NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1
. Basis of Presentation and Significant Accounting Policies
In May 2016, Red Rock Resorts, Inc. (“Red Rock Resorts”) completed an initial public offering (the “IPO”) and related reorganization transactions of Station Casinos LLC and its consolidated subsidiaries (“Station LLC”). Station LLC, a Nevada limited liability company, is a gaming, development and management company that owns and operates
nine
major hotel/casino properties and
ten
smaller casino properties (
three
of which are
50%
owned) in the Las Vegas regional market. Station LLC also manages a casino in Sonoma County, California and a casino in Allegan County, Michigan, both on behalf of Native American tribes. Prior to the IPO and related reorganization transactions, all of the economic and voting interests in Station LLC were held by Station Holdco LLC (“Station Holdco”) and Station Voteco LLC (“Station Voteco”), respectively, and Station LLC operated under management agreements with Fertitta Entertainment LLC and its consolidated subsidiaries (“Fertitta Entertainment”). These condensed combined financial statements comprise the financial statements of Station Holdco, Station Voteco, Station LLC and Fertitta Entertainment (as combined, the “Company”) and are presented on a combined basis because the combined entities were under the common control of brothers Frank J. Fertitta III and Lorenzo J. Fertitta prior to the IPO, who collectively held more than
50%
of these entities’ voting and economic interests. Frank J. Fertitta III is Red Rock Resorts’ Chairman and Chief Executive Officer and Lorenzo J. Fertitta is a member of Red Rock Resorts’ board of directors. All significant intercompany and intra-company transactions, including the effects of the management agreements, have been eliminated. The Company is the predecessor entity of Red Rock Resorts for accounting purposes.
Acquisition of Fertitta Entertainment and Reorganization
Fertitta Entertainment was formed in October 2009 to pursue the acquisition of or obtain management contracts for gaming and entertainment facilities domestically and internationally. Effective June 2011, certain wholly-owned subsidiaries of Fertitta Entertainment entered into
25
-year management agreements with Station LLC and certain of its subsidiaries. All but one of Station LLC’s executive officers and certain other key personnel were employed by Fertitta Entertainment and provided services to Station LLC pursuant to the management agreements.
In May 2016, Station LLC acquired all of the outstanding membership interests in Fertitta Entertainment for
$460.0 million
in cash less
$51.0 million
paid by Station LLC in satisfaction of Fertitta Entertainment’s term loan and revolving credit facility on the closing date, and less
$1.3 million
in liabilities of Fertitta Entertainment assumed by Station LLC (“the Fertitta Entertainment Acquisition”). The Fertitta Entertainment Acquisition was primarily funded through proceeds received by Station LLC in connection with the IPO. Station LLC funded the balance of the purchase price by incurring
$41.7 million
in additional borrowings under its revolving credit facility.
In connection with the IPO, Red Rock Resorts was designated as the sole managing member of Station Holdco and Station LLC, and Station Voteco transferred all of its voting interest in Station LLC to Red Rock Resorts. Station LLC terminated the management agreements (other than with respect to the Wild Wild West property) between Station LLC and Fertitta Entertainment and entered into new employment agreements with its executive officers and other individuals who were employed by Fertitta Entertainment and provided services to Station LLC through the management agreements prior to the completion of the Fertitta Entertainment Acquisition. As a result of the IPO and these reorganization transactions, Red Rock Resorts obtained all of the voting interests in Station LLC and an indirect interest in approximately
36%
of the economic interests in Station LLC, and accordingly, controls and operates of all of the business and affairs of Station LLC.
The Fertitta Entertainment Acquisition constituted an acquisition of an entity under common control which was accounted for at historical cost in a manner similar to a pooling of interests. Prior to the completion of the Fertitta Entertainment Acquisition, Fertitta Entertainment sold certain net assets, including an aircraft and associated debt, to related parties. At the closing of the Fertitta Entertainment Acquisition, Fertitta Entertainment did not have material assets other than its workforce and the management agreements with Station LLC, and all debt of Fertitta Entertainment was repaid. As a result, the majority of the purchase price was treated as a deemed distribution for accounting purposes, calculated as the difference between the purchase price and the historical cost of the net assets acquired.
Basis of Presentation
The accompanying condensed combined financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally
STATION HOLDCO LLC
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
included in financial statements prepared in accordance with accounting principles generally accepted in the United States ("GAAP") have been condensed or omitted pursuant to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary for a fair presentation of the results for the interim periods have been made. The interim results reflected in these condensed combined financial statements are not necessarily indicative of results to be expected for the full fiscal year. These financial statements should be read in conjunction with the Company's audited combined financial statements and related notes for the year ended
December 31, 2015
included in Red Rock Resorts’ prospectus filed with the SEC on April 28, 2016 pursuant to Rule 424(b) (the “Prospectus”).
Use of Estimates
The preparation of condensed combined financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying notes. Significant estimates incorporated into the Company’s condensed combined financial statements include the estimated useful lives of depreciable and amortizable assets, the estimated cash flows and other factors used in assessing the recoverability of goodwill, intangible assets and other long-lived assets, the estimated fair values of certain assets related to write-downs and impairments, the estimated reserve for self-insured claims, the estimated costs associated with the Company’s player rewards program and the estimated liabilities related to litigation, claims and assessments. Actual results could differ from those estimates.
Investments in Joint Ventures and Variable Interest Entities
The amounts shown in the accompanying condensed combined financial statements include the accounts of MPM Enterprises, LLC ("MPM"), which is a
50%
owned, consolidated variable interest entity (“VIE”) of the Company. The Company consolidates MPM because it directs the activities of MPM that most significantly impact MPM’s economic performance and has the right to receive benefits and the obligation to absorb losses that are significant to MPM. The assets of MPM reflected in the Company’s Condensed Combined Balance Sheets at
March 31, 2016
and
December 31, 2015
included intangible assets of
$19.2 million
and
$21.7 million
, respectively, and receivables of
$3.7 million
and
$3.4 million
, respectively. MPM’s assets may be used only to settle MPM’s obligations, and MPM’s beneficial interest holders have no recourse to the general credit of the Company.
