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PNK > SEC Filings for PNK > Form 10-Q on 12-Nov-2013All Recent SEC Filings

Show all filings for PINNACLE ENTERTAINMENT INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for PINNACLE ENTERTAINMENT INC.


12-Nov-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis of financial condition, results of operations, liquidity and capital resources should be read in conjunction with, and is qualified in its entirety by, the unaudited Condensed Consolidated Financial Statements and the notes thereto included in this Quarterly Report on Form 10-Q, and the Consolidated Financial Statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K, Form 10-K/A Amendment No.1 and Form 10-K/A Amendment No.2 for the year ended December 31, 2012.

                               EXECUTIVE SUMMARY

Pinnacle Entertainment, Inc. is an owner, operator and developer of casinos and
related hospitality and entertainment facilities. On August 13, 2013, we
completed an acquisition of all the outstanding common shares of Ameristar
Casinos, Inc. ("Ameristar") in an all cash transaction valued at $26.50 per
share representing total consideration of $2.8 billion, including assumed debt
(the "Merger"). As a result of the Merger, we added eight properties and now own
gaming operations in Louisiana, Mississippi, Missouri, Indiana, Iowa, Ohio,
Colorado, and Nevada, which we aggregate into the following reportable segments:
South segment
Ameristar Vicksburg *                                    Vicksburg, Mississippi
Boomtown Bossier City                                    Bossier City, Louisiana
Boomtown New Orleans                                     New Orleans, Louisiana
L'Auberge Baton Rouge                                    Baton Rouge, Louisiana
L'Auberge Lake Charles                                   Lake Charles, Louisiana

Midwest segment
Ameristar Council Bluffs *                               Council Bluffs, Iowa
Ameristar East Chicago *                                 East Chicago, Indiana
Ameristar Kansas City *                                  Kansas City, Missouri
Ameristar St. Charles *                                  St. Charles, Missouri
Belterra Casino Resort                                   Switzerland County, Indiana
Belterra Park Gaming & Entertainment Center (formerly
River Downs)                                             Cincinnati, Ohio
River City Casino                                        St. Louis, Missouri

West segment
Ameristar Black Hawk *                                   Black Hawk, Colorado
Cactus Petes *                                           Jackpot, Nevada
The Horseshu *                                           Jackpot, Nevada

* Ameristar properties acquired in the Merger

In addition, we manage a racetrack facility, Retama Park Racetrack, in San Antonio, Texas, and own and operate a live and televised poker tournament series that is operated under the trade name Heartland Poker Tour.

We financed the acquisition of Ameristar largely with debt financing. On August 5, 2013, we completed an offering of $850.0 million in aggregate principal amount of 6.375% senior notes due 2021 (the "6.375% Notes"). The net proceeds from the offering of the 6.375% Notes, after deducting the initial purchasers' selling commissions and related offering expenses, were approximately $835 million. In addition, upon closing of the Ameristar transaction, we entered into a new credit agreement that provides a $1.0 billion revolving credit facility and $1.6 billion in new term loans. We utilized the net proceeds from the offering, together with proceeds from the new credit facility, to finance the aggregate cash consideration for the Ameristar transaction, pay related transaction fees and expenses, redeem our existing 8.625% senior notes due 2017 (the "8.625% Notes") and provide working capital and funds for general corporate purposes after the Ameristar transaction.

On August 16, 2013, we entered into a definitive agreement to divest Lumiere Casinos and Hotels ("Lumiere") to an affiliate of Tropicana Entertainment for cash consideration of $260 million. The divestiture of Lumiere is expected to be


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completed in the 2014 first quarter, subject to approval of the Missouri Gaming Control Board and the U.S. Federal Trade Commission (the "FTC"). Lumiere is accounted for as discontinued operations beginning in the 2013 third quarter. We recorded a non-cash impairment charge of $144.6 million related to Lumiere in the 2013 third quarter.

