MGM

Business Context and Reporting Period

Company: MGM Mirage (now MGM Resorts International)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three months ended March 31, 2008
Business Overview: MGM Mirage operates 17 wholly-owned casino resorts and holds 50% interests in four others, including CityCenter (Las Vegas), Borgata (Atlantic City), Grand Victoria (Illinois), and MGM Grand Macau. The company is heavily invested in the development of CityCenter, a mixed-use project on the Las Vegas Strip expected to open in late 2009.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net revenue decreased 2% year-over-year. Casino revenue fell 3% due to a 4% drop in table games volume on the Las Vegas Strip. Room revenue declined 6% driven by a 4% decrease in Las Vegas Strip REVPAR (Revenue Per Available Room) and the closure of Monte Carlo following a January 2008 fire.
• Profitability Compression: Operating income dropped 23% to $341.3 million. Operating margins contracted from 23% to 18% due to lower revenues, increased wage rates, and higher operating costs at the newly opened MGM Grand Detroit.
• Cash Flow Reversal: Operating cash flow swung from a $256 million inflow in Q1 2007 to a $124 million outflow in Q1 2008. This was primarily caused by a significant income tax payment related to the CityCenter joint venture contribution and lower operating income.
• Debt Increase: Long-term debt increased by approximately $1.6 billion to $12.78 billion, driven by borrowings under the senior credit facility to fund CityCenter construction and share repurchases.

Guidance, Outlook, and Risks

• CityCenter Funding: The joint venture expects to spend approximately $2.0 billion on construction for the remainder of 2008. MGM Mirage and Dubai World each funded $200 million in Q1 2008 and expect to fund additional costs as needed while negotiating project financing.
• Monte Carlo Fire: The Monte Carlo resort remained partially closed through March 31, 2008. While insurance recoveries for property damage and closure costs have been received, recoveries for lost profits have not been recorded pending resolution of contingencies.
• Share Repurchases: The company completed a joint tender offer with Dubai World in February 2008, purchasing 8.5 million shares at $80/share ($680 million). Additionally, 7 million shares were repurchased on the open market for $427 million. Approximately 2.6 million shares remain available under the current authorization.
• Economic Risks: Management cited weakness in the U.S. economy, including the housing market, credit concerns, and higher travel costs, as primary drivers for reduced leisure travel and convention cancellations.
• Legal Contingency: A Nevada Supreme Court ruling regarding sales tax on complimentary meals could result in refunds of approximately $33 million, though no income has been recorded pending final resolution.

Investor Verification Checklist

• CityCenter Liquidity: Verify the status of project financing negotiations and the sufficiency of cash reserves to fund the projected $2.0 billion in remaining 2008 construction costs.
• Monte Carlo Recovery: Monitor the timeline for full reopening and the final settlement of insurance claims regarding lost profits.
• Debt Covenants: Confirm continued compliance with leverage (max 6.5:1) and interest coverage (min 2.0:1) ratios, which stood at 3.5:1 and 4.1:1 respectively as of March 31, 2008.
• Regional Performance: Assess the long-term impact of the economic downturn on regional markets (Detroit, Mississippi) which are reportedly more sensitive than the Las Vegas Strip.
• Tax Refund Status: Track the outcome of the Nevada Supreme Court rehearing regarding the $33 million sales tax refund claim.