The Company has various other investments in
50%
owned joint ventures which are accounted for using the equity method, including
three
50%
owned smaller casino properties. Equity method investments at
March 31, 2016
and
December 31, 2015
included
$3.3 million
and
$6.3 million
, respectively, of investments in certain restaurants at the Company’s properties which are considered to be VIEs, of which the Company is not the primary beneficiary. In January 2016, one of these restaurants closed and the joint venture ended. The Company’s equity method investments are not, in the aggregate, material in relation to its financial position or results of operations.
Discontinued Operations
During the fourth quarter of 2014, the Company’s majority-owned consolidated subsidiary, Fertitta Interactive LLC (“Fertitta Interactive”), ceased operations. The results of operations of Fertitta Interactive are reported in discontinued operations in the Condensed Combined Statements of
Income
for the three months ended March 31, 2015, and the assets and liabilities of Fertitta Interactive are reported separately in the Condensed Combined Balance Sheet as of December 31, 2015. The Condensed Combined Statements of Cash Flows have not been adjusted for discontinued operations.
Related Party Note Receivable
Fertitta Entertainment has a non-recourse secured note receivable due April 30, 2019 from Fertitta Investment LLC (“FI”), the parent of FI Station Investor LLC, an entity controlled by brothers Frank J. Fertitta III and Lorenzo J. Fertitta. The principal balance of the note accrues interest at the rate of
4.99%
. At
March 31, 2016
, the principal balance of the note was
$14.9 million
and unpaid interest was
$2.9 million
. This note receivable was not acquired in the Fertitta Entertainment Acquisition.
STATION HOLDCO LLC
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
Income Taxes
Each of the combined entities are limited liability companies treated as partnerships for income tax purposes and as such, are pass-through entities that are not liable for income tax in the jurisdictions in which they operate. Accordingly, no provision for income taxes has been made in the condensed combined financial statements and the Company has no liability associated with uncertain tax positions.
Significant Accounting Policies
A description of the Company’s significant accounting policies is included in the Company’s audited combined financial statements for the year ended
December 31, 2015
included in the Prospectus.
Recently Issued and Adopted Accounting Standards
In March 2016, the Financial Accounting Standards Board (“FASB”) issued amended accounting guidance that simplifies certain aspects of the accounting for share-based payments, including income taxes, classification of awards as either equity or liabilities and classification within the statement of cash flows. The amended guidance is effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2016 and early adoption is permitted. The Company is currently evaluating the impact this guidance will have on its financial position and results of operations.
In February 2016, the FASB issued amended accounting guidance that changes the accounting for leases and requires expanded disclosures about leasing activities. Under the new guidance, lessees will be required to recognize a right-of-use asset and a lease liability, measured on a discounted basis, at the commencement date for all leases with terms greater than twelve months. Lessor accounting will remain largely unchanged, other than certain targeted improvements intended to align lessor accounting with the lessee accounting model and with the updated revenue recognition guidance issued in 2014. Lessees and lessors must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The amended guidance is effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2018 and early adoption is permitted. The Company is currently evaluating the impact this guidance will have on its financial position and results of operations.
In September 2015, the FASB issued amended accounting guidance that simplifies the accounting for measurement-period adjustments in business combinations. The amended guidance requires an acquirer to record changes in depreciation, amortization, or other income effects, if any, as a result of changes to estimated amounts identified during the measurement period, in the reporting period in which the adjustments are identified, calculated as if the accounting had been completed at the acquisition date. The amended guidance also requires an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings, by line item, that would have been recorded in previous reporting periods if the adjustment to the estimated amounts had been recognized as of the acquisition date. The Company adopted this guidance in the first quarter of 2016 and the adoption had no impact on its financial position or results of operations.
In May 2014, the FASB issued a new accounting standard for revenue recognition which requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard supersedes the existing accounting guidance for revenue recognition, including industry-specific guidance, and amends certain accounting guidance for recognition of gains and losses on the transfer of non-financial assets. The new guidance is effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2017. Early adoption is permitted for annual reporting periods (including interim periods within those periods) beginning after December 15, 2016. Upon adoption, financial statement issuers may elect to apply the new standard either retrospectively to each prior reporting period presented, or using a modified retrospective approach by recognizing the cumulative effect of initial application and providing certain additional disclosures. The Company will adopt this guidance in the first quarter of 2018. The Company is currently evaluating the impact this guidance will have on its financial position and results of operations, and has not yet determined which adoption method it will elect.
STATION HOLDCO LLC
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
2
. Native American Development
Following is information about the Company’s Native American development activities.
North Fork Rancheria of Mono Indian Tribe
The Company has development and management agreements with the North Fork Rancheria of Mono Indians (the "Mono"), a federally recognized Native American tribe located near Fresno, California, which were originally entered into in 2003. In August 2014, the Mono and the Company entered into the Second Amended and Restated Development Agreement (the "Development Agreement") and the Second Amended and Restated Management Agreement (the "Management Agreement"). Pursuant to those agreements, the Company will assist the Mono in developing and operating a gaming and entertainment facility (the "North Fork Project") to be located in Madera County, California. The Company purchased a
305
-acre parcel of land located on U.S. Highway 99 north of the city of Madera (the “North Fork Site”), which was taken into trust for the benefit of the Mono by the Department of the Interior (“DOI”) in February 2013.
