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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with, and is qualified in its entirety by, the consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K.
Overview
We are a developer, owner and operator of destination casino resorts (integrated resorts). In Macau, we own 72% of Wynn Macau, Limited and operate Wynn Macau and Encore at Wynn Macau. We refer to the integrated Wynn Macau and Encore at Wynn Macau resort as Wynn Macau | Encore or as our Macau Operations. In Las Vegas, Nevada, we own 100% of and operate Wynn Las Vegas and Encore at Wynn Las Vegas, which we refer to as Wynn Las Vegas | Encore or our Las Vegas Operations. We are currently constructing Wynn Palace, an integrated casino resort in the Cotai area of Macau. In addition, we are developing an integrated casino resort in Everett, Massachusetts.
Macau Operations
Our integrated Macau resort of Wynn Macau and Encore at Wynn Macau features approximately 284,000 square feet of casino space with 458 table games and 708 slot machines and two luxury hotel towers with a total of 1,008 guest rooms and suites. Wynn Macau | Encore includes casual and fine dining in eight restaurants, approximately 57,000 square feet of retail space, approximately 31,000 square feet of lounge and meeting facilities and recreation and leisure facilities.
In response to our evaluation of our Macau Operations and our commitment to creating a unique customer experience, we have made and expect to continue to make enhancements and refinements to this resort. In February 2015, we completed the renovation of approximately 27,000 square feet of our casino space at Wynn Macau for new VIP gaming rooms.
Las Vegas Operations
Our integrated Las Vegas resort of Wynn Las Vegas and Encore at Wynn Las Vegas features approximately 186,000 square feet of casino space with 232 table games, 1,866 slot machines and two luxury hotel towers with a total of 4,748 guest rooms, suites and villas. Wynn Las Vegas | Encore includes 34 food and beverage outlets, approximately 99,000 square feet of retail space, approximately 290,000 square feet of meeting and convention space, an on-site 18 hole golf course, as well as two showrooms, three nightclubs and a beach club.
In response to our evaluation of our Las Vegas Operations and our commitment to creating a unique customer experience, we have made and expect to continue to make enhancements and refinements to this resort. In October 2015, we closed the Ferrari and Maserati automobile dealership inside Wynn Las Vegas. We have obtained relevant approvals to transform the dealership and adjacent space into additional retail space. In November 2015, we completed the remodel of all guest rooms in our Encore hotel tower, completed the remodel of one of our restaurants and began the re-branding of one of our night clubs, which is scheduled for completion in April 2016. In December 2015, we opened a 5,000 square-foot luxury lounge for gaming and entertainment in Encore.
Future Development
We are currently constructing Wynn Palace, an integrated resort containing a 1,700-room hotel, performance lake, and a wide range of amenities, including meeting, retail, food and beverage, and gaming space, in the Cotai area of Macau. In July 2013, we signed a $2.7 billion GMP contract for the project's construction. The total project budget, including construction costs, capitalized interest, pre-opening expenses, land costs and financing fees, is approximately $4.1 billion. As of December 31, 2015, we have invested approximately $3.5 billion in the project. We expect to open Wynn Palace in the first half of 2016; however, potential construction delays could push the opening date into the second half of 2016.
In November 2014, the Company was awarded a gaming license to develop and construct an integrated resort in Everett, Massachusetts, adjacent to Boston. The resort will be located on a 33-acre site along the Mystic River. The resort will contain a hotel, a waterfront boardwalk, meeting space, a casino, a spa, retail offerings and food and beverage outlets. We have begun site remediation, site preparation and pre-construction activities.
We continually seek out new opportunities for additional gaming or related businesses, in the United States, and worldwide.
Key Operating Measures
Certain key operating measures specific to the gaming industry are included in our discussion of our operational performance for the periods for which a Consolidated Statement of Income is presented. Below are definitions of these key operating measures discussed:
| • | Table drop for our Macau Operations is the amount of cash that is deposited in a gaming table's drop box plus cash chips purchased at the casino cage. |
| • | Table drop for our Las Vegas Operations is the amount of cash and net markers issued that are deposited in a gaming table's drop box. |
| • | Turnover is the sum of all losing rolling chip wagers within our Macau Operations' VIP program. |
| • | Table games win is the amount of table drop or turnover that is retained and recorded as casino revenue. |
| • | Rolling chips are identifiable chips that are used to track turnover for purposes of calculating incentives. |
| • | Slot win is the amount of handle (representing the total amount wagered) that is retained by us and is recorded as casino revenue. |
| • | Average daily rate ("ADR") is calculated by dividing total room revenues including the retail value of promotional allowances (less service charges, if any) by total rooms occupied including complimentary rooms. |
| • | Revenue per available room ("REVPAR") is calculated by dividing total room revenues including the retail value of promotional allowances (less service charges, if any) by total rooms available. |
| • | Occupancy is calculated by dividing total occupied rooms, including complimentary rooms, by the total rooms available. |
Below is a discussion of the methodologies used to calculate win percentage at our resorts.
In our VIP casino in Macau, customers primarily purchase non-negotiable chips, commonly referred to as rolling chips, from the casino cage and there is no deposit into a gaming table drop box from chips purchased from the cage. Non-negotiable chips can only be used to make wagers. Winning wagers are paid in cash chips. The loss of the non-negotiable chips in the VIP casino is recorded as turnover and provides a base for calculating VIP casino win percentage. It is customary in Macau to measure VIP casino play using this rolling chip method. We expect our win as a percentage of turnover in this segment to be within the range of 2.7% to 3.0%.
In our mass market casino in Macau, customers may purchase cash chips at either the gaming tables or at the casino cage. Commencing in the second quarter of 2015, the sum of these purchases is the base of measurement used for calculating win percentage in our mass market casino in accordance with standard Macau industry practice. All prior period amounts have been adjusted to conform to this new measurement.
The measurements in our VIP casino and the mass market casino are not comparable as the mass market casino tracks the initial purchase of chips at the table while the measurement method in our VIP casino tracks the sum of all losing wagers. Accordingly, the base measurement in the VIP casino is much larger than the base measurement in the mass market casino. As a result, the expected win percentage with the same amount of gaming win is smaller in the VIP casino when compared to the mass market casino.
In Las Vegas, customers purchase chips at the gaming tables. The cash and net markers used to purchase chips are deposited in the gaming table's drop box. This is the base of measurement that we use for calculating win percentage in Las Vegas. Each type of table game has its own theoretical win percentage. Our expected table games win percentage in Las Vegas is 21% to 25%.
