EXHIBIT 99
Supplemental Discussion of Financial Harrah’s Operating Company Results
On January 28, 2008, Harrah’s Entertainment was acquired by affiliates of Apollo Global Management, LLC (“Apollo”) and TPG Capital, LP (“TPG”) in an all cash transaction, hereinafter referred to as the “Acquisition.” A substantial portion of the financing of the Acquisition is comprised of bank and bond financing obtained by Harrah’s Operating Company, Inc. (“HOC”), a wholly-owned subsidiary of Harrah’s Entertainment. This financing is neither secured nor guaranteed by Harrah’s Entertainment’s other wholly-owned subsidiaries, including certain subsidiaries that own properties that are secured under $5,551.5 million of commercial mortgage-backed securities (“CMBS”) financing. Therefore, we believe it is meaningful to provide financial information pertaining solely to the consolidated financial position and results of operations of HOC and its subsidiaries.
OPERATING RESULTS FOR HOC
Overall HOC Results
The following tables represent HOC’s unaudited condensed combined balance sheet as of March 31, 2010, and its unaudited condensed combined statements of operations for the quarters ended March 31, 2010 and March 31, 2009. Also included are the unaudited condensed combined statements of cash flow for the quarters ended March 31, 2010 and March 31, 2009.
Harrah’s Operating Company, Inc.
Condensed Combined Balance Sheet
As of March 31, 2010
(Unaudited)
(In millions) | HOC(1) | HET Parent and Other Harrah’s Entertainment Subsidiaries and Accounts(2) | Harrah’s Entertainment(3) | |||||||
ASSETS | ||||||||||
Current assets | ||||||||||
Cash and cash equivalents | $ | 567.4 | $ | 379.3 | $ | 946.7 | ||||
Receivables, net of allowance for doubtful accounts | 338.2 | (11.1 | ) | 327.1 | ||||||
Deferred income taxes | 128.3 | 19.0 | 147.3 | |||||||
Prepayments and other | 146.0 | 56.2 | 202.2 | |||||||
Inventories | 38.8 | 11.3 | 50.1 | |||||||
Total current assets | 1,218.7 | 454.7 | 1,673.4 | |||||||
Land, buildings, riverboats and equipment, net of accumulated depreciation | 12,781.3 | 5,449.5 | 18,230.8 | |||||||
Assets held for sale | 4.7 | — | 4.7 | |||||||
Goodwill | 1,788.3 | 1,689.4 | 3,477.7 | |||||||
Intangible assets | 4,309.5 | 602.7 | 4,912.2 | |||||||
Deferred charges and other | 721.3 | 243.8 | 965.1 | |||||||
Intercompany receivables | 235.0 | (235.0 | ) | — | ||||||
| $ | 21,058.8 | $ | 8,205.1 | $ | 29,263.9 | |||||
LIABILITIES AND STOCKHOLDER’S EQUITY | ||||||||||
Current liabilities | ||||||||||
Accounts payable | $ | 209.5 | $ | 37.7 | $ | 247.2 | ||||
Interest payable | 396.4 | (11.1 | ) | 385.3 | ||||||
Accrued expenses | 744.1 | 363.7 | 1,107.8 | |||||||
Current portion of long-term debt | 76.9 | — | 76.9 | |||||||
Total current liabilities | 1,426.9 | 390.3 | 1,817.2 | |||||||
Long-term debt | 14,286.2 | 4,966.5 | 19,252.7 | |||||||
Deferred credits and other | 920.9 | 22.1 | 943.0 | |||||||
Deferred income taxes | 3,971.1 | 1,746.6 | 5,717.7 | |||||||
| 20,605.1 | 7,125.5 | 27,730.6 | ||||||||
Total Harrah’s Operating Company, Inc. Stockholder’s equity | 409.5 | 1,078.5 | 1,488.0 | |||||||
Non-controlling interests | 44.2 | 1.1 | 45.3 | |||||||
Total Stockholder’s equity | 453.7 | 1,079.6 | 1,533.3 | |||||||
| $ | 21,058.8 | $ | 8,205.1 | $ | 29,263.9 | |||||
| (1) | Represents the financial information of HOC. |
| (2) | Represents the combination of the parent company of Harrah’s Entertainment and the financial information of subsidiaries of Harrah’s Entertainment that are not a component of HOC, primarily, captive insurance companies and the CMBS properties. |
| (3) | Represents the financial information of Harrah’s Entertainment, Inc. |
| (4) | Long-term debt for HET Parent and Other Harrah’s Entertainment Subsidiaries totals $5,551.5 million. The amount of $4,966.5 million shown above is presented net of approximately $585.0 million of long-term debt outstanding for HOC which is payable to an HET subsidiary. |
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Harrah’s Operating Company, Inc.
Condensed Combined Statement of Operations
For the Quarter Ended March 31, 2010
(Unaudited)
(In millions) | HOC(1) | HET Parent and Other Harrah’s Entertainment Subsidiaries and Accounts(2) | Harrah’s Entertainment(3) | |||||||||
Revenues | ||||||||||||
Casino | $ | 1,429.2 | $ | 320.8 | $ | 1,750.0 | ||||||
Food and beverage | 251.4 | 122.6 | 374.0 | |||||||||
Rooms | 163.4 | 105.0 | 268.4 | |||||||||
Management fees | 13.1 | — | 13.1 | |||||||||
Other | 106.5 | 24.5 | 131.0 | |||||||||
Less: casino promotional allowances | (252.7 | ) | (95.4 | ) | (348.1 | ) | ||||||
Net revenues | 1,710.9 | 477.5 | 2,188.4 | |||||||||
Operating expenses | ||||||||||||
Direct | ||||||||||||
Casino | 827.2 | 160.4 | 987.6 | |||||||||
Food and beverage | 88.4 | 56.2 | 144.6 | |||||||||
Rooms | 34.3 | 24.9 | 59.2 | |||||||||
Property, general, administrative and other | 364.7 | 138.6 | 503.3 | |||||||||
Depreciation and amortization | 129.8 | 39.9 | 169.7 | |||||||||
Project opening costs | 0.7 | — | 0.7 | |||||||||
Write-downs, reserves and recoveries | 5.3 | 7.2 | 12.5 | |||||||||
Equity in loss on interests in non-consolidated affiliates | 0.6 | — | 0.6 | |||||||||
Corporate expense | 27.0 | 7.5 | 34.5 | |||||||||
Acquisition and integration costs | 7.2 | — | 7.2 | |||||||||
Amortization of intangible assets | 27.8 | 14.9 | 42.7 | |||||||||
Total operating expenses | 1,513.0 | 449.6 | 1,962.6 | |||||||||
Income from operations | 197.9 | 27.9 | 225.8 | |||||||||
Interest expense, net of interest capitalized | (447.8 | ) | (43.7 | ) | (491.5 | ) | ||||||
Losses on early extinguishments of debt, net | — | (47.4 | ) | (47.4 | ) | |||||||
Other income, including interest income | 14.5 | 0.1 | 14.6 | |||||||||
Loss from continuing operations before income taxes | (235.4 | ) | (63.1 | ) | (298.5 | ) | ||||||
Benefit for income taxes | 72.4 | 32.5 | 104.9 | |||||||||
Net loss | (163.0 | ) | (30.6 | ) | (193.6 | ) | ||||||
Less: net income attributable to non-controlling interests | (2.1 | ) | 0.1 | (2.0 | ) | |||||||
Net loss attributable to Harrah’s Operating Company, Inc. | $ | (165.1 | ) | $ | (30.5 | ) | $ | (195.6 | ) | |||
| (1) | Represents the financial information of HOC. |
| (2) | Represents the combination of the parent company of Harrah’s Entertainment and the financial information of subsidiaries of Harrah’s Entertainment that are not a component of HOC, primarily, captive insurance companies and the CMBS properties. |
| (3) | Represents the consolidated financial information of Harrah’s Entertainment, Inc. |
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Harrah’s Operating Company, Inc.