As currently contemplated, the North Fork Project is expected to include approximately
2,000
slot machines, approximately
40
table games and several restaurants. Development of the North Fork Project is subject to certain governmental and regulatory approvals, including, but not limited to, approval of the Management Agreement by the Chairman of the National Indian Gaming Commission (“NIGC”).
Under the Development Agreement, the Company will receive a development fee of
4%
of the costs of construction and the costs of development of the North Fork Project (both as defined in the Development Agreement). Under the terms of the Development Agreement, the Company has agreed to arrange the financing for the ongoing development costs and construction of the facility. The Company will contribute significant financial support to the North Fork Project. Through
March 31, 2016
, the Company has paid approximately
$27.3 million
of reimbursable advances to the Mono, primarily to complete the environmental impact study, secure the North Fork Site and pay the costs of litigation. The advances are expected to be repaid from the proceeds of third-party financing or from the Mono’s gaming revenues; however, there can be no assurance that the advances will be repaid. The carrying amount of the advances was reduced to fair value upon the Company’s adoption of fresh-start reporting in 2011. At
March 31, 2016
, the carrying amount of the advances was
$12.2 million
.
STATION HOLDCO LLC
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
The following table outlines the Company's evaluation at
March 31, 2016
of each of the critical milestones necessary to complete the North Fork Project.
|
|
|
|
As of March 31, 2016
|
Federally recognized as a tribe by the Bureau of Indian Affairs (“BIA”)
|
Yes
|
Date of recognition
|
Federal recognition was terminated in 1961 and restored in 1983.
|
Tribe has possession of or access to usable land upon which the project is to be built
|
The DOI accepted approximately 305 acres of land for the project into trust for the benefit of the Mono in February 2013.
|
Status of obtaining regulatory and governmental approvals:
|
|
Tribal–state compact
|
A compact was negotiated and signed by the Governor of California and the Mono in August 2012. The Compact was ratified by the California State Assembly and Senate in May 2013 and June 2013, respectively. Opponents of the North Fork Project qualified a referendum, “Proposition 48,” for a state-wide ballot challenging the legislature’s ratification of the Compact. In November 2014, Proposition 48 failed. The North Fork Project’s opponents contend that the failure of Proposition 48 nullified the ratification of the Compact and, therefore, the Compact is not in effect. In March 2015, the Mono filed suit against the State
(see North Fork Rancheria of Mono Indians v. State of California)
to obtain a compact with the State or procedures from the Assistant Secretary of the Interior for Indian Affairs under which Class III gaming may be conducted on the North Fork Site. In November 2015, the district court issued its order granting judgment in favor of the Mono and ordering the parties to conclude a compact within 60 days. The parties were unable to conclude a compact and the court ordered mediation. In February 2016, the mediation was conducted and the mediator issued her decision selecting the Mono’s compact as the compact that best comports with the law and the orders from the district court. The State had 60 days in which to consent to the selected compact. The State failed to consent to the selected compact and in April 2016, it was submitted to the Secretary of the Interior for the adoption of procedures consistent with the selected compact to allow the Mono to conduct Class III gaming at the North Fork Site. No assurances can be provided as to whether the Mono will be successful in obtaining Secretarial procedures to conduct Class III gaming on the North Fork Site.
|
Approval of gaming compact by DOI
|
The Compact was submitted to the DOI in July 2013. In October 2013, notice of the Compact taking effect was published in the Federal Register.
|
Record of decision regarding environmental impact published by BIA
|
In November 2012, the record of decision for the Environmental Impact Statement for the North Fork Project was issued by the BIA. In December 2012, the Notice of Intent to take land into trust was published in the Federal Register.
|
BIA accepting usable land into trust on behalf of the tribe
|
The North Fork Site was accepted into trust in February 2013.
|
Approval of management agreement by NIGC
|
In December 2015, the Mono submitted the Second Amended and Restated Management Agreement, and certain related documents, to the NICG. Approval of the Management Agreement by the NIGC is expected to occur following the Mono’s written request for such approval. The Company believes the Management Agreement will be approved because the terms and conditions thereof are consistent with the provisions of the Indian Gaming Regulatory Act.
|
Gaming licenses:
|
|
Type
|
Current plans for the North Fork Project include Class II and Class III gaming, which requires that the Mono enters into a compact with the State or obtains Secretarial procedures to conduct Class III gaming on the North Fork Site and that the Management Agreement be approved by the NIGC.
|
Number of gaming devices allowed
|
The Compact permitted a maximum of 2,000 Class III slot machines at the facility. There is no limit on the number of Class II gaming devices that the Mono can offer.
|
Agreements with local authorities
|
The Mono has entered into memoranda of understanding with the City of Madera, the County of Madera and the Madera Irrigation District under which the Mono agreed to pay one-time and recurring mitigation contributions, subject to certain contingencies.
|
STATION HOLDCO LLC
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
Following is a discussion of legal matters related to the North Fork Project.
Stand Up For California! v. Dept. of the Interior.
In December 2012, Stand Up for California!, several individuals and the Ministerial Association of Madera (collectively, the “Stand Up” plaintiffs) filed a complaint against the DOI, the BIA and the Secretary of Interior and Assistant Secretary of the Interior, in their official capacities, seeking to overturn the Secretary’s determination to take the North Fork Site into trust for the purposes of gaming (the “North Fork Determination”) and seeking declaratory and injunctive relief to prevent the United States from taking the North Fork Site into trust. The Mono filed a motion to intervene as a party to the lawsuit, which was granted. In January 2013, the Court denied the Stand Up plaintiffs’ Motion for Preliminary Injunction and the United States accepted the North Fork Site into trust for the benefit of the Mono in February 2013. In June 2013, the court granted the Stand Up plaintiffs leave to amend their complaint to add a claim alleging that the federal defendants failed to comply with the requirements of the Clean Air Act, and the Stand Up plaintiffs subsequently filed an amended Complaint for Declaratory and Injunctive Relief challenging the validity of the Compact and alleging that the North Fork Site should be taken out of trust because the purposes for which it was taken into trust are no longer valid. The parties’ motions for summary judgment, oppositions to motions for summary judgment and responses were all filed by April 2015. The parties are currently awaiting a hearing date for oral argument or a decision on the pleadings.