Results of Operations
Summary annual results
The following table summarizes our financial results for the periods presented (in thousands, except per share data).
| Years Ended December 31, | |||||||||||
| 2015 | 2014 | 2013 | |||||||||
| Net revenues | $ | 4,075,883 | $ | 5,433,661 | $ | 5,620,936 | |||||
| Net income attributable to Wynn Resorts, Limited | $ | 195,290 | $ | 731,554 | $ | 728,652 | |||||
| Diluted net income per share | $ | 1.92 | $ | 7.18 | $ | 7.17 | |||||
| Adjusted Property EBITDA | $ | 1,185,789 | $ | 1,773,278 | $ | 1,810,801 |
During the year ended December 31, 2015, our net income attributable to Wynn Resorts, Limited was $195.3 million, a decrease of 73.3% over the same period of 2014, resulting in diluted earnings per share of $1.92. Adjusted Property EBITDA decreased year-over-year by 33.1%, from $1,773.3 million for the year ended December 31, 2014 to $1,185.8 million for the
same period of 2015. Our results reflect continued weak performance from our Macau Operations, with a reduction in VIP turnover of 46.4% for the year ended December 31, 2015, compared to the same period of 2014. The VIP turnover reduction is a result of the current economic and political conditions in Macau and China as well as the effect of regional economic factors on gaming promoters and our premium customers. We continue to experience a significant slowdown in activity from our premium customers with a reduction in overall visitation at our Macau Operations.
During the year ended December 31, 2014, our net income attributable to Wynn Resorts, Limited was $731.6 million, relatively flat compared to the same period of 2013, resulting in diluted earnings per share of $7.18. Adjusted Property EBITDA decreased year-over-year by 2.1%, from $1,810.8 million for the year ended December 31, 2013 to $1,773.3 million for the same period of 2014. Our results for the year ended December 31, 2014 compared to the same period of 2013 were primarily attributable to a 5.8% decline in casino revenues from our Macau Operations offset by non-casino revenue growth from our Las Vegas Operations. Although we experienced stable overall visitation to our Macau Operations during 2014, a significant slowdown in activity from our premium customers drove the decline in casino revenues.
Financial results for the year ended December 31, 2015 compared to the year ended December 31, 2014.
Net revenues
The following table presents net revenues from our Macau and Las Vegas Operations (in thousands):
| Years Ended December 31, | ||||||||||
| 2015 | 2014 | Percent Change | ||||||||
| Net revenues | ||||||||||
| Macau Operations | $ | 2,463,092 | $ | 3,796,750 | (35.1 | ) | ||||
| Las Vegas Operations | 1,612,791 | 1,636,911 | (1.5 | ) | ||||||
| $ | 4,075,883 | $ | 5,433,661 | (25.0 | ) |
Net revenues decreased 25.0% to $4,075.9 million for the year ended December 31, 2015, from $5,433.7 million for the same period in 2014. The decline is primarily due to a decrease of 35.5%, or $1,273.9 million, in casino revenues from our Macau Operations.
Non-casino revenues consist of operating revenues from rooms, food and beverage, entertainment, retail and other, less promotional allowances. The following table presents net revenues from our casino revenues and non-casino revenues (in thousands).
| Years Ended December 31, | ||||||||||
| 2015 | 2014 | Percent Change | ||||||||
| Net revenues | ||||||||||
| Casino revenues | $ | 2,932,419 | $ | 4,274,221 | (31.4 | ) | ||||
| Non-casino revenues | 1,143,464 | 1,159,440 | (1.4 | ) | ||||||
| $ | 4,075,883 | $ | 5,433,661 | (25.0 | ) |
Casino revenues were 71.9% of total net revenues for the year ended December 31, 2015, compared to 78.7% of total net revenues for the same period of 2014, while non-casino revenues were 28.1% of total net revenues, compared to 21.3% in the prior year. This increase in non-casino revenues as a percentage of total net revenues reflects performance of non-gaming amenities, such as Las Vegas nightclubs and continued high occupancy and use of our facilities, in contrast to the decline in VIP gaming revenue in Macau.
Casino revenues
Casino revenues decreased 31.4% to $2,932.4 million for the year ended December 31, 2015, from $4,274.2 million in the same period of 2014. The decline is primarily due to the continued weak gaming environment affecting our Macau Operations, which experienced a year-over-year decrease in casino revenues of 35.5% from $3,586.8 million to $2,312.9 million. Our VIP gaming operations drove the Macau Operations casino revenue reduction, with $57.92 billion in VIP turnover for the year ended December 31, 2015, compared to $108.08 billion for the same period of 2014. In addition, our mass market gaming operations contributed to the decline in casino revenues from our Macau Operations with a 12.0% decrease in table drop combined with a reduction in table games win percentage of 1.9 percentage points. Our VIP tables decreased from 248 at December 31, 2014 to 190 at December 31, 2015 based on current operating environment and customer demand.
The table below sets forth our casino revenues and associated key operating measures for our Macau and Las Vegas Operations (dollars in thousands, except for win per unit per day).
| Years Ended December 31, | ||||||||||||||
| 2015 | 2014 | Increase/ (Decrease) | Percent Change | |||||||||||
| Macau Operations: | ||||||||||||||
| Total casino revenues | $ | 2,312,925 | $ | 3,586,781 | $ | (1,273,856 | ) | (35.5 | ) | |||||
| Average number of table games | 458 | 461 | (3 | ) | (0.7 | ) | ||||||||
| VIP | ||||||||||||||
| Average number of table games | 230 | 259 | (29 | ) | (11.2 | ) | ||||||||
| VIP turnover | $ | 57,917,060 | $ | 108,077,342 | $ | (50,160,282 | ) | (46.4 | ) | |||||
| Table games win | $ | 1,659,683 | $ | 3,051,046 | $ | (1,391,363 | ) | (45.6 | ) | |||||
| VIP win as a % of turnover | 2.87 | % | 2.82 | % | 0.05 | |||||||||
| Table games win per unit per day | $ | 19,785 | $ | 32,258 | $ | (12,473 | ) | (37.2 | ) | |||||
| Mass market | ||||||||||||||
| Average number of table games | 228 | 202 | 26 | 12.9 | ||||||||||
| Table drop | $ | 4,857,804 | $ | 5,517,382 | $ | (659,578 | ) | (12.0 | ) | |||||
| Table games win | $ | 951,458 | $ | 1,187,997 | $ | (236,539 | ) | (19.9 | ) | |||||
| Table games win % | 19.6 | % | 21.5 | % | (1.9 | ) | ||||||||
| Table games win per unit per day | $ | 11,431 | $ | 16,154 | $ | (4,723 | ) | (29.2 | ) | |||||
| Average number of slot machines | 708 | 679 | 29 | 4.3 | ||||||||||
| Slot machine handle | $ | 3,961,115 | $ | 5,415,127 | $ | (1,454,012 | ) | (26.9 | ) | |||||
| Slot machine win | $ | 191,164 | $ | 264,763 | $ | (73,599 | ) | (27.8 | ) | |||||
| Slot machine win per unit per day | $ | 740 | $ | 1,068 | $ | (328 | ) | (30.7 | ) | |||||
| Las Vegas Operations: | ||||||||||||||
| Total casino revenues | $ | 619,494 | $ | 687,440 | $ | (67,946 | ) | (9.9 | ) | |||||
| Average number of table games | 232 | 232 | — | — | ||||||||||
| Table drop | $ | 2,060,189 | $ | 2,556,452 | $ | (496,263 | ) | (19.4 | ) | |||||
| Table games win | $ | 490,920 | $ | 623,968 | $ | (133,048 | ) | (21.3 | ) | |||||
| Table games win % | 23.8 | % | 24.4 | % | (0.6 | ) | ||||||||
| Table games win per unit per day | $ | 5,786 | $ | 7,354 | $ | (1,568 | ) | (21.3 | ) | |||||
| Average number of slot machines | 1,866 | 1,858 | 8 | 0.4 | ||||||||||
| Slot machine handle | $ | 2,969,327 | $ | 3,008,563 | $ | (39,236 | ) | (1.3 | ) | |||||
| Slot machine win | $ | 206,626 | $ | 186,458 | $ | 20,168 | 10.8 | |||||||
| Slot machine win per unit per day | $ | 303 | $ | 275 | $ | 28 | 10.2 |
Non-casino revenues
Non-casino revenues decreased 1.4%, or $16.0 million, to $1,143.5 million for the year ended December 31, 2015, from $1,159.4 million for the same period of 2014.