In July 2013, we entered into an agreement with GNLC Holdings, Inc. ("GNLC"), an affiliate of Golden Nugget Casinos and Landry's, Inc., to sell all of the equity interests of Ameristar Casino Lake Charles, LLC, which is developing the Ameristar Lake Charles development project. Under the terms of the agreement, GNLC will pay total consideration equal to all cash expenditures on the development up until the date of closing, and the assumption of all outstanding payables related to the project at that time, less a $37 million credit. GNLC will complete the project following the closing of the acquisition of Ameristar Lake Charles. Through September 30, 2013, total invested capital related to the project was $260.5 million, including the original purchase price, capital expenditures and escrow deposits. We expect the transaction to close by the end of 2013, subject to approval of the Louisiana Gaming Commission and the FTC. The Ameristar Lake Charles development project is accounted for as a discontinued operation.

On August 23, 2013, we completed the divestiture of our land holdings in Atlantic City, New Jersey for cash consideration of $29.5 million.

On August 28, 2013, we opened a new 200-room hotel at our River City property, completing an $82 million expansion of the facility that also included a 1,600-space covered parking structure and a 14,000-square-foot multi-purpose event center.

In October 2013, we announced the re-branding of our redevelopment project at River Downs in Cincinnati, Ohio, to Belterra Park Gaming & Entertainment Center. The project budget remains approximately $209 million, excluding license fees, original acquisition costs, and capitalized interest, and is scheduled to open in May 2014.

In January 2013, we closed on the acquisition of 75.5% of the equity of Pinnacle Retama Partners, LLC ("PRP"), which is a reorganized limited liability company formerly known as RPL, and entered into a management contract with Retama Development Corporation ("RDC") to manage the day-to-day operations of Retama Park Racetrack.

We operate casino properties, all of which include gaming and dining facilities, and some of which include hotel, retail and other amenities. In addition, we operate two racetracks and a poker tour. Our operating results are highly dependent on the volume of customers at our properties, which, in turn, affects the price we can charge for our hotel rooms and other amenities. While we do provide casino credit in several gaming jurisdictions, most of our revenue is cash-based, with customers wagering with cash or paying for non-gaming services with cash or credit cards. Our properties generate significant operating cash flow. Our industry is capital-intensive, and we rely on the ability of our properties to generate operating cash flow to pay interest, repay debt costs and fund maintenance capital expenditures.

Our mission is to increase stockholder value. We seek to increase revenues through enhancing the guest experience by providing them with their favorite games, restaurants, hotel accommodations, entertainment and other amenities in attractive surroundings with high-quality guest service and guest rewards programs. We seek to improve margins by focusing on operational excellence and efficiency while meeting our guests' expectations of value. Our long-term strategy includes disciplined capital expenditures to improve and maintain our existing properties, while growing the number and quality of our facilities by pursuing gaming entertainment opportunities we can improve or develop. We intend to diversify our guest demographics and revenue sources by growing our portfolio of operating properties both domestic and foreign, while remaining gaming and entertainment centric. We intend to implement these strategies either alone or with third parties when we believe it benefits our stockholders to do so. In making decisions, we consider our stockholders, guests, team members and other constituents in the communities in which we operate.


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RESULTS OF OPERATIONS
The following table highlights our results of operations for the three and nine months ended September 30, 2013 and 2012. As discussed in Note 10 to our unaudited Condensed Consolidated Financial Statements, we report segment operating results based on revenues and Adjusted EBITDA. Such segment reporting is on a basis consistent with how we measure our business and allocate resources internally. See Note 10 to our unaudited Condensed Consolidated Financial Statements for more information regarding our segment information. The following table highlights our Adjusted EBITDA for each segment and reconciles Consolidated Adjusted EBITDA (defined below) to income (loss) from continuing operations in accordance with U.S. GAAP.
                                              For the three months ended
                                                     September 30,              For the nine months ended September 30,
                                                2013                2012              2013                  2012
                                                                          (in millions)
Revenues:
South segment (a)                         $      192.2         $      160.4     $      549.8         $           465.7
Midwest segment (b)                              194.5                 95.6            368.7                     282.1
West segment (c)                                  30.3                    -             30.3                         -
                                                 417.0                256.0            948.8                     747.8
Corporate and other                                1.9                  0.2              4.0                       0.3
Total revenues                            $      418.9         $      256.2     $      952.8         $           748.1
Adjusted EBITDA (d):
South segment (a)                         $       56.5         $       45.0     $      150.4         $           136.6
Midwest segment (b)                               55.3                 25.9            100.4                      73.4
West segment (c)                                  10.6                    -             10.6                         -
                                                 122.4                 70.9            261.4                     210.0
Corporate and other (e)                          (19.8 )               (5.8 )          (31.2 )                   (16.1 )
Consolidated Adjusted EBITDA (d)          $      102.6         $       65.1     $      230.2         $           193.9
Other benefits (costs):
Depreciation and amortization                    (39.5 )              (19.1 )          (85.2 )                   (54.5 )
Pre-opening and development costs                (63.1 )              (11.5 )          (87.9 )                   (18.4 )
Non-cash share-based compensation expense         (3.1 )               (1.6 )           (8.2 )                    (7.0 )
Write-downs, reserves and recoveries, net        (12.1 )               (0.1 )          (14.3 )                    (0.2 )
Interest expense, net                            (48.5 )              (23.0 )         (105.4 )                   (67.3 )
Loss from equity method investment                   -                 (1.4 )          (92.2 )                    (4.2 )
Loss on early extinguishment of debt             (30.8 )                  -            (30.8 )                   (20.7 )
Income tax benefit (expense)                      47.4                 (1.7 )           51.8                      (3.7 )
Income (loss) from continuing operations  $      (47.1 )       $        6.7     $     (142.0 )       $            17.8

