UNITED STATES

SECURITIES & EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

For the quarterly period ended September 30, 2017

OR

For the transition period from            to            

Commission File No. 001-10362

 

MGM Resorts International

(Exact name of registrant as specified in its charter)

 

 

3600 Las Vegas Boulevard South, Las Vegas, Nevada 89109

(Address of principal executive offices)

(702) 693-7120

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:   Yes   ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files):   Yes   ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act: Yes  ☐  No  ☐ 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):   Yes  ☐     No  ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

 

 

 

 

 

 

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MGM RESORTS INTERNATIONAL AND SUBSIDIARIES

 

FORM 10-Q

 

I N D E X

 

 

 

 

 

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Part I. FINANCIAL INFORMATION

 

MGM RESORTS INTERNATIONAL AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)

 

 

 

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MGM RESORTS INTERNATIONAL AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

 

The accompanying condensed notes are an integral part of these consolidated financial statements.

 

 

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MGM RESORTS INTERNATIONAL AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

 

 

The accompanying condensed notes are an integral part of these consolidated financial statements.

 

 

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MGM RESORTS INTERNATIONAL AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

The accompanying condensed notes are an integral part of these consolidated financial statements.

 

 

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MGM RESORTS INTERNATIONAL AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  

 

NOTE 1 — ORGANIZATION

 

Organization. MGM Resorts International (together with its consolidated subsidiaries, unless otherwise indicated or unless the context requires otherwise, the “Company”) is a Delaware corporation that acts largely as a holding company and, through subsidiaries, owns and operates casino resorts. As discussed further below, the Company leases certain of its real estate assets from MGM Growth Properties Operating Partnership LP (the “Operating Partnership”), which is a consolidated subsidiary.

 

The Company owns and operates the following integrated casino, hotel and entertainment resorts in Las Vegas, Nevada: Bellagio, MGM Grand Las Vegas, The Mirage, Mandalay Bay, Luxor, New York-New York, Monte Carlo, Excalibur and Circus Circus Las Vegas. Operations at MGM Grand Las Vegas include management of The Signature at MGM Grand Las Vegas, a condominium-hotel consisting of three towers. The Company operates and, along with local investors, owns MGM Grand Detroit in Detroit, Michigan and MGM National Harbor in Prince George’s County, Maryland. The Company also owns and operates the Borgata Hotel Casino & Spa (“Borgata”), located on Renaissance Pointe in the Marina area of Atlantic City, New Jersey and the following resorts in Mississippi: Beau Rivage in Biloxi and Gold Strike in Tunica. Additionally, the Company owns and operates The Park, a dining and entertainment district located between New York-New York and Monte Carlo, Shadow Creek, an exclusive world-class golf course located approximately ten miles north of its Las Vegas Strip resorts, Primm Valley Golf Club at the California/Nevada state line and Fallen Oak golf course in Saucier, Mississippi.

 

MGM Growth Properties LLC (“MGP”), a consolidated subsidiary of the Company, is organized as an umbrella partnership REIT (commonly referred to as an “UPREIT”) structure in which substantially all of its assets are owned by and substantially all of its businesses are conducted through its Operating Partnership subsidiary. MGP has two classes of authorized and outstanding voting common shares (collectively, the “shares”): Class A shares and a single Class B share. The Company owns MGP’s Class B share, which does not provide its holder any rights to profits or losses or any rights to receive distributions from operations of MGP or upon liquidation or winding up of MGP. MGP’s Class A shareholders are entitled to one vote per share, while the Company, as the owner of the Class B share, is entitled to an amount of votes representing a majority of the total voting power of MGP’s shares so long as the Company and its controlled affiliates’ (excluding MGP) aggregate beneficial ownership of the combined economic interests in MGP and the Operating Partnership does not fall below 30%. The Operating Partnership units held by the Company are exchangeable into Class A shares of MGP on a one-to-one basis, or cash at the fair value of a Class A share. The determination of settlement method is at the option of MGP’s independent conflicts committee. Subsequent to MGP closing its public offering of 13,225,000 Class A shares in September 2017, the Company indirectly owned 72.3% of the partnership units in the Operating Partnership, and MGP owned the remaining 27.7% ownership interest in the Operating Partnership. Prior to September 2017, the Company owned 76.3% of the Operating Partnership units and MGP owned the remaining 23.7% ownership interest in the Operating Partnership. MGP owns 100% of the general partner of the Operating Partnership. See Note 9 for additional information pertaining to the public offering of MGP’s Class A shares. In addition, as discussed further in Note 11, the Company indirectly acquired additional partnership units in connection with the closing of the National Harbor transaction in October 2017 and subsequently holds a 73.4% ownership interest in the Operating Partnership.

 

Pursuant to a master lease agreement between a subsidiary of the Company (the “Tenant”) and a subsidiary of the Operating Partnership (the “Landlord”), the Company leases the real estate assets of The Mirage, Mandalay Bay, Luxor, New York-New York, Monte Carlo, Excalibur, The Park, Borgata, Gold Strike Tunica, MGM Grand Detroit and Beau Rivage from subsidiaries of the Operating Partnership. As discussed further in Note 11, MGP acquired the long-term leasehold interest and real property associated with MGM National Harbor from a subsidiary of the Company in October 2017. An amendment to the master lease agreement executed in October 2017 provides for the Company to lease the real estate assets of MGM National Harbor from a subsidiary of the Operating Partnership. See Note 11 for additional information related to MGP and certain of the Company’s related intercompany agreements with MGP or the Operating Partnership.

 

The Company has an approximately 56% controlling interest in MGM China, which owns MGM Grand Paradise, S.A. (“MGM Grand Paradise”), the Macau company that owns and operates the MGM Macau resort and casino and the related gaming subconcession and land concessions, and is in the process of developing an 18 acre site on the Cotai Strip in Macau (“MGM Cotai”). MGM Cotai will be an integrated casino, hotel and entertainment resort with capacity for up to 500 gaming tables and up to 1,500 slots, and featuring approximately 1,400 hotel rooms. The actual number of gaming tables allocated to MGM Cotai will be determined by the Macau government prior to opening, and such allocation is expected to be less than MGM Cotai’s 500 gaming table capacity. The total estimated project budget increased to $3.4 billion excluding development fees eliminated in consolidation, capitalized interest and land related costs as a result of the damage and delays caused by Typhoon Hato in August 2017.

 

The Company owns 50% of and manages CityCenter Holdings, LLC (“CityCenter”), located between Bellagio and Monte Carlo. The other 50% of CityCenter is owned by Infinity World Development Corp, a wholly owned subsidiary of Dubai World, a

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Dubai, United Arab Emirates government decree entity. CityCenter consists of Aria, an integrated casino, hotel and entertainment resort; Mandarin Oriental Las Vegas, a non-gaming boutique hotel; and Vdara, a luxury condominium-hotel. In addition, CityCenter features residential units in the Residences at Mandarin Oriental and Veer. See Note 4 for additional information related to CityCenter.

 

The Company and a subsidiary of Anschutz Entertainment Group, Inc. (“AEG”) each own 42.5% of the Las Vegas Arena Company, LLC (“Las Vegas Arena Company”), the entity which owns the T-Mobile Arena, and Athena Arena, LLC owns the remaining 15%. The Company manages the T-Mobile Arena, which is located on a parcel of the Company’s land between Frank Sinatra Drive and New York-New York, adjacent to the Las Vegas Strip. The T-Mobile Arena is a 20,000 seat venue designed to host world-class events – from mixed martial arts, boxing, basketball and bull riding, to high profile awards shows and top-name concerts, and is the home of the Vegas Golden Knights of the National Hockey League. Additionally, the Company leases the MGM Grand Garden Arena, located adjacent to the MGM Grand Las Vegas, to the Las Vegas Arena Company. See Note 4 for additional information regarding the Company’s investment in the Las Vegas Arena Company.

 

The Company also has a 50% interest in Grand Victoria. Grand Victoria is a riverboat casino in Elgin, Illinois; an affiliate of Hyatt Gaming owns the other 50% of Grand Victoria and also operates the resort. See Note 4 for additional information regarding the Company’s investment in Grand Victoria.

 

A subsidiary of the Company was awarded a casino license to build and operate MGM Springfield in Springfield, Massachusetts. MGM Springfield will be developed on approximately 14 acres of land in downtown Springfield. The Company’s plans for the resort currently include a casino with approximately 2,550 slots and 120 table games including poker; a 250-room hotel; 100,000 square feet of retail and restaurant space; 44,000 square feet of meeting and event space; and a 3,500 space parking garage, with an expected development and construction cost of approximately $960 million, excluding capitalized interest and land related costs.  

 

The Company has two reportable segments: domestic resorts and MGM China. See Note 10 for additional information about the Company’s segments.

 

NOTE 2 — BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

 

Basis of presentation. As permitted by the rules and regulations of the Securities and Exchange Commission, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted. These consolidated financial statements should be read in conjunction with the Company’s 2016 annual consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

 

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company’s interim financial statements. The results for such periods are not necessarily indicative of the results to be expected for the full year.

 

Principles of consolidation. For entities not determined to be a variable interest entity (“VIE”), the Company consolidates such entities in which the Company owns 100% of the equity. For entities in which the Company owns less than 100% of the equity interest, the Company consolidates the entity if it has the direct or indirect ability to control the entities’ activities based upon the terms of the respective entities’ ownership agreements. For these entities, the Company records a noncontrolling interest in the consolidated balance sheets. The Company’s investments in unconsolidated affiliates which are 50% or less owned are accounted for under the equity method when the Company can exercise significant influence over or has joint control of the unconsolidated affiliate. All intercompany balances and transactions are eliminated in consolidation.

 

The Company evaluates entities for which control is achieved through means other than voting rights to determine if it is the primary beneficiary of a VIE. A VIE is an entity in which either (i) the equity investors as a group, if any, lack the power through voting or similar rights to direct the activities of such entity that most significantly impact such entity’s economic performance or (ii) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support. The Company identifies the primary beneficiary of a VIE as the enterprise that has both of the following characteristics: (i) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance; and (ii) the obligation to absorb losses or receive benefits of the VIE that could potentially be significant to the entity. The Company consolidates its investment in a VIE when it determines that it is its primary beneficiary. For these VIEs, the Company records a noncontrolling interest in the consolidated balance sheets. The Company may change its original assessment of a VIE upon subsequent events such as the modification of contractual arrangements that affect the characteristics or adequacy of the entity’s equity investments at risk and the disposition of all or a portion of an interest held by the primary beneficiary. The Company performs this analysis on an ongoing basis.

 

Management has determined that MGP is a VIE because the Class A equity investors as a group lack the power through voting or similar rights to direct the activities of such entity that most significantly impact such entity’s economic performance. The

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Company has determined that it is the primary beneficiary of MGP and consolidates MGP because (i) its ownership of MGP’s single Class B share entitles it to a majority of the total voting power of MGP’s shares, and (ii) the exchangeable nature of the Operating Partnership units owned provide the Company the right to receive benefits from MGP that could potentially be significant to MGP. The Company has recorded MGP’s ownership interest in the Operating Partnership (27.7% as of September 30, 2017) as noncontrolling interest in the Company’s consolidated financial statements. As of September 30, 2017 and December 31, 2016, on a consolidated basis, MGP had total assets of $10.1 billion and $9.5 billion, respectively, primarily related to its real estate investments, and total liabilities of $4.3 billion and $3.9 billion, respectively, primarily related to its indebtedness.  

 

Fair value measurements. Fair value measurements affect the Company’s accounting and impairment assessments of its long-lived assets, investments in unconsolidated affiliates, cost method investments, assets acquired and liabilities assumed in an acquisition, and goodwill and other intangible assets. Fair value measurements also affect the Company’s accounting for certain of its financial assets and liabilities. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and is measured according to a hierarchy that includes: Level 1 inputs, such as quoted prices in an active market; Level 2 inputs, which are observable inputs for similar assets; or Level 3 inputs, which are unobservable inputs. The Company used the following inputs in its fair value measurements:

 

 

Property and equipment. Property and equipment are stated at cost. A significant amount of the Company’s property and equipment was acquired through business combinations and therefore recognized at fair value at the acquisition date. Gains and losses on dispositions of property and equipment are included in the determination of income or loss. Maintenance costs are expensed as incurred. As of September 30, 2017 and December 31, 2016, the Company had accrued $11 million and $36 million, respectively, for property and equipment within accounts payable and $34 million and $32 million, respectively, related to construction retention in other long-term liabilities.

 

Income tax provision. For interim income tax reporting the Company estimates its annual effective tax rate and applies it to its year-to-date ordinary income. The tax effects of unusual or infrequently occurring items, including changes in judgment about valuation allowances and effects of changes in tax laws or rates, are reported in the interim period in which they occur. The Company’s effective income tax rate was 39.5% and 27.3% for the three and nine months ended September 30, 2017, respectively.

The Company recognizes deferred tax assets, net of applicable reserves, related to tax loss and credit carryforwards and other temporary differences with a future tax benefit to the extent that realization of such benefit is more likely than not. Otherwise, a valuation allowance is applied.