Room revenues decreased $4.3 million to $538.5 million for the year ended December 31, 2015, from $542.8 million in the same period of 2014, driven by a decline from our Macau Operations of $8.4 million, partially offset by an increase from our Las Vegas Operations of $4.2 million.
The table below sets forth our room revenues and associated key operating measures for our Macau and Las Vegas Operations.
| Years Ended December 31, | ||||||||||
| 2015 | 2014 | Percent Change (a) | ||||||||
| Macau Operations: | ||||||||||
| Total room revenues (in thousands) | $ | 125,348 | $ | 133,781 | (6.3 | ) | ||||
| Occupancy | 96.5 | % | 98.4 | % | (1.9 | ) | ||||
| ADR | $ | 323 | $ | 333 | (3.0 | ) | ||||
| REVPAR | $ | 312 | $ | 327 | (4.6 | ) | ||||
| Las Vegas Operations: | ||||||||||
| Total room revenues (in thousands) | $ | 413,152 | $ | 408,981 | 1.0 | |||||
| Occupancy | 85.2 | % | 86.9 | % | (1.7 | ) | ||||
| ADR | $ | 285 | $ | 274 | 4.0 | |||||
| REVPAR | $ | 243 | $ | 238 | 2.1 |
(a) Except occupancy, which is presented as a percentage point change.
Food and beverage revenues decreased $7.6 million to $597.1 million for the year ended December 31, 2015, from $604.7 million for the same period of 2014. We experienced a decline of $24.0 million in food and beverage revenues from our Macau Operations, mainly from restaurants, partially offset by an increase of $16.4 million in food and beverage revenues from our Las Vegas Operations, which was driven by increases in revenues at nightclubs and from catering and banquets.
Entertainment, retail and other decreased 12.6%, or $50.6 million, to $350.6 million for the year ended December 31, 2015, from $401.2 million for the same period of 2014. The decrease is primarily due to a decline in revenue from retail shops at our Macau Operations.
Promotional allowances decreased 11.9%, or $46.5 million, to $342.7 million for the year ended December 31, 2015, from $389.2 million for the same period of 2014. As a percentage of total casino revenues, promotional allowances were 11.7% for the year ended December 31, 2015, compared to 9.1% for the same period of 2014, as the decline in total complimentaries was less than the decline in total revenues.
Operating costs and expenses
Operating costs and expenses decreased 18.0%, or $750.3 million, to $3,417.1 million for the year ended December 31, 2015, from $4,167.4 million for the same period of 2014, mainly from a decrease in casino expenses.
Casino expenses decreased 30.2%, or $804.3 million, to $1,862.7 million for the year ended December 31, 2015, from $2,667.0 million for the same period of 2014, primarily due to lower gaming taxes from the 39.0% gross win tax incurred at our Macau Operations. The decline in gaming taxes was commensurate with the 35.5% decrease in casino revenues at our Macau Operations.
Room expenses were relatively flat for the year ended December 31, 2015, compared to the same period of 2014.
Food and beverage expenses increased 7.1%, or $24.0 million, to $361.2 million for the year ended December 31, 2015, from $337.2 million for the same period of 2014, due primarily to an increase of $21.8 million from our Las Vegas Operations.
The increase from our Las Vegas Operations is primarily a result of higher costs in the current period for entertainment at our nightclubs.
Entertainment, retail and other expenses decreased 3.9%, or $6.3 million, to $157.4 million for the year ended December 31, 2015, from $163.8 million in the same period of 2014. The decrease is primarily attributable to the reduction in merchandise cost at our Macau Operations associated with the decline in retail shop revenues, partially offset by an increase from our Las Vegas Operations due to costs associated with Steve Wynn's ShowStoppers, which opened in December 2014.
General and administrative expenses decreased 5.6%, or $27.7 million, to $464.8 million for the year ended December 31, 2015, from $492.5 million in the same period of 2014, primarily attributable to a decrease in corporate related expenses.
Provision for doubtful accounts increased $7.2 million, or 184.6%, to $11.1 million for the year ended December 31, 2015, from $3.9 million for the same period of 2014. The change in the provision was primarily due to the impact of historical collection patterns and current collection trends, as well as specific review of customer accounts and outstanding gaming promoter accounts, on our estimated allowance for the respective periods.
Pre-opening costs were $77.6 million for the year ended December 31, 2015, compared to $30.1 million for the same period of 2014 and were primarily associated with the design and planning for our development projects. During the year ended December 31, 2015, we incurred $55.1 million related to Wynn Palace and $22.6 million related to the Wynn resort in Massachusetts. Pre-opening costs for the year ended December 31, 2014 related to Wynn Palace. We expect our pre-opening costs to increase in 2016 as Wynn Palace progresses toward completion and we begin development of the Wynn resort in Massachusetts.
Depreciation and amortization increased 2.7%, or $8.5 million, to $322.6 million for the year ended December 31, 2015, from $314.1 million for the same period of 2014. The increase is primarily due to additional depreciation associated with building improvements at our Macau Operations, including our new VIP gaming rooms. The increase was partially offset by a $7.4 million reduction in depreciation due to a change in the estimated useful lives of certain assets in Macau. Effective September 1, 2015, we changed our estimate of remaining useful lives of buildings and improvements for Wynn Macau to more accurately reflect the estimated periods during which these assets are expected to remain in service. For further information on the change in estimate, see Item 8—"Financial Statements and Supplementary Data," Note 2 "Summary of Significant Accounting Policies."
Interest expense, net of capitalized interest
The following table summarizes information related to interest expense (in thousands):
| Years Ended December 31, | ||||||||||
| 2015 | 2014 | Percent Change | ||||||||
| Interest expense | ||||||||||
| Interest cost, including amortization of deferred financing costs and original issue discount and premium | $ | 354,233 | $ | 348,520 | 1.6 | |||||
| Capitalized interest | (53,327 | ) | (33,458 | ) | 59.4 | |||||
| $ | 300,906 | $ | 315,062 | (4.5 | ) |
Our interest cost increased $5.7 million to $354.2 million for the year ended December 31, 2015, due to an increase in our long-term debt balance, partially offset by a decrease in our weighted average interest rate. Financing activities during 2015 include the issuance of the 5 1/2% senior notes due 2025, cash tender offer and subsequent redemption of the 7 7/8% first mortgage notes due 2020 and 7 3/4% first mortgage notes due 2020 and amendment of the Wynn Macau credit facilities. Financing activities during 2014 include the issuance of 5 1/4% senior notes due 2021. Capitalized interest increased $19.9 million to $53.3 million for the year ended December 31, 2015, primarily due to the construction of Wynn Palace.