Stand Up For California! v. Brown.
In March 2013, Stand Up for California! and Barbara Leach, a local resident, filed a complaint for declaratory relief and petition for writ of mandate in California Superior Court for the County of Madera against California Governor Edmund G. Brown, Jr., alleging that Governor Brown violated the California constitutional separation-of-powers doctrine when he concurred in the North Fork Determination. The complaint sought to vacate and set aside the Governor’s concurrence. Plaintiffs’ complaint was subsequently amended to include a challenge to the constitutionality of AB 277. The Mono intervened as a defendant in the lawsuit and both the State and the Mono filed demurrers to plaintiffs’ complaint. In March 2014, the court issued its Judgment of Dismissal dismissing plaintiffs’ amended complaint. In September 2014, plaintiffs filed their opening appellate brief appealing the Judgment of Dismissal. The State and the Mono subsequently filed their responsive briefs and the plaintiffs filed their reply brief in January 2015. Prior to the court’s issuing its Judgment of Dismissal, the Mono filed a Cross-Complaint against the State alleging that Proposition 48 was invalid and unenforceable to the extent that it purports to invalidate the legislative ratification of the Compact. The State and the plaintiffs filed demurrers seeking to dismiss the Cross-Complaint. In June 2014, the court sustained the plaintiffs’ and the State’s demurrers and dismissed the Mono’s Cross-Complaint. The Mono timely filed their notice of appeal for dismissal of the Cross-Complaint and in June 2015, filed their opening appellate brief. In September 2015, plaintiffs and the State filed their responsive briefs and in November 2015 the Mono filed its reply brief. In May 2016, the parties voluntarily stipulated to the dismissal of the Mono’s appeal. The dismissal of the Mono’s appeal does not affect the plaintiffs’ appeal, which is still pending. The parties are currently awaiting a hearing date for oral arguments on plaintiffs’ appeal or a decision on the appellate briefs.
North Fork Rancheria of Mono Indians v. State of California.
In March 2015, the Mono filed a complaint against the State alleging that the State violated 25 U.S.C. Section 2710(d)(7) et. seq. by failing to negotiate with the Mono in good faith to enter into a tribal-state compact governing Class III gaming on the Mono’s Indian lands. The compliant sought a declaration that the State failed to negotiate in good faith to enter into an enforceable tribal-state compact and an order directing the State to conclude an enforceable tribal-state compact within 60 days or submit to mediation. The State filed its answer to the Mono’s complaint in May 2015. The Mono’s motion for judgment on the pleadings was filed in August 2015 and the State’s opposition and cross motion for judgment on the pleadings was filed in September 2015. The Mono’s reply and the State’s reply brief were filed in October 2015. In November 2015, the district court issued its order granting judgment in favor of the Mono and ordering the parties to conclude a compact within 60 days. The parties were unable to conclude a compact within such period and on January 13, 2016 the district court filed its Order to Show Cause as to why the court should not order the parties to submit to mediation. On January 26, 2016, the court filed its order confirming the selection of a mediator and requiring the parties to submit their last, best offers for a compact to the mediator within ten days. On February 8, 2016, the mediation was conducted and on February 11, 2016, the mediator issued her decision selecting the Mono’s compact as the compact that best comports with the law and the orders from the district court. The State had 60 days in which to consent to the selected compact. The State failed to consent to the selected compact and on April 11, 2016, the selected compact was submitted to the Secretary of the Interior for the adoption of procedures consistent with the terms of the selected compact to allow the Mono to conduct Class III gaming at the North Fork Site. On March 18, 2016, the Picayune Rancheria of Chukchansi Indians filed a motion to intervene in the lawsuit. On April 4, 2016, the Mono filed a brief opposing the intervention, and the State filed its own opposition brief on April 18, 2016. On April 26, 2016, the court vacated the hearing scheduled for May 2, 2016 and took the matter under submission.
Picayune Rancheria of Chukchansi Indians v. Brown
. On March 21, 2016, the Picayune Rancheria filed a complaint for declaratory relief and petition for writ of mandate in California Superior Court for the County of Madera against California Governor Edmund G. Brown, Jr., alleging that Governor Brown violated the California constitutional separation-of-powers
STATION HOLDCO LLC
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
doctrine when he concurred in the North Fork Determination. The complaint seeks to vacate and set aside the Governor’s concurrence.
The timing of this type of project is difficult to predict and is dependent upon the receipt of the necessary governmental and regulatory approvals. There can be no assurance as to when, or if, these approvals will be obtained. The Company currently estimates that construction of the facility may begin in the next
36
to
48
months and estimates that the facility would be completed and opened for business approximately
18
months after construction begins. There can be no assurance, however, that the North Fork Project will be completed and opened within this time frame or at all. The Company expects to assist the Mono in obtaining third-party financing for the North Fork Project once all necessary regulatory approvals have been received and prior to commencement of construction; however, there can be no assurance that the Company will be able to obtain such financing for the North Fork Project on acceptable terms or at all.