(a) Our South segment consists of Ameristar Vicksburg, Boomtown Bossier City, Boomtown New Orleans, L'Auberge Baton Rouge and L'Auberge du Lac.

(b) Our Midwest segment consists of Ameristar Council Bluffs, Ameristar East Chicago, Ameristar Kansas City, Ameristar St. Charles, Belterra, Belterra Park (formerly River Downs) and River City.

(c) Our West segment consists of Ameristar Black Hawk, Cactus Petes and the Horseshu.

(d) We define Consolidated Adjusted EBITDA as earnings before interest income and expense, income taxes, depreciation, amortization, pre-opening and development expenses, non-cash share-based compensation, asset impairment costs, write-downs, reserves, recoveries, corporate-level litigation settlement costs, gain (loss) on sale of certain assets, loss on early extinguishment of debt, gain (loss) on sale of equity security investments, income (loss) from equity method investments, non-controlling interest and discontinued operations. We define Adjusted EBITDA for each operating segment as earnings before interest income and expense, income taxes, depreciation, amortization, pre-opening and development


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expenses, non-cash share-based compensation, asset impairment costs, write-downs, reserves, recoveries, inter-company management fees, gain (loss) on sale of certain assets, gain (loss) on early extinguishment of debt, gain (loss) on sale of discontinued operations, and discontinued operations. We define Adjusted EBITDA margin for each operating segment as Adjusted EBITDA divided by revenues for such segment. We use Consolidated Adjusted EBITDA and Adjusted EBITDA for each segment to compare operating results among our properties and between accounting periods. Consolidated Adjusted EBITDA and Adjusted EBITDA have economic substance because they are used by management as measures to analyze the performance of our business and are especially relevant in evaluating large, long-lived casino-hotel projects because they provide a perspective on the current effects of operating decisions separated from the substantial non-operational depreciation charges and financing costs of such projects. We eliminate the results from discontinued operations at the time they are deemed discontinued. We also review pre-opening and development expenses separately, as such expenses are also included in total project costs when assessing budgets and project returns, and because such costs relate to anticipated future revenues and income. We believe that Consolidated Adjusted EBITDA and Adjusted EBITDA are useful measures for investors because they are indicators of the performance of ongoing business operations. These calculations are commonly used as a basis for investors, analysts and credit rating agencies to evaluate and compare operating performance and value of companies within our industry. In addition, our credit agreement and bond indentures require compliance with financial measures similar to Consolidated Adjusted EBITDA. Consolidated Adjusted EBITDA should not be considered as an alternative to operating income as an indicator of performance, or as an alternative to any other measure provided in accordance with GAAP. Our calculations of Adjusted EBITDA and Consolidated Adjusted EBITDA may be different from the calculation methods used by other companies and, therefore, comparability may be limited.
(e) Corporate expenses represent unallocated payroll, professional fees, travel expenses and other general and administrative expenses not directly related to our casino and hotel operations. Other includes the Retama Park Racetrack (which we manage) and the Heartland Poker Tour.