Other non-operating income and expenses
We incurred a loss of $126.0 million on the extinguishment of debt for the year ended December 31, 2015, compared to a loss of $9.6 million for the same period of 2014. During 2015, in connection with the cash tender offer and subsequent redemption of untendered 7 7/8% first mortgage notes due 2020 and 7 3/4% first mortgage notes due 2020, we incurred a loss
of $124.0 million associated with the premium paid and the write-off of unamortized deferred financing costs and original issue discount. In addition, we incurred a loss of $2.1 million related to the write-off of unamortized deferred financing costs associated with the amendment of our Wynn Macau credit facilities. During the year ended December 31, 2014, the loss was for the premium paid on first mortgage notes due 2020 through open market transactions and the write-off of related unamortized deferred financing costs and original issue discount.
During the year ended December 31, 2015, we recognized a gain of $52.0 million from the change in fair value of the Redemption Note as a result of changes in certain variables used in the estimated fair value. No change was recognized in the same period of 2014. For further information on the fair value of the Redemption Note, see Item 8—"Financial Statements and Supplementary Data," Note 2 "Summary of Significant Accounting Policies."
We incurred a loss of $5.3 million and $4.4 million for the years ended December 31, 2015 and 2014, respectively, from the change in the fair value of our interest rate swaps. For further information on our interest rate swaps, see Item 8—"Financial Statements and Supplementary Data," Note 2 "Summary of Significant Accounting Policies."
Interest income was $7.2 million for the year ended December 31, 2015, compared to $20.4 million for 2014. During 2015 and 2014, our short-term investment strategy has been to preserve capital while retaining sufficient liquidity. The majority of our short-term investment securities were in fixed deposits and money market accounts with a maturity of three months or less.
Income Taxes
For the years ended December 31, 2015 and 2014, we recorded a tax expense of $7.7 million and a tax benefit of $3.8 million, respectively. For the year ended December 31, 2015, our income tax expense is primarily related to an increase in our deferred tax liabilities. For the year ended December 31, 2014, our benefit for income taxes was primarily related to a release of valuation allowance on prior year foreign tax credits resulting from the implementation of a tax planning strategy.
Wynn Macau SA received a 5-year exemption from Macau's Complementary Tax on casino gaming profits through December 31, 2015. In October 2015, Wynn Macau SA received an additional 5-year exemption, effective January 1, 2016, from Macau's Complementary Tax on casino gaming profits through December 31, 2020. During the years ended December 31, 2015 and 2014, we were exempt from the payment of $41.6 million and $99.4 million in such taxes, respectively. Our non-gaming profits remain subject to the Macau Complementary Tax and casino winnings remain subject to the Macau Special Gaming tax and other levies together totaling 39% in accordance with our concession agreement.
In 2011, Wynn Macau SA entered into an agreement with the Macau Special Administrative Region that provides for an annual payment of 15.5 million Macau patacas ("MOP") (approximately $1.9 million) to the Macau Special Administrative Region as complementary tax due by shareholders on dividend distributions. This agreement on dividends is effective through December 31, 2015. In June 2015, Wynn Macau SA applied for an extension of the agreement for an additional five years effective January 1, 2016 through December 31, 2020.
We have participated in the Internal Revenue Service ("IRS") Compliance Assurance Program ("CAP") for 2013 through 2015 tax years and will continue to participate in the IRS CAP for the 2016 tax year. In February 2016, the IRS completed an examination of the 2014 U.S. tax return and had no changes.
In December 2015, the Financial Services Bureau completed an examination of the 2012 Macau income tax return of Wynn Macau SA. While no additional tax was due, adjustments were made to our foreign net operating loss carryforwards.
Net income attributable to noncontrolling interests
Net income attributable to noncontrolling interests was $86.2 million for the year ended December 31, 2015, compared to $231.1 million for the year ended December 31, 2014. These amounts represent the noncontrolling interests' share of net income from Wynn Macau, Limited for each year.
Financial results for the year ended December 31, 2014 compared to the year ended December 31, 2013.
Net Revenues
The following table presents net revenues from our Macau and Las Vegas Operations (in thousands):
| Years Ended December 31, | ||||||||||
| 2014 | 2013 | Percent Change | ||||||||
| Net revenues | ||||||||||
| Macau Operations | $ | 3,796,750 | $ | 4,040,526 | (6.0 | ) | ||||
| Las Vegas Operations | 1,636,911 | 1,580,410 | 3.6 | |||||||
| $ | 5,433,661 | $ | 5,620,936 | (3.3 | ) |
Net revenues increased 3.3% to $5,433.7 million for the year ended December 31, 2014, from $5,620.9 million for the same period in 2013. The decline in net revenues was primarily driven by a decrease of 5.8%, or $221.1 million, in casino revenue from our Macau Operations, partially offset by an increase of 5.8%, or $51.8 million, in non-casino revenues from our Las Vegas Operations.
The following table presents net revenues from our casino revenues and non-casino revenues (in thousands).
| Years Ended December 31, | ||||||||||
| 2014 | 2013 | Percent Change | ||||||||
| Net revenues | ||||||||||
| Casino revenues | $ | 4,274,221 | $ | 4,490,637 | (4.8 | ) | ||||
| Non-casino revenues | 1,159,440 | 1,130,299 | 2.6 | |||||||
| $ | 5,433,661 | $ | 5,620,936 | (3.3 | ) |
Casino revenues were 78.7% of total net revenues for the year ended December 31, 2014, compared to 79.9% of total net revenues for the same period of 2013, while non-casino revenues were 21.3% of total net revenues, compared to 20.1% in the prior year.
Casino Revenues
Casino revenues decreased 4.8% to $4,274.2 million for the year ended December 31, 2014, from $4,490.6 million in the same period of 2013. Our Macau Operations experienced a year-over-year decrease in casino revenues of 5.8% from $3,807.9 million to $3,586.8 million. The decrease is primarily due to a decrease from our VIP gaming operations, partially offset by an increase in table games win of 19.7% from our mass market gaming operations. Our VIP gaming operations experienced a 12.1% reduction in turnover and a decline in win as a percentage of turnover from 3.01% to 2.82%. Las Vegas Operations were relatively flat year-over-year with casino revenues of $687.4 million for the year ended December 31, 2014 compared to $682.8 million in the same period of 2013.
