MGM

Business Context and Reporting Period

Company: MGM Mirage (now MGM Resorts International)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended June 30, 2006
Business Overview: The Company operates 23 wholly-owned casino resorts and holds 50% investments in three others (Borgata, Grand Victoria, MGM Grand Macau). Key properties include Bellagio, MGM Grand, Mandalay Bay, and The Mirage in Las Vegas. The Company is heavily engaged in major capital projects, including the $7 billion Project CityCenter and the rebuilding of Beau Rivage following Hurricane Katrina.

Key Financial Metrics (Six Months Ended June 30, 2006)

Liquidity: As of June 30, 2006, the Company had approximately $2.5 billion of available borrowing capacity under its $7.0 billion senior credit facility.

Material Changes vs. Prior Period

• Revenue Growth: Net revenues increased 28% year-over-year, driven primarily by the full-year inclusion of Mandalay Resort Group properties (acquired April 2005) and modest same-store revenue growth (4% in Q2).
• Profitability: Operating income rose 27% to $852.1 million. Operating margin improved to 23% in Q2 2006 from 22% in Q2 2005.
• Stock Compensation Impact: Adoption of SFAS 123(R) resulted in an additional $38.3 million in stock-based compensation expense for the six-month period, reducing net income by approximately $24.5 million.
• Interest Expense: Net interest expense increased significantly to $392.7 million (from $268.8 million in 2005) due to debt assumed in the Mandalay merger.
• Cash Flow Decline: Operating cash flow decreased 32% to $418.1 million, attributed to higher interest payments, a $112 million tax payment related to the Motor City Casino sale, and the absence of a $61 million tax benefit from stock compensation present in the prior year.

Outlook, Risks, and Contingencies

• Major Projects:
  • Project CityCenter: Estimated total cost of $7 billion; expected opening late 2009. $231 million spent in the first six months of 2006.
  • Beau Rivage Rebuilding: Closed since Hurricane Katrina (Aug 2005). Expected to reopen in stages beginning Q3 2006. Insurance proceeds are expected to exceed the net book value of damaged assets.
  • MGM Grand Macau: 50% joint venture; estimated cost $1.1 billion; expected opening late 2007.
• Debt Covenants: The Company is in compliance with debt covenants. As of June 30, 2006, the leverage ratio was 5.4:1 (max 6.75:1) and interest coverage was 2.7:1 (min 2.0:1).
• Legal and Contingencies:
  • Hurricane Katrina: $126 million in damaged assets written off; $34 million in cleanup costs incurred. Net insurance receivable of $74 million recorded.
  • NYRA Agreement: Definitive agreement to manage video lottery terminals at Aqueduct, with potential project financing up to $190 million.
• Share Repurchases: Repurchased 3.5 million shares for $141 million in the first six months of 2006. 11 million shares remain available under the current authorization.

Investor Verification Checklist

• Insurance Recovery: Verify the final settlement amount and timing of Hurricane Katrina insurance proceeds for Beau Rivage to confirm the projected gain.
• Project CityCenter Funding: Monitor capital expenditure burn rates and the timeline for residential unit sales, which are projected to fund $2.5 billion of the project cost.
• Debt Maturities: Confirm refinancing plans for the $245 million of long-term debt maturing in late 2006.
• Beau Rivage Reopening: Track the actual reopening date and initial revenue performance against the Q3 2006 target.
• Stock Compensation: Assess the ongoing impact of SFAS 123(R) on future earnings per share as unvested grants are amortized.