Condensed Combined Statement of Operations
For the Quarter Ended March 31, 2009
(Unaudited)
(In millions) | HOC(1) | HET Parent and Other Harrah’s Entertainment Subsidiaries and Accounts(2) | Harrah’s Entertainment(3) | |||||||||
Revenues | ||||||||||||
Casino | $ | 1,470.6 | $ | 341.6 | $ | 1,812.2 | ||||||
Food and beverage | 237.0 | 133.9 | 370.9 | |||||||||
Rooms | 161.7 | 113.0 | 274.7 | |||||||||
Management fees | 13.4 | — | 13.4 | |||||||||
Other | 106.3 | 33.2 | 139.5 | |||||||||
Less: casino promotional allowances | (255.2 | ) | (100.8 | ) | (356.0 | ) | ||||||
Net revenues | 1,733.8 | 520.9 | 2,254.7 | |||||||||
Operating expenses | ||||||||||||
Direct | ||||||||||||
Casino | 828.3 | 165.0 | 993.3 | |||||||||
Food and beverage | 83.6 | 60.2 | 143.8 | |||||||||
Rooms | 27.7 | 24.3 | 52.0 | |||||||||
Property, general, administrative and other | 371.0 | 133.3 | 504.3 | |||||||||
Depreciation and amortization | 134.0 | 38.4 | 172.4 | |||||||||
Project opening costs | 1.8 | 0.2 | 2.0 | |||||||||
Write-downs, reserves and recoveries | 17.9 | 9.5 | 27.4 | |||||||||
Income on interests in non-consolidated affiliates | (0.9 | ) | 0.7 | (0.2 | ) | |||||||
Corporate expense | 23.1 | 7.2 | 30.3 | |||||||||
Acquisition and integration costs | 0.2 | — | 0.2 | |||||||||
Amortization of intangible assets | 28.9 | 14.9 | 43.8 | |||||||||
Total operating expenses | 1,515.6 | 453.7 | 1,969.3 | |||||||||
Income from operations | 218.2 | 67.2 | 285.4 | |||||||||
Interest expense, net of interest capitalized | (430.3 | ) | (66.5 | ) | (496.8 | ) | ||||||
Gain on early extinguishments of debt, net | 1.2 | — | 1.2 | |||||||||
Other income, including interest income | 8.2 | 0.3 | 8.5 | |||||||||
(Loss)/income from continuing operations before income taxes | (202.7 | ) | 1.0 | (201.7 | ) | |||||||
Benefit for income taxes | 73.9 | 0.4 | 74.3 | |||||||||
Net (loss)/income from continuing operations | (128.8 | ) | 1.4 | (127.4 | ) | |||||||
Discontinued operations, net | (0.1 | ) | — | (0.1 | ) | |||||||
Net (loss)/income | (128.9 | ) | 1.4 | (127.5 | ) | |||||||
Less: net income attributable to non-controlling interests | (3.9 | ) | (1.3 | ) | (5.2 | ) | ||||||
Net (loss)/income attributable to Harrah’s Operating Company, Inc. | $ | (132.8 | ) | $ | 0.1 | $ | (132.7 | ) | ||||
| (1) | Represents the financial information of HOC. |
| (2) | Represents the combination of the parent company of Harrah’s Entertainment and the financial information of subsidiaries of Harrah’s Entertainment that are not a component of HOC, primarily, captive insurance companies and the CMBS properties. |
| (3) | Represents the consolidated financial information of Harrah’s Entertainment, Inc. |
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Harrah’s Operating Company, Inc.
Condensed Combined Statement of Cash Flows
For the March 31, 2010
(Unaudited)
(In millions) | HOC(1) | HET Parent and Other Harrah’s Entertainment Subsidiaries and Accounts(2) | Harrah’s Entertainment(3) | |||||||||
Cash flows provided by operating activities | $ | 51.4 | $ | 110.9 | $ | 162.3 | ||||||
Cash flows provided by/(used in) investing activities | ||||||||||||
Land, buildings, riverboats and equipment additions, net of change in construction payables | (27.3 | ) | (8.4 | ) | (35.7 | ) | ||||||
Additional investment in subsidiaries | (18.8 | ) | — | (18.8 | ) | |||||||
Payment made for partnership interest | (19.5 | ) | — | (19.5 | ) | |||||||
Cash acquired in business acquisition | 31.8 | — | 31.8 | |||||||||
Proceeds from other asset sales | 12.5 | — | 12.5 | |||||||||
Other | (2.7 | ) | (1.2 | ) | (3.9 | ) | ||||||
Cash flows used in investing activities | (24.0 | ) | (9.6 | ) | (33.6 | ) | ||||||
Cash flows provided by/(used in) financing activities | ||||||||||||
Borrowings under lending agreements | 545.0 | — | 545.0 | |||||||||
Debt issuance costs | (0.1 | ) | (2.2 | ) | (2.3 | ) | ||||||
Repayments under lending agreements | (472.0 | ) | — | (472.0 | ) | |||||||
Scheduled debt retirements | (159.5 | ) | — | (159.5 | ) | |||||||
Non-controlling interests’ distributions, net of contributions | (1.5 | ) | 0.1 | (1.4 | ) | |||||||
Other | (1.7 | ) | (0.3 | ) | (2.0 | ) | ||||||
Transfers from/(to) affiliates | 56.6 | (56.6 | ) | — | ||||||||
Cash flows used in financing activities | (33.2 | ) | (59.0 | ) | (92.2 | ) | ||||||
Effect of deconsolidation of variable interest entities | 4.4 | (12.3 | ) | (7.9 | ) | |||||||
Net (decrease)/increase in cash and cash equivalents | (1.4 | ) | 30.0 | 28.6 | ||||||||
Cash and cash equivalents, beginning of period | 568.8 | 349.3 | 918.1 | |||||||||
Cash and cash equivalents, end of period | $ | 567.4 | $ | 379.3 | $ | 946.7 | ||||||
| (1) | Represents the financial information of HOC. |
| (2) | Represents the combination of the parent company of Harrah’s Entertainment and the financial information of subsidiaries of Harrah’s Entertainment that are not a component of HOC, primarily, captive insurance companies and the CMBS properties. |
| (3) | Represents the consolidated financial information of Harrah’s Entertainment, Inc. |
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Harrah’s Operating Company, Inc.
Condensed Combined Statement of Cash Flows
For the Quarter Ended March 31, 2009
(Unaudited)
(In millions) | HOC(1) | HET Parent and Other Harrah’s Entertainment Subsidiaries and Accounts(2) | Harrah’s Entertainment(3) | |||||||||
Cash flows (used in)/provided by operating activities | $ | (100.6 | ) | $ | 78.6 | $ | (22.0 | ) | ||||
Cash flows provided by/(used in) investing activities | ||||||||||||
Land, buildings, riverboats and equipment additions, net of change in construction payables | (131.5 | ) | (12.5 | ) | (144.0 | ) | ||||||
Proceeds from other asset sales | 34.2 | — | 34.2 | |||||||||
Other | (2.9 | ) | (1.0 | ) | (3.9 | ) | ||||||
Cash flows used in investing activities | (100.2 | ) | (13.5 | ) | (113.7 | ) | ||||||
Cash flows provided by/(used in) financing activities | ||||||||||||
Borrowings under lender agreements | 1,355.1 | — | 1,355.1 | |||||||||
Debt issuance costs | (0.8 | ) | — | (0.8 | ) | |||||||
Repayments under lending agreements | (85.0 | ) | — | (85.0 | ) | |||||||
Cash paid in connection with early extinguishments of debt | (1.5 | ) | — | (1.5 | ) | |||||||
Scheduled debt retirements | (23.2 | ) | — | (23.2 | ) | |||||||
Non-controlling interests’ distributions, net of contributions | (1.3 | ) | (0.7 | ) | (2.0 | ) | ||||||
Other | 2.1 | — | 2.1 | |||||||||
Transfers (to)/from affiliates | (177.8 | ) | 177.8 | — | ||||||||
Cash flows provided by financing activities | 1,067.6 | 177.1 | 1,244.7 | |||||||||
Cash flows from discontinued operations | ||||||||||||
Cash flows from operating activities | (0.1 | ) | — | (0.1 | ) | |||||||
Cash flows provided by/(used in) financing activities | (0.1 | ) | — | (0.1 | ) | |||||||
Net increase in cash and cash equivalents | 866.7 | 242.2 | 1,108.9 | |||||||||
Cash and cash equivalents, beginning of period | 447.4 | 203.1 | 650.5 | |||||||||
Cash and cash equivalents, end of period | $ | 1,314.1 | $ | 445.3 | $ | 1,759.4 | ||||||
| (1) | Represents the financial information of HOC. |
| (2) | Represents the combination of the parent company of Harrah’s Entertainment and the financial information of subsidiaries of Harrah’s Entertainment that are not a component of HOC, primarily, captive insurance companies and the CMBS properties. |
| (3) | Represents the consolidated financial information of Harrah’s Entertainment, Inc. |
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REGIONAL AGGREGATION
The executive officers of our Company review operating results, assess performance and make decisions related to the allocation of resources on a property-by-property basis. We, therefore, believe that each property is an operating segment and that it is appropriate to aggregate and present the operations of our Company as one reportable segment. In order to provide more meaningful information than would be possible on a consolidated basis, our properties (as of March 31, 2010, or as otherwise noted below) have been grouped as follows to facilitate discussion of our operating results:
Las Vegas | Atlantic City | Louisiana/Mississippi | Iowa/Missouri | |||
Caesars Palace | Showboat Atlantic City | Harrah’s New Orleans | Harrah’s St. Louis | |||
Bally’s Las Vegas | Caesars Atlantic City | Harrah’s Louisiana Downs | Harrah’s North Kansas City | |||
Imperial Palace | Bally’s Atlantic City | Horseshoe Bossier City | Harrah’s Council Bluffs | |||
Bill’s Gamblin’ Hall & Saloon | Harrah’s Chester(2) | Grand Biloxi | Horseshoe Council Bluffs/ | |||
| Planet Hollywood Resort & Casino(1) | Tunica Roadhouse Hotel & Casino | Bluffs Run | ||||
| Horseshoe Tunica | ||||||
| Harrah’s Tunica |
Illinois/Indiana | Other Nevada | Managed and International | ||
Horseshoe Southern Indiana | Harrah’s Reno | Harrah’s Ak-Chin(4) | ||
Harrah’s Joliet(3) | Harrah’s Lake Tahoe | Harrah’s Cherokee(4) | ||
Harrah’s Metropolis | Harvey’s Lake Tahoe | Harrah’s Rincon(4) | ||
Horseshoe Hammond | Conrad Punta del Este(2) | |||
| Casino Windsor(5) | ||||
| London Clubs International(6) |
| (1) | Acquired February 19, 2010. |
| (2) | We have approximately 95 percent ownership interest in this property. |
| (3) | We have an 80 percent ownership interest in and manage this property. |
| (4) | Managed, not owned. |
| (5) | We have a 50 percent interest in Windsor Casino Limited, which manages this property. The province of Ontario owns the complex. |
| (6) | As of March 31, 2010, we operate/manage 10 casino clubs in the provinces of the United Kingdom, 2 in Egypt and 1 in South Africa. |
Overall Summary Statement of Operations Information for HOC
Quarter Results
| Quarter Ended March 31, | Percentage Increase/ (Decrease) | ||||||||||
(In millions) | 2010 | 2009 | |||||||||
Casino revenues | $ | 1,429.2 | $ | 1,470.6 | (2.8 | )% | |||||
Net revenues | 1,710.9 | 1,733.8 | (1.3 | )% | |||||||
Income from operations | 197.9 | 218.2 | (9.3 | )% | |||||||
Loss from continuing operations, net of tax | (163.0 | ) | (128.8 | ) | (26.6 | )% | |||||
Net loss attributable to Harrah’s Operating Company, Inc. | (165.1 | ) | (132.8 | ) | (24.3 | )% | |||||
Operating margin | 11.6 | % | 12.6 | % | (1.0 | ) pts | |||||
N/M = Not Meaningful
Revenues for the quarter ended March 31, 2010, declined primarily due to the continuing impact of the recession on customers’ discretionary spending and reduced aggregate demand, which continued to pressure average daily room rates. Income from operations declined as cost-savings initiatives were unable to offset the earnings impact of the revenue decline.