The Company has generated significant excess foreign tax credits that are attributable to the Macau Special Gaming Tax, which is 35% of gross gaming revenue in Macau. Because MGM Grand Paradise is presently exempt from the Macau 12% complementary tax on gaming profits, the Company believes that payment of the Macau Special Gaming Tax qualifies as a tax paid in lieu of an income tax that is creditable against U.S. taxes. As long as the exemption from Macau’s 12% complementary tax on gaming profits continues and the Company continues to receive distributions from MGM China, the Company expects that it will generate excess foreign tax credits in most years and that most of the excess foreign credits will not be utilized before the exemption expires. On September 7, 2016, MGM Grand Paradise was granted an additional extension of the complementary tax exemption through March 31, 2020, concurrent with the end of the term of its current gaming subconcession. A competitor of MGM Grand Paradise subsequently received an additional extension of its exemption through March 31, 2020, which also runs concurrent with the end of the term of its current gaming concession. Based upon these developments and the uncertainty concerning taxation after the concession renewal process, the Company has assumed that MGM Grand Paradise will pay the Macau 12% complementary tax on gaming profits for all periods beyond March 31, 2020 and it will thus not be able to credit the Macau Special Gaming Tax in such years, and has factored that assumption into its assessment of the realization of the foreign tax credit deferred tax asset and the measurement of Macau deferred tax liabilities.

MGM Grand Paradise’s exemption from the Macau 12% complementary tax on gaming profits does not apply to dividend distributions of such profits to MGM China. However, MGM Grand Paradise has had an agreement with the Macau government to settle the 12% complementary tax that would otherwise be due by its shareholder, MGM China, on distributions of its gaming profits by paying a flat annual payment (“annual fee arrangement”) regardless of the amount of distributable dividends. Such annual fee arrangement was effective for distributions of profits earned through December 31, 2016. MGM China was not subject to the complementary tax on distributions covered by the annual fee arrangement. Annual payments of $2 million were required under the annual fee arrangement. MGM Grand Paradise has requested an extension of this agreement to cover distributions of profits earned through December 31, 2021. However, no assurance can be given that an extension will be granted or that the terms, if granted, will not be less favorable than the prior agreement. Since 2017 earnings are not currently covered by an annual fee arrangement, the

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Company is providing deferred taxes on such earnings in estimating its annual effective tax rate for 2017. If an extension is granted in a future period, the Company will reverse all associated deferred taxes, which total $28 million as of September 30, 2017, resulting in a reduction in provision for income taxes in such period.

The Company’s assessment of realization of its foreign tax credit deferred tax asset is based on available evidence, including assumptions about future profitability of and distributions from MGM China, as well as its assumption concerning renewals of the exemption from Macau’s 12% complementary tax on gaming profits and future profitability of its U.S. operations. As a result, significant judgment is required in assessing the possible need for and amount of valuation allowance and changes to such assumptions may have a material impact on the amount of the valuation allowance. For example, should the Company in a future period actually receive or be able to assume an additional five-year exemption, an additional valuation allowance would likely need to be provided on some portion or all of the foreign tax credit deferred tax asset, resulting in an increase in the provision for income taxes in such period, and such increase may be material. In addition, a change to forecasts of future profitability of, and distributions from, MGM China could also result in a material change in the valuation allowance with a corresponding impact on the provision for income taxes in such period.

 

Recently issued accounting standards. In 2015 and 2016, the FASB issued the following ASUs related to revenue recognition, effective for fiscal years beginning after December 15, 2017, pursuant to ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date”:  

 

The Company is currently assessing the impact that the adoption of the above ASUs related to revenue recognition will have on its consolidated financial statements and footnote disclosures. However, the Company has identified a few significant impacts. Under the new guidance, the Company expects it will no longer be permitted to recognize revenues for goods and services provided to customers for free as an inducement to gamble as gross revenue with a corresponding offset to promotional allowances to arrive at net revenues. The Company expects the majority of such amounts will offset casino revenues. In addition, accounting for Express Comps granted under the Company’s M life Rewards program will also change. Under the new guidance, Express Comps earned by customers through past revenue transactions will be identified as separate performance obligations and recorded as a reduction in gaming revenues when earned at the retail value of such benefits owed to the customer (less estimated breakage). When customers redeem such benefits and the performance obligation is fulfilled by the Company, revenue will be recognized in the department that provides the goods or services (i.e., hotel, food and beverage, or entertainment). The Company also expects impacts related to its loyalty programs and gaming promoter incentive programs at MGM Macau, which will affect classification of revenues and expenses. The Company expects to adopt the above ASUs on a full retrospective basis.

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In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” (“ASU 2016-02”), which replaces the existing guidance in Accounting Standards Codification (“ASC”) 840, “Leases.” ASU 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. ASU 2016-02 requires a dual approach for lessee accounting under which a lessee would account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of-use (“ROU”) asset and a corresponding lease liability. For finance leases, the lessee would recognize interest expense and amortization of the ROU asset and for operating leases the lessee would recognize a straight-line total lease expense. The Company is currently assessing the impact the adoption of ASU 2016-02 will have on its consolidated financial statements and footnote disclosures.

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force),” (“ASU 2016-15”), effective for fiscal years beginning after December 15, 2017. ASU 2016-15 amends the guidance of ASC 230 on the classification of certain cash receipts and payments in the statement of cash flows. The primary purpose of ASU 2016-15 is to reduce the diversity in practice that has resulted from the lack of consistent principles, specifically clarifying the guidance on eight cash flow issues. The Company does not expect the adoption of ASU 2016-15 to have a material effect on its consolidated financial statements.

In January 2017, the Company adopted ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718),” (“ASU 2016-09”). ASU 2016-09 simplifies the accounting for share-based payment transactions, including the income tax consequences, accounting for forfeitures, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 has separate transition guidance for each element of the new standard. The adoption of ASU 2016-09 did not have a material effect on the Company’s consolidated financial statements and footnote disclosures.

In January 2017, the Company adopted ASU No. 2016-17, “Consolidation (Topic 810): Interests Held Through Related Parties that are Under Common Control,” (“ASU 2016-17”). The amendments affect the evaluation of whether to consolidate a VIE in certain situations involving entities under common control. Specifically, the amendments change the evaluation of whether an entity is the primary beneficiary of a VIE for an entity that is a single decision-maker of a variable interest by changing how an entity treats indirect interests in the VIE held through related parties that are under common control with the reporting entity. The guidance in ASU 2016-17 must be applied retrospectively to all relevant periods. The adoption of ASU 2016-17 did not have a material effect on the Company’s consolidated financial statements and footnote disclosures.

In January 2017, the Company early adopted ASU No. 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating step two from the goodwill impairment test. Under the amended guidance, the Company will perform its annual goodwill impairment tests (and interim tests if any are determined to be necessary) by comparing the fair value of its reporting units with their carrying value, and an impairment charge, if any, will be recognized for the amount by which the carrying value exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to that reporting unit. The adoption of ASU 2017-04 did not have a material effect on the Company’s consolidated financial statements and footnote disclosures.

 

NOTE 3 — BORGATA ACQUISITION

 

On August 1, 2016, the Company completed the acquisition of Boyd Gaming Corporation’s (“Boyd Gaming”) ownership interest in Borgata. Following the completion of the acquisition of Boyd Gaming’s interest, MGP acquired Borgata’s real property from the Company and leased back the real property to a subsidiary of the Company.

 

As part of the purchase and sale agreement to acquire Borgata, the Company agreed to pay Boyd Gaming half of any net amount received or utilized by the Company as it relates to the Atlantic City property tax refund owed to Borgata at the time of the transaction. Pursuant to tax court judgments, The City of Atlantic City, New Jersey (“Atlantic City”) owed Borgata property tax refunds of approximately $106 million, plus interest, related to the over-assessment of property values for the 2009-2012 tax years. As a result of funding shortfalls, the City of Atlantic City did not pay the refunds due to Borgata. See Note 7 for information regarding the property tax reimbursement agreement Borgata entered into in February 2017 with the Department of Community Affairs of the State of New Jersey and Atlantic City, and the subsequent receipt of the settlement amount in June 2017.

 

Through the acquisition of Boyd Gaming’s interest in Borgata, the Company obtained 100% of the equity interests in Borgata and therefore consolidated Borgata as of August 1, 2016. The Company recognized 100% of the assets and liabilities of Borgata at fair value at the date of the acquisition. Prior to the acquisition, the Company held a 50% ownership interest in Borgata, which was accounted for under the equity method.

 

Pro forma information. The operating results for Borgata are included in the accompanying consolidated statements of operations from the date of acquisition. The following unaudited pro forma consolidated financial information for the Company has been prepared assuming the Company’s acquisition of its controlling interest had occurred as of January 1, 2015. The unaudited pro

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forma financial information below is not necessarily indicative of either future results of operations or results that might have been achieved had the acquisition been consummated as of January 1, 2015.

 

 

NOTE 4 — INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES

 

Investments in and advances to unconsolidated affiliates consisted of the following:

 

 

The Company recorded its share of net income (loss) from unconsolidated affiliates, including adjustments for basis differences, as follows:

  

 

CityCenter

 

Summarized balance sheet information for CityCenter is as follows:

 

 

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Summarized income statement information for CityCenter is as follows:

 

 

Crystals sale. In April 2016, CityCenter closed the sale of Crystals for approximately $1.1 billion. During the nine months ended September 30, 2016, CityCenter recognized a gain on the sale of Crystals of $392 million and the Company recognized a $397 million gain, which included $196 million representing its 50% share of the gain recorded by CityCenter and $201 million representing the reversal of certain basis differences. The basis differences primarily related to other-than-temporary impairment charges recorded on the Company’s investment in CityCenter that were allocated to Crystals’ building assets. The results of Crystals are classified as discontinued operations in the summarized income statement information.

 

CityCenter credit facility. In April 2017, CityCenter completed a refinancing of its senior credit facility. The new senior credit facility consists of a $1.6 billion term loan B facility maturing in April 2024 and a $125 million revolving credit facility maturing in April 2022. The term loan B was issued at 99.5% and bears interest at LIBOR plus 2.50% with a LIBOR floor of 0.75%. The revolving facility bears interest at LIBOR plus 2.00%.

 

CityCenter distributions. In April 2017, CityCenter paid a $600 million dividend, consisting of a $350 million dividend using proceeds from the upsized senior credit facilities and a $250 million dividend from cash on hand, of which $78 million was part of its annual dividend policy. MGM Resorts received its 50% share, or $300 million. In March 2016, a $90 million distribution was declared in accordance with CityCenter’s annual distribution policy and in April 2016, CityCenter declared a $990 million special distribution in connection with the Crystals sale. The Company’s $540 million share of such distributions was paid in May 2016.

 

Borgata

 

Borgata transaction. As discussed in Note 3, the Company acquired Boyd Gaming’s ownership interest in Borgata on August 1, 2016, and therefore began to consolidate Borgata beginning on that date. Prior thereto, the Company’s investment in Borgata was accounted for under the equity method.

 

Las Vegas Arena Company, LLC

 

Athena Arena transaction. On September 1, 2016, the Company and AEG each sold a 7.5% membership interest in the Las Vegas Arena Company, LLC to Athena Arena, LLC. As a result of this transaction, the Company received $15 million in proceeds and recorded a $3 million gain in “Property transactions, net” in the three and nine months ended September 30, 2016.

 

 

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NOTE 5 — LONG-TERM DEBT

 

Long-term debt consisted of the following:

 

 

Debt due within one year of the September 30, 2017 and December 31, 2016 balance sheets was classified as long-term as the Company had both the intent and ability to refinance current maturities on a long-term basis under its revolving senior credit facilities, with the exception that $478 million, net of debt issuance costs, related to the MGM National Harbor credit facility was classified as current at September 30, 2017 because the outstanding amount was repaid in October 2017 and $8 million of MGP’s quarterly amortization payments under its senior credit facility were classified as current at December 31, 2016 because MGP used cash to make such amortization payments in January 2017.

 

Senior credit facility. At September 30, 2017, the Company’s senior credit facility consisted of a $241 million term loan A facility and a $1.25 billion revolving facility. The revolving facility and the term loan A facility bear interest determined by reference to a total net leverage ratio pricing grid which results in an interest rate of LIBOR plus 1.75% to 2.75%. Both the term loan A facility and the revolving facility will mature in April 2021. The term loan A facility is subject to amortization of principal in equal quarterly installments, with 5.0% of the initial aggregate principal amount of the term loan A facility to be payable each year. The Company permanently repaid $3 million and $9 million of the term loan A facility in the three and nine months ended September 30, 2017, respectively, in accordance with the scheduled amortization. At September 30, 2017, $300 million was drawn on the revolving credit facility. At September 30, 2017, the interest rate on the term loan A facility was 3.49% and the interest rate on the revolving credit facility was 3.44%.

The senior credit facility contains representations and warranties, customary events of default, and positive, negative and financial covenants, including that the Company maintain compliance with a maximum total net leverage ratio, a maximum first lien net leverage ratio and a minimum interest coverage ratio. The Company was in compliance with its credit facility covenants at September 30, 2017.

The senior credit facility is secured by (i) a mortgage on the real properties comprising the MGM Grand Las Vegas and the Bellagio; (ii) a pledge of substantially all existing and future personal property of the subsidiaries of the Company that own the MGM Grand Las Vegas and the Bellagio; and (iii) a pledge of the equity or limited liability company interests of the entities that own MGM Grand Las Vegas and the Bellagio.

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Mandatory prepayments of the credit facilities will be required upon the occurrence of certain events, including sales of certain assets, casualty events and the incurrence of certain additional indebtedness, subject to certain exceptions and reinvestment rights.