The table below sets forth our casino revenues and associated key operating measures for our Macau and Las Vegas Operations (dollars in thousands, except for win per unit per day).
| Years Ended December 31, | ||||||||||||||
| 2014 | 2013 | Increase/ (Decrease) | Percent Change | |||||||||||
| Macau Operations: | ||||||||||||||
| Total casino revenues | $ | 3,586,781 | $ | 3,807,850 | $ | (221,069 | ) | (5.8 | ) | |||||
| Average number of table games | 461 | 491 | (30 | ) | (6.1 | ) | ||||||||
| VIP | ||||||||||||||
| Average number of table games | 259 | 283 | (24 | ) | (8.5 | ) | ||||||||
| VIP turnover | $ | 108,077,342 | $ | 122,991,763 | $ | (14,914,421 | ) | (12.1 | ) | |||||
| Table games win | $ | 3,051,046 | $ | 3,696,224 | $ | (645,178 | ) | (17.5 | ) | |||||
| VIP win as a % of turnover | 2.82 | % | 3.01 | % | (0.19 | ) | ||||||||
| Table games win per unit per day | $ | 32,258 | $ | 35,797 | $ | (3,539 | ) | (9.9 | ) | |||||
| Mass market | ||||||||||||||
| Average number of table games | 202 | 208 | (6 | ) | (2.9 | ) | ||||||||
| Table drop | $ | 5,517,382 | $ | 4,893,998 | $ | 623,384 | 12.7 | |||||||
| Table games win | $ | 1,187,997 | $ | 992,872 | $ | 195,125 | 19.7 | |||||||
| Table games win % | 21.5 | % | 19.9 | % | 1.6 | |||||||||
| Table games win per unit per day | $ | 16,154 | $ | 13,098 | $ | 3,056 | 23.3 | |||||||
| Average number of slot machines | 679 | 866 | (187 | ) | (21.6 | ) | ||||||||
| Slot machine handle | $ | 5,415,127 | $ | 4,846,938 | $ | 568,189 | 11.7 | |||||||
| Slot machine win | $ | 264,763 | $ | 245,578 | $ | 19,185 | 7.8 | |||||||
| Slot machine win per unit per day | $ | 1,068 | $ | 777 | $ | 291 | 37.5 | |||||||
| Las Vegas Operations: | ||||||||||||||
| Total casino revenues | $ | 687,440 | $ | 682,787 | $ | 4,653 | 0.7 | |||||||
| Average number of table games | 232 | 233 | (1 | ) | (0.4 | ) | ||||||||
| Table drop | $ | 2,556,452 | $ | 2,617,634 | $ | (61,182 | ) | (2.3 | ) | |||||
| Table games win | $ | 623,968 | $ | 657,927 | $ | (33,959 | ) | (5.2 | ) | |||||
| Table games win % | 24.4 | % | 25.1 | % | (0.7 | ) | ||||||||
| Table games win per unit per day | $ | 7,354 | $ | 7,729 | $ | (375 | ) | (4.9 | ) | |||||
| Average number of slot machines | 1,858 | 2,030 | (172 | ) | (8.5 | ) | ||||||||
| Slot machine handle | $ | 3,008,563 | $ | 2,874,646 | $ | 133,917 | 4.7 | |||||||
| Slot machine win | $ | 186,458 | $ | 177,452 | $ | 9,006 | 5.1 | |||||||
| Slot machine win per unit per day | $ | 275 | $ | 239 | $ | 36 | 15.1 |
Non-casino revenues
Non-casino revenues increased 2.6%, or $29.1 million, to $1,159.4 million for the year ended December 31, 2014, from $1,130.3 million for the same period of 2013, driven by a 10.3% increase in room revenues.
Room revenues increased 10.3%, or $50.5 million, to $542.8 million for the year ended December 31, 2014, from $492.2 million in the same period of 2013. Our Las Vegas Operations accounted for $31.4 million of the increase, while Macau Operations accounted for $19.1 million, both experiencing an increase in ADR and occupancy.
The table below sets forth our room revenues and associated key operating measures for our Macau and Las Vegas Operations.
| Years Ended December 31, | |||||||||
| 2014 | 2013 | Percent Change (a) | |||||||
| Macau Operations: | |||||||||
| Total room revenues (in thousands) | $ | 133,781 | $ | 114,638 | 16.7 | ||||
| Occupancy | 98.4 | % | 95.5 | % | 2.9 | ||||
| ADR | $ | 333 | $ | 313 | 6.4 | ||||
| REVPAR | $ | 327 | $ | 299 | 9.4 | ||||
| Las Vegas Operations: | |||||||||
| Total room revenues (in thousands) | $ | 408,981 | $ | 377,592 | 8.3 | ||||
| Occupancy | 86.9 | % | 84.6 | % | 2.3 | ||||
| ADR | $ | 274 | $ | 258 | 6.2 | ||||
| REVPAR | $ | 238 | $ | 218 | 9.2 |
| (a) | Except occupancy, which is presented as a percentage point change. |
Food and beverage revenues increased 3.1%, or $18.0 million, to $604.7 million for the year ended December 31, 2014, from $586.7 million for the same period of 2013. The increase is primarily a result of an increase in revenues at our Las Vegas Operations.
Entertainment, retail and other decreased 4.2%, or $17.5 million, to $401.2 million for the year ended December 31, 2014, from $418.7 million for the same period of 2013. The decrease is primarily due to a decline in revenue from retail shops at our Macau Operations.
Promotional allowances increased 6.0%, or $21.9 million, to $389.2 million for the year ended December 31, 2014, from $367.3 million for the same period of 2013. As a percentage of total casino revenues, promotional allowances were 9.1% for the year ended December 31, 2014 compared to 8.2% for the same period of 2013.
Operating costs and expenses
Operating costs and expenses decreased 3.8%, or $163.5 million, to $4,167.4 million for the year ended December 31, 2014, from $4,330.8 million for the same period of 2013. The reduction was primarily driven by decreases of casino expenses and depreciation and amortization, partially offset by increases in general and administrative expenses and pre-opening costs.
Casino expenses decreased 6.3%, or $179.5 million, to $2,667.0 million for the year ended December 31, 2014, from $2,846.5 million for the same period of 2013, primarily due to lower gaming taxes from the 39.0% gross win tax incurred at our Macau Operations. The decline in gaming taxes was commensurate with the 5.8% decrease in casino revenues at our Macau Operations.
Room expenses increased 11.1%, or $14.8 million, to $148.3 million for the year ended December 31, 2014, from $133.5 million for the same period of 2013. The increase is due to certain room expenses from our Las Vegas Operations to maintain a premium guest experience and expenses associated with the increase in occupancy over the prior year at both our Macau and Las Vegas Operations.
Food and beverage expenses increased 4.2%, or $13.6 million, to $337.2 million for the year ended December 31, 2014, from $323.6 million for the same period of 2013. The increase in food and beverage expenses is primarily a result of higher costs in the current period for entertainment at Wynn Las Vegas nightclubs.
General and administrative expenses increased 9.7%, or $43.7 million, to $492.5 million for the year ended December 31, 2014 from $448.8 million in the same period of 2013 primarily from our Macau Operations. Our Macau Operations experienced an increase compared to the prior year in labor costs, along with certain property maintenance and repair expenses and other miscellaneous items. Our Macau Operations incurred additional general and administrative labor costs associated with a new 2014 bonus program for non-management employees.
