at Kansas Speedway. The opening of this casino has
and will continue to negatively impact the financial results of our
Argosy Riverside property due to their close proximity to one another.
º •
º On May 1, 2011, Hollywood Casino Tunica was forced to close as a
result of flooding by the Mississippi River. Due to the flooding,
access to the property was temporarily cut-off and the property
sustained minor damage. The property reopened on May 25, 2011. At the
time of the flood, we carried property insurance coverage with a flood
. . .
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