 

MGM Growth Properties senior credit facility. At September 30, 2017, the Operating Partnership’s senior secured credit facility consisted of a $278 million term loan A facility, a $1.82 billion term loan B facility, and a $600 million revolving credit facility. The revolving credit facility and term loan A facility bear interest determined by reference to a total net leverage ratio pricing grid which results in an interest rate of LIBOR plus 2.25% to 2.75%. Prior to February 2017, the term loan B facility bore interest at LIBOR plus 2.75% with a LIBOR floor of 0.75%. In February 2017, the Operating Partnership received a reduction of its term loan B interest rate to LIBOR plus 2.50%, with a LIBOR floor of 0.75% upon achieving a minimum corporate family rating of Ba3/BB-. On May 1, 2017, the Operating Partnership repriced its term loan B interest rate to LIBOR plus 2.25% with a LIBOR floor of 0%. All other principal provisions of the existing credit facility remain unchanged. The revolving credit facility and the term loan A facility will mature in 2021 and the term loan B facility will mature in 2023.

 

The term loan facilities are subject to amortization of principal in equal quarterly installments, with 5.0% of the initial aggregate principal amount of the term loan A facility and 1.0% of the initial aggregate principal amount of the term loan B facility to be payable each year. The Operating Partnership permanently repaid $4 million and $15 million of the term loan A facility in the three and nine months ended September 30, 2017, respectively, in accordance with the scheduled amortization, and the Operating Partnership permanently repaid $5 million and $19 million of the term loan B facility in the three and nine months ended September 30, 2017, respectively, in accordance with the scheduled amortization. At September 30, 2017, the interest rate on the term loan A facility was 3.99% and the interest rate on the term loan B facility was 3.49%. No amounts have been drawn on the revolving credit facility.

 

The Operating Partnership credit facility contains customary representations and warranties, events of default, and positive, negative and financial covenants, including that the Operating Partnership maintain compliance with a maximum senior secured net debt to adjusted total assets ratio, maximum total net debt to adjusted assets ratio and a minimum interest coverage ratio. The Operating Partnership was in compliance with its credit facility covenants at September 30, 2017. 

MGM China credit facility. At September 30, 2017, the MGM China credit facility consisted of $1.55 billion of term loans and a $1.45 billion revolving credit facility, which bear interest at a fluctuating rate per annum based on HIBOR plus a margin that ranges between 1.375% and 2.5% based on MGM China’s leverage ratio. The MGM China credit facility matures in April 2019, with scheduled amortization payments of the term loans beginning in October 2017. The MGM China credit facility is secured by MGM Grand Paradise’s interest in the Cotai land use right, and MGM China, MGM Grand Paradise and their guarantor subsidiaries have granted a security interest in substantially all of their assets to secure the facility. The outstanding balance at September 30, 2017 was comprised of $1.55 billion of term loans and $704 million drawn on the revolving credit facility. At September 30, 2017, the weighted average interest rate on the term loans was 2.83% and the weighted average interest rate on the revolving credit facility was 2.67%.

 

The MGM China credit facility contains customary representations and warranties, events of default, and positive, negative and financial covenants, including that MGM China maintains compliance with a maximum leverage ratio and a minimum interest coverage ratio. In February 2017, the MGM China credit facility was amended to increase the maximum total leverage ratio to 6.00 to 1.00 through December 31, 2017, declining to 5.50 to 1.00 at March 31, 2018, 5.00 to 1.00 at June 30, 2018 and 4.50 to 1.00 at September 30, 2018 and thereafter. MGM China was in compliance with its credit facility covenants at September 30, 2017. Due to the damage caused to MGM Cotai in August 2017 by Typhoon Hato and the resulting delay in the MGM Cotai opening date, MGM China is in the process of amending its credit facility to increase the maximum leverage ratio covenant for fiscal year 2018.

 

MGM National Harbor credit facility. At September 30, 2017, the MGM National Harbor credit facility consisted of a $425 million term loan facility and a $100 million revolving credit facility. The term loan and revolving facilities bear interest at LIBOR plus an applicable rate determined by MGM National Harbor’s total leverage ratio (2.25% as of September 30, 2017). The outstanding balance at September 30, 2017 consisted of $425 million of term loans and $53 million drawn on the revolving credit facility. At September 30, 2017, the interest rate on the term loan A was 3.45% and the interest rate on the revolving credit facility was 3.44%. In October 2017, the revolving credit facility was repaid and terminated and the outstanding term loans were assumed by a subsidiary of MGP and repaid in conjunction with the MGM National Harbor transaction, as discussed below.

 

The credit agreement contained customary representations and warranties, events of default, and positive, negative and financial covenants, including that MGM National Harbor and its restricted subsidiaries maintain compliance with a maximum total leverage ratio and a minimum interest coverage ratio. MGM National Harbor was in compliance with its credit agreement covenants at September 30, 2017.

 

Senior notes. In September 2017, MGP issued $350 million in aggregate principal amount of 4.50% senior notes due 2028 for net proceeds of $346 million. In October 2017, MGP used the net proceeds of this offering, together with the net proceeds from the September 2017 public offering of MGP’s Class A shares, to pay a subsidiary of the Company a portion of the purchase price for the

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long-term leasehold interest and real property associated with MGM National Harbor and to repay the $425 million of term loans assumed in connection with the transaction. See Note 9 for additional information related to the public offering of MGP’s Class A shares. See Note 11 for additional information related to the MGM National Harbor transaction.

 

In July 2017, the Company redeemed for cash all $475 million principal amount of its outstanding 11.375% senior notes due 2018. The Company incurred a $30 million loss on the early retirement of such notes.

 

Fair value of long-term debt. The estimated fair value of the Company’s long-term debt was $14.4 billion and $13.9 billion at September 30, 2017 and December 31, 2016, respectively. Fair value was estimated using quoted market prices for the Company’s senior notes and credit facilities.

 

 

NOTE 6 — DERIVATIVES AND HEDGING ACTIVITIES

 

The Operating Partnership uses derivative instruments to mitigate the effects of interest rate volatility inherent in its variable rate debt, which could unfavorably impact its future earnings and forecasted cash flows. The Operating Partnership does not use derivative instruments for speculative or trading purposes.

 

The Operating Partnership is party to interest rate swaps that are designated as cash flow hedges to mitigate the interest rate risk inherent in its senior secured term loan B facility. In May 2017, the Operating Partnership amended its outstanding interest rate swap agreements. Under the new agreements the Operating Partnership now pays a weighted average fixed rate of 1.844% on a total notional amount of $1.2 billion and the variable rate received will reset monthly to the one-month LIBOR, with no minimum floor. The principal terms at September 30, 2017 are as follows:

 

 

As of December 31, 2016, the Operating Partnership had interest rate swaps with a notional amount of $500 million outstanding with a weighted average fixed rate of 1.825% and a net unrealized gain of $2 million.

 

Interest rate swaps valued in net unrealized gain positions are recognized as asset balances within “Other long-term assets, net.” Interest rate swaps valued in net unrealized loss positions are recognized as liability balances within “Other long-term obligations.” For the three and nine months ended September 30, 2017, the amount recorded in other comprehensive income related to the derivative instruments was a net gain of $1 million and a net loss of $3 million, respectively, net of tax. There was no material ineffective portion of the change in fair value of the derivatives. During the three and nine months ended September 30, 2017, the Operating Partnership recorded interest expense of $2 million and $7 million, respectively, related to the swap agreements.

 

NOTE 7 — COMMITMENTS AND CONTINGENCIES

 

October 1 litigation. The Company and/or certain of its subsidiaries have been named as defendants in a number of lawsuits related to the October 1, 2017 shooting in Las Vegas. The matters involve in large degree the same legal and factual issues, in each case being filed on behalf of individuals who are seeking damages for emotional distress, physical injury, medical expenses, economic damages and/or wrongful death based on assertions that the Company and/or certain of its subsidiaries were negligent. Pending lawsuits were first filed in October 2017 and include two individual actions filed in the District Court of Clark County, Nevada and three individual actions and one putative class action filed in the Superior Court of Los Angeles County, California. Additional lawsuits related to this incident may be filed in the future.

The Company is currently unable to reliably predict the developments in, outcome of, and economic costs and other consequences of pending or future litigation related to this matter. The Company will continue to investigate the factual and legal defenses, and evaluate these matters based on subsequent events, new information and future circumstances. The Company intends to defend against these lawsuits and ultimately believes it should prevail, but litigation of this type is inherently unpredictable. Although there are significant procedural, factual and legal issues to be resolved that could significantly affect the Company’s belief as to the possibility of liability, the Company currently believes that it is reasonably possible that it could incur liability in connection with certain of these lawsuits. The foregoing determination was made in accordance with generally accepted accounting principles, as codified in ASC 450-20, and is not an admission of any liability on the part of the Company or any of its affiliates. Given that these cases are in the early stages and in light of the uncertainties surrounding them, the Company does not currently possess sufficient

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information to determine a range of reasonably possible liability. In the event the Company incurs any liability, the Company believes it is unlikely it would incur losses in connection with these claims in excess of its insurance coverage.

Borgata property tax reimbursement agreement. On February 15, 2017, Borgata, the Department of Community Affairs of the State of New Jersey and Atlantic City entered into an agreement wherein Borgata was to be reimbursed $72 million as settlement for property tax refunds in satisfaction of New Jersey Tax Court and Superior Court judgments totaling approximately $106 million, plus interest for the 2009-2012 tax years and the settlement of pending tax appeals for the tax years 2013-2015. Those pending tax appeals could potentially have resulted in Borgata being awarded additional refunds due of approximately $65 million. In June 2017, Atlantic City and the State of New Jersey issued bonds and used the proceeds to pay the $72 million settlement in full. The Company recorded the amounts received pursuant to the reimbursement agreement as an offset to general and administrative expenses in the consolidated statements of operations. As required by the purchase and sale agreement to acquire Borgata in August 2016, the Company paid Boyd Gaming half of the settlement amount received by the Company, net of fees and expenses. Amounts paid to Boyd Gaming were recorded in general and administrative expenses in the consolidated statements of operations.

 

NV Energy. In July 2016, the Company filed its notice to exit the fully bundled sales system of NV Energy and now purchases energy, capacity, and/or ancillary services from a provider other than NV Energy. The Company paid an upfront impact payment of $83 million, including $14 million related to CityCenter, in September 2016. Under the terms of the exit agreement, the Company and CityCenter were required to make ongoing payments to NV Energy for non-bypassable rate charges, which primarily relate to each entity’s share of NV Energy’s portfolio of renewable energy contracts which extended through 2040 and each entity’s share of the costs of decommissioning and remediation of coal-fired power plants in Nevada. The Company’s initial estimate of its obligation related to non-bypassable charges was $71 million. The expense recognized related to the upfront payment and the initial accrual for the liability associated with the non-bypassable charges was recognized within “NV Energy exit expense” in the Company’s consolidated statements of operations in the three and nine months ended September 30, 2016. Subsequent accretion of the liability and changes in estimates are recognized within general and administrative expenses in the consolidated statement of operations. In the second quarter of 2017, the terms of the ongoing impact fee obligations were modified. Such modifications included a credit to be applied against future non-bypassable rate charges and substantially shortened the period over which the Company and CityCenter are responsible for such charges, with an end date in 2022. As such, the Company recognized a reduction in its liability for future charges of $41 million with a corresponding credit to “NV Energy exit expense”. Additionally, CityCenter recorded an $8 million reduction in liability and credit to expense. As of September 30, 2017 and December 31, 2016, the Company has recorded an estimate of its liability on a discounted basis of $9 million and $8 million, respectively, in “Other accrued liabilities” and $25 million and $63 million, respectively, in “Other long-term obligations.”

 

T-Mobile Arena senior credit facility. The Company is party to a repayment guarantee for the term loan B facility under the Las Vegas Arena Company’s senior credit facility. As of September 30, 2017, the term loan B was $50 million.

 

Other guarantees. The Company and its subsidiaries are party to various guarantee contracts in the normal course of business, which are generally supported by letters of credit issued by financial institutions. The Company’s senior credit facility limits the amount of letters of credit that can be issued to $250 million, MGP’s senior credit facility limits the amount to $75 million, MGM China’s credit facility limits the amount to $100 million, and MGM National Harbor’s credit facility limits the amount to $30 million. At September 30, 2017, $15 million in letters of credit were outstanding under the Company’s senior credit facility and $39 million in letters of credit were outstanding under MGM China’s credit facility. No letters of credit were outstanding under the MGP senior credit facility and the MGM National Harbor credit facility at September 30, 2017. The amounts of available borrowings under each of the credit facilities are reduced by any outstanding letters of credit.

 

Other litigation. The Company is a party to various legal proceedings, most of which relate to routine matters incidental to its business. Management does not believe that the outcome of such proceedings will have a material adverse effect on the Company’s financial position, results of operations or cash flows.

 

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NOTE 8 — INCOME PER SHARE OF COMMON STOCK

 

The table below reconciles basic and diluted income per share of common stock. Diluted net income attributable to common stockholders includes adjustments for redeemable noncontrolling interests and the potentially dilutive effect on the Company’s equity interests in MGP and MGM China due to shares outstanding under their respective stock compensation plans. Diluted weighted-average common and common equivalent shares include adjustments for potential dilution of share-based awards outstanding under the Company’s stock compensation plan.   