Pre-opening costs were $30.1 million for the year ended December 31, 2014, compared to $3.2 million for the same period of 2013 and were attributable to Wynn Palace. We expect our pre-opening costs to increase in the future as the construction and development of Wynn Palace progresses toward the expected opening date in the first half of 2016 and with the beginning of development for the Wynn resort in Massachusetts.
Depreciation and amortization decreased 15.3%, or $56.9 million, to $314.1 million for the year ended December 31, 2014, compared to $371.1 million for the same period of 2013 due to certain Las Vegas Operations assets with a five-year useful life becoming fully depreciated.
Interest expense, net of capitalized interest
The following table summarizes information related to interest expense (in thousands):
| Years Ended December 31, | |||||||||
| 2014 | 2013 | Percent Change | |||||||
| Interest expense | |||||||||
| Interest cost, including amortization of deferred financing costs and original issue discount and premium | $ | 348,520 | $ | 309,506 | 12.6 | ||||
| Capitalized interest | (33,458 | ) | (10,485 | ) | 219.1 | ||||
| $ | 315,062 | $ | 299,021 | 5.4 |
Interest expense, net of capitalized interest, increased 5.4%, or $16.0 million, to $315.1 million for the year ended December 31, 2014, up from $299.0 million for the same period of 2013, attributable to a $39.0 million increase in interest expense partially offset by a $23.0 million increase in capitalized interest. During 2013, we completed issuances of $500.0 million 4 1/4% senior notes, $600.0 million 5 1/4% senior notes and exercised our option to increase our Macau senior term loan facility by $200.0 million. During the first quarter of 2014, we issued an additional $750.0 million of 5 1/4% senior notes. These issuances of long-term debt were partially offset by the principal repayment of $500.0 million 7 7/8% first mortgage notes through a cash tender offer in May 2013 and redemption of untendered notes in November 2013. In addition, our interest expense associated with our first mortgage notes reduced year-over-year as a result of open market repurchases we made during 2014. Capitalized interest increased due to the construction costs of Wynn Palace. Capitalized interest will continue to increase with the ongoing borrowings and construction costs related to Wynn Palace.
Other non-operating income and expenses
We incurred a loss of $9.6 million on the extinguishment of debt for the year ended December 31, 2014, compared to a loss of $40.4 million in 2013. During the year ended December 31, 2014, the loss was due to the premium paid on the purchase of first mortgage notes due in 2020 through open market transactions and the write-off of related unamortized deferred financing costs and original issue discount. During the year ended December 31, 2013, the loss was primarily from the premium paid in the cash tender offer of our first mortgage notes due in 2017 and the write-off of related unamortized deferred financing costs and original issue discount.
We incurred a loss of $4.4 million for the year ended December 31, 2014 from the decrease in the fair value of our interest rate swaps, compared to a gain of $14.2 million from the increase in fair value in 2013.
Interest income was $20.4 million for the year ended December 31, 2014, compared to $15.7 million in 2013. During 2014 and 2013, our short-term investment strategy has been to preserve capital while retaining sufficient liquidity. The majority of our short-term investments were in time deposits, fixed deposits and money market accounts with a maturity of three months or less.
Income Taxes
For the years ended December 31, 2014 and 2013, we recorded a tax benefit of $3.8 million and $17.6 million, respectively. For the year ended December 31, 2014, our benefit for income taxes was primarily related to a release of valuation allowance on prior year FTCs resulting from the implementation of a tax planning strategy. For the year ended December 31,
2013, our income tax benefit was primarily related to a decrease in our deferred tax liabilities reduced by foreign taxes assessable on the dividends of Wynn Macau SA.
Wynn Macau SA received an exemption from Macau's 12% Complementary Tax on casino gaming profits through December 31, 2015. Accordingly, we were exempt from the payment of $99.4 million and $107.3 million in such taxes during the year ended December 31, 2014 and 2013, respectively. Our non-gaming profits remained subject to the Macau Complementary Tax and casino winnings remained subject to the Macau Special Gaming tax and other levies together totaling 39% in accordance with our concession agreement.
In February 2014, we received notification that the IRS completed its examination of our 2012 U.S. income tax return and had no changes.
In March 2013, the Financial Services Bureau commenced an examination of the 2009, 2010, and 2011 Macau income tax returns of Wynn Macau SA. In December 2014, Wynn Macau SA reached an agreement with the Macau Financial Services Bureau regarding issues raised during its examination. While no additional tax was due as a result of the examination, adjustments were made to Wynn Macau SA's foreign net operating loss carryforwards. On December 31, 2014, the statute of limitations for the 2009 Macau Complementary tax return expired.
Net income attributable to noncontrolling interests
Net income attributable to noncontrolling interests was $231.1 million for the year ended December 31, 2014, compared to $275.5 million for the year ended December 31, 2013. These amounts represent the noncontrolling interests' share of net income from Wynn Macau, Limited for each year.
Adjusted Property EBITDA
We use Adjusted Property EBITDA to manage the operating results of our segments. Adjusted Property EBITDA is net income before interest, taxes, depreciation and amortization, pre-opening costs, property charges and other, management and license fees, corporate expenses and other, intercompany golf course and water rights leases, stock-based compensation, loss on extinguishment of debt, change in interest rate swap fair value, change in Redemption Note fair value and other non-operating income and expenses, and includes equity in income from unconsolidated affiliates. Adjusted Property EBITDA is presented exclusively as a supplemental disclosure because we believe that it is widely used to measure the performance, and as a basis for valuation, of gaming companies. We use Adjusted Property EBITDA as a measure of the operating performance of our segments and to compare the operating performance of our properties with those of our competitors. We also present Adjusted Property EBITDA because it is used by some investors as a way to measure a company's ability to incur and service debt, make capital expenditures and meet working capital requirements. Gaming companies have historically reported EBITDA as a supplement to financial measures in accordance with U.S. generally accepted accounting principles ("GAAP"). In order to view the operations of their casinos on a more stand-alone basis, gaming companies, including us, have historically excluded from their EBITDA calculations pre-opening expenses, property charges, corporate expenses and stock-based compensation that do not relate to the management of specific casino properties. However, Adjusted Property EBITDA should not be considered as an alternative to operating income as an indicator of our performance, as an alternative to cash flows from operating activities as a measure of liquidity, or as an alternative to any other measure determined in accordance with GAAP. Unlike measures of net income, Adjusted Property EBITDA does not include depreciation or interest expense and therefore does not reflect current or future capital expenditures or the cost of capital. We have significant uses of cash flows, including capital expenditures, interest payments, debt principal repayments, taxes and other non-recurring charges, which are not reflected in Adjusted Property EBITDA. Also, our calculation of Adjusted Property EBITDA may be different from the calculation methods used by other companies and, therefore, comparability may be limited.
The following table summarizes Adjusted Property EBITDA (in thousands) for our Macau and Las Vegas Operations as reviewed by management and summarized in Item 8—"Financial Statements and Supplementary Data," Note 18 "Segment Information." That footnote also presents a reconciliation of Adjusted Property EBITDA to net income.
| Years Ended December 31, | |||||||||||
| 2015 | 2014 | 2013 | |||||||||
| Macau Operations | $ | 708,623 | $ | 1,258,082 | $ | 1,324,119 | |||||
| Las Vegas Operations | 477,166 | 515,196 | 486,682 | ||||||||
| $ | 1,185,789 | $ | 1,773,278 | $ | 1,810,801 |
Adjusted Property EBITDA at our Macau and Las Vegas Operations decreased year-over-year by 43.7% and 7.4%, respectively, for the year ended December 31, 2015, primarily due to the decline in casino revenues.