The Company has evaluated the likelihood that the North Fork Project will be successfully completed and opened, and has concluded that the likelihood of successful completion is in the range of
65%
to
75%
at
March 31, 2016
. The Company’s evaluation is based on its consideration of all available positive and negative evidence about the status of the North Fork Project, including, but not limited to, the status of required regulatory approvals, as well as the progress being made toward the achievement of all milestones and the successful resolution of all contingencies. There can be no assurance that the North Fork Project will be successfully completed or that future events and circumstances will not change the Company’s estimates of the timing, scope, and potential for successful completion or that any such changes will not be material. In addition, there can be no assurance that the Company will recover all of its investment in the North Fork Project even if it is successfully completed and opened for business.
3
. Long-term Debt
Long-term debt consisted of the following (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
March 31,
2016
|
|
December 31, 2015
|
$1.625 billion Term Loan Facility, due March 1, 2020, interest at a margin above LIBOR or base rate (4.25% at March 31, 2016 and December 31, 2015), net of unamortized discount and deferred issuance costs of $42.9 million and $45.6 million, respectively
|
$
|
1,377,582
|
|
|
$
|
1,423,026
|
|
$350 million Revolving Credit Facility, due March 1, 2018, interest at a margin above LIBOR or base rate (5.50% and 6.00% at March 31, 2016 and December 31, 2015, respectively)
|
30,000
|
|
|
20,000
|
|
$500 million 7.50% Senior Notes, due March 1, 2021, net of unamortized discount and deferred issuance costs of $10.8 million and $11.3 million at March 31, 2016 and December 31, 2015, respectively
|
489,179
|
|
|
488,735
|
|
Restructured Land Loan, due June 17, 2016, interest at a margin above LIBOR or base rate (3.93% and 3.92% at March 31, 2016 and December 31, 2015, respectively), net of unamortized discount of $1.0 million and $2.1 million, respectively
|
114,764
|
|
|
112,517
|
|
Other long-term debt, weighted-average interest of 4.47% and 4.46% at March 31, 2016 and December 31, 2015, respectively, net of unamortized deferred issuance costs of $0.4 million at March 31, 2016 and December 31, 2015, maturity dates ranging from 2016 to 2027
|
108,839
|
|
|
110,919
|
|
Total long-term debt
|
2,120,364
|
|
|
2,155,197
|
|
Current portion of long-term debt
|
(55,136
|
)
|
|
(88,937
|
)
|
Total long-term debt, net
|
$
|
2,065,228
|
|
|
$
|
2,066,260
|
|
The current portion of long-term debt at
March 31, 2016
and
December 31, 2015
excluded amounts outstanding under the
$105 million
restructured land loan due June 16, 2016 (the “Restructured Land Loan”). In June 2016, the Company’s wholly owned subsidiary, CV Propco LLC (“CV Propco”), notified the lenders of its request to exercise its option to extend the maturity date of the Restructured Land Loan from June 17, 2016 to June 17, 2017. In connection with the extension of the maturity date, the Company will pay interest accruing during the extension period in cash. The current portion of long-term debt at
December 31, 2015
included a
$43.7 million
mandatory excess cash flow payment on the
$1.625 billion
term loan facility (the “Term Loan Facility”) which was paid during the first quarter of 2016.
The credit agreement governing Station LLC’s Term Loan Facility and the
$350 million
revolving credit facility (the "Revolving Credit Facility" and, together with the Term Loan Facility, the "Credit Facility") contains a number of customary covenants, including requirements that Station LLC maintain a maximum total leverage ratio ranging from
5.75
to
1.00
at
STATION HOLDCO LLC
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
March 31, 2016
to
5.00
to
1.00
in 2017 and a minimum interest coverage ratio of
3.00
to
1.00
, provided that a default of the financial ratio covenants shall only become an event of default under the Term Loan Facility if the lenders providing the Revolving Credit Facility take certain affirmative actions after the occurrence of a default of such financial ratio covenants. At
March 31, 2016
, Station LLC’s total leverage ratio was
4.14
to 1.00 and its interest coverage ratio was
4.23
to 1.00, both as defined in the credit agreement, and the Company believes Station LLC was in compliance with all applicable covenants.
The Fertitta Entertainment term loan and revolving credit facility, which is included in Other long-term debt, was fully repaid as part of the Fertitta Entertainment Acquisition and reorganization of the Company’s corporate structure.
At
March 31, 2016
, Station LLC’s borrowing availability under the Revolving Credit Facility, subject to continued compliance with the terms of the Credit Facility, was
$286.8 million
, which is net of
$30.0 million
in outstanding borrowings and
$33.2 million
in outstanding letters of credit and similar obligations. In connection with the Fertitta Entertainment Acquisition, Station LLC borrowed
$41.7 million
under the Revolving Credit Facility.
Refinancing Transaction
In June 2016, Station LLC entered into a new credit agreement (the “New Credit Facility”) consisting of a term loan A facility with an outstanding principal amount of
$225 million
(the “Term A Facility”), a term loan B facility with an outstanding principal amount of
$1.5 billion
(the “Term B Facility”) and a revolving credit facility with
$685 million
of borrowing availability. The revolving credit facility was undrawn as of the closing date of the New Credit Facility. The Company’s obligations under the Term A Facility and the revolving credit facility will mature on June 8, 2021. The Company’s obligations under the Term B Facility will mature on June 8, 2023. The Company will be required to make quarterly principal payments in an amount equal to
$2,812,500
on the Term A Facility and
$3,750,000
on the Term B Facility, in each case on the last day of each fiscal quarter beginning on September 30, 2016. In addition, the Company will be required to make mandatory payments of amounts outstanding under the New Credit Facility with the proceeds of certain casualty events, debt issuances, asset sales and equity issuances and, depending on its consolidated total leverage ratio, the Company may be required to apply a portion of its excess cash flow to repay amounts outstanding under the New Credit Facility. The proceeds of debt incurred under the New Credit Facility were applied to repay all amounts outstanding under the Credit Facility, which was terminated. Such transactions are referred to herein as the “Refinancing Transaction.”