 

 

NOTE 9 — STOCKHOLDERS’ EQUITY

 

MGM Resorts International dividends. On November 7, 2017, the Company’s Board of Directors approved a quarterly dividend of $0.11 per share, totaling $62 million, which is expected to be paid on December 15, 2017 to holders of record on December 11, 2017. In September, June and March 2017, the Company paid quarterly dividends of $0.11 per share, each totaling $63 million.

 

MGM China dividends. MGM China paid an interim dividend of $56 million in September 2017. The Company received its 56% share of the dividend, or $32 million, of which $3 million was paid to Grand Paradise Macau under the deferred cash payment arrangement. MGM China paid a final dividend for 2016 of $78 million in June 2017. The Company received its 56% share of the dividend, or $44 million, of which $4 million was paid to Grand Paradise Macau under the deferred cash payment arrangement.

 

MGM China paid a $58 million interim dividend in August 2016, of which $29 million was distributed to noncontrolling interests, and a $46 million final dividend in May 2016, of which $23 million was distributed to noncontrolling interests.

 

MGP dividends. On September 15, 2017, MGP’s Board of Directors declared a quarterly dividend of $0.3950 per Class A share totaling $28 million, which was paid on October 13, 2017 to holders of record on September 29, 2017. The Company concurrently received a $73 million distribution attributable to its ownership of Operating Partnership units. In July 2017, MGP paid a quarterly dividend of $0.3950 per Class A share totaling $23 million, and the Company concurrently received a $73 million distribution attributable to its ownership of Operating Partnership units. In April 2017 and January 2017, MGP paid quarterly dividends of $0.3875 per Class A share, each totaling $22 million, and the Company concurrently received distributions attributable to its ownership of Operating Partnership units each totaling $72 million.

 

In October 2016, MGP paid a quarterly dividend of $0.3875 per Class A share totaling $22 million, and the Company concurrently received a $72 million distribution attributable to its ownership of Operating Partnership units. In July 2016, MGP paid a pro-rated quarterly dividend of $0.2632 per Class A share totaling $15 million, and the Company concurrently received a $42 million distribution attributable its ownership of Operating Partnership units.

 

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Supplemental equity information. The following table presents the Company’s changes in stockholders’ equity for the nine months ended September 30, 2017:

 

 

Net income attributable to noncontrolling interests in the above table excludes $6 million related to redeemable noncontrolling interests in the nine months ended September 30, 2017.

 

MGM Resorts International stock repurchase program. In September 2017, the Company’s Board of Directors authorized a $1.0 billion stock repurchase program (the “Stock Repurchase Program”). Under the Stock Repurchase Program, the Company may repurchase shares from time to time in the open market or in privately negotiated agreements. The timing, volume and nature of stock repurchases will be at the sole discretion of management, dependent on market conditions, applicable securities laws, and other factors, and may be suspended or discontinued at any time.

 

In September 2017, the Company repurchased 10 million shares of its common stock at $32.75 per share for a total aggregate amount of $328 million. Repurchased shares were retired. The remaining availability under the Stock Repurchase Program was approximately $672 million as of September 30, 2017.

 

MGP Class A Share issuance. In September 2017, MGP completed a public offering of 13,225,000 of its Class A shares, including 1,725,000 shares sold pursuant to the underwriters’ over-allotment option, at a public offering price of $30.60 per share for net proceeds of $388 million. In October 2017, MGP used the net proceeds of this offering, together with the net proceeds of the issuance of its 4.50% senior notes due 2028 and cash on hand, to pay a subsidiary of the Company a portion of the purchase price for the long-term leasehold interest and real property associated with MGM National Harbor, and to refinance the $425 million of term loans assumed in connection with the transaction. See Note 5 for additional information related to the issuance of MGP’s senior notes. See Note 11 for additional information regarding the MGM National Harbor transaction.

 

The Company has adjusted the carrying value of the noncontrolling interests as a result of MGP’s Class A share issuance to adjust for the change in noncontrolling interests ownership percentage of the Operating Partnership's net assets, with an offsetting adjustment to additional paid in capital.

 

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Accumulated other comprehensive income. Changes in accumulated other comprehensive income attributable to MGM Resorts International are as follows:

 

 

NOTE 10 — SEGMENT INFORMATION

 

The Company’s management views each of its casino resorts as an operating segment. Operating segments are aggregated based on their similar economic characteristics, types of customers, types of services and products provided, the regulatory environments in which they operate and their management and reporting structure. The Company’s principal operating activities occur in two geographic regions: the United States and Macau S.A.R. The Company has aggregated its operations into two reportable segments based on the similar characteristics of the operating segments: domestic resorts and MGM China. The Company’s operations related to investments in unconsolidated affiliates and certain other corporate operations and management services have not been identified as separate reportable segments; therefore, these operations are included in “Corporate and other” in the following segment disclosures to reconcile to consolidated results.

 

The Company’s management utilizes Adjusted Property EBITDA as the primary profit measure for its reportable segments. Adjusted Property EBITDA is a measure defined as Adjusted EBITDA before corporate expense and stock compensation expense related to the Company’s omnibus incentive plan and MGP’s omnibus incentive plan, which are not allocated to the reportable segments or each operating segment, as applicable. MGM China recognizes stock compensation expense related to the MGM China stock compensation plan, which is included in the calculation of Adjusted EBITDA for MGM China. Adjusted EBITDA is a measure defined as earnings before interest and other non-operating income (expense), taxes, depreciation and amortization, NV Energy exit expense, gain on Borgata transaction, preopening and start-up expenses, goodwill impairment charges and property transactions, net.

 

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The following tables present the Company’s segment information:

 

 

NOTE 11 — RELATED PARTY TRANSACTIONS

 

MGM China. MGM Branding and Development Holdings, Ltd. (together with its subsidiary MGM Development Services, Ltd., “MGM Branding and Development”), an entity included in the Company’s consolidated financial statements, is party to a brand license agreement with MGM China. MGM China pays a license fee to MGM Branding and Development equal to 1.75% of MGM Macau’s consolidated net revenue, subject to an annual cap of $75 million in 2017 with a 20% increase per annum during the term of the agreement. During the three and nine months ended September 30, 2017, MGM China incurred total license fees of $8 million and $25 million, respectively. During the three and nine months ended September 30, 2016, MGM China incurred total license fees of $9 million and $25 million, respectively. Such amounts have been eliminated in consolidation.

 

MGM China is party to a development services agreement with MGM Branding and Development whereby the latter will provide certain development services to MGM China in connection with future expansion of existing projects and development of future resort gaming projects. Such services are subject to a development fee which is calculated separately for each casino resort property upon commencement of development. For each such property, the fee is 2.625% of project costs, to be paid in installments as certain benchmarks are achieved. Project costs are the total costs incurred for the design, development and construction of the casino, casino hotel, integrated resort and other related sites associated with each project, including all construction costs, fixtures and fittings, signage, gaming and other supplies and equipment and all costs associated with the opening of the business to be conducted at each project but excluding the cost of land, gaming concessions, financing charges and license fees. The development fee for each project is subject to an annual cap of $32 million for each of the years 2017, 2018, and 2019, and the aggregate total development fee cap over the duration of the MGM Cotai project is $70 million. Cumulative payments for the MGM Cotai project have totaled $56 million. During the three and nine months ended September 30, 2017, MGM China paid $0 and $13 million of fees, respectively, to MGM

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Branding and Development related to development services for MGM Cotai. During the three and nine months ended September 30, 2016, MGM China paid $0 and $12 million of fees, respectively, to MGM Branding and Development related to development services for MGM Cotai. Such amounts have been eliminated in consolidation.

 

MGP. Pursuant to a master lease agreement by and between the Tenant, which is a subsidiary of the Company and the Landlord, which is a subsidiary of the Operating Partnership, the Tenant has leased MGP’s real estate assets from the Landlord. The master lease has an initial lease term of ten years with the potential to extend the term for four additional five-year terms thereafter at the option of the Tenant. The master lease provides that any extension of its term must apply to all of the real estate under the master lease at the time of the extension. The master lease has a triple-net structure, which requires the Tenant to pay substantially all costs associated with the lease, including real estate taxes, insurance, utilities and routine maintenance, in addition to the base rent. Additionally, the master lease provides the Landlord with a right of first offer with respect to the Company’s development property located in Springfield, Massachusetts, which the Landlord may exercise should the Company elect to sell this property in the future.

 

In October 2017, MGP acquired the long-term leasehold interest and real property associated with MGM National Harbor from a subsidiary of the Company in exchange for cash of $463 million, the assumption of $425 million of indebtedness and the issuance of 9.8 million Operating Partnership units to a subsidiary of the Company. In connection with this transaction, the Tenant and Landlord entered into an amendment to the master lease to include the MGM National Harbor property.

 

The annual rent payments due under the master lease for the first lease year ending March 31, 2017 were $550 million prior to MGP’s acquisition of Borgata’s real property on August 1, 2016. Subsequent to the acquisition, annual rent payments under the master lease increased to $650 million, prorated for the remainder of the first lease year after the Borgata transaction. Rent under the master lease consists of a “base rent” component and a “percentage rent” component. For the second lease year commencing April 1, 2017, annual rent payments due under the master lease were $662 million, which included base rent of approximately $597 million and percentage rent of approximately $65 million. In October 2017, subsequent to MGP’s acquisition of MGM National Harbor’s real property, annual rent payments under the master lease increased to $757 million, prorated for the remainder of the second lease year. Base rent under the master lease increased to $682 million and the percentage rent increased to $75 million. The base rent includes a fixed annual rent escalator of 2.0% for the second through the sixth lease years (as defined in the master lease). Thereafter, the annual escalator of 2.0% will be subject to the Tenant and, without duplication, the operating subsidiary sublessees of the Tenant, collectively meeting an adjusted net revenue to rent ratio of 6.25:1.00 based on their net revenue from the leased properties subject to the master lease (as determined in accordance with U.S. GAAP, adjusted to exclude net revenue attributable to certain scheduled subleases and, at the Company’s option, reimbursed cost revenue). The percentage rent will initially be a fixed amount for approximately the first six years and will then be adjusted every five years based on the average actual annual net revenues of the Tenant and, without duplication, the operating subsidiary sublessees of the Tenant, from the leased properties subject to the master lease at such time for the trailing five calendar-year period (calculated by multiplying the average annual net revenues, excluding net revenue attributable to certain scheduled subleases and, at the Landlord’s option, reimbursed cost revenue, for the trailing five calendar-year period by 1.4%). During the three and nine months ended September 30, 2017, the Company made rent payments to MGP in the amount of $165 million and $493 million, respectively.

 

Pursuant to the master lease, upon an event of default the Landlord may, at its option (i) terminate the master lease, repossess any leased property, relet any leased property to a third party and require that the Tenant pay damages; (ii) require that the Tenant pay to the Landlord rent and other sums payable with interest calculated at the overdue rate provided for in the master lease or terminate the Tenant’s right to possession of the leased property and seek damages; and/or (iii) seek any and all other rights and remedies available under law or in equity. An event of default will be deemed to occur upon certain events, including: (1) the failure by the Tenant to pay rent or other additional charges when due; (2) failure by the Tenant to comply with the covenants set forth in the master lease; (3) certain events of bankruptcy or insolvency with respect to a Tenant or the guarantor; (4) the occurrence of a default under the guaranty of the master lease; (5) the loss or suspension of a material license that causes cessation of gaming activity that would reasonably be expected to have a material adverse effect on the Tenant, the facilities or the leased properties taken as a whole; and (6) the failure of the Company, on a consolidated basis with Tenant, to maintain an EBITDAR to rent ratio (as described in the master lease) of at least 1.10:1.00 for two consecutive test periods. The Company was in compliance with all applicable covenants as of September 30, 2017.

All intercompany transactions, including transactions under the master lease, have been eliminated in the Company’s consolidation of MGP. The public ownership of MGP’s Class A shares is recognized as non-controlling interests in the Company’s consolidated financial statements.

 

NOTE 12 — CONDENSED CONSOLIDATING FINANCIAL INFORMATION

 

As of September 30, 2017, all of the Company’s principal debt arrangements are guaranteed by each of its material domestic subsidiaries, other than MGP and the Operating Partnership, MGM Grand Detroit, MGM National Harbor, Blue Tarp redevelopment (the company that will own and operate the Company’s proposed casino in Springfield, Massachusetts), and each of their respective

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subsidiaries. The Company’s international subsidiaries, including MGM China and its subsidiaries, are not guarantors of such indebtedness. Separate condensed consolidating financial information for the subsidiary guarantors and non-guarantors as of September 30, 2017 and December 31, 2016, and for the three and nine months ended September 30, 2017 and 2016 are presented below. Within the Condensed Consolidating Statements of Cash Flows for the nine months ended September 30, 2017 and 2016, the Company has presented net changes in intercompany accounts as investing activities if the applicable entities have a net asset in intercompany accounts and as a financing activity if the applicable entities have a net intercompany liability balance.