Adjusted Property EBITDA at our Macau Operations decreased year-over-year by 5.0% for the year ended December 31, 2014, due to a decline in VIP turnover, partially offset by an increase in table games win from our mass market gaming operations. Adjusted Property EBITDA at our Las Vegas Operations increased year-over-year by 5.9% for the year ended December 31, 2014, driven by our non-casino revenue performance.
Refer to the discussions above regarding the specific details of our results of operations.
Liquidity and Capital Resources
Operating Activities
Our operating cash flows primarily consist of our operating income generated by our Macau and Las Vegas Operations (excluding depreciation and other non-cash charges), interest paid and earned, and changes in working capital accounts such as receivables, inventories, prepaid expenses, and payables. Our table games play both in Macau and Las Vegas is a mix of cash play and credit play, while our slot machine play is conducted primarily on a cash basis. A significant portion of our table games revenue is attributable to the play of a limited number of premium international customers that gamble on credit. The ability to collect these gaming receivables may impact our operating cash flow for the period. Our rooms, food and beverage, and entertainment, retail, and other revenue is conducted primarily on a cash basis or as a trade receivable. Accordingly, operating cash flows will be impacted by changes in operating income and accounts receivables.
Net cash provided by operations for the year ended December 31, 2015 was $572.8 million, compared to $1,098.3 million provided by operations for the year ended December 31, 2014. The reduction was primarily due to lower operating income generated by our Macau Operations and from the change in ordinary working capital accounts.
Net cash provided by operations for the year ended December 31, 2014 was $1,098.3 million, compared to $1,676.6 million for the same period of 2013, with the reduction due to lower operating income in 2014 and from the change in ordinary working capital accounts.
Net cash provided by operations for the year ended December 31, 2013 was $1,676.6 million compared to $1,185.7 million for the same period of 2012. The increase was primarily due to significant changes in ordinary working capital accounts and higher operating income in 2013.
Investing Activities
Net cash used in investing activities for the year ended December 31, 2015 was $1,891.6 million, which was primarily attributable to $1,921.2 million in capital expenditures, net of construction payables and retention, with majority for Wynn Palace construction.
Net cash used in investing activities for the year ended December 31, 2014 was $1,114.4 million, which was primarily attributable to $1,221.4 million in capital expenditures, net of construction payables and retention, with majority for Wynn Palace construction. We also used cash of $86.7 million for payment of our Massachusetts gaming license.
Net cash used in investing activities for the year ended December 31, 2013 was $677.6 million, which was primarily attributable to $514.8 million in capital expenditures related to site preparation costs for Wynn Palace land and various renovations at our resorts including Wynn Macau guest room renovations.
Financing Activities
Net cash provided by financing activities was $1,216.3 million for the year ended December 31, 2015. During the year ended December 31, 2015 we amended our Wynn Macau credit facilities and received proceeds of $2.27 billion from our fully funded senior secured term loan facility. These proceeds were used to repay $953.3 million in outstanding borrowings under the senior secured term loan facility dated July 30, 2012 and $815.8 million in outstanding borrowings under the senior secured revolving credit facility dated July 30, 2012, of which $683.3 million had been previously borrowed during 2015. We also issued $1.8 billion of 5 1/2% senior notes due in 2025 and used the proceeds for the purchase of $1.6 billion of our first mortgage notes due in 2020.
Net cash used in financing activities was $235.6 million for the year ended December 31, 2014, which was mainly due to the payment of dividends of $942.9 million and payments on our long-term debt, primarily offset by proceeds of $755.6 million from the issuance of senior notes and $132.6 million from borrowings, net of repayments, under our Wynn Macau revolving credit facility. During 2014, we used $98.4 million for open market purchases of principal on our first mortgage notes and $31.5 million for the repayment of remaining principal on our note payable secured by aircraft.
Net cash used in financing activities was $291.1 million for the year ended December 31, 2013, which was primarily attributable to the payment of dividends of $1,035.0 million and the redemption of first mortgage notes of $500.0 million, offset by proceeds from the issuance of senior notes of $1,100.0 million and the increase in our senior term loan facility of $200.0 million.
Capital Resources
As of December 31, 2015, we had approximately $2,080.1 million of cash and cash equivalents and $251.6 million of available-for-sale investments in domestic and foreign debt securities and commercial paper. Cash and cash equivalents include cash on hand, cash in bank and fixed deposits, investments in money market funds, domestic and foreign bank time deposits and commercial paper, all with maturities of less than 90 days. Of these amounts, Wynn Macau, Limited and its subsidiaries (of which we own 72%) held $868.4 million in cash. If our portion of this cash was repatriated to the U.S. on December 31, 2015, it would not be subject to U.S. tax in the year of repatriation. Wynn Las Vegas, LLC held cash balances of $77.1 million. Wynn Resorts, Limited (including its subsidiaries other than Wynn Macau, Limited and Wynn Las Vegas, LLC), which is not a guarantor of the debt of its subsidiaries, held $1,134.6 million and $251.6 million of cash and available-for-sale investments, respectively.
The Wynn Macau credit facilities consist of a $2.27 billion equivalent fully funded senior secured term loan facility and a $750.0 million equivalent senior secured revolving credit facility (together, the "Wynn Macau Credit Facilities"). Borrowings under the Wynn Macau Credit Facilities consist of both United States dollar and Hong Kong dollar tranches and were used to refinance Wynn Macau SA's existing indebtedness, and will be used to fund the construction and development of Wynn Palace and for general corporate purposes. As of December 31, 2015, we had $318.8 million of available borrowing capacity under the senior secured revolving credit facility.
The Wynn America credit facilities consist of a $375.0 million senior secured revolving credit facility and an $875.0 million delay draw senior secured term loan facility (together, the "Wynn America Credit Facilities"). Borrowings under the Wynn America Credit Facilities will be used to fund the design, development, construction and pre-opening expenses of the Wynn resort in Massachusetts and for general corporate purposes. As of December 31, 2015, we had borrowed $70.0 million of the delay draw senior secured term loan facility. Of the remaining $805.0 million delay draw senior secured term loan facility, the borrowing period is March 30, 2016, for up to $100.3 million and June 30, 2016, for up to $704.7 million. As of December 31, 2015, we had $1.17 billion of available borrowing capacity under the senior secured revolving credit facility, which includes a reduction for outstanding letters of credit totaling $11.7 million.
We expect that our future cash needs will relate primarily to operations, funding of development projects and enhancements to our operating resorts, debt service and retirement and general corporate purposes. We expect to meet our cash needs including our contractual obligations with future anticipated cash flow from operations, availability under our bank credit facilities and our existing cash balances. We intend to primarily fund our current development projects, Wynn Palace and the Wynn resort in Massachusetts, with the available borrowing capacity under our bank credit facilities.