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Included in income from operations for each grouping are project opening costs and write-downs, reserves and recoveries. Project opening costs include costs incurred in connection with expansion and renovation projects at various properties. Write-downs, reserves and recoveries include various pretax charges to record asset impairments, contingent liability reserves, demolition costs, recoveries of previously recorded non-routine charges and other non-routine transactions.
Las Vegas Results
Quarter Results
(In millions) | Quarter Ended March 31, 2010 | Quarter Ended March 31, 2009 | Percentage Increase/ (Decrease) | ||||||||
Casino revenues | $ | 193.6 | $ | 165.1 | 17.3 | % | |||||
Net revenues | 339.8 | 305.2 | 11.3 | % | |||||||
Income from operations | 56.3 | 48.8 | 15.4 | % | |||||||
Operating margin | 16.6 | % | 16.0 | % | 0.6 | pts | |||||
On February 19, 2010, HOC acquired 100% of the equity interests of PHW Las Vegas, LLC (“PHW Las Vegas”), which owns and operates the Planet Hollywood Resort and Casino (“Planet Hollywood”) located in Las Vegas, Nevada. Net revenues and income from continuing operations before income taxes (excluding transaction costs associated with the acquisition) of Planet Hollywood subsequent to the date of acquisition through March 31, 2010 of $26.3 million and $3.1 million, respectively, are included in consolidated results from operations for the quarter ended March 31, 2010.
For the quarter ended March 31, 2010, revenues and income from operations were higher than in the comparable quarter of the prior year, driven primarily by higher customer spend per trip, combined with the inclusion of results related to the 2010 acquisition of Planet Hollywood. Same-store net revenues, which excludes revenues resulting from the acquisition of Planet Hollywood, increased by 2.7 percent in the 2010 first quarter when compared to the prior year. Although hotel occupancy remained strong, average room rates declined due to increased room inventory on the market. Income from operations for the quarter ended March 31, 2010 improved over the comparable period of 2009 due to the earnings impact of the increased revenues.
An expansion and renovation of Caesars Palace Las Vegas was completed in stages during 2009 on the Octavius Tower, a new hotel tower with 110,000 square feet of additional meeting and convention space, three 10,000-square-foot luxury villa suites and an expanded pool and garden area. We have deferred completion of approximately 660 rooms, including 75 luxury suites, in the hotel tower expansion as a result of current economic conditions impacting the Las Vegas tourism sector. The convention center and the remainder of the expansion project, other than the deferred rooms, was completed during 2009. The Company has incurred capital expenditures of approximately $646.7 million on this project through March 31, 2010, and does not expect to incur significant additional capital expenditures on this project until construction on the deferred rooms is resumed.
Atlantic City Results
Quarter Results
(In millions) | Quarter Ended March 31, 2010 | Quarter Ended March 31, 2009 | Percentage Increase/ (Decrease) | ||||||||
Casino revenues | $ | 322.7 | $ | 357.5 | (9.7 | )% | |||||
Net revenues | 342.1 | 369.8 | (7.5 | )% | |||||||
Income from operations | 9.5 | 25.3 | (62.5 | )% | |||||||
Operating margin | 2.8 | % | 6.8 | % | (4.0 | ) pts | |||||
Revenues for the quarter ended March 31, 2010 were lower than in the comparable prior year quarter due to reduced visitation and spend per trip, plus unusually harsh winter storms. For the quarter ended March 31, 2010, cost savings initiatives were unable to offset increased marketing expenses and the earnings impact of reduced revenues, which contributed to the 2010 decline in income from operations.
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Louisiana/Mississippi Results
Quarter Results
(In millions) | Quarter Ended March 31, 2010 | Quarter Ended March 31, 2009 | Percentage Increase/ (Decrease) | ||||||||
Casino revenues | $ | 282.5 | $ | 306.2 | (7.7 | )% | |||||
Net revenues | 307.0 | 334.5 | (8.2 | )% | |||||||
Income from operations | 32.3 | 58.3 | (44.6 | )% | |||||||
Operating margin | 10.5 | % | 17.4 | % | (6.9 | ) pts | |||||
Revenues for the quarter ended March 31, 2010 from our properties in Louisiana and Mississippi were lower than the comparable prior year quarter driven by lower visitation and customer spend per trip. Income from operations was lower than in the 2009 first quarter as cost-savings initiatives were unable to offset increased marketing expenses and the earnings impact of reduced revenues.
Construction began in third quarter 2007 on Margaritaville Casino & Resort in Biloxi. We have halted construction on this project, and will continue to review and refine the project in light of the current economic environment, market conditions on the Gulf Coast and the current financing environment. We license the Margaritaville name from an entity affiliated with the singer/songwriter Jimmy Buffett. As of March 31, 2010, $178.5 million had been spent on this project.
Iowa/Missouri Results
Quarter Results
(In millions) | Quarter Ended March 31, 2010 | Quarter Ended March 31, 2009 | Percentage Increase/ (Decrease) | ||||||||
Casino revenues | $ | 175.7 | $ | 181.4 | (3.1 | )% | |||||
Net revenues | 187.6 | 193.6 | (3.1 | )% | |||||||
Income from operations | 47.5 | 47.8 | (0.6 | )% | |||||||
Operating margin | 25.3 | % | 24.7 | % | 0.6 | pts | |||||
Revenues for the quarter ended March 31, 2010 at our Iowa and Missouri properties were slightly lower compared to the same period last year due to new competition in the market and the continuing impact of the weak economy. Income from operations remained relatively consistent compared with the 2009 first quarter as cost savings initiatives across all properties within the region helped offset the earnings impact of the revenue decline.
Illinois/Indiana Results
Quarter Results
(In millions) | Quarter Ended March 31, 2010 | Quarter Ended March 31, 2009 | Percentage Increase/ (Decrease) | ||||||||
Casino revenues | $ | 297.9 | $ | 305.4 | (2.5 | )% | |||||
Net revenues | 297.0 | 303.3 | (2.1 | )% | |||||||
Income from operations | 38.9 | 36.4 | 6.9 | % | |||||||
Operating margin | 13.1 | % | 12.0 | % | 1.1 | pts | |||||
Revenues declined slightly in the quarter ended March 31, 2010 due to the continuing impact of the weak economy. Included in income from operations for the prior year was the write-down of assets of $6.9 million at the Company’s Horseshoe Hammond property. Prior to the consideration of this charge, income from operations in first quarter 2010 declined when compared to 2009 as cost savings initiatives were insufficient to offset the earnings impact of the revenue decline.