 

Certain of the Company’s subsidiaries collectively own 72.3% of the Operating Partnership units as of September 30, 2017, and each subsidiary accounts for its respective investment under the equity method within the condensed consolidating financial information presented below. For these subsidiaries, such investment constitutes continuing involvement, and accordingly, the contribution and leaseback of the real estate assets do not qualify for sale-leaseback accounting. The real estate assets that were contributed to and owned by the Operating Partnership, along with the related transactions, are reflected in the balance sheets of the MGM subsidiaries that contributed such assets. In addition, such subsidiaries recognized finance liabilities within “Other long-term obligations” related to rent payments due under the master lease and recognized the related interest expense component of such payments. These real estate assets are also reflected on the balance sheet of the MGP subsidiary that received such assets in connection with the contribution. The condensed consolidating financial information presented below therefore includes the accounting for such activity within the respective columns presented and in the elimination column.

 

CONDENSED CONSOLIDATING BALANCE SHEET INFORMATION

 

 

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CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) INFORMATION

 

 

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CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATION

 

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CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) INFORMATION

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CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATION

 

 

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This management’s discussion and analysis of financial condition and results of operations contain forward-looking statements that involve risks and uncertainties. Please see “Cautionary Statement Concerning Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions that may cause our actual results to differ materially from those discussed in the forward-looking statements. This discussion should be read in conjunction with our historical financial statements and related notes thereto and the other disclosures contained elsewhere in this Quarterly Report on Form 10-Q, and the audited consolidated financial statements and notes for the fiscal year ended December 31, 2016, which were included in our Form 10-K, filed with the Securities and Exchange Commission (“SEC”) on March 1, 2017. The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods. MGM Resorts International together with its subsidiaries may be referred to as “we,” “us” or “our.” MGM China Holdings Limited together with its subsidiaries is referred to as “MGM China.” MGM Growth Properties LLC together with its subsidiaries is referred to as “MGP.”

 

Executive Overview

 

Our primary business is the ownership and operation of integrated casino resorts, which offer gaming, hotel, convention, dining, entertainment, retail and other resort amenities. We own or invest in several of the finest casino resorts in the world and we continually reinvest in our resorts to maintain our competitive advantage. Most of our revenue is cash-based, through customers wagering with cash or paying for non-gaming services with cash or credit cards. We rely heavily on the ability of our resorts to generate operating cash flow to fund capital expenditures, provide excess cash flow for future development and repay debt financings. We make significant investments in our resorts through newly remodeled hotel rooms, restaurants, entertainment and nightlife offerings, as well as other new features and amenities.

 

According to the Las Vegas Convention and Visitors Authority, Las Vegas visitor volume decreased 1%, Las Vegas Strip REVPAR increased 4% and Las Vegas Strip gaming revenue increased 4% in the nine months ended September 30, 2017 compared to the prior year period. Results of operations for our domestic resorts in the nine months ended September 30, 2017 benefited from an increase in operating margins. Our rooms revenue benefited from robust convention business at our Las Vegas Strip resorts, which allowed us to yield higher room rates across our portfolio of resorts.

 

In the days immediately following the October 1st incident we experienced a brief increase in non-group room cancellations at our Las Vegas Strip resorts as compared to historic levels.  These cancellations largely related to room reservations booked for the fourth quarter.  In addition, during this period, we experienced a decline in forward non-group reservations as well as accompanying pricing pressure on the Las Vegas Strip.  As a result of the foregoing, we expect our Las Vegas Strip revenues for the fourth quarter of 2017 to decline compared to the prior year quarter.

As a significant number of MGM Macau’s customers are from mainland China, we believe operating results at MGM Macau are affected by economic conditions in mainland China as well as by certain policy initiatives enacted in mainland China and Macau. We believe a slowdown in China’s economic growth rate as well as the implementation of policies related to gaming promoters, the Chinese government’s restrictions on travel to Macau and restrictions on cross-border currency transactions led to a multi-year decrease in gross gaming revenues for the Macau market which lasted through the first half of 2016 and primarily impacted VIP casino gaming operations and, to a lesser extent, main floor operations throughout the Macau market. Despite the impact of these events and concerns over the sustainability of economic growth in China, we expect the Macau market to grow on a long-term basis due to further development and penetration of the mainland China market and infrastructure improvements expected to facilitate more convenient travel to and within Macau. We believe recent trends reflect stabilization and growth within the Macau market as gross gaming revenue has increased year over year in each month beginning in August 2016 and continuing through September 2017. In the nine months ended September 30, 2017, gross gaming revenue increased 19% compared to the same period in the prior year, primarily as a result of growth on the Cotai Strip. Additionally, according to statistics published by the Statistics and Census Service of the Macau Government, visitor arrivals increased 4% and overnight visitors increased 11% in the nine months ended September 30, 2017 compared to the same period in the prior year.

Our results of operations are affected by decisions we make related to our capital allocation, our access to capital and our cost of capital. While we continue to be focused on improving our financial position, we are also dedicated to capitalizing on development opportunities. In Macau, we plan to spend approximately $3.4 billion, excluding development fees eliminated in consolidation, capitalized interest and land-related costs, to develop MGM Cotai, a casino resort with capacity for up to 500 gaming tables and up to 1,500 slots, and featuring approximately 1,400 hotel rooms, built on an approximately 18 acre site on the Cotai Strip in Macau. The actual number of gaming tables allocated to MGM Cotai will be determined by the Macau government prior to opening, and such allocation is expected to be less than our 500 gaming table capacity. As a result of damage and delays caused by Typhoon Hato in August 2017, MGM Cotai is expected to open on January 29, 2018.

 

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We were awarded a casino license to build and operate MGM Springfield in Springfield, Massachusetts. MGM Springfield will be developed on approximately 14 acres of land in downtown Springfield. MGM’s plans for the resort currently include a casino with approximately 2,550 slots and 120 table games including poker; a 250-room hotel; 100,000 square feet of retail and restaurant space; 44,000 square feet of meeting and event space; and a 3,500 space parking garage; with an expected development and construction cost of approximately $960 million, excluding capitalized interest and land-related costs. Construction of MGM Springfield is expected to be completed in the third quarter of 2018.

 

MGM National Harbor Transaction

 

In October 2017, MGP acquired MGM National Harbor’s long-term leasehold interest and real property from our subsidiary in exchange for the assumption of $425 million of indebtedness from such subsidiary, the issuance of 9.8 million Operating Partnership units to such subsidiary, and cash of $463 million. The Operating Partnership repaid the debt with proceeds from the September 2017 offering of 13,225,000 of its Class A shares together with the proceeds from the offering of its 4.50% senior notes due 2028. Pursuant to an amendment of the master lease, MGP leased back the real property to our subsidiary and as a result, contracted annual rent payments to MGP increased by $95 million. Consistent with the master lease terms, 90% of this rent is fixed and will contractually grow at 2% per year until 2022, after which such escalator will be based on meeting a revenue to rent ratio as further described in Note 11.

 

See Note 1 and Note 11 in the accompanying consolidated financial statements for information regarding MGP and its subsidiaries, which we consolidate in our financial statements, and from which we lease certain of our real estate assets pursuant to a master lease agreement. All intercompany transactions, including transactions under the master lease, have been eliminated in consolidation.

 

Reportable Segments

 

We have two reportable segments: domestic resorts and MGM China. See Note 10 in the accompanying consolidated financial statements for additional information regarding our segments.

 

Domestic Resorts

 

Over half of the net revenue from our domestic resorts is derived from non-gaming operations including hotel, food and beverage, entertainment and other non-gaming amenities. We market to different customer groups and utilize our extensive convention and meeting facilities to maximize hotel occupancy and customer volumes which lead to better labor utilization. Our operating results are highly dependent on demand for our services, and the volume of customers at our resorts, which in turn affect the price we can charge for our hotel rooms and other amenities. In addition, our results of operations compared to prior periods can be impacted by holiday calendar shifts, significant one-time events and the strength of our convention calendar. Also, we generate a significant portion of our revenue from our domestic resorts in Las Vegas, Nevada, which exposes us to certain risks, such as increased competition from new or expanded Las Vegas resorts, and from the expansion of gaming in the United States generally.

 

Key performance indicators related to gaming and hotel revenue at our domestic resorts are:

 

 

 

MGM China

 

We own an approximate 56% controlling interest in MGM China, which owns MGM Grand Paradise, the Macau company that owns and operates MGM Macau and the related gaming subconcession and land concessions, and is in the process of developing

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MGM Cotai. We believe our investment in MGM China plays an important role in extending our reach internationally and will foster future growth and profitability.

 

Revenues at MGM Macau are generated from three primary customer segments in the Macau gaming market: VIP casino gaming operations, main floor gaming operations and slot machine operations. VIP players play mostly in dedicated VIP rooms or designated gaming areas. VIP customers can be further divided into customers sourced by in-house VIP programs and those sourced through gaming promoters. A significant portion of our VIP volume is generated through the use of gaming promoters. Gaming promoters introduce VIP gaming players to MGM Macau, assist these customers with travel arrangements, and extend gaming credit to these players. In exchange for their services, gaming promoters are compensated through payment of revenue-sharing arrangements or rolling chip turnover based commissions. In-house VIP players also typically receive a commission based on the program in which they participate. MGM Macau main floor operations primarily consist of walk-in and day trip visitors. Unlike gaming promoters and in-house VIP players, main floor players do not receive commissions. The profit contribution from the main floor segment exceeds the VIP segment due to commission costs paid to gaming promoters. Gaming revenues from the main floor segment have become an increasingly significant portion of total gaming revenues in recent years and we believe this segment represents the most potential for sustainable growth in the future.

 

VIP gaming at MGM Macau is conducted by the use of special purpose nonnegotiable gaming chips. Gaming promoters purchase these nonnegotiable chips from MGM Macau and in turn they sell these chips to their players. The nonnegotiable chips allow MGM Macau to track the amount of wagering conducted by each gaming promoters’ clients in order to determine VIP gaming play. Gaming promoter commissions are based on either a percentage of actual win plus a monthly complimentary allowance based on a percentage of the rolling chip turnover their customers generate, or a percentage of the rolling chip turnover plus discounted offerings on nongaming amenities. The estimated portion of the gaming promoter payments that represent amounts passed through to VIP customers is recorded as a reduction of casino revenue, and the estimated portion retained by the gaming promoter for its compensation is recorded as casino expense. In-house VIP commissions are based on a percentage of rolling chip turnover and are recorded as a reduction of casino revenue.

 

In addition to the key performance indicators used by our domestic resorts, MGM Macau utilizes “turnover,” which is the sum of nonnegotiable chip wagers won by MGM Macau calculated as nonnegotiable chips purchased plus nonnegotiable chips exchanged less nonnegotiable chips returned. Turnover provides a basis for measuring VIP casino win percentage. Win for VIP gaming operations at MGM Macau is typically in the range of 2.7% to 3.0% of turnover. Normal main floor table games hold percentage at MGM Macau is in the range of 16% to 22% of table games drop.

 

Corporate and Other

 

Corporate and other includes our investments in unconsolidated affiliates and certain management and other operations.

 

 

Results of Operations

 

Summary Financial Results

 

The following table summarizes our consolidated financial results for the three and nine months ended September 30, 2017 and 2016:

 

 

Summary Operating Results

 

Consolidated net revenue increased 12% and 17% for the three and nine months ended September 30, 2017, respectively, compared to the same periods in the prior year, due primarily to the Borgata acquisition in August 2016, the opening of MGM National Harbor in December 2016, and an increase in casino and non-casino revenue at our domestic resorts. See “Operating Results – Segment Information” below for additional information related to segment revenues.

 

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Consolidated operating income was $494 million for the three months ended September 30, 2017 compared to $713 million for the same period in the prior year. The current year quarter included a full quarter of operations at Borgata and $18 million of operating income from MGM National Harbor. The prior year quarter included a $430 million gain related to the Borgata acquisition on August 1, 2016 and $152 million of NV Energy exit expense associated with the Company’s strategic decision to exit the fully bundled sales system of NV Energy, which included the expense at our domestic resorts as well as our 50% share of expense recognized at CityCenter. For the three months ended September 30, 2017, operating income at our domestic resorts increased 82%, or $245 million, compared to the prior year period, and benefitted from the contributions from Borgata and MGM National Harbor. Operating income at MGM China was $35 million compared to $84 million in the prior year period. Income from unconsolidated affiliates was $38 million for the three months ended September 30, 2017 compared to $33 million in the prior year period. See “Operating Results – Income from Unconsolidated Affiliates” for additional detail.

 

Preopening expense decreased 7%, or $2 million, compared to the prior year quarter as a result of the opening of MGM National Harbor in December 2016. Preopening expense in the three months ended September 30, 2017 primarily related to our MGM Cotai and MGM Springfield projects. Property transactions, net increased $9 million, compared to the prior year quarter and primarily related to costs associated with the rebranding of the Monte Carlo Resort and Casino to Park MGM and NoMad Hotel.

 

Consolidated operating income was $1.5 billion for the nine months ended September 30, 2017 compared to $1.8 billion for the same period in the prior year. The current year period included a full nine months of operations at Borgata, which included a benefit of $36 million related to Borgata’s share of a property tax settlement from Atlantic City, $46 million of operating income from MGM National Harbor and a benefit of $45 million related to the modification of the NV Energy exit fee, which included the benefit recognized at our domestic resorts as well as our 50% share of the benefit recognized at CityCenter. The prior year period included the gain related to the Borgata acquisition and charge related to the NV Energy exit fee, as discussed above. Operating income at our domestic resorts increased 46%, or $488 million, in the nine months ended September 30, 2017 compared to the prior year period, and benefitted from the contributions from Borgata and MGM National Harbor. Operating income at MGM China decreased 18%, or $32 million, compared to the prior year period. Income from unconsolidated affiliates was $118 million for the nine months ended September 30, 2017 compared to $496 million in the prior year period. See “Operating Results – Income from Unconsolidated Affiliates” for additional detail.

