Business Context and Reporting Period
Company: Penn National Gaming, Inc. (now PENN Entertainment, Inc.)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: A diversified, multi-jurisdictional owner and manager of gaming and pari-mutuel properties. As of year-end 2009, the Company owned or managed 19 facilities across 15 jurisdictions, including land-based casinos, riverboats, and racetracks. Key properties include Charles Town Entertainment Complex (WV), Hollywood Casino Lawrenceburg (IN), and Hollywood Casino at Penn National Race Course (PA).
Key Financial Metrics
| Metric | 2009 | 2008 |
|---|---|---|
| Net Revenues | $2,369.3 million | $2,423.1 million |
| Net Loss (Attributable to Shareholders) | $(264.9) million | $(153.3) million |
| Loss Per Share (Basic & Diluted) | $(3.39) | $(1.81) |
| Operating Cash Flow | $338.2 million | $420.5 million |
| Total Debt | $2,334.8 million | $2,430.2 million |
| Cash and Cash Equivalents | $713.1 million | $746.3 million |
| Total Assets | $4,712.6 million | $5,189.7 million |
Note: The 2009 results include significant non-cash impairment charges totaling $532.4 million.
Material Changes vs. Prior Period
- Revenue Decline: Net revenues decreased by 2.2% ($53.8 million) primarily due to decreased consumer spending from economic conditions, competitive pressures, and the temporary closure of Empress Casino Hotel due to a fire.
- Impairment Charges: The Company recorded a pre-tax impairment charge of $520.5 million related to goodwill and indefinite-life intangible assets at Hollywood Casino Lawrenceburg due to anticipated gaming expansion in Ohio. An additional $11.9 million impairment was recorded for the replaced Lawrenceburg vessel.
- Fire Loss: A fire at Empress Casino Hotel in March 2009 resulted in a $6.1 million pre-tax loss (deductibles and non-recoverable fees) and a temporary closure from March to June 2009.
- Debt Restructuring: The Company issued $325 million of 8 3/4% senior subordinated notes in August 2009. Proceeds were used to redeem $200 million of 6 7/8% senior subordinated notes and repay portions of the Term Loan A and B facilities. The Company also amended its senior secured credit facility to increase capacity to $1 billion.
- Merger Termination: Unlike 2008, which included a $195.4 million gain from merger termination fees, 2009 had no such income.
Guidance, Outlook, and Risks
Outlook and Capital Projects: The Company expects to fund future growth through cash flow, existing credit facilities, and potential new financing. Major capital projects underway or planned include:
- Ohio Expansion: Development of Hollywood Casino Columbus and Hollywood Casino Toledo (estimated completion H2 2012).
- Kansas Expansion: Development of a facility at Kansas Speedway in partnership with International Speedway Corporation (planned opening early 2012).
- Property Upgrades: Installation of table games at Charles Town Entertainment Complex and Hollywood Casino at Penn National Race Course following legislative approvals.
- Empress Casino Hotel: Reconstruction of the land-based pavilion following the fire.
Key Risks and Contingencies:
- Competition: Significant competitive threats exist in Ohio, Maryland, Kansas, and Illinois, which could negatively impact existing properties like Lawrenceburg and Charles Town.
- Regulatory/Legal: Ongoing litigation regarding a 3% tax surcharge in Illinois (RICO case filed against former Governor Blagojevich) and a lawsuit in Kansas regarding a withdrawn gaming application (seeking $50 million+ damages).
- Capital Structure: Substantial indebtedness limits flexibility and requires significant cash flow for debt service. Covenants restrict additional indebtedness and dividends.
- Insurance Recovery: Uncertainty regarding full recovery of losses from the Empress Casino Hotel fire, though $20.6 million in proceeds were received in 2009.
Investor Verification Checklist
- Impairment Validity: Verify the assumptions used for the $520.5 million impairment charge at Hollywood Casino Lawrenceburg, specifically the projected impact of Ohio casino expansion.
- Ohio Project Viability: Monitor the outcome of the May 2010 statewide election in Ohio regarding the location of the Columbus casino, which impacts the timeline and cost of the $400 million project.
- Illinois Tax Litigation: Track the status of the RICO lawsuit and the 3% tax surcharge appeal, as a favorable outcome could result in significant refunds.
- Debt Covenants: Confirm continued compliance with financial covenants (fixed charge coverage, leverage ratios) given the high debt load and recent losses.
- Empress Casino Recovery: Assess the timeline for the full reopening of Empress Casino Hotel and the finality of insurance claim settlements.