The Term A Facility and debt incurred under the revolving credit facility will bear interest at a rate per annum equal, at the Company’s option, to either (i) LIBOR plus an amount ranging from
1.75%
to
2.75%
, or (ii) an alternate base rate plus an amount ranging from
0.75%
up to
1.75%
, depending on the Company’s consolidated total leverage ratio. The Term B Facility will bear interest at a rate per annum equal, at the Company’s option, to either (i) LIBOR plus
3.00%
, or (ii) an alternate base rate plus
2.00%
. The initial margin applicable to the Term A Facility and revolving credit facility for LIBOR loans and alternate base rate loans is expected to be
2.50%
and
1.50%
, respectively.
Borrowings under the New Credit Facility are guaranteed by all of the Company’s existing and future material restricted subsidiaries and are secured by pledges of all of the equity interests in the Company and its material restricted subsidiaries, a security interest in substantially all of the personal property of the Company and the subsidiary guarantors, and mortgages on the real property and improvements owned or leased by certain of the Company’s subsidiaries.
The New Credit Facility contains a number of customary covenants that, among other things, restrict, subject to certain exceptions, the Company’s ability and the ability of the subsidiary guarantors to incur debt; create a lien on collateral; engage in mergers, consolidations or asset dispositions; pay dividends or make distributions; make investments, loans or advances; engage in certain transactions with affiliates or subsidiaries; or modify their lines of business.
The New Credit Facility also includes certain financial covenants, including the requirements that the Company maintain throughout the term of the New Credit Facility and measured as of the end of each fiscal quarter, a maximum consolidated total leverage ratio of not more than
6.50
to 1.00 for the period beginning with the fiscal quarter ending September 30, 2016 and ending with the fiscal quarter ending June 30, 2017,
6.25
to 1.00 for the period beginning with the fiscal quarter ending September 30, 2017 and ending with the fiscal quarter ending September 30, 2018,
5.75
to 1.00 for the period beginning with the fiscal quarter ending December 31, 2018 and ending with the fiscal quarter ending March 31, 2019,
5.50
to 1.00 for the period beginning with the fiscal quarter ending June 30, 2019 and ending with the fiscal quarter ending December 31, 2019 and
5.25
to 1.00 thereafter. The Company will also be required to maintain an interest coverage ratio in an amount not less than
2.50
to 1.00 measured on the last day of each fiscal quarter beginning with the quarter ending September 30, 2016. A breach of the financial ratio covenants shall only become an event of default under the Term B Facility if the lenders providing the Term
STATION HOLDCO LLC
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
A Facility and the revolving credit facility take certain affirmative actions after the occurrence of a default of such financial ratio covenants.
4
. Derivative Instruments
The Company’s objective in using derivative instruments is to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company uses interest rate swaps as a primary part of its cash flow hedging strategy, which involves the receipt of variable–rate payments in exchange for fixed–rate payments without exchange of the underlying notional amount. The Company does not use derivative financial instruments for trading or speculative purposes.
At
March 31, 2016
, the Company’s interest rate swap effectively converted
$916.8 million
of the Company’s variable interest rate debt to a fixed rate of approximately
5.02%
. Under the terms of the interest rate swap agreement, the Company pays a fixed rate of
1.77%
and receives a variable rate based on
one
-month
LIBOR
(subject to a minimum of
1.00%
).
The Company carries its interest rate swap on the Condensed Combined Balance Sheets at fair value. At
March 31, 2016
and
December 31, 2015
, the fair value of the Company’s interest rate swap, exclusive of any accrued interest, was a liability of
$8.1 million
and
$8.3 million
, respectively, which was included in Interest rate swap and other long-term liabilities on the Condensed Combined Balance Sheets.
The Company defers the gain or loss on the effective portion of the change in fair value of its interest rate swaps as a component of other comprehensive income (loss) until the interest payments being hedged are recorded as interest expense, at which time the amounts in accumulated other comprehensive loss are reclassified as an adjustment to interest expense. Approximately
$4.9 million
of deferred losses from the Company’s interest rate swap is expected to be reclassified from accumulated other comprehensive loss into earnings during the next twelve months. The Company recognizes the gain or loss on any ineffective portion of the change in fair value of its interest rate swaps in the period in which the change occurs as a component of change in fair value of derivative instruments in the Condensed Combined Statements of
Income
.
Information about losses on derivative financial instruments held by the Company and their location within the combined financial statements is presented below (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives in Cash Flow Hedging Relationships
|
|
Amount of Loss on Derivatives Recognized in Other Comprehensive Loss (Effective Portion)
|
|
Location of Loss Reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion)
|
|
Amount of Loss Reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion)
|
|
Location of Loss on Derivatives Recognized in Income (Ineffective Portion and Amount Excluded from Effectiveness Testing)
|
|
Amount of Loss on Derivatives Recognized in Income (Ineffective Portion and Amount Excluded from Effectiveness Testing)
|
|
Three Months Ended March 31,
|
|
|
Three Months Ended March 31,
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
2015
|
|
|
2016
|
|
2015
|
|
|
2016
|
|
2015
|
Interest rate swaps
|
|
$
|
(1,515
|
)
|
|
$
|
(3,746
|
)
|
|
Interest expense, net
|
|
$
|
(1,266
|
)
|
|
$
|
(3,097
|
)
|
|
Change in fair value of derivative instruments
|
|
$
|
(3
|
)
|
|
$
|
(3
|
)
|
During the three months ended
March 31, 2015
, losses reclassified from accumulated other comprehensive loss into interest expense, net included deferred losses on discontinued cash flow hedging relationships that were being amortized as an increase to interest expense because the previously hedged interest payments continued to occur. These deferred losses became fully amortized in June 2015.
