MGM

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2011, for MGM Resorts International. The Company operates casino resorts in the United States and Macau. A pivotal event during this period was the acquisition of a controlling financial interest (51%) in MGM China Holdings Limited on June 3, 2011, following an IPO. Consequently, MGM China results are consolidated for the 28 days ending June 30, 2011, whereas they were previously accounted for under the equity method.

Key Financial Metrics

Note: Operating income and net income figures are significantly inflated by a non-cash gain on the MGM China transaction.

Material Changes vs. Prior Period

• Revenue Growth: Net revenues increased 17% for the quarter and 10% for the six-month period compared to 2010. This was driven by a 4% increase in wholly owned domestic resort revenues and the inclusion of MGM China revenues ($193 million) for the quarter.
• Profitability Surge: Operating income swung from a loss of $1.05 billion in Q2 2010 to a profit of $3.68 billion in Q2 2011. This reversal is primarily due to a $3.5 billion gain recognized on the MGM China acquisition. Excluding this gain and other non-recurring items, operating income increased by $140 million for the quarter.
• CityCenter Impairment: Unlike the prior year, which saw a $1.12 billion impairment charge on the CityCenter investment, no such charge was recorded in 2011. However, a $26 million impairment charge related to CityCenter residential inventory was recognized in Q2 2011.
• Segment Performance: Wholly owned domestic resorts saw an 11% increase in REVPAR at Las Vegas Strip resorts. MGM Macau (consolidated) reported strong performance with a 110% increase in VIP table games turnover pro forma.

Outlook, Risks, and Contingencies

• CityCenter Completion Guarantee: The Company has funded $619 million under the completion guarantee for CityCenter. A remaining estimated net obligation of $18 million is accrued. Significant disputes remain with the general contractor (Perini) regarding construction costs, with claims exceeding the accrual by approximately $200 million.
• Harmon Hotel Structural Issues: A consulting engineer opined that the Harmon Hotel & Spa tower at CityCenter is likely to fail in a code-level earthquake due to missing or misplaced reinforcing steel. The Clark County Building Division has required a plan to abate the potential for collapse. The Company does not currently believe it is responsible for funding remediation but notes this is subject to change.
• Borgata Divestiture: The Company's 50% interest in Borgata is held in a divestiture trust pending sale by March 2014. The trust holds $188 million in cash and investments. The Company ceased receiving distributions from Borgata in 2011.
• Debt Covenants: The Company is in compliance with its senior credit facility covenants, including a minimum trailing annual EBITDA of $1.1 billion (actual was $1.25 billion). Capital expenditures are capped at $500 million for 2011.
• Gold Strike Tunica Closure: The property was closed for 16 days in May 2011 due to flooding, resulting in $8 million in expenses. Insurance claims are pending.

Investor Verification Checklist

• MGM China Gain: Verify the sustainability of earnings by excluding the $3.5 billion one-time gain on the MGM China transaction when analyzing core operational performance.
• CityCenter Liability: Monitor the resolution of the Perini litigation and the structural remediation plan for the Harmon Hotel, as these could result in significant unaccrued costs.
• Debt Maturity Wall: Review the schedule of debt maturities, noting $128.7 million due in 2011 and $544.7 million due in 2012, and assess refinancing capabilities given current credit market conditions.
• Borgata Sale Timeline: Track progress on the sale of the Borgata trust assets, as the inability to sell by the mandated deadline could impact liquidity and future licensing.
• Macau Regulatory Risk: Assess the impact of potential changes in Macau gaming regulations or subconcession renewal terms, which are critical to the long-term value of the MGM China acquisition.