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Other Nevada Results
Quarter Results
(In millions) | Quarter Ended March 31, 2010 | Quarter Ended March 31, 2009 | Percentage Increase/ (Decrease) | ||||||||
Casino revenues | $ | 53.9 | $ | 57.6 | (6.4 | )% | |||||
Net revenues | 72.7 | 78.1 | (6.9 | )% | |||||||
Income from operations | 1.9 | 1.1 | 72.7 | % | |||||||
Operating margin | 2.6 | % | 1.4 | % | 1.2 | pts | |||||
For the quarter ended March 31, 2010, revenues from our Nevada properties outside of Las Vegas were lower than in the 2009 period due to lower customer spend per trip. In the first quarter 2010, the impact of lower revenues on income from operations was more than offset by cost savings initiatives implemented at the properties.
Managed and International
Quarter Results
(In millions) | Quarter Ended March 31, 2010 | Quarter Ended March 31, 2009 | Percentage Increase/ (Decrease) | ||||||
Revenues | |||||||||
Managed | $ | 12.5 | $ | 13.4 | (6.7 | )% | |||
International | 117.7 | 110.6 | 6.4 | % | |||||
Total revenues | $ | 130.2 | $ | 124.0 | 5.0 | % | |||
Income from operations | |||||||||
Managed | $ | 4.0 | $ | 3.3 | 21.2 | % | |||
International | 11.4 | 8.8 | 29.5 | % | |||||
Total income from operations | $ | 15.4 | $ | 12.1 | 27.3 | % | |||
Managed and international include income from our managed properties and results of our international properties. Revenues from our Managed and International properties rose in the 2010 first quarter due to strong volumes at our Uruguay property and favorable foreign exchange impact in the London Clubs businesses. Income from operations increased in the 2010 first quarter compared to 2009 as a result of the earnings impact of increased revenues.
Other Factors Affecting Net Income
Quarter Results
(In millions) Expense/(income) | Quarter Ended March 31, 2010 | Quarter Ended March 31, 2009 | Percentage Increase/ (Decrease) | ||||||||||
Corporate expense | $ | 27.0 | $ | 23.1 | 16.9 | % | |||||||
Write-downs, reserves and recoveries | 5.3 | 17.9 | (70.4 | )% | |||||||||
Acquisition and integration costs | 7.2 | 0.2 | N/M | ||||||||||
Amortization of intangible assets | 27.8 | 28.9 | (3.8 | )% | |||||||||
Interest expense, net | 447.8 | 430.3 | 4.1 | % | |||||||||
Gains on early extinguishments of debt | — | (1.2 | ) | N/M | |||||||||
Other income | (14.5 | ) | (8.2 | ) | 76.8 | % | |||||||
Benefit for income taxes | (72.4 | ) | (73.9 | ) | (2.0 | )% | |||||||
Income attributable to non-controlling interests | 2.1 | 3.9 | (46.2 | )% | |||||||||
N/M = Not Meaningful
Corporate expense increased in the quarter ended March 31, 2010 from the same period in 2009 due to increased marketing expenditures.
Write-downs, reserves and recoveries include various pretax charges to record certain long-lived tangible asset impairments, contingent liability reserves, demolition costs, recoveries of previously recorded non-routine reserves and other non-routine
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transactions. Given the nature of the transactions included within write-downs, reserves and recoveries, these amounts are not expected to be comparable from year-to-year, nor are the amounts expected to follow any particular trend from year-to-year. For the quarter ended March 31, 2010, total write-downs, reserves and recoveries were $5.3 million, a reduction of $12.6 million recorded during the comparable quarter of 2009. Amounts incurred during the quarter ended March 31, 2010 for remediation costs were $8.8 million, and increased by $8.3 million when compared to the first quarter of 2009. Partially offsetting these charges was the release of a $4.8 million reserve for excise tax for which the statute of limitations had recently expired.
Acquisition and integration costs in 2010 include costs incurred in connection with our acquisition of PHW Las Vegas.
Amortization of intangible assets was slightly lower in the quarter ended March 31, 2010 when compared to the same period in 2009 due to lower intangible asset balances as a result of certain contract rights being fully amortized during 2009.
Interest expense increased by $17.5 million for the quarter ended March 31, 2010 compared to the same period in 2009 primarily due to changes in the variable rates received under our interest rate swap agreements. Interest expense for the quarter ended March 31, 2010, as a result of interest rate swap agreements, includes (i) $3.6 million of expense due to measured ineffectiveness and amounts excluded from effectiveness testing; and (ii) $2.4 million of expense due to amortization of deferred losses frozen in other comprehensive income.
As a result of the cancellation of our debt investment in certain predecessor entities of PHW Las Vegas in exchange for the equity of PHW Las Vegas, the Company recognized a gain of $7.1 million to adjust our investment to reflect the estimated fair value of consideration paid for the acquisition. This gain is reflected in Other income, including interest income, in the Statement of Operations for the quarter ended March 31, 2010. In addition, other income for all periods presented included insurance policy proceeds related to the Company’s deferred compensation plan.
For the 2010 first quarter, HOC recorded a tax benefit of $72.4 million on pre-tax loss from continuing operations of $235.4 million (an effective tax rate of 30.8 percent), compared with a tax benefit of $73.9 million on a pre-tax loss from continuing operations of $202.7 million in the 2009 first quarter (an effective tax rate of 36.5 percent). The primary differences between HOC’s first-quarter 2010 recorded benefit and the benefit that would have resulted from applying the U.S. statutory tax rate of 35 percent to HOC’s pre-tax loss from continuing operations are the effects of state income tax benefits and other adjustments.
LIQUIDITY AND CAPITAL RESOURCES
Cost Savings Initiatives
In light of the severe economic downturn and adverse conditions in the travel and leisure industry generally, Harrah’s Entertainment has undertaken a comprehensive cost reduction effort to right-size expenses with business levels. Beginning in August 2008, the program includes organizational restructurings at our corporate and property operations, reduction of employee travel and entertainment expenses, rationalization of our corporate-wide marketing expenses, procurement and headcount reductions at property operations and corporate offices. To date, Harrah’s Entertainment has identified $683.0 million in estimated cost savings from these initiatives, of which approximately $540.6 million had been realized in the trailing twelve month period ending March 31, 2010.
In accordance with our shared services agreement with Harrah’s Entertainment, $491.7 million of these estimated cost savings and $389.2 million of the trailing twelve months realized cost savings have been allocated to Harrah’s Operating Company, Inc.
Capital Spending and Development
In addition to the development and expansion projects discussed in the “Regional Operating Results” section, we also perform on-going refurbishment and maintenance at our casino entertainment facilities to maintain our quality standards, and we continue to pursue development and acquisition opportunities for additional casino entertainment facilities that meet our strategic and return on investment criteria. Prior to the receipt of necessary regulatory approvals, the costs of pursuing development projects are expensed as incurred. Construction-related costs incurred after the receipt of necessary approvals are capitalized and depreciated over the estimated useful life of the resulting asset. Project opening costs are expensed as incurred.
Our planned development projects, if they go forward, will require, individually and in the aggregate, significant capital commitments and, if completed, may result in significant additional revenues. The commitment of capital, the timing of completion and the commencement of operations of casino entertainment development projects are contingent upon, among other things, negotiation of final agreements and receipt of approvals from the appropriate political and regulatory bodies. We must also comply with covenants and restrictions set forth in our debt agreements. Cash needed to finance projects currently under development as well as additional projects being pursued is expected to be made available from operating cash flows, established debt programs, joint venture partners, specific project financing, guarantees of third-party debt and additional debt offerings. Our capital spending for the quarter ended March 31, 2010, excluding costs related to the acquisition of Planet Hollywood, totaled approximately $27.3 million. Estimated total capital expenditures for 2010 are expected to be between $160 million and $220 million.
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Liquidity
We generate substantial cash flows from operating activities, as reflected on the Consolidated Statements of Cash Flows in our audited consolidated financial statements. We use the cash flows generated by our operations to fund debt service, to reinvest in existing properties for both refurbishment and expansion projects and to pursue additional growth opportunities via new development. When necessary, we supplement the cash flows generated by our operations with funds provided by financing activities to balance our cash requirements.
Our ability to fund our operations, pay our debt obligations and fund planned capital expenditures depends, in part, upon economic and other factors that are beyond our control, and disruptions in capital markets and restrictive covenants related to our existing debt could impact our ability to secure additional funds through financing activities. We believe that our cash and cash equivalents balance, our cash flows from operations and the financing sources discussed herein will be sufficient to meet our normal operating requirements during the next twelve months and to fund capital expenditures. In addition, we may consider issuing additional debt in the future to refinance existing debt or to finance specific capital projects.
We cannot assure you that our business will generate sufficient cash flows from operations, or that future borrowings will be available to us, to fund our liquidity needs and pay our indebtedness. If we are unable to meet our liquidity needs or pay our indebtedness when it is due, we may have to reduce or delay refurbishment and expansion projects, reduce expenses, sell assets or attempt to restructure our debt. In addition, we have pledged a significant portion of our assets as collateral under certain of our debt agreements, and if any of those lenders accelerate the repayment of borrowings, there can be no assurance that we will have sufficient assets to repay our indebtedness.
