Penn National Gaming Inc. Reports Operating Results (10-Q)
Penn National Gaming Inc. has a market cap of $2.67 billion; its shares were traded at around $33.88 with a P/E ratio of 40.2 and P/S ratio of 1.1. PENN is in the portfolios of Chuck Akre of Akre Capital Management, LLC, Ron Baron of Baron Funds, Columbia Wanger of Columbia Wanger Asset Management, George Soros of Soros Fund Management LLC, Mario Gabelli of GAMCO Investors, Bruce Kovner of Caxton Associates.
Highlight of Business Operations: · Factors affecting our results for the three months ended September 30, 2010, as compared to the three months ended September 30, 2009, included the insurance gain related to the Empress Casino Fire of $5.9 million in the third quarter of 2010, the reversal of previously accrued reserves associated with the Capitol House litigation for $9.6 million in the third quarter of 2010, the opening of table games in July 2010 at Hollywood Casino at Charles Town Races and Hollywood Casino at Penn National Race Course which led to increased attendance levels at these properties, decreased lobbying expenses in Ohio for the three months ended September 30, 2010, lower customer visitation levels in the third quarter of 2010 compared to the corresponding period in the prior year at Hollywood Casino Lawrenceburg resulting from the opening of the new facility in late June 2009 and at Empress Casino Hotel for the re-opening of the casino following the fire in late June 2009, and continued low consumer spending levels on gaming activities caused by current economic conditions.
· Factors affecting our results for the nine months ended September 30, 2010, as compared to the nine months ended September 30, 2009, included the impact from the fire at Empress Casino Hotel in March 2009 which closed this property from March 20, 2009 to June 25, 2009 and resulted in $5.9 million of insurance deductible charges and certain other write-offs for the nine months ended September 30, 2009 and the insurance gain in the third quarter of 2010 mentioned above, the reversal of previously accrued reserves associated with the Capitol House litigation for $9.6 million in the third quarter of 2010, the opening of table games in July 2010 at Hollywood Casino at Charles Town Races and Hollywood Casino at Penn National Race Course, the continued impact of the opening of the new casino riverboat in late June 2009 at Hollywood Casino Lawrenceburg, decreased lobbying expenses in Ohio for the nine months ended September 30, 2010, the impairment loss in 2010 for the land held for sale in Columbus, Ohio of $31.3 million, the impairment loss for the replaced Lawrenceburg vessel in 2009 of $11.8 million, the police services contract termination charge of $6.6 million at Hollywood Casino Aurora in the second quarter of 2010, and continued low consumer spending levels on gaming activities caused by current economic conditions.
· On May 4, 2010, in a statewide election in Ohio, the voters determined that our casino in Columbus will be located at the site of the former Delphi Automotive plant along Columbuss West Side. As a result of the election, we initiated the process to sell the parcel of land that we purchased in Columbuss Arena District, and reclassified the land as held for sale. We obtained an appraisal to determine the estimated fair market value of the parcel of land that we had purchased in Columbuss Arena District, and recorded a pre-tax impairment charge of $0.8 million and $31.3 million during the three and nine months ended September 30, 2010, respectively, which was comprised of the difference between the lands estimated fair market value less costs to sell and its carrying value. The project scope for Hollywood Casino Columbus, a $400 million Hollywood-themed casino in Columbus, Ohio, inclusive of $50 million in licensing fees, is in development, with a planned casino opening of up to 3,000 slot machines, 70 table games and 30 poker tables, structured and surface parking, as well as food and beverage outlets and an entertainment lounge. Hollywood Casino Columbus is anticipated to be completed in the fourth quarter of 2012. In December 2009, we announced that we had completed the purchase of a 44-acre site in Toledo, Ohio that was expressly authorized for casino gaming as part of the amendment to Ohios Constitution. Construction is underway for Hollywood Casino Toledo, a $300 million Hollywood-themed casino in Toledo, Ohio, inclusive of $50 million in licensing fees, with a planned casino opening of 2,000 slot machines, 60 table games and 20 poker tables, structured and surface parking, as well as food and beverage outlets and an entertainment lounge. Hollywood Casino Toledo is anticipated to be completed in the first half of 2012.
· In April 2010, we entered into a termination contract with the city of Aurora, Illinois, whereby we will pay $7 million in lieu of perpetual annual payments (of approximately $1 million) to have off duty Aurora police officials provide security at Hollywood Casino Aurora each day. Payments of $1.5 million were made on June 1, 2010 and September 1, 2010 and additional payments of $2.0 million and $2.0 million are due on June 1, 2011 and June 1, 2012, respectively. This liability was discounted using an estimate of our incremental borrowing rate over the term of the obligation. The accretion of this discount is recorded in interest expense in the consolidated statements of income.
· In February 2010, Kansas Entertainment, LLC (Kansas Entertainment) received the final approval under the Kansas Expanded Lottery Act, along with its gaming license from the Kansas Racing and Gaming Commission, to proceed with the development of a Hollywood-themed destination facility overlooking Turn 2 at Kansas Speedway. Kansas Entertainment began construction of the facility in the second quarter of 2010 and has a planned opening in the first half of 2012. The approximately $411 million facility, inclusive of licensing fees, is expected to feature a 82,000 square foot casino with approximately 2,000 slot machines, 52 table games and 12 poker tables, a 1,253 space parking structure, as well as a variety of dining and entertainment amenities. We, along with our partner in Kansas Entertainment, International Speedway Corporation (International Speedway), will share equally the cost of developing and constructing the proposed facility and are currently pursuing third party financing for the project jointly. If such third party financing cannot be obtained on satisfactory terms, we and International Speedway are prepared to finance the project. We estimate that our share of the project will be approximately $155 million.
· On March 20, 2009, Empress Casino Hotel, which was undergoing a $55 million renovation, was closed following a fire that started in the land-based pavilion at the facility. All customers and employees were successfully evacuated, and the fire was contained on the land-side of the property before it could spread to the adjacent casino barge. On June 25, 2009, the casino barge was reopened with temporary land-based facilities, and we began construction of a new land-based pavilion. We recorded a $0.2 million and $5.9 million pre-tax loss during the three and nine months ended September 30, 2009, respectively, for the insurance deductibles for property damage, business interruption and employee lost wages, as well as a write-off of construction fees related to the renovation that are not recoverable under our insurance policies and certain consulting fees. At that time, we carried a builders risk insurance policy for the on-going renovations with a policy limit of $57 million, inclusive of $14 million for delay in completion and $43 million for property damage. The builders risk insurance policy included a $50,000 property damage deductible and a 30-day delay in completion deductible for the peril of fire. In addition, we carried comprehensive business interruption and property damage insurance for the operational components of the Empress Casino Hotel with an overall limit of $228 million. The operational insurance policy included a $2.5 million property damage deductible and a 48-hour business interruption deductible for the peril of fire. During the nine months ended September 30, 2010, we received $39.8 million in insurance proceeds related to the fire at Empress Casino Hotel, with $19.8 million received during the third quarter of 2010. In the third quarter of 2010, the insurance recovery amount exceeded the net book value of assets believed to be damaged, destroyed or abandoned and other costs incurred as a result of the fire at Empress Casino Hotel, and as such, we recorded a gain of $5.9 million during the three and nine months ended September 30, 2010. We continue to work with our insurance providers to settle the claim related to the fire and we anticipate additional proceeds in future periods.
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