Change to Corporate Expense Accounting Methodology

Beginning in the third quarter of 2013, we changed the methodology used to allocate corporate expenses to our reportable segments. Historically, we allocated direct and some indirect expenses incurred at the corporate headquarters to each property. Expenses incurred at the corporate headquarters that were related to property operations, but not directly attributable to a specific property, were allocated, typically on a pro rata basis, to each property. Only the remaining corporate expenses that were not related to an operating property were retained in the Corporate expense category.

Under our new methodology, only corporate expenses that are directly attributable to a property were allocated to each applicable property. All other costs incurred relating to management and consulting services provided by corporate headquarters to the properties are now allocated to those properties based on their respective share of the monthly consolidated net revenues in the form of a management fee. The corporate management fee is excluded in the calculation of segment Adjusted EBITDA and is completely eliminated in any consolidated financial results. The change in methodology increases Adjusted EBITDA and the related margin for the reportable segments with a corresponding increase in corporate expense, resulting in no impact to Consolidated Adjusted EBITDA or the related margin. For the quarter ended September 30, 2013, the change in the corporate expense allocation methodology resulted in an increase in corporate expense of $8.3 million, and increases in segment Adjusted EBITDA of $5.8 million and $2.5 million for the South and Midwest segments, respectively.

Consolidated Overview

In the 2013 third quarter, consolidated revenues increased by $162.8 million, or 63.5% year over year to $418.9 million, and Consolidated Adjusted EBITDA was $102.6 million, an increase of $37.4 million, or 57.5%, year over year. The third quarter of 2013 results reflect revenues of $150.4 million and Adjusted EBITDA of $49.0 million from the operations of Ameristar for the 49 days that followed the completion of the transaction on August 13, 2013 and the removal of Lumiere for all periods presented, which is being divested and now accounted for as a discontinued operation. For the quarter ended September 30, 2013, we reported a loss from continuing operations of $47.1 million.


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Segment comparison of the three and nine months ended September 30, 2013 and 2012

South Segment
                   For the three months ended                             For the nine months ended
                          September 30,            Percentage change            September 30,            Percentage change
                       2013            2012          2013 vs. 2012           2013            2012          2013 vs. 2012
                                                                (in millions)
Gaming revenues   $       171.4     $   142.5               20.3 %      $      491.9     $    417.0               18.0 %
Total revenues            192.2         160.4               19.8 %             549.8          465.7               18.1 %
Operating income           30.4          24.6               23.6 %              95.5           95.3                0.2 %
Adjusted EBITDA            56.5          45.0               25.6 %             150.4          136.6               10.1 %

For the three months ended September 30, 2013, the South segment's total revenues increased by $31.8 million (19.9%) year over year to $192.2 million. Adjusted EBITDA increased by $11.5 million (25.6%), to $56.5 million. The South segment's Adjusted EBITDA margin was 29.4%, an increase of 1.3 percentage points year over year. Ameristar Vicksburg contributed total revenues of $13.8 million and Adjusted EBITDA of $5.6 million during the 49 days it was included in the South segment results.

In the 2013 third quarter, L'Auberge Lake Charles produced strong revenue and cash flow performance, Boomtown New Orleans saw continued operational improvement from cost containment initiatives and L'Auberge Baton Rouge continued to ramp up its revenue and margin performance. Boomtown Bossier was adversely impacted by the addition of a new competitor in the Bossier City/Shreveport gaming market in June 2013.
For the nine months ended September 30, 2013, the South segment's year-over-year improvements were primarily due to Baton Rouge providing a full nine months of operating results as compared to one month in 2012, and the acquisition of the Vicksburg property. The South segment's nine-month results were negatively impacted by Bossier's new competitor and generally soft revenue performance throughout the market that was particularly evident in early 2013.


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Midwest Segment
                      For the three months ended      Percentage       For the nine months ended    Percentage
                            September 30,               change               September 30,            change
                         2013             2012       2013 vs. 2012        2013            2012     2013 vs. 2012
                                                           (in millions)
Gaming revenues     $       175.0     $     83.2         110.3 %     $      330.5     $    247.0       33.8 %
Total revenues              194.5           95.6         103.5 %            368.7          282.1       30.7 %
Operating income             36.0           17.4         106.9 %             64.2           47.3       35.7 %
Adjusted EBITDA              55.3           25.9         113.5 %            100.4           73.4       36.8 %