Our cash and cash equivalents totaled $567.4 million at March 31, 2010, compared to $568.8 million at December 31, 2009.
Capital Resources
The majority of our debt is due in 2015 and beyond. Payments of short-term debt obligations and other commitments are expected to be made from operating cash flows and from borrowings under our established debt programs. Long-term obligations are expected to be paid through operating cash flows, refinancing of debt, joint venture partners or, if necessary, additional debt offerings.
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The following table presents our debt as of March 31, 2010 and December 31, 2009:
Detail of Debt (dollars in millions) | Final Maturity | Rate(s) at Mar. 31, 2010 | Face Value at Mar. 31, 2010 | Book Value at Mar. 31, 2010 | Book Value at Dec. 31, 2009 | |||||||||||
Credit Facilities and Secured Debt | ||||||||||||||||
Term Loans | ||||||||||||||||
Term Loans B1-B3 | 2015 | 3.25%-3.29% | $ | 5,830.1 | $ | 5,830.1 | $ | 5,835.3 | ||||||||
Term Loans B4 | 2016 | 9.5% | 997.5 | 973.7 | 975.3 | |||||||||||
Revolving Credit Facility | 2014 | 3.23%-3.25% | 500.0 | 500.0 | 427.0 | |||||||||||
Senior Secured Notes | 2017 | 11.25% | 2,095.0 | 2,046.2 | 2,045.2 | |||||||||||
Second-Priority Senior Secured Notes | 2018 | 10.0% | 4,553.1 | 1,975.7 | 1,959.1 | |||||||||||
Second-Priority Senior Secured Notes | 2015 | 10.0% | 214.8 | 152.3 | 150.7 | |||||||||||
Secured debt | 2010 | 6.0% | 25.0 | 25.0 | 25.0 | |||||||||||
Chester Downs term loan | 2016 | 12.375% | 221.4 | 209.1 | 217.2 | |||||||||||
PHW Las Vegas senior secured loan | 2011 | 3.09% | 554.3 | 410.6 | — | |||||||||||
Other, various maturities | various | 4.25%-6.0% | 0.4 | 0.4 | — | |||||||||||
Subsidiary-guaranteed debt | ||||||||||||||||
Senior Notes | 2016 | 10.75% | 478.6 | 478.6 | 478.6 | |||||||||||
Senior PIK Toggle Notes | 2018 | 10.75%/11.5% | 10.0 | 10.0 | 9.4 | |||||||||||
Unsecured Senior Debt | ||||||||||||||||
5.5% | 2010 | 5.5% | 191.6 | 189.1 | 186.9 | |||||||||||
8.0% | 2011 | 8.0% | 13.2 | 12.7 | 12.5 | |||||||||||
5.375% | 2013 | 5.375% | 125.2 | 97.0 | 95.5 | |||||||||||
7.0% | 2013 | 7.0% | 0.6 | 0.7 | 0.7 | |||||||||||
5.625% | 2015 | 5.625% | 791.9 | 565.1 | 557.5 | |||||||||||
6.5% | 2016 | 6.5% | 573.1 | 404.8 | 400.4 | |||||||||||
5.75% | 2017 | 5.75% | 538.8 | 346.4 | 342.8 | |||||||||||
Floating Rate Contingent Convertible Senior Notes | 2024 | 0.5% | 0.2 | 0.2 | 0.2 | |||||||||||
Unsecured Senior Subordinated Notes | ||||||||||||||||
7.875% | 2010 | 7.875% | — | — | 142.5 | |||||||||||
8.125% | 2011 | 8.125% | 12.0 | 11.5 | 11.4 | |||||||||||
Other Unsecured Borrowings | ||||||||||||||||
5.3% special improvement district bonds | 2035 | 5.3% | 68.4 | 68.4 | 68.4 | |||||||||||
Other | Various | Various | 18.0 | 18.0 | 18.0 | |||||||||||
Capitalized Lease Obligations | ||||||||||||||||
6.42%-9.8% | to 2020 | 6.42%-9.8% | 37.5 | 37.5 | 10.0 | |||||||||||
Total debt | 17,850.7 | 14,363.1 | 13,969.6 | |||||||||||||
Current portion of long-term debt | (76.9 | ) | (76.9 | ) | (74.3 | ) | ||||||||||
Long-term debt | $ | 17,773.8 | $ | 14,286.2 | $ | 13,895.3 | ||||||||||
Book values of debt as of March 31, 2010 are presented net of unamortized discounts of $3,487.7 million and unamortized premiums of $0.1 million. As of December 31, 2009, book values are presented net of unamortized discounts of $3,384.6 million and unamortized premiums of $0.1 million.
At March 31, 2010, $191.6 million, face amount, of our 5.5% Senior Notes due July 1, 2010, and $25.0 million, face amount, of our 6.0% Secured Note due July 15, 2010, are classified as long-term in our Consolidated Condensed Balance Sheet because the Company currently has both the intent and the ability to refinance these notes with proceeds from $750 million principal amount of 12.75% Senior Secured notes issued April 16, 2010, discussed further below. Our current maturities of debt include required interim principal payments on each of our Term Loans, our Chester Downs term loan, and the special improvement district bonds.
On April 16, 2010, Harrah’s Operating Escrow LLC and Harrah’s Escrow Corporation (the “Escrow Issuers”), wholly-owned subsidiaries of HOC, completed the offering of $750.0 million aggregate principal amount of 12.75% second-priority senior secured notes due 2018. In connection with the issuance of the notes, on April 16, 2010, we delivered notices of redemption (each, a “Redemption Notice”, and collectively, the “Redemption Notices”) to the holders of our currently outstanding 5.50% Senior Notes due 2010 (the “5.50% Notes”), 8.0% Senior Notes due 2011 (the “8.0% Notes”) and 8.125% Senior Subordinated Notes due 2011 (the “8.125% Notes” and, collectively with the 5.50% Notes and the 8.0% Notes, the “2010/2011 Notes”). The Redemption Notices provide for our redemption on May 20, 2010 (the “Redemption Date”), pursuant to the terms of the indentures relating to the 2010/2011 Notes, of all $17.6 million of 8.125% Notes, $191.6 million of 5.50% Notes and $13.2 million of 8.0% Notes at a redemption price of (a) in the case of the 8.125% Notes, 100% of the principal amount of the 8.125% Notes to be redeemed plus the
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Make-Whole Premium (as defined in the indenture relating to the 8.125% Notes), and (b) in the case of each of the 5.50% Notes and the 8.0% Notes, an amount equal to the greater of (x) 100% of the principal amount of such notes to be redeemed and (y) the sum of the present values of the remaining scheduled payments of principal and interest thereon (not including any portion of such payments of interest accrued as of such Redemption Date) discounted to the Redemption Date on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the Adjusted Treasury Rate (as defined in the applicable indenture), plus 25 basis points, as calculated by an Independent Investment Banker (as defined in the applicable indenture), plus, in the case of both (a) and (b), accrued and unpaid interest on the principal amount being redeemed to the Redemption Date.
Credit Agreement and Incremental Facility Amendment
In connection with the Acquisition, HOC entered into the senior secured credit facilities (the “Credit Facilities”). This financing is neither secured nor guaranteed by Harrah’s Entertainment’s other direct, wholly-owned subsidiaries, including the subsidiaries that own properties that are security for certain real estate loans (the “CMBS Financing”) and certain subsidiaries of HOC that are unrestricted subsidiaries. In late 2009, HOC completed cash tender offers for certain of its outstanding debt, and in connection with these tender offers, HOC borrowed $1,000 million of new term loans under its Credit Facilities pursuant to an incremental amendment (the “Incremental Loans”).
As of March 31, 2010, our Credit Facilities provide for senior secured financing of up to $8,457.6 million, consisting of (i) senior secured term loan facilities in an aggregate principal amount of up to $6,827.6 million with $5,830.1 million maturing on January 20, 2015 and $997.5 million maturing on October 31, 2016, and (ii) a senior secured revolving credit facility in an aggregate principal amount of $1,630.0 million, maturing January 28, 2014, including both a letter of credit sub-facility and a swingline loan sub-facility. The term loans under the Credit Facilities require scheduled quarterly payments of $7.5 million, with the balance due at maturity. A total of $7,327.6 million face amount of borrowings were outstanding under the Credit Facilities as of March 31, 2010, with an additional $133.5 million committed to letters of credit. After consideration of these borrowings and letters of credit, $996.5 million of additional borrowing capacity was available to the Company under its revolving credit facility as of March 31, 2010.