 

Preopening expense decreased 16%, or $13 million, compared to the prior year period as a result of the opening of MGM National Harbor in December 2016 and the opening of the T-Mobile Arena in April 2016. Preopening expense in the nine months ended September 30, 2017 primarily related to our MGM Cotai and MGM Springfield projects. Property transactions, net increased $18 million compared to the prior year period and primarily related to costs associated with the rebranding of the Monte Carlo Resort and Casino to Park MGM and NoMad Hotel.

 

Operating Results – Segment Information

 

The following table presents detail by segment of consolidated net revenues and Adjusted EBITDA. Management uses Adjusted Property EBITDA as the primary profit measure for its reportable segments. See “Non-GAAP Measures” for additional information:

 

 

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Domestic resorts. The following table is a reconciliation of domestic resorts net revenues to domestic resorts same-store net revenues:

 

 

The following table presents detailed net revenues at our domestic resorts:

 

 

The following table presents detailed domestic resorts same-store net revenues:

 

 

Casino revenue for the three months ended September 30, 2017 increased 32% compared to the same period in the prior year. Same-store casino revenue increased 6% compared to the prior year quarter due primarily to an 11% increase in same-store table games revenue. Same-store table games volume increased 8% compared to the prior year quarter and same-store table games hold

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percentage increased to 25.0% from 23.7% in the prior year quarter. On a same-store basis, slots revenue increased 2% compared to the prior year quarter. 

 

Casino revenue for the nine months ended September 30, 2017 increased 40% compared to the same period in the prior year. Same-store casino revenue increased 2% compared to the prior year period due primarily to a 2% increase in same-store slots revenue. Same-store table games revenue decreased 1% compared to the prior year period partially due to a decrease in same-store table games hold percentage to 23.1% in the current year period from 23.4% in the prior year period. Same-store table games volume increased 2% compared to the prior year period.

The following table shows key gaming statistics for the Company’s Las Vegas Strip resorts:

 

 

Domestic resorts rooms revenue increased 7% for the three months ended September 30, 2017 compared to the prior year quarter. On a same-store basis, rooms revenue increased 3% for the three months ended September 30, 2017 as a result of a 4% increase in REVPAR at our Las Vegas Strip resorts when compared to the same period in the prior year.

Domestic resorts rooms revenue increased 10% for the nine months ended September 30, 2017 compared to the same period in the prior year. On a same-store basis, rooms revenue increased 4% for the nine months ended September 30, 2017 as a result of a 5% increase in REVPAR at our Las Vegas Strip resorts when compared to the same period in the prior year.

The following table provides key hotel statistics for our Las Vegas Strip resorts:

 

 

Entertainment revenue for the three and nine months ended September 30, 2017 increased 7% and 11%, respectively, compared to the same periods in the prior year. Same-store entertainment revenue for the three months ended September 30, 2017 increased 2% compared to the same period in the prior year due to the opening of the Park Theater in December 2016. Same-store entertainment revenue for the nine months ended September 30, 2017 increased 6% compared to the same period in the prior year due to the previously mentioned opening of the Park Theater in December 2016, and an increase in Cirque du Soleil revenue.

 

The following table is a reconciliation of domestic resorts Adjusted Property EBITDA to domestic resorts Same-store Adjusted Property EBITDA:

 

 

Adjusted Property EBITDA at our domestic resorts increased 25% during the three months ended September 30, 2017 compared to the prior year quarter, and was positively impacted by a full quarter of operations at Borgata, and $37 million of Adjusted Property EBITDA from MGM National Harbor. Same-store Adjusted Property EBITDA increased 12% during the three months ended September 30, 2017 compared to the prior year quarter and Same-store Adjusted Property EBITDA margin for the three months ended

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September 30, 2017 increased by 241 basis points compared to the prior year period to 33.0% due to an increase in casino and non-casino revenues, as discussed above.

 

Adjusted Property EBITDA at our domestic resorts increased 29% during the nine months ended September 30, 2017 compared to the prior year period, and was positively impacted by a full nine months of operations at Borgata, which included a benefit of $36 million related to a property tax settlement, and $107 million of Adjusted Property EBITDA from MGM National Harbor. Same-store Adjusted Property EBITDA increased 9% during the nine months ended September 30, 2017 compared to the prior year period and Same-store Adjusted Property EBITDA margin for the nine months ended September 30, 2017, increased by 182 basis points compared to the same prior year period to 32.1% due to an increase in casino and non-casino revenues, as discussed above.

 

MGM China. The following table presents detailed net revenues for MGM China:

 

 

For the three months ended September 30, 2017, net revenue for MGM China decreased 6% compared to the same period in the prior year, primarily as a result of an 11% decrease in main floor table games revenue. Main floor table games volume decreased 3% and hold percentage decreased to 18.4% in the current year quarter from 20.1% in the prior year quarter. VIP table games revenue decreased 3% due to a 6% decrease in turnover, partially offset by an increase in hold percentage to 3.3% in the current year quarter from 3.0% in the prior year quarter.

 

MGM China’s Adjusted EBITDA for the three months ended September 30, 2017 and 2016 was $118 million and $150 million, respectively, and Adjusted EBITDA margin decreased 487 basis points to 25.1% in the current year quarter compared to 30.0% in the prior year quarter due primarily to a decrease in main floor table games revenue and an increase in general and administrative expense. Excluding license fees of $8 million in the current year quarter and $9 million in the prior year quarter, Adjusted EBITDA decreased 20%.

 

For the nine months ended September 30, 2017, net revenue for MGM China was flat compared to the same period in the prior year. Main floor table games volume decreased 5% and was offset by an increase in hold percentage to 20.0% in the current year period from 18.8% in the prior year period. VIP table games revenue decreased 2% due to a 7% decrease in turnover, partially offset by an increase in hold percentage to 3.2% in the current year period from 3.0% in the prior year period. Slots revenue increased 10% due to a 5% increase in slot handle and an increase in hold percentage to 4.5% in the current year period from 4.3% in the prior year period.

 

MGM China’s Adjusted EBITDA for the nine months ended September 30, 2017 and 2016 was $378 million and $383 million, respectively. Adjusted EBITDA margin decreased 42 basis points to 26.6% in the current year period from 27.0% in the prior year. Excluding license fees of $25 million for both the nine months ended September 30, 2017 and 2016, Adjusted EBITDA decreased 1%.

 

Corporate and other. Corporate and other revenue includes revenue from corporate operations, management services and reimbursed costs revenue primarily related to our CityCenter management agreement. Corporate and other Adjusted EBITDA for the three months ended September 30, 2017 increased compared to the same period in the prior year due to an increase in operating results at City Center, partially offset by the cessation of equity method accounting for Borgata subsequent to the acquisition in the prior year period. Corporate and other Adjusted EBITDA for the nine months ended September 30, 2017 decreased compared to the same period in the prior year due to our share of the gain from the sale of Crystals at CityCenter recognized in the prior year, partially offset by the cessation of equity method accounting for Borgata subsequent to the acquisition in the prior year period. See below for additional discussion of our share of operating results from unconsolidated affiliates.

  

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Operating Results – Income from Unconsolidated Affiliates

 

The following table summarizes information related to our income from unconsolidated affiliates:

 

 

We completed our acquisition of Borgata on August 1, 2016, at which time the subsidiary operating Borgata became a consolidated subsidiary. Prior to the acquisition, we held a 50% interest in Borgata, which was accounted for under the equity method.

 

Our share of CityCenter’s operating income, including certain basis difference adjustments, for the three months ended September 30, 2017 was $35 million, compared to $12 million in the prior year period. The prior year period included $13 million related to our share of NV Energy exit expense. At Aria, casino revenues increased 4% for the three months ended September 30, 2017 compared to the prior year period. Table games volume increased 5% and hold percentage decreased to 23.5% in the current year quarter compared to 25.4% in the prior year quarter. Slots revenue increased 3% compared to the same period in the prior year due to a 10% increase in slots volume, which was partially offset by a decrease in slot hold percentage to 7.7% in the current year quarter compared to 8.2% in the prior year quarter. REVPAR increased by 8% and 4% at Aria and Vdara, respectively, which led to a 7% increase in CityCenter’s rooms revenue in the current year quarter compared to the prior year quarter. CityCenter’s operating income in the prior year quarter included a $26 million charge related to NV Energy exit expense.

 

Our share of CityCenter’s operating income, including certain basis difference adjustments, for the nine months ended September 30, 2017 was $110 million, which included a benefit of $4 million related to our share of the modification of the NV Energy exit fee. Our share of CityCenter’s operating income for the nine months ended September 30, 2016 was $419 million, which included a $397 million gain related to the sale of Crystals, of which $196 million related to our 50% share of the gain recorded by CityCenter and $201 million related to the reversal of certain basis differences, partially offset by a $41 million charge related to our share of accelerated depreciation associated with the April 2016 closure of the Zarkana theatre and $13 million related to our share of NV Energy exit expense. At Aria, casino revenues increased 12% for the nine months ended September 30, 2017 compared to the prior year period. Table games revenue increased 18% due to a 4% increase in table games volume and an increase in hold percentage to 25.2% in the nine months ended September 30, 2017 compared to 23.1% for the same period in 2016. Slots revenue increased 2% compared to the same period in the prior year due to a 5% increase in slot volume. REVPAR increased by 7% and 4% at Aria and Vdara, respectively, which led to a 5% increase in CityCenter’s rooms revenue in the nine months ended September 30, 2017 compared to the same period in 2016. CityCenter’s operating results for the nine months ended September 30, 2017 benefited from $8 million related to the modification of the NV Energy exit fee. CityCenter’s operating results for the nine months ended September 30, 2016 were affected by $82 million of accelerated depreciation associated with the April 2016 closure of the Zarkana theatre and $26 million of NV Energy exit expense.

 

Non-operating Results

 

Interest Expense

 

Gross interest expense for the three and nine months ended September 30, 2017 decreased $9 million and $32 million, respectively, compared to the prior year period due to a decrease in the average debt outstanding related to our senior notes and a decrease in the weighted average interest rate of our senior notes. This was partially offset by an increase in the average debt outstanding under our credit facilities and an increase in amortization of debt issuance costs. Capitalized interest was $29 million and $78 million during the three and nine months ended September 30, 2017, compared to $33 million and $88 million during the three and nine months ended September 30, 2016, respectively. The decrease in capitalized interest in both the three and nine month periods was due primarily to the substantial completion of MGM National Harbor in December 2016, partially offset by an increase related to the MGM Cotai and MGM Springfield projects during the first nine months of 2017.

 

Non-operating Items from Unconsolidated Affiliates

 

Non-operating expense from unconsolidated affiliates decreased in the three and nine months ended September 30, 2017 compared to the same period in the prior year due primarily to the acquisition of Borgata on August 1, 2016, at which time the

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subsidiary operating Borgata became a consolidated subsidiary of our company. Prior to the acquisition, we held a 50% ownership interest in Borgata, which was accounted for under the equity method.

 

Other, net

 

Other expenses for the three months ended September 30, 2017 were primarily comprised of a $30 million loss incurred on the early retirement of debt related to the $475 million principal amount of our 11.375% senior notes due 2018. Other expenses for the three months ended September 30, 2016 were primarily comprised of a $16 million loss on the early retirement of debt related to the previously outstanding $743 million 7.625% senior notes due 2017. Other expenses for the nine months ended September 30, 2017 were primarily comprised of the $30 million loss incurred on the early retirement of debt discussed above. Other expenses for the nine months ended September 30, 2016 were primarily comprised of the $16 million loss on retirement of debt discussed above, as well as a $49 million loss incurred on the early retirement of debt related to the $1.23 billion aggregate principal amount of our previously outstanding 7.5% senior notes due 2016 and 10% senior notes due 2016 and our prior senior credit facility, recorded in the second quarter of 2016.

 

Income Taxes

 

Our effective tax rate for the three months ended September 30, 2017 was a provision of 39.5% compared to a benefit of 8.7% in the prior year quarter, resulting in income tax provision of $115 million compared to income tax benefit of $45 million in the prior year quarter. Our effective tax rate for the nine months ended September 30, 2017 was a provision of 27.3% compared to a benefit of 1.3% in the prior year period, resulting in income tax provision of $252 million in the current year period compared to income tax benefit of $15 million in the prior year period. The effective tax rate for the three months ended September 30, 2017 was unfavorably impacted by income tax expense of $38 million due to an increase in the valuation allowance against the foreign tax credit deferred tax asset while the prior year quarter was favorably impacted by income tax benefit of $169 million due to a reduction in the valuation allowance against the foreign tax credit deferred tax asset, partially offset by $36 million of income tax expense attributable to the remeasurement of Macau deferred tax liabilities resulting from a change in assumption concerning renewal of the exemption from the Macau complementary tax on gaming profits. The nine months ended September 30, 2016 were also favorably impacted by income tax benefit of $77 million due to a net reduction in the valuation allowance against the foreign tax credit deferred tax asset. The annual effective tax rate calculation for all periods is impacted by assumptions made regarding projected foreign tax credit usage and valuation allowance. See Note 2 in the accompanying consolidated financial statements for further discussion of these assumptions.