In the Midwest segment, total revenues increased by $98.9 million (103.5%) year over year to $194.5 million in the 2013 third quarter. Adjusted EBITDA increased by $29.4 million (113.5%), to $55.3 million. The Midwest segment's Adjusted EBITDA margin was 28.4%, an increase of 1.3 percentage points year over year. During the three months ended September 30, 2013, the Midwest segment's metrics improved year over year mostly as a result of the acquisition of the Ameristar properties, which contributed $106.3 million in total revenues, $24.4 million in operating income, and $33.4 million in Adjusted EBITDA in the period following the acquisition date.
In the 2013 third quarter, Midwest segment results were negatively affected by a challenging revenue environment in the St. Louis gaming market, which impacted the operating performance of both River City and Ameristar St. Charles. In addition, Belterra experienced year over year declines in its key metrics as a result of a new competitor in Cincinnati, Ohio ramping up its operations. The new facility opened in March 2013.
For the nine months ended September 30, 2013, the Midwest segment's year-over-year improvements were due to the acquisition of the Ameristar properties. The Midwest segment's nine-month results were negatively affected by soft market conditions, a new competitor in Cincinnati, Ohio, and the decline in the overall St. Louis market.

West Segment
                     For the three months ended      Percentage      For the nine months ended       Percentage
                           September 30,               change              September 30,               change
                                                      2013 vs.                                        2013 vs.
                        2013             2012           2012            2013             2012           2012
                                                          (in millions)
Gaming revenues   $         25.2     $         -             NA   $         25.2     $         -             NA
Total revenues              30.3               -             NA             30.3               -             NA
Operating income             7.6               -             NA              7.6               -             NA
Adjusted EBITDA             10.6               -             NA             10.6               -             NA

For the three and nine months ended September 30, 2013, our West segment's total revenues were $30.3 million and Adjusted EBITDA was $10.6 million. The segment's Adjusted EBITDA margin was 35.0%. The incorporation of financial results from Ameristar's properties comprised 100% of the total West segment results.

Severe weather and flooding constrained visitation to Ameristar Black Hawk in September 2013, which negatively affected the property's operating performance and West segment results.

Corporate expenses and Other

Corporate expenses and Other, which is principally comprised of corporate overhead expenses, as well as the Heartland Poker Tour and the Retama Park management operations, increased by $14.0 million year over year to $19.8 million in the 2013 third quarter. The increase in corporate overhead expenses was driven by the acquisition of Ameristar, an increase to legal reserves in the 2013 third quarter, and the change in allocation methodology for corporate expenses described above.


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Other factors affecting loss from continuing operations The following is a description of the other costs and benefits affecting income from continuing operations for the three and nine months ended September 30, 2013 and 2012, respectively:

                    For the three months ended September      Percentage                                                      Percentage
                                     30,                        change          For the nine months ended September 30,         change
                         2013                  2012          2013 vs. 2012           2013                     2012           2013 vs. 2012
                                                                        (in millions)
Other (costs)
benefits:
Corporate expenses $      (19.8 )       $           (5.8 )       241.4 %     $           (31.2 )       $           (16.1 )        93.8 %
Depreciation and
amortization              (39.5 )                  (19.1 )       106.8 %                 (85.2 )                   (54.5 )        56.3 %
Pre-opening and
development costs         (63.1 )                  (11.5 )       448.7 %                 (87.9 )                   (18.4 )       377.7 %
Share-based
compensation
expense                    (3.1 )                   (1.6 )        93.8 %                  (8.2 )                    (7.0 )        17.1 %
Write-downs,
reserves and
recoveries, net           (12.1 )                   (0.1 )          NM                   (14.3 )                    (0.2 )          NM
Loss from equity
method investment             -                     (1.4 )          NM                   (92.2 )                    (4.2 )          NM
Loss on early
extinguishment of
debt                      (30.8 )                      -            NM                   (30.8 )                   (20.7 )        48.8 %
Interest expense,
net                       (48.5 )                  (23.0 )       110.9 %                (105.4 )                   (67.3 )        56.6 %
Income tax benefit
(expense)                  47.4                     (1.7 )          NM                    51.8                      (3.7 )          NM

NM - Not Meaningful

Corporate expenses increased in the three and nine months ended September 2013 due to the acquisition of Ameristar and the change in allocation methodology for corporate expenses described above.

Depreciation and amortization expense increased for the three and nine months . . .

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