Interest and Fees
Borrowings under the Credit Facilities, other than borrowings under the Incremental Loans, bear interest at a rate equal to the then-current LIBOR rate or at a rate equal to the alternate base rate, in each case plus an applicable margin. As of March 31, 2010, the Credit Facilities, other than borrowings under the Incremental Loans, bore interest at LIBOR plus 300 basis points for the term loans and a portion of the revolver loan, 150 basis points over the alternate base rate for the swingline loan and at the alternate base rate plus 200 basis points for the remainder of the revolver loan.
Borrowings under the Incremental Loans bear interest at a rate equal to either the alternate base rate or the greater of i) the then-current LIBOR rate or ii) 2.0%; in each case plus an applicable margin. At March 31, 2010, borrowings under the Incremental Loans bore interest at the minimum base rate of 2.0%, plus 750 basis points.
In addition, on a quarterly basis, we are required to pay each lender (i) a commitment fee in respect of any unborrowed amounts under the revolving credit facility and (ii) a letter of credit fee in respect of the aggregate face amount of outstanding letters of credit under the revolving credit facility. As of March 31, 2010, the Credit Facilities bore a commitment fee for unborrowed amounts of 50 basis points.
Our outstanding notes (secured and unsecured) have semi-annual interest payments, with the majority of those payments on June 15 and December 15.
A change in interest rates on variable-rate debt will impact our financial results. For example, assuming a constant outstanding balance for our variable-rate debt, excluding the $5,810 million of variable-rate debt for which our interest rate swap agreements are designated as hedging instruments for accounting purposes, for the next twelve months, a hypothetical 1% increase in corresponding interest rates would change interest expense for the twelve months following March 31, 2010 by approximately $10.9 million. At March 31, 2010, the three-month USD LIBOR rate was 0.268%. A hypothetical reduction of this rate to 0% would decrease interest expense for the next twelve months by approximately $2.9 million. At March 31, 2010, our variable-rate debt, excluding the aforementioned $5,810 million of variable-rate debt hedged against interest rate swap agreements, represents approximately 14.5% of our total debt, while our fixed-rate debt is approximately 85.5% of our total debt.
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Collateral and Guarantors
HOC’s Credit Facilities are guaranteed by Harrah’s Entertainment, and are secured by a pledge of HOC’s capital stock and by substantially all of the existing and future property and assets of HOC and its material, wholly-owned domestic subsidiaries other than certain unrestricted subsidiaries, including a pledge of the capital stock of HOC’s material, wholly-owned domestic subsidiaries and 65% of the capital stock of the first-tier foreign subsidiaries, in each case subject to exceptions. The following casino properties have mortgages under the Credit Facilities:
Las Vegas | Atlantic City | Louisiana/Mississippi | Iowa/Missouri | |||
Caesars Palace | Bally’s Atlantic City | Harrah’s New Orleans | Harrah’s St. Louis | |||
Bally’s Las Vegas | Caesars Atlantic City | (Hotel only) | Harrah’s North Kansas City | |||
Imperial Palace | Showboat Atlantic City | Harrah’s Louisiana Downs | Harrah’s Council Bluffs | |||
Bill’s Gamblin’ Hall & Saloon | Horseshoe Bossier City | Horseshoe Council Bluffs/ | ||||
| Harrah’s Tunica | Bluffs Run | |||||
| Horseshoe Tunica | ||||||
| Tunica Roadhouse |
Illinois/Indiana | Other Nevada | |
Horseshoe Southern Indiana | Harrah’s Reno | |
Harrah’s Metropolis | Harrah’s Lake Tahoe | |
Horseshoe Hammond | Harveys Lake Tahoe |
Additionally, certain undeveloped land in Las Vegas also is mortgaged.
Restrictive Covenants and Other Matters
The Credit Facilities require compliance on a quarterly basis with a maximum net senior secured first lien debt leverage test. In addition, the Credit Facilities include negative covenants, subject to certain exceptions, restricting or limiting HOC’s ability and the ability of its restricted subsidiaries to, among other things: (i) incur additional debt; (ii) create liens on certain assets; (iii) enter into sale and lease-back transactions (iv) make certain investments, loans and advances; (v) consolidate, merge, sell or otherwise dispose of all or any part of its assets or to purchase, lease or otherwise acquire all or any substantial part of assets of any other person; (vi) pay dividends or make distributions or make other restricted payments; (vii) enter into certain transactions with its affiliates; (viii) engage in any business other than the business activity conducted at the closing date of the loan or business activities incidental or related thereto; (ix) amend or modify the articles or certificate of incorporation, by-laws and certain agreements or make certain payments or modifications of indebtedness; and (x) designate or permit the designation of any indebtedness as “Designated Senior Debt”.
Harrah’s Entertainment is not bound by any financial or negative covenants contained in HOC’s credit agreement, other than with respect to the incurrence of liens on and the pledge of its stock of HOC.
All borrowings under the senior secured revolving credit facility are subject to the satisfaction of customary conditions, including the absence of a default and the accuracy of representations and warranties, and the requirement that such borrowing does not reduce the amount of obligations otherwise permitted to be secured under our new senior secured credit facilities without ratably securing the retained notes.
Certain covenants contained in HOC’s credit agreement require the maintenance of a senior first priority secured debt to last twelve months (LTM) Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) ratio, as defined in the agreements (“Senior Secured Leverage Ratio”). The June 3, 2009 amendment and waiver to our credit agreement excludes from the Senior Secured Leverage Ratio (a) the $1,375.0 million first lien notes issued June 15, 2009 and the $720.0 million first lien notes issued on September 11, 2009 and (b) up to $250 million aggregate principal amount of consolidated debt of subsidiaries that are not wholly-owned subsidiaries. Certain covenants contained in HOC’s credit agreement governing its senior secured credit facilities, the indenture and other agreements governing HOC’s 10.0% Second-Priority Senior Secured Notes due 2015 and 2018, and our first lien notes restrict our ability to take certain actions such as incurring additional debt or making acquisitions if we are unable to meet defined Adjusted EBITDA to Fixed Charges, senior secured debt to LTM Adjusted EBITDA and consolidated debt to LTM Adjusted EBITDA ratios. The covenants that restrict additional indebtedness and the ability to make future acquisitions require an LTM Adjusted EBITDA to Fixed Charges ratio (measured on a trailing four-quarter basis) of 2.0:1.0. Failure to comply with these covenants can result in limiting our long-term growth prospects by hindering our ability to incur future indebtedness or grow through acquisitions.
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The indenture governing the 10.75% Senior Notes, 10.75%/11.5% Senior Toggle Notes and the agreements governing the other cash pay debt and PIK toggle debt limit HOC’s (and most of its subsidiaries’) ability to among other things: (i) incur additional debt or issue certain preferred shares; (ii) pay dividends or make distributions in respect of our capital stock or make other restricted payments; (iii) make certain investments; (iv) sell certain assets; (v) with respect to HOC only, engage in any business or own any material asset other than all of the equity interest of HOC so long as certain investors hold a majority of the notes; (vi) create or permit to exist dividend and/or payment restrictions affecting its restricted subsidiaries; (vii) create liens on certain assets to secure debt; (viii) consolidate, merge, sell or otherwise dispose of all or substantially all of its assets; (ix) enter into certain transactions with its affiliates; and (x) designate its subsidiaries as unrestricted subsidiaries. Subject to certain exceptions, the indenture governing the notes and the agreements governing the other cash pay debt and PIK toggle debt will permit us and our restricted subsidiaries to incur additional indebtedness, including secured indebtedness.
Other Financing Transactions
Acquisition of Planet Hollywood
On February 19, 2010, HOC acquired 100% of the equity interests of PHW Las Vegas, which owns and operates the Planet Hollywood Resort and Casino located in Las Vegas, Nevada. In connection with this transaction, PHW Las Vegas assumed a $554.3 million, face value, senior secured loan, and a subsidiary of HOC cancelled certain debt issued by PHW Las Vegas’ predecessor entities. In connection with the transaction and the assumption of debt, PHW Las Vegas entered into the Amended and Restated Loan Agreement with Wells Fargo Bank, N.A., as trustee for The Credit Suisse First Boston Mortgage Securities Corp. Commercial Mortgage Pass-Through Certificates, Series 2007-TFL2 (“Lender”). The $554.3 million outstanding under the Amended and Restated Loan Agreement bears interest at a rate per annum equal to LIBOR plus 2.859% (the “Applicable Interest Rate”), is secured by the assets of PHW Las Vegas, and is non-recourse to other subsidiaries of the Company. PHW Las Vegas is an unrestricted subsidiary of HOC and therefore not a borrower under HOC’s credit facilities. A subsidiary of HOC manages the property for PHW Las Vegas for a fee. The maturity date for this loan is December 2011, with two extension options, which, if exercised, would extend maturity until April 2015.