At
March 31, 2016
, the Company had not posted any collateral related to its interest rate swap agreement; however, the Company’s obligation under the interest rate swap agreement is subject to the security and guarantee arrangements applicable to the credit agreement governing the Credit Facility. The interest rate swap agreement contains a cross-default provision under which the Company could be declared in default on its obligation under such agreement if certain conditions of default exist on the Credit Facility. At
March 31, 2016
, the termination value of the Company’s interest rate swap, including accrued interest, was a net liability of
$8.7 million
. Had the Company been in breach of the provisions of the interest rate swap agreement, it could have been required to pay the termination value to settle the obligation.
STATION HOLDCO LLC
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
In June 2016, the Company paid
$7.3 million
to terminate the existing interest rate swap agreement. The Company expects to enter into a new interest rate swap agreement in connection with the Refinancing Transaction.
5
. Fair Value Measurements
Assets Measured at Fair Value on a Recurring Basis
Information about the Company’s financial assets and liabilities measured at fair value on a recurring basis, aggregated by the level in the fair value hierarchy within which those measurements fall, is presented below (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at Reporting Date Using
|
|
Balance at March 31, 2016
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Assets
|
|
|
|
|
|
|
|
Available-for-sale securities (a)
|
$
|
104
|
|
|
$
|
104
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Liabilities
|
|
|
|
|
|
|
|
Interest rate swap
|
$
|
8,067
|
|
|
$
|
—
|
|
|
$
|
8,067
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at Reporting Date Using
|
|
Balance at December 31, 2015
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Assets
|
|
|
|
|
|
|
|
Available-for-sale securities (a)
|
$
|
85
|
|
|
$
|
85
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Liabilities
|
|
|
|
|
|
|
|
Interest rate swaps
|
$
|
8,334
|
|
|
$
|
—
|
|
|
$
|
8,334
|
|
|
$
|
—
|
|
____________________________________
(a) Available-for-sale securities are included in Other assets, net in the accompanying Condensed Combined Balance Sheets.
The fair value of the Company's interest rate swap was determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of the interest rate swap. This analysis reflects the contractual terms of the interest rate swap, including the period to maturity, and uses observable market-based inputs, including forward interest rate curves. The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the counterparty's nonperformance risk in the fair value measurement.
Fair Value of Long-term Debt
The estimated fair value of the Company’s long-term debt compared with its carrying amount is presented below (amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2016
|
|
December 31, 2015
|
Aggregate fair value
|
|
$
|
2,179
|
|
|
$
|
2,177
|
|
Aggregate carrying amount
|
|
2,120
|
|
|
2,155
|
|
The estimated fair value of the Company’s long-term debt is based on quoted market prices from various banks for similar instruments, which is considered a Level 2 input under the fair value measurement hierarchy.
STATION HOLDCO LLC
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
6
. Members’ Equity
Changes in Members’ Equity and Noncontrolling Interest
The changes in members' equity and noncontrolling interest for the
three
months ended
March 31, 2016
were as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined Members’ Equity
|
|
Accumulated
Other
Comprehensive
Loss
|
|
Total Combined Members’
Equity
|
|
Noncontrolling
Interest
|
|
Total Members’
Equity
|
Balances, December 31, 2015
|
$
|
558,227
|
|
|
$
|
(5,303
|
)
|
|
$
|
552,924
|
|
|
$
|
20,785
|
|
|
$
|
573,709
|
|
Unrealized loss on interest rate swap, net
|
—
|
|
|
(249
|
)
|
|
(249
|
)
|
|
—
|
|
|
(249
|
)
|
Unrealized gain on available-for-sale securities
|
—
|
|
|
19
|
|
|
19
|
|
|
—
|
|
|
19
|
|
Share-based compensation
|
436
|
|
|
—
|
|
|
436
|
|
|
—
|
|
|
436
|
|
Net income
|
57,639
|
|
|
—
|
|
|
57,639
|
|
|
1,864
|
|
|
59,503
|
|
Distributions
|
(6,226
|
)
|
|
—
|
|
|
(6,226
|
)
|
|
(2,121
|
)
|
|
(8,347
|
)
|
Balances, March 31, 2016
|
$
|
610,076
|
|
|
$
|
(5,533
|
)
|
|
$
|
604,543
|
|
|
$
|
20,528
|
|
|
$
|
625,071
|
|
At
March 31, 2016
, noncontrolling interest represented a
50%
ownership interest in MPM and ownership interests of the former mezzanine lenders and former unsecured creditors of Station Casinos, Inc. who hold warrants to purchase membership interests in CV Propco and NP Tropicana LLC.
Subsequent to
March 31, 2016
, Station Holdco paid distributions to its equityholders of
$43.7 million
, which included tax distributions of
$12.8 million
, and Fertitta Entertainment paid
$10.5 million
in distributions to its equityholders.
In May 2016, Station LLC received
$424.4 million
of proceeds from the IPO, the majority of which was treated as a capital contribution from Station Holdco. Station LLC used such proceeds, along with
$41.7 million
in additional borrowings under the Revolving Credit Facility, to fund the Fertitta Entertainment Acquisition and pay certain costs and expenses associated with the transactions. At the closing of the Fertitta Entertainment Acquisition, Fertitta Entertainment did not have material assets other than its workforce and the management agreements with Station LLC and as a result, the majority of the
$460.0 million
purchase price was treated as a deemed distribution for accounting purposes, calculated as the difference between the purchase price and the historical cost of the net assets acquired.