 

Non-GAAP Measures

 

“Adjusted EBITDA” is earnings before interest and other non-operating income (expense), taxes, depreciation and amortization, preopening and start-up expenses, NV Energy exit expense, gain on Borgata transaction, goodwill impairment charges, and property transactions, net. “Adjusted Property EBITDA” is Adjusted EBITDA before corporate expense and stock compensation expense related to the MGM Resorts and MGP stock compensation plans, which are not allocated to each property. MGM China recognizes stock compensation expense related to its stock compensation plan which is included in the calculation of Adjusted EBITDA for MGM China. “Same-store Adjusted Property EBITDA” is Adjusted Property EBITDA related to operating resorts which were consolidated by the Company for both the entire current and prior year periods presented. Adjusted EBITDA information is presented solely as a supplemental disclosure to reported GAAP measures because management believes these measures are 1) widely used measures of operating performance in the gaming industry, and 2) a principal basis for valuation of gaming companies. We present Adjusted Property EBITDA on a “same-store” basis as supplemental information because management believes that providing performance measures on a “same-store” basis is useful for evaluating the period-to-period performance of our domestic casino resorts.

 

We believe that while items excluded from Adjusted EBITDA, Adjusted Property EBITDA and Same-store Adjusted Property EBITDA may be recurring in nature and should not be disregarded in evaluation of our earnings performance, it is useful to exclude such items when analyzing current results and trends compared to other periods because these items can vary significantly depending on specific underlying transactions or events that may not be comparable between the periods being presented. Also, we believe excluded items may not relate specifically to current operating trends or be indicative of future results. For example, preopening and start-up expenses will be significantly different in periods when we are developing and constructing a major expansion project and will depend on where the current period lies within the development cycle, as well as the size and scope of the project(s). Property transactions, net includes normal recurring disposals, gains and losses on sales of assets related to specific assets within our resorts, but also includes gains or losses on sales of an entire operating resort or a group of resorts and impairment charges on entire asset groups or investments in unconsolidated affiliates, which may not be comparable period over period. In addition, capital allocation, tax planning, financing and stock compensation awards are all managed at the corporate level. Therefore, we use Adjusted Property EBITDA and Same-store Adjusted Property EBITDA as the primary measure of domestic resorts operating performance.

 

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Adjusted EBITDA, Adjusted Property EBITDA and Same-store Adjusted Property EBITDA should not be construed as alternatives to operating income or net income, as indicators of our performance; or as alternatives to cash flows from operating activities, as measures of liquidity; or as any other measure determined in accordance with generally accepted accounting principles. We have significant uses of cash flows, including capital expenditures, interest payments, taxes and debt principal repayments, which are not reflected in Adjusted EBITDA, Adjusted Property EBITDA or Same-store Adjusted Property EBITDA. Also, other companies in the gaming and hospitality industries that report Adjusted EBITDA, Adjusted Property EBITDA or Same-store Adjusted Property EBITDA information may calculate Adjusted EBITDA, Adjusted Property EBITDA or Same-store Adjusted Property EBITDA in a different manner.

 

The following table presents a reconciliation of net income attributable to MGM Resorts International to Adjusted EBITDA:

 

 

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The following tables present reconciliations of operating income (loss) to Adjusted Property EBITDA and Adjusted EBITDA:

 

 

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Liquidity and Capital Resources

 

Cash Flows

 

Our cash and cash equivalents at September 30, 2017 were $2.0 billion, which included $336 million at MGM China and $1.1 billion at MGP.

 

Operating activities. Trends in our operating cash flows tend to follow trends in operating income, excluding non-cash charges, but can be affected by changes in working capital, the timing of significant tax payments or refunds, and by distributions from unconsolidated affiliates. Cash provided by operating activities was $1.5 billion for the nine months ended September 30, 2017 compared to cash provided by operating activities of $1.0 billion in the prior year period. Operating cash flows increased in the current year period due to an increase in operating income at our domestic resorts and a decrease in cash paid for interest, partially offset by a decrease in operating income at MGM China and an increase in income taxes paid.

 

Investing activities. We made capital expenditures of $1.4 billion for the nine months ended September 30, 2017, of which $744 million related to MGM China, excluding development fees and capitalized interest on development fees eliminated in consolidation. Capital expenditures at MGM China included $711 million related to the construction of MGM Cotai and $33 million related to projects at MGM Macau. Capital expenditures at our domestic resorts and corporate entities of $654 million included $170 million related to MGM National Harbor, $172 million related to the construction of MGM Springfield, and $128 million related to the Monte Carlo rebranding as well as various room remodels, construction of the parking garage at Excalibur, a waterpark at Circus Circus, and restaurant and entertainment venue remodels. Most of the costs capitalized at our domestic resorts during the nine months ended September 30, 2017 related to construction materials, furniture and fixtures, and external labor costs.

 

We made capital expenditures of $1.6 billion for the nine months ended September 30, 2016, of which $712 million related to MGM China, excluding development fees and capitalized interest on development fees eliminated in consolidation. Capital expenditures at MGM China included $686 million related to the construction of MGM Cotai and $27 million related to projects at MGM Macau. Capital expenditures at our domestic resorts and corporate entities of $878 million included $557 million related to the construction of MGM National Harbor, $71 million related to the construction of MGM Springfield and $34 million related to the construction of The Park, as well as various room remodels including the tower rooms at Mandalay Bay, construction of additional

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exhibit space at the Mandalay Bay Convention Center, and restaurant and entertainment venue remodels. Most of the costs capitalized at our domestic resorts related to construction materials, furniture and fixtures, and external labor costs.

 

Distributions from unconsolidated affiliates for the nine months ended September 30, 2017 consisted of our $300 million share of a $600 million dividend paid by CityCenter in April 2017. Distributions from unconsolidated affiliates for the nine months ended September 30, 2016 primarily related to a $540 million distribution paid by CityCenter in May 2016.

 

During the nine months ended September 30, 2016, we received $15 million of proceeds related to the partial disposition of our investment in the Las Vegas Arena Company, LLC, and we paid approximately $594 million and acquired cash of approximately $43 million in connection with the acquisition of Boyd Gaming’s ownership interest in Borgata.

Financing activities. In the nine months ended September 30, 2017, we borrowed net debt of $466 million which primarily consisted of a $300 million draw on our senior credit facility, a $334 million draw on the MGM China credit facility, and a $28 million draw on the MGM National Harbor credit facility, as well as MGP’s issuance of $350 million 4.50% senior notes due 2028 in connection with the MGM National Harbor transaction, partially offset by the redemption of our $475 million 11.375% senior notes at a premium, as well as amortization payments on our term loan facilities. We paid $10 million of debt issuance costs related to the issuance of MGP’s senior notes and the amendments to the MGM China and MGP credit facilities.

In the nine months ended September 30, 2016, we repaid net debt of $493 million. In April 2016, in connection with the MGP IPO and related financing transactions we permanently repaid $2.7 billion under our prior senior credit facility and entered into an amended and restated senior credit facility under which we borrowed $250 million, and the Operating Partnership borrowed $2.2 billion under its senior credit facility. In addition, MGM National Harbor borrowed $425 million under its credit facility, MGM China borrowed $206 million under its revolving credit facility, and we permanently repaid $584 million under Borgata’s credit facility. The following senior notes were issued during the nine months of 2016:

We redeemed the following senior notes during the nine months of 2016:

Additionally, we paid $138 million of debt issuance costs related to the senior notes issued in August 2016, the MGP financing transactions, the MGM National Harbor credit facility and the February 2016 amendment to the MGM China credit facility.

In September 2017, MGP received net proceeds of $388 million from a secondary offering of its Class A shares issued in connection with the MGM National Harbor transaction and during the nine months ended September 30, 2016, MGP received net proceeds of $1.1 billion in connection with the MGP IPO in April 2016. In August 2016 we also paid $100 million as part of the consideration for the purchase of an additional 188.1 million common shares of our MGM China subsidiary.

In the nine months ended September 30, 2017, we paid $190 million of dividends to our common shareholders, MGP distributed $67 million to noncontrolling interests and MGM China distributed $59 million to noncontrolling interests. In the nine months ended September 30, 2016, MGP distributed $15 million to noncontrolling interests and MGM China distributed $51 million to noncontrolling interests.

In September 2017, we repurchased and retired $328 million of our common stock pursuant to our stock repurchase plan.

 

Other Factors Affecting Liquidity

 

Anticipated uses of cash. We have significant outstanding debt and contractual obligations in addition to planned capital expenditures. At September 30, 2017, we had $13.6 billion in principal amount of indebtedness, including $541 million of borrowings outstanding under our $1.5 billion senior credit facility, $2.1 billion outstanding under the $2.7 billion MGP senior credit facility, $2.3 billion outstanding under the $3.0 billion MGM China credit facility and $478 million outstanding under the $525 million MGM National Harbor credit facility. In October 2017, the total borrowings outstanding under the MGM National Harbor credit facility were repaid in connection with the MGM National Harbor transaction. We have an estimated $713 million of cash interest payments based on current outstanding debt and applicable interest rates within the next twelve months. We expect to meet our debt maturities and

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planned capital expenditure requirements with future anticipated operating cash flows, cash and cash equivalents, and available borrowings under our credit facilities.

 

In addition, we have made significant investments through September 30, 2017 and we expect to make capital investments as described below during the fourth quarter of 2017. See “Executive Overview” for further information regarding the scope and timing of our significant development projects.

 

 

 

During the fourth quarter of 2017, MGM China expects to spend approximately $20 million in capital improvements at MGM Macau and $255 million on the MGM Cotai project, excluding capitalized interest and land-related costs.

 

Our capital expenditures fluctuate depending on our decisions with respect to strategic capital investments in new or existing resorts and the timing of capital investments to maintain the quality of our resorts, the amounts of which can vary depending on timing of larger remodel projects related to our public spaces and hotel rooms. Future capital expenditures could vary from our current expectations depending on the progress of our development efforts and the structure of our ownership interests in future developments.

 

MGM Resorts International dividend. On November 7, 2017, our Board of Directors approved a quarterly dividend to holders of record on December 11, 2017 of $0.11 per share, totaling $62 million, which will be paid on December 15, 2017.

 

MGP distributions. On September 15, 2017, MGP’s Board of Directors declared a quarterly dividend of $0.3950 per Class A share totaling $28 million, which was paid on October 13, 2017 to holders of record on September 29, 2017. We concurrently received a $73 million distribution attributable to our ownership of Operating Partnership units, which remained within the consolidated entity.

 

MGM Resorts International stock repurchase program. In September 2017, our Board of Directors authorized a $1.0 billion stock repurchase program, under which we may repurchase shares from time to time in the open market or in privately negotiated agreements. The timing, volume and nature of stock repurchases will be at the sole discretion of management, dependent on market conditions, applicable securities laws, and other factors, and may be suspended or discontinued at any time. Repurchased shares are retired. The remaining availability under the stock repurchase program was approximately $672 million as of September 30, 2017.

 

Critical Accounting Policies and Estimates

A complete discussion of our critical accounting policies and estimates is included in our Form 10-K for the fiscal year ended December 31, 2016. There have been no significant changes in our critical accounting policies and estimates since year end, except as follows:

On January 1, 2017, we early adopted ASU 2017-04 “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). In accordance with ASU 2017-04, we perform our annual goodwill impairment tests (and interim tests if any are determined to be necessary) by comparing the fair value of our reporting units with their carrying value and an impairment charge, if any, will be recognized for the amount by which the carrying value exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to that reporting unit.

 

Market Risk

In addition to the inherent risks associated with our normal operations, we are also exposed to additional market risks. Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates and foreign currency exchange rates. Our primary exposure to market risk is interest rate risk associated with our variable rate long-term debt. We attempt to limit our exposure to interest rate risk by managing the mix of our long-term fixed-rate borrowings and short-term borrowings under our bank credit facilities. A change in interest rates generally does not have an impact upon our future earnings and cash flow for fixed-rate debt instruments. As fixed-rate debt matures, however, and if additional debt is acquired to fund the debt repayment, future earnings and cash flow may be affected by changes in interest rates. This effect would be realized in the periods subsequent to the periods when the debt matures. We do not hold or issue financial instruments for trading purposes and do not enter into derivative transactions that would be considered speculative positions.

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The Operating Partnership has entered into interest rate swap agreements to mitigate the interest rate risk inherent in its senior secured term loan B facility. These interest rate swaps are designated as cash flow hedges and had the following terms as of September 30, 2017:

As of September 30, 2017, variable rate borrowings represented 31% of our total borrowings after giving effect to the $1.2 billion notional amount of Operating Partnership interest rate swaps discussed above. Assuming a 100 basis-point increase in LIBOR (after giving effect to the $1.2 billion notional amount of Operating Partnership interest rate swaps discussed above), our annual interest cost would increase by $19 million based on gross amounts outstanding at September 30, 2017. Assuming a 100 basis-point increase in HIBOR for the MGM China credit facility, our annual interest cost would increase by $23 million based on amounts outstanding at September 30, 2017. The following table provides additional information about our gross long-term debt subject to changes in interest rates excluding the effect of the Operating Partnership interest rate swaps discussed above:

 

 

In addition to the risk associated with our variable interest rate debt, we are also exposed to risks related to changes in foreign currency exchange rates, mainly related to MGM China and to our operations at MGM Macau and the development of MGM Cotai. While recent fluctuations in exchange rates have not been significant, potential changes in policy by governments or fluctuations in the economies of the United States, China, Macau or Hong Kong could cause variability in these exchange rates. We cannot ensure that the Hong Kong dollar will continue to be pegged to the U.S. dollar or the current peg rate for the Hong Kong dollar will remain at the same level. The possible changes to the peg of the Hong Kong dollar may result in severe fluctuations in the exchange rate thereof. As of September 30, 2017, a 1% increase in the Hong Kong dollar (the functional currency of MGM China) to the U.S. dollar exchange rate would impact the carrying value of our cash balance by $3 million and a 1% decrease in the exchange rate would impact the carrying value of our debt balance by $23 million.