Guaranty
In connection with PHW Las Vegas’ Amended and Restated Loan Agreement, Harrah’s Entertainment entered into a Guaranty Agreement (the “Guaranty”) for the benefit of Lender pursuant to which Harrah’s Entertainment guaranteed to Lender certain recourse liabilities of PHW Las Vegas. Harrah’s Entertainment’s maximum aggregate liability for such recourse liabilities is limited to $30.0 million provided that such recourse liabilities of PHW Las Vegas do not arise from (i) events, acts, or circumstances that are actually committed by, or voluntarily or willfully brought about by Harrah’s Entertainment or (ii) event, acts, or circumstances (regardless of the cause of the same) that provide actual benefit (in cash, cash equivalent, or other quantifiable amount) to the Registrant, to the full extent of the actual benefit received by the Registrant. Pursuant to the Guaranty, Harrah’s Entertainment is required to maintain a net worth or liquid assets of at least $100.0 million.
Prepayments
PHW Las Vegas may, at its option, voluntarily prepay the loan in whole or in part upon twenty (20) days prior written notice to Lender.
PHW Las Vegas is required to prepay the loan in (i) the amount of any insurance proceeds received by Lender for which Lender is not obligated to make available to PHW Las Vegas for restoration in accordance with the terms of the Amended and Restated Loan Agreement, (ii) the amount of any proceeds received from the operator of the timeshare property adjacent to the Planet Hollywood Resort and Casino, subject to the limitations set forth in the Amended and Restated Loan Agreement and (iii) the amount of any excess cash remaining after application of the cash management provisions of the Amended and Restated Loan Agreement.
Amortization
On each scheduled monthly payment date prior to the maturity date, PHW Las Vegas pays to Lender interest accruing at the Applicable Interest Rate.
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Derivative Instruments
We use interest rate swaps to manage the mix of our debt between fixed and variable rate instruments. As of March 31, 2010 we have entered into 10 interest rate swap agreements for notional amounts totaling $6,500 million. 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 for the related debt. Changes in the variable interest rates to be paid or 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 March 31, 2010 are as follows:
Effective Date | Notional Amount | Fixed Rate Paid | Variable Rate Received as of Mar. 31, 2010 | Next Reset Date | Maturity Date | ||||||||
| (In millions) | |||||||||||||
April 25, 2007 | $ | 200 | 4.898 | % | 0.249 | % | April 26, 2010 | April 25, 2011 | |||||
April 25, 2007 | 200 | 4.896 | % | 0.249 | % | April 26, 2010 | April 25, 2011 | ||||||
April 25, 2007 | 200 | 4.925 | % | 0.249 | % | April 26, 2010 | April 25, 2011 | ||||||
April 25, 2007 | 200 | 4.917 | % | 0.249 | % | April 26, 2010 | April 25, 2011 | ||||||
April 25, 2007 | 200 | 4.907 | % | 0.249 | % | April 26, 2010 | April 25, 2011 | ||||||
September 26, 2007 | 250 | 4.809 | % | 0.249 | % | April 26, 2010 | April 25, 2011 | ||||||
September 26, 2007 | 250 | 4.775 | % | 0.249 | % | April 26, 2010 | April 25, 2011 | ||||||
April 25, 2008 | 2,000 | 4.276 | % | 0.249 | % | April 26, 2010 | April 25, 2013 | ||||||
April 25, 2008 | 2,000 | 4.263 | % | 0.249 | % | April 26, 2010 | April 25, 2013 | ||||||
April 25, 2008 | 1,000 | 4.172 | % | 0.249 | % | April 26, 2010 | April 25, 2012 | ||||||
The variable rate on our interest rate swap agreements did not materially change as a result of the April 26, 2010 reset.
Until October 2009, our interest rate swap agreements were designated as cash flow hedging instruments for accounting purposes. During October 2009, we borrowed $1,000 million under the Incremental Loans and used a majority of the net proceeds to temporarily repay most of our revolving debt under the Credit Facility. As a result, we no longer had a sufficient amount of outstanding debt under the same terms as our interest rate swap agreements to support hedge accounting treatment for the full $6,500 million in interest rate swaps. Thus, as of September 30, 2009, we removed the cash flow hedge designation for the $1,000 million swap agreement, freezing the amount of deferred losses recorded in Other Comprehensive Income associated with this swap agreement, and reducing the total notional amount on interest rate swaps designated as cash flow hedging instruments to $5,500 million. Beginning October 1, 2009, we began amortizing deferred losses frozen in Other Comprehensive Income into income over the original remaining term of the hedged forecasted transactions that are still considered to be probable of occurring. We will record $8.7 million as an increase to interest expense and other comprehensive income over the next 12 months related to the $1,000 million interest rate swap.
During the fourth quarter of 2009, we re-designated approximately $310 million of the $1,000 million swap as a cash flow hedging instrument. As a result, at March 31, 2010, $5,810 million of our total interest rate swap notional amount of $6,500 million remained designated as hedging instruments for accounting purposes. Any future changes in fair value of the portion of the interest rate swap not designated as a hedging instrument will be recognized in Interest expense during the period in which the changes in value occur.
On April 5, 2010, HOC entered into an interest rate cap agreement to partially hedge the risk of future increases in the variable rate of the PHW Las Vegas senior secured loan. The interest rate cap agreement is for a notional amount of $554.3 million at a LIBOR cap rate of 5%, and matures on December 9, 2011. To give proper consideration to the prepayment requirements of the PHW Las Vegas term loan, we designated only $525 million of the $554.3 million notional amount of the interest rate cap as a cash flow hedging instrument for accounting purposes.
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Derivative Instruments – Impact on Financial Statements
The following table represents the effect of derivative instruments in the Consolidated Statements of Operations for the quarters ended March 31, 2010 and 2009 for amounts transferred into or out of other comprehensive income:
| Amount of (Gain) or Loss on Derivatives Recognized in OCI (Effective Portion) | Location of (Gain) or Loss Reclassified From Accumulated OCI Into Income (Effective Portion) | Amount of (Gain) or Loss Reclassified from Accumulated OCI into Income (Effective Portion) | Location of (Gain) or Loss Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) | Amount of (Gain) or Loss Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) | |||||||||||||||||||
Cash Flow Hedging Relationships | Quarter Ended Mar. 31, 2010 | Quarter Ended Mar. 31, 2009 | Quarter Ended Mar. 31, 2010 | Quarter Ended Mar. 31, 2009 | Quarter Ended Mar. 31, 2010 | Quarter Ended Mar. 31, 2009 | |||||||||||||||||
Interest rate contracts | $ | 15.6 | $ | (83.3 | ) | Interest Expense | $ | 2.4 | $ | 0.2 | Interest Expense | $ | 3.6 | $ | — | ||||||||
| Amount of (Gain) or Loss Recognized in Income on Derivatives | |||||||
Derivatives Not Designated as Hedging Instruments | Location of (Gain) or Loss Recognized in Income on Derivative | Quarter Ended Mar. 31, 2010 | Quarter Ended Mar. 31, 2009 | ||||
Interest Rate Contracts | Interest Expense | $ | 1.3 | — | |||
In addition to the impact on interest expense from amounts reclassified from other comprehensive income, the difference to be paid or received under the terms of the interest rate swap agreements is recognized as interest expense and is paid quarterly. This cash settlement portion of the interest rate swap agreements increased interest expense for the quarters ended March 31, 2010 and 2009 by approximately $66.4 million and $43.2 million, respectively.
Guarantees of Third-Party Debt and Other Obligations and Commitments
The tables below summarize, as of March 31, 2010, material additions to or changes in HOC’s contractual obligations and other commitments through their respective maturity or ending dates, which were disclosed in Exhibit 99.1 in Harrah’s Entertainment’s Annual Report on Form 10-K for the year ended December 31, 2009.
Contractual Obligations(a) (In millions) | Increase/ (Decrease) | Total | |||||
Face value of debt, including capital lease obligations | $ | 496.4 | $ | 17,850.7 | |||
Estimated interest payments(b) | 442.8 | 10,083.8 | |||||
Operating lease obligations | 136.0 | 1,957.4 | |||||
Purchase order obligations | 21.0 | 44.7 | |||||
Guaranteed payments to State of Louisiana | (15.0 | ) | 59.8 | ||||
Construction commitments | 4.1 | 39.1 | |||||
Community reinvestment | (27.1 | ) | 90.0 | ||||
Entertainment obligations | (9.1 | ) | 65.2 | ||||
Other contractual obligations | 8.4 | 320.3 | |||||
| (a) | In addition to the contractual obligations disclosed in this table, we have unrecognized tax benefits that, based on uncertainties associated with the items, we are unable to make reasonably reliable estimates of the period of potential cash settlements, if any, with taxing authorities. |
| (b) | Estimated interest for variable rate debt is based on rates at March 31, 2010. Estimated interest includes the estimated impact of our interest rate swap agreements. |
Other Commitments (In millions) | (Decrease)/ Increase | Total | |||
Letters of credit | (28.7 | ) | 133.5 | ||
Minimum payments to tribes | (3.4 | ) | 27.3 |
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The agreements pursuant to which we manage casinos on Indian lands contain provisions required by law that provide that a minimum monthly payment be made to the tribe. That obligation has priority over scheduled repayments of borrowings for development costs and over the management fee earned and paid to the manager. In the event that insufficient cash flow is generated by the operations to fund this payment, we must pay the shortfall to the tribe. Subject to certain limitations as to time, such advances, if any, would be repaid to us in future periods in which operations generate cash flow in excess of the required minimum payment. These commitments will terminate upon the occurrence of certain defined events, including termination of the management contract. Our aggregate monthly commitment for the minimum guaranteed payments, pursuant to these contracts for the three managed Indian-owned facilities now open, which extend for periods of up to 57 months from March 31, 2010, is $1.2 million. Each of these casinos currently generates sufficient cash flows to cover all of its obligations, including its debt service.