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss were as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Loss on Interest Rate Swaps
|
|
Unrealized Loss on Available-for-sale Securities
|
|
Total
|
Balances, December 31, 2015
|
$
|
(5,279
|
)
|
|
$
|
(24
|
)
|
|
$
|
(5,303
|
)
|
Unrealized loss on interest rate swap
|
(1,515
|
)
|
|
—
|
|
|
(1,515
|
)
|
Reclassification of unrealized loss on interest rate swap into income
|
1,266
|
|
|
—
|
|
|
1,266
|
|
Unrealized gain on available-for-sale securities
|
—
|
|
|
19
|
|
|
19
|
|
Balances, March 31, 2016
|
$
|
(5,528
|
)
|
|
$
|
(5
|
)
|
|
$
|
(5,533
|
)
|
STATION HOLDCO LLC
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
7
. Write-downs and Other Charges, Net
Write-downs and other charges, net include various charges to record net losses on asset disposals and non-routine transactions. Write-downs and other charges, net consisted of the following (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
2015
|
Loss on disposal of assets, net
|
$
|
718
|
|
|
$
|
2,038
|
|
Transaction-related costs
|
1,268
|
|
|
—
|
|
Severance expense
|
330
|
|
|
269
|
|
Other, net
|
52
|
|
|
708
|
|
|
$
|
2,368
|
|
|
$
|
3,015
|
|
Transaction-related costs included costs related to the Fertitta Entertainment Acquisition as well as IPO-related advisory, legal and other costs that were not deferred as direct and incremental costs of the IPO. At
March 31, 2016
, capitalized deferred offering costs directly related to the registration statement on Form S-1 for the IPO were
$3.2 million
, which was included in Other assets, net on the Condensed Combined Balance Sheet.
For the
three
months ended
March 31, 2015
, Loss on disposal of assets, net included write-offs of investments in two joint ventures and Other, net included canceled debt offering costs.
8
. Commitments and Contingencies
The Company and its subsidiaries are defendants in various lawsuits relating to routine matters incidental to their business. As with all litigation, no assurance can be provided as to the outcome of any legal matters and litigation inherently involves significant costs.
9
. Segments
The Company views each of its Las Vegas casino properties and each of its Native American management arrangements as individual operating segments. The Company aggregates all of its Las Vegas operating segments into one reportable segment because all of its Las Vegas properties offer similar products, cater to the same customer base, have the same regulatory and tax structure, share the same marketing techniques, are directed by a centralized management structure and have similar economic characteristics. The Company also aggregates its Native American management arrangements into
one
reportable segment.
STATION HOLDCO LLC
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
The Company utilizes Adjusted EBITDA as the primary measure of each of its properties’ performance. The Company’s segment information and a reconciliation of Adjusted EBITDA to income from continuing operations is presented below:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
2015
|
Net revenues
|
|
|
|
Las Vegas operations
|
$
|
331,458
|
|
|
$
|
321,499
|
|
Native American management
|
26,487
|
|
|
19,786
|
|
Reportable segment net revenues
|
357,945
|
|
|
341,285
|
|
Corporate and other
|
1,302
|
|
|
1,484
|
|
Net revenues
|
$
|
359,247
|
|
|
$
|
342,769
|
|
|
|
|
|
Adjusted EBITDA (a)
|
|
|
|
Las Vegas operations
|
$
|
119,010
|
|
|
$
|
111,249
|
|
Native American management
|
20,432
|
|
|
14,403
|
|
Reportable segment Adjusted EBITDA
|
139,442
|
|
|
125,652
|
|
Corporate and other
|
(6,226
|
)
|
|
(5,810
|
)
|
Adjusted EBITDA
|
133,216
|
|
|
119,842
|
|
|
|
|
|
Other operating (expense) income
|
|
|
|
Preopening
|
(348
|
)
|
|
(128
|
)
|
Depreciation and amortization
|
(39,427
|
)
|
|
(35,193
|
)
|
Share-based compensation
|
(620
|
)
|
|
(3,007
|
)
|
Write-downs and other charges, net
|
(2,368
|
)
|
|
(3,015
|
)
|
Adjusted EBITDA attributable to MPM noncontrolling interest
|
4,121
|
|
|
3,664
|
|
Operating income and earnings from joint ventures
|
94,574
|
|
|
82,163
|
|
Other expense
|
|
|
|
Interest expense, net
|
(35,068
|
)
|
|
(36,462
|
)
|
Change in fair value of derivative instruments
|
(3
|
)
|
|
(3
|
)
|
Income from continuing operations
|
$
|
59,503
|
|
|
$
|
45,698
|
|
|
|
|
|
____________________________________
|
|
(a)
|
Adjusted EBITDA includes income from continuing operations plus interest expense, net, depreciation and amortization, preopening, share-based compensation, write-downs and other charges, net, and change in fair value of derivative instruments, and excludes Adjusted EBITDA attributable to the noncontrolling interests of MPM.
|
STATION HOLDCO LLC
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
10
. Subsequent Event
In May 2016, Station LLC entered into a definitive agreement to acquire the outstanding partnership interests of FP Holdings, L.P. (“FP Holdings”) and limited liability company interests of certain related entities (collectively, the “Purchased Companies”) which own and operate Palms Casino Resort in Las Vegas, Nevada. Under the terms and subject to the conditions of the purchase agreement, Station LLC will acquire the Purchased Companies for cash consideration of
$312.5 million
, subject to a working capital adjustment and subject to increase in the amount of FP Holdings’ cash on hand at the closing of the transaction and decrease for indebtedness and certain other liabilities outstanding at closing and expenses incurred by FP Holdings in connection with the transaction. Station LLC expects to fund the acquisition of the Purchased Companies by incurring additional debt. The transaction is expected to close during the third quarter of 2016, subject to the satisfaction of customary closing conditions, including the receipt of all required gaming approvals and the expiration of the waiting period under the Hart-Scott-Rodino Act.
Item 2.