 

Cautionary Statement Concerning Forward-Looking Statements

 

This Form 10-Q contains “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as “anticipates,” “intends,” “plans,” “seeks,” “believes,” “estimates,” “expects,” “will,” “may” and similar references to future periods. Examples of forward-looking statements include, but are not limited to, statements we make regarding expected market growth in Macau, our ability to generate significant cash flow and execute on ongoing and future projects, amounts we will spend in capital expenditures and investments, the expected opening of strategic resort developments, the estimated costs and components associated with those developments, our expectations with respect to future cash dividends on our common stock and dividends and distributions we will receive from MGM China, the Operating Partnership or CityCenter and amounts projected to be realized as deferred tax assets. The foregoing is not a complete list of all forward-looking statements we make.

 

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Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. Therefore, we caution you against relying on any of these forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, regional, national or global political, economic, business, competitive, market, and regulatory conditions and the following:

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Any forward-looking statement made by us in this Form 10-Q speaks only as of the date on which it is made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law. If we update one or more forward-looking statements, no inference should be made that we will make additional updates with respect to those or other forward-looking statements.

 

You should also be aware that while we from time to time communicate with securities analysts, we do not disclose to them any material non-public information, internal forecasts or other confidential business information. Therefore, you should not assume that we agree with any statement or report issued by any analyst, irrespective of the content of the statement or report. To the extent that reports issued by securities analysts contain projections, forecasts or opinions, those reports are not our responsibility and are not endorsed by us.

 

 

We incorporate by reference the information appearing under “Market Risk” in Part I, Item 2 of this Form 10-Q.

 

 

Our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer) have concluded that our disclosure controls and procedures (as such term is defined in Rules 13(a)-15(e) and 15d-15(e) under the Securities

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Exchange Act of 1934, as amended (“the Exchange Act”)) were effective as of September 30, 2017 to provide reasonable assurance that information required to be disclosed in the Company’s reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and regulations and to provide that such information is accumulated and communicated to management to allow timely decisions regarding required disclosures. This conclusion is based on an evaluation as required by Rules 13a-15(b) and 15d-15(b) under the Exchange Act conducted under the supervision and participation of the principal executive officer and principal financial officer along with company management.

 

During the quarter ended September 30, 2017, there were no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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Part II. OTHER INFORMATION

 

October 1 litigation. The Company and/or certain of its subsidiaries have been named as defendants in a number of lawsuits related to the October 1, 2017 shooting in Las Vegas. The matters involve in large degree the same legal and factual issues, in each case being filed on behalf of individuals who are seeking damages for emotional distress, physical injury, medical expenses, economic damages and/or wrongful death based on assertions that the Company and/or certain of its subsidiaries were negligent. Pending lawsuits were first filed in October 2017 and include two individual actions filed in the District Court of Clark County, Nevada and three individual actions and one putative class action filed in the Superior Court of Los Angeles County, California. Additional lawsuits related to this incident may be filed in the future.

We are currently unable to reliably predict the developments in, outcome of, and economic costs and other consequences of pending or future litigation related to this matter. We will continue to investigate the factual and legal defenses, and evaluate these matters based on subsequent events, new information and future circumstances. We intend to defend against these lawsuits and ultimately believe we should prevail, but litigation of this type is inherently unpredictable. Although there are significant procedural, factual and legal issues to be resolved that could significantly affect our belief as to the possibility of liability, we currently believe that it is reasonably possible that we could incur liability in connection with certain of these lawsuits. The foregoing determination was made in accordance with generally accepted accounting principles, as codified in ASC 450-20, and is not an admission of any liability on the part of us or any of our affiliates. Given that these cases are in the early stages and in light of the uncertainties surrounding them, we do not currently possess sufficient information to determine a range of reasonably possible liability. In the event we incur any liability, we believe it is unlikely we would incur losses in connection with these claims in excess of our insurance coverage.

 

Securities and derivative litigation. In 2009 various shareholders filed six lawsuits in Nevada federal and state court against the Company and various of its former and current directors and officers alleging federal securities laws violations and/or related breaches of fiduciary duties in connection with statements allegedly made by the defendants during the period August 2007 through the date of such lawsuit filings in 2009 (the “class period”). In general, the lawsuits asserted the same or similar allegations, including that during the relevant period defendants artificially inflated the Company’s common stock price by knowingly making materially false and misleading statements and omissions to the investing public about the Company’s financial statements and condition, operations, CityCenter, and the intrinsic value of the Company’s common stock; that these alleged misstatements and omissions thereby enabled certain Company insiders to derive personal profit from the sale of Company common stock to the public; that defendants caused plaintiffs and other shareholders to purchase Company common stock at artificially inflated prices; and that defendants imprudently implemented a share repurchase program to the detriment of the Company. The lawsuits sought unspecified compensatory damages, restitution and disgorgement of alleged profits and/or attorneys’ fees and costs in amounts to be proven at trial, as well as injunctive relief related to corporate governance.  

 

The state and federal court derivative actions were dismissed pursuant to defendants’ motions. In November 2009, the U.S. District Court for Nevada consolidated the remaining cases Robert Lowinger v. MGM MIRAGE, et al. (Case No. 2:09-cv-01558-RCL-LRL, filed August 19, 2009) and Khachatur Hovhannisyan v. MGM MIRAGE, et al. (Case No. 2:09-cv-02011-LRH-RJJ, filed October 19, 2009) putative class actions under the caption In re MGM MIRAGE Securities Litigation, Case No. 2:09-cv-01558-GMN-LRL. The consolidated case names the Company and certain former and current directors and officers as defendants and alleges violations of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder. In January 2011, lead plaintiffs filed a consolidated amended complaint, alleging that between August 2, 2007 and March 5, 2009, the Company, its directors and certain of its officers violated Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 thereunder.  

 

In July 2015, the lead plaintiffs and defendants agreed in principle to settle the securities class actions. In August 2015, the lead plaintiffs and defendants entered into a Stipulation and Agreement of Settlement (the “Settlement Agreement”). Under the terms of the Settlement Agreement, the claims against the Company and the named former and current directors and officers will be dismissed with prejudice and released in exchange for a $75 million cash payment by the Company’s directors and officers liability insurers.

 

On March 1, 2016, the court entered a Final Judgment and Order of Dismissal with Prejudice (the “Final Judgment”) of the two cases consolidated under In re MGM MIRAGE Securities Litigation. Of the thousands of putative class members, only one objected to the adequacy of the settlement. The court entered the Final Judgment over his objection, finding that the settlement was fair, reasonable and adequate to the settlement class in all respects, and dismissed the actions and all released claims with prejudice as to all defendants, and expressly provided that neither the settlement nor associated negotiations and proceedings constitute an admission or evidence of liability, fault or omission by the defendants.  

 

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On March 25, 2016, the sole objector to the adequacy of the settlement filed a Notice of Appeal as to the Final Judgment and related orders entered by the court concerning the plan of settlement distribution and award of attorneys’ fees and expenses to the lead plaintiffs’ counsel. On September 15, 2017, the Ninth Circuit Court of Appeals issued its decision affirming the Final Judgment. Unless the objector files an appeal with the United States Supreme Court, the Ninth Circuit’s decision will become final on December 15, 2017.

 

Environmental proceedings. In June 2017, the Clark County Department of Air Quality (the “Department”) issued a Notice of Violation to the Company for alleged violations of the Clark County Air Quality Regulations and permit conditions at several of the Company’s properties on the Las Vegas Strip. In September 2017, the Company reached a settlement with the Department and has agreed to pay $150,000 for such violations (without admitting to any liability or error), $30,000 of which is deferred and will be cancelled if we comply with the settlement and certain other defined violations do not occur during the one year period following the date the Department issues a final permit per the application submitted to the Department on August 21, 2017.

 

Other. We and our subsidiaries are also defendants in various other lawsuits, most of which relate to routine matters incidental to our business. We do not believe that the outcome of such pending litigation, considered in the aggregate, will have a material adverse effect on the Company.

 

 

A description of certain factors that may affect our future results and risk factors is set forth in our Annual Report on Form 10-K for the year ended December 31, 2016. There have been no material changes to those factors for the nine months ended September 30, 2017, except as discussed below.

 

Risks Related to Our Business

Our business may be materially affected by changes to fiscal and tax policies. Congress has recently introduced tax reform legislation that would make significant changes to the U.S. Internal Revenue Code. Such changes include a reduction in the corporate tax rate, moving from a worldwide to a territorial system of taxing multi-national companies and limitations on interest expense and other corporate deductions, among other changes. Although we cannot predict what changes, if any, will actually be enacted, any such changes could have a material effect on our business, financial condition, results of operations and cash flows.

We are required to obtain an occupation permit for our development in Cotai, Macau by January 8, 2018. As a result of the significant damage caused by Typhoon Hato on August 23, 2017, we decided to seek an extension from the Macau government in the event we are unable to timely complete the procedures required to receive our occupation permit by January 8, 2018. The land concession for our approximately 18 acre site on Cotai, Macau was officially gazetted on January 9, 2013, and therefore, if we do not receive the occupation permit from the government for our proposed resort and casino by January 8, 2018, the Macau government has the right to apply certain monetary penalties, or to unilaterally terminate the land concession contract, in each case unless the deadline is extended or the delay is due to a situation of force majeure. As a result of the significant damage caused by Typhoon Hato, MGM China developed a revised schedule for completing repair works and processing governmental inspections that are necessary for obtaining relevant licenses to operate MGM Cotai. MGM China now anticipates opening MGM Cotai on January 29, 2018, although, MGM China still anticipates that it will be able to receive the occupation permit for the development prior to the January 8, 2018 deadline. MGM China has discussed this revised timeline with the Macau government and has applied for an extension to the January 8 deadline to receive the occupation permit and for the delay to be treated as a situation of force majeure. While we believe the government of Macau would accept our position with respect to any such potential force majeure claim, there can be no assurance that the government would accept our position, that we will be able to otherwise extend the January 8 deadline, or that we will be able to complete the necessary repair work and governmental inspection processes by the times required to timely receive the occupation permit. A loss of the land concession could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

The agreements governing our senior secured credit facility and other senior indebtedness contain restrictions and limitations that could significantly affect our ability to operate our business, as well as significantly affect our liquidity, and therefore could adversely affect our results of operations. Covenants governing our senior secured credit facility and certain of our debt securities restrict, among other things, our ability to:

 

 

 

 

 

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Our ability to comply with these provisions may be affected by events beyond our control. The breach of any such covenants or obligations not otherwise waived or cured could result in a default under the applicable debt obligations and could trigger acceleration of those obligations, which in turn could trigger cross-defaults under other agreements governing our long-term indebtedness. In addition, our senior secured credit facility requires us to satisfy certain financial covenants, including a maximum total net leverage ratio, a maximum first lien net leverage ratio and a minimum interest coverage ratio. Any default under our senior secured credit facility or the indentures governing our other debt could adversely affect our growth, our financial condition, our results of operations and our ability to make payments on our debt.

 

In addition, MGM Grand Paradise and MGM China are co-borrowers under an amended and restated credit facility and the Operating Partnership is a borrower under its senior secured credit facility, all of which contain covenants that restrict the respective borrower’s ability to engage in certain transactions. In particular, these credit agreements require MGM China and the Operating Partnership to satisfy certain financial covenants and impose certain operating and financial restrictions on them and their respective subsidiaries (including, with respect to MGM China, MGM Grand Paradise), respectively. These restrictions include, among other things, limitations on their ability to pay dividends or distributions to us, incur additional debt, make investments or engage in other businesses, merge or consolidate with other companies, or transfer or sell assets. MGM China is in the process of amending its credit facility to, among other things, increase the maximum leverage ratio covenant for fiscal year 2018, which MGM China believes will be necessary due to the delay in the MGM Cotai opening date as a result of the damage and delays caused to MGM Cotai in August 2017 by Typhoon Hato. If MGM China is unable to obtain an amendment or waiver to the maximum leverage ratio, MGM China could be at risk of default under its credit agreement and would be unable to make any draws under that facility. Moreover, an acceleration of the debt under the MGM China facility by the lenders could adversely affect our financial condition and results of operations if MGM China is unable to refinance the defaulted facility, all of which would likely have a negative effect on MGM China’s growth.

 

The following table provides information about share repurchases made by the Company of its common stock during the quarter ended September 30, 2017:

_________________________

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On September 5, 2017, the Company announced that its Board of Directors had adopted a $1.0 billion stock repurchase program. All repurchases under the stock repurchase program are made from time to time at the Company’s discretion in the open market or in privately negotiated agreements. Repurchases under the program may be suspended or discontinued at any time. All shares repurchased by the Company during the three months ended September 30, 2017 were purchased pursuant to the Company’s publicly announced stock repurchase program and have been retired.

 

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

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