DEBT COVENANT COMPLIANCE
Our credit agreement requires the maintenance of a senior first priority secured debt to last twelve months (LTM) Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) ratio, as defined in the agreement (“Senior Secured Leverage Ratio”). The amendment and waiver to our credit agreement excludes from the Senior Secured Leverage Ratio (a) notes secured with a first priority lien on the assets of HOC and its subsidiaries that secure the senior secured credit facilities (including the $1.375 billion First Lien Notes issued June 15, 2009 and the $720 million Additional First Lien Notes issued on September 11, 2009) that collectively result in up to $2 billion in net proceeds (provided that the aggregate face amount of all notes shall not exceed $2.2 billion) and (b) up to $250 million aggregate principal amount of consolidated debt of subsidiaries that are not wholly-owned subsidiaries. PHW Las Vegas is an unrestricted subsidiary of HOC and therefore not a borrower under HOC’s credit facilities. A subsidiary of HOC manages the property for PHW Las Vegas for a fee.
Certain covenants contained in our credit agreement governing our senior secured credit facilities, the indenture and other agreements governing our 10.0% Second-Priority Senior Secured Notes due 2015 and 2018 restrict our ability to take certain actions such as incurring additional debt or making acquisitions if we are unable to meet defined Adjusted EBITDA to Fixed Charges, senior secured debt to LTM Adjusted EBITDA and consolidated debt to LTM Adjusted EBITDA ratios. The covenants that restrict additional indebtedness and the ability to make future acquisitions require an LTM Adjusted EBITDA to Fixed Charges ratio (measured on a trailing four-quarter basis) of 2.0:1.0. Failure to comply with these covenants can result in limiting our long-term growth prospects by hindering our ability to incur future indebtedness or grow through acquisitions.
We believe we are in compliance with our credit agreement and indentures, including the Senior Secured Leverage Ratio, as of March 31, 2010. If our LTM Adjusted EBITDA were to decline significantly from the level achieved at March 31, 2010, it could cause us to exceed the Senior Secured Leverage Ratio and could be an Event of Default under our credit agreement. However, we could implement certain actions in an effort to minimize the possibility of a breach of the Senior Secured Leverage Ratio, including reducing payroll and other operating costs, deferring or eliminating certain maintenance, delaying or deferring capital expenditures, or selling assets. In addition, under certain circumstances, our credit agreement allows us to apply the cash contributions received by HOC as a capital contribution to cure covenant breaches. However, there is no guarantee that such contributions will be able to be secured.
EBITDA is defined as income from continuing operations plus interest, income taxes, depreciation and amortization. EBITDA is not a recognized term under U.S. GAAP and does not purport to be an alternative to income from continuing operations as a measure of operating performance or to cash flows from operations as a measure of liquidity. Additionally, EBITDA is not intended to be a measure of free cash flow available for management’s discretionary use, as it does not consider certain cash requirements such as interest payments, tax payments and debt service requirements. Our presentation of EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under U.S. GAAP. Management believes EBITDA is helpful in reviewing business performance because EBITDA excludes the results of decisions that are outside the control of operating management. EBITDA can differ significantly from company to company depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate and capital investments. Management compensates for the limitations of using non-GAAP financial measures by using them to supplement U.S. GAAP results to provide a more complete understanding of the factors and trends affecting the business than U.S. GAAP results alone. Because not all companies use identical calculations, these presentations of EBITDA may not be comparable to other similarly titled measures of other companies. LTM Adjusted EBITDA is defined as EBITDA further adjusted to exclude unusual items and other adjustments required or permitted in calculating covenant compliance under the indenture and other agreements governing the 10.0% Second-Priority Senior Notes and/or our senior secured credit facilities. We believe that the inclusion of supplementary adjustments to EBITDA applied in presenting LTM Adjusted EBITDA are appropriate to provide additional information to lenders and investors about certain material non-cash items and about unusual items that we do not expect to continue at the same level in the future. Adjusted EBITDA does not include adjustments related to unrestricted subsidiaries of HOC. Because not all companies use identical calculations, our presentation of LTM Adjusted EBITDA may not be comparable to other similarly titled measures of other companies.
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The following table reconciles Net income and LTM Adjusted EBITDA of HOC for the twelve months ended March 31, 2010, including those adjustments required or permitted under the indenture and other agreements governing the 10.0% Second-Priority Senior Notes and/or our senior secured credit facilities. Adjusted EBITDA for HOC as calculated below excludes adjustments for unrestricted subsidiaries of HOC.
HARRAH’S OPERATING COMPANY, A WHOLLY-OWNED SUBSIDIARY OF
HARRAH’S ENTERTAINMENT, INC.
SUPPLEMENTAL INFORMATION
RECONCILIATION OF NET (LOSS)/INCOME TO LTM ADJUSTED EBITDA
(UNAUDITED)
(In millions) | (1) Quarter Ended Mar. 31, 2010 | (2) Quarter Ended Mar. 31, 2009 | (3) Year Ended Dec. 31, 2009 | (1)-(2)+(3) LTM | ||||||||||||
Net (loss)/income attributable to Harrah’s Operating Company, Inc. | $ | (165.1 | ) | $ | (132.8 | ) | $ | 612.8 | $ | 580.5 | ||||||
Interest expense, net of interest income | 437.2 | 422.1 | 1,646.2 | 1,661.3 | ||||||||||||
Provision/(benefit) for income taxes | (72.4 | ) | (73.9 | ) | 1,287.2 | 1,288.7 | ||||||||||
Depreciation and amortization | 160.5 | 166.3 | 652.0 | 646.2 | ||||||||||||
EBITDA(a) | 360.2 | 381.7 | 4,198.2 | 4,176.7 | ||||||||||||
Project opening costs, abandoned projects and development costs (b) | 0.7 | 1.8 | 3.3 | 2.2 | ||||||||||||
Acquisition and integration costs (c) | 7.2 | 0.2 | 0.3 | 7.3 | ||||||||||||
Losses on early extinguishment of debt (d) | — | (1.2 | ) | (3,929.6 | ) | (3,928.4 | ) | |||||||||
Net income/(loss) attributable to non-controlling interests, net of distributions (e) | 0.6 | 1.7 | (1.8 | ) | (2.9 | ) | ||||||||||
Impairment of goodwill, intangible assets and investment securities | — | — | 1,178.9 | 1,178.9 | ||||||||||||
Non-cash expense for stock compensation benefits (f) | 6.4 | 3.1 | 12.0 | 15.3 | ||||||||||||
Other non-recurring or non-cash items (g) | 8.0 | 20.0 | 89.3 | 77.3 | ||||||||||||
Adjusted EBITDA | 383.1 | 407.3 | 1,550.6 | 1,526.4 | ||||||||||||
Pro forma adjustment for acquired, new or disposed properties(h) | 17.0 | |||||||||||||||
Pro forma adjustment for yet-to-be realized cost savings(i) | 102.5 | |||||||||||||||
LTM Adjusted EBITDA | $ | 1,645.9 | ||||||||||||||
| (a) | Amount will differ from amounts previously reported as the starting point has been changed from Income/(loss) from continuing operations to Net income/(loss) attributable to Harrah’s Operating Company, Inc. |
| (b) | Represents (i) project opening costs incurred in connection with expansion and renovation projects at various properties; (ii) write-off of abandoned development projects; and (iii) non-recurring strategic planning and restructuring costs. |
| (c) | Acquisition and integration costs in 2010 include costs incurred in connection with our acquisition of Planet Hollywood. |
| (d) | Represents (i) the difference between the net book value and cash paid for notes exchanged and retired for cash; (ii) the difference between the net book value of the old notes and the fair market value of new notes issued; and (iii) the write-off of historical unamortized deferred financing costs and unamortized market value premiums/discounts. |
| (e) | Represents minority owners’ share of income from our majority-owned subsidiaries, net of cash distributions to minority owners. |
| (f) | Represents non-cash compensation expense related to stock options. |
| (g) | Represents the elimination of other non-recurring and non-cash items including, but not limited to, litigation awards and settlements, severance and relocation costs, excess gaming taxes, gains and losses from disposal of assets, income on interests in non-consolidated affiliates (net of distributions) and one-time costs relating to new state gaming legislation. |
| (h) | Represents the full period estimated impact of newly completed construction projects. |
| (i) | Represents the cost savings yet-to-be realized from our previously announced profitability improvement program. |
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