Macau Related Debt
Our Macau related debt consists of senior notes and the Wynn Macau Credit Facilities.
On March 20, 2014, Wynn Macau, Limited ("WML"), an indirect subsidiary of Wynn Resorts, Limited, issued $750.0 million aggregate principal amount of 5 1/4% Senior Notes due 2021 (the "Additional 2021 Notes"), which were consolidated and form a single series with the $600.0 million aggregate principal amount of 5 1/4% Senior Notes due 2021 issued by WML on October 16, 2013 (the "Original 2021 Notes" and together with the "Additional 2021 Notes," the "2021 Notes").
The 2021 Notes will bear interest at the rate of 5 1/4% per annum and will mature on October 15, 2021. Interest on the 2021 Notes is payable semi-annually in arrears on April 15 and October 15 of each year, beginning on April 15, 2014. At any time on or before October 14, 2016, WML may redeem the 2021 Notes, in whole or in part, at a redemption price equal to the greater of (a) 100% of the aggregate principal amount of the 2021 Notes or (b) a "make-whole" amount as determined by an independent investment banker in accordance with the terms of the indenture for the 2021 Notes, dated as of October 16, 2013
(the "WML Indenture"). In either case, the redemption price would include accrued and unpaid interest. In addition, on or after October 15, 2016, WML may redeem the 2021 Notes, in whole or in part, at a premium decreasing annually from 103.94% of the principal amount to zero, plus accrued and unpaid interest. If WML undergoes a Change of Control (as defined in the WML Indenture), it must offer to repurchase the 2021 Notes at a price equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest. In addition, we may redeem the 2021 Notes, in whole but not in part, at a redemption price equal to 100% of the principal amount, plus accrued and unpaid interest, in response to any change in or amendment to certain tax laws or tax positions. Further, if a holder or beneficial owner of the 2021 Notes fails to meet certain requirements imposed by any Gaming Authority (as defined in the WML Indenture), WML may require the holder or beneficial owner to dispose of or redeem its 2021 Notes.
The 2021 Notes are WML's general unsecured obligations and rank pari passu in right of payment with all of WML's existing and future senior unsecured indebtedness; will rank senior to all of WML's future subordinated indebtedness, if any; will be effectively subordinated to all of WML's future secured indebtedness to the extent of the value of the assets securing such debt; and will be structurally subordinated to all existing and future obligations of WML's subsidiaries, including Wynn Macau Credit Facilities' existing credit facilities. The 2021 Notes are not registered under the Securities Act of 1933, as amended (the "Securities Act"), and the 2021 Notes are subject to restrictions on transferability and resale.
The WML Indenture contains covenants limiting WML's (and certain of its subsidiaries') ability to, among other things: merge or consolidate with another company; transfer or sell all or substantially all of its properties or assets; and lease all or substantially all of its properties or assets. The terms of the WML Indenture contain customary events of default, including, but not limited to: default for 30 days in the payment when due of interest on the 2021 Notes; default in the payment when due of the principal of, or premium, if any, on the 2021 Notes; failure to comply with any payment obligations relating to the repurchase by WML of the 2021 Notes upon a change of control; failure to comply with certain covenants in the WML Indenture; certain defaults on certain other indebtedness; failure to pay judgments against WML or certain subsidiaries that, in the aggregate, exceed $50.0 million; and certain events of bankruptcy or insolvency. In the case of an event of default arising from certain events of bankruptcy or insolvency, all 2021 Notes then outstanding will become due and payable immediately without further action or notice.
On September 30, 2015, we amended our Wynn Macau Credit Facilities. The borrowing availability was increased to $3.05 billion with ability to upsize an additional $1 billion in equivalent senior secured loans upon satisfaction of various conditions. The senior secured term loan facility is repayable in graduating installments of between 2.5% and 7.33% of the principal amount on a quarterly basis commencing December 2018, with a final installment of 50% of the principal amount repayable in September 2021 (extended from July 2018). Any outstanding borrowings from the senior secured revolving credit facility will mature in September 2020 (extended from July 2017) by which time any outstanding borrowings from the senior secured revolving credit facility must be repaid. The Wynn Macau Credit Facilities bear interest at LIBOR or HIBOR plus a margin of 1.50% to 2.25% per annum based on Wynn Macau SA's Leverage Ratio (as defined in the Wynn Macau Credit Facilities). The commitment fee required to pay for unborrowed amounts under the senior secured revolving credit facility, if any, is between 0.52% to 0.79% per annum, based on Wynn Macau SA's Leverage Ratio. The annual commitment fee is payable quarterly in arrears and calculated based on the daily average of the unborrowed amounts.
The Wynn Macau Credit Facilities contain a requirement that Wynn Macau SA must make mandatory repayments of indebtedness from specified percentages of excess cash flow. If Wynn Macau SA's Leverage Ratio is greater than 4.5 to 1, then 25% of Excess Cash Flow (as defined in the Wynn Macau Credit Facilities) must be used for prepayment of indebtedness and cancellation of available borrowings under the Wynn Macau Credit Facilities. There is no mandatory prepayment in respect of Excess Cash Flow if Wynn Macau SA's Leverage Ratio is equal to or less than 4.5 to 1.
The Wynn Macau Credit Facilities contain customary covenants restricting certain activities including, but not limited to: the incurrence of additional indebtedness, the incurrence or creation of liens on any of its property, sale and leaseback transactions, the ability to dispose of assets, and making loans or other investments. In addition, Wynn Macau SA is required by the financial covenants to maintain a Leverage Ratio of not greater than 5.25 to 1 for the fiscal year ending December 31, 2015, and an Interest Coverage Ratio (as defined in the Wynn Macau Credit Facilities) of not less than 2.00 to 1 at any time.
Borrowings under the Wynn Macau Credit Facilities will continue to be guaranteed by Palo Real Estate Company Limited ("Palo"), a subsidiary of Wynn Macau SA, and by certain subsidiaries of the Company that own equity interests in Wynn Macau SA, and are secured by substantially all of the assets of Wynn Macau SA and Palo, and the equity interests in Wynn Macau SA. Borrowings under the Wynn Macau Facilities are not guaranteed by the Company or WML.
In connection with the gaming concession contract of Wynn Macau SA, Wynn Macau SA entered into a Bank Guarantee Reimbursement Agreement with Banco Nacional Ultramarino, S.A. ("BNU") for the benefit of the Macau government. This
guarantee assures Wynn Macau SA's performance under the casino concession agreement, including the payment of premiums, fines and indemnity for any material failure to perform under the terms of the concession agreement and the payment of any gaming taxes. As of December 31, 2015, the guarantee was in the amount of MOP 300.0 million (approximately $37.0 million) and will remain at such amount until 180 days after the end of the term of the concession agreement (2022). BNU, as issuer of the guarantee, is currently secured by a second priority security interest in the senior lender collateral package. From and after repayment of all indebtedness under the Wynn Macau Credit Facilities, Wynn Macau SA is obligated to promptly, upon demand by BNU, repay any claim made on the guarantee by the Macau government. BNU is paid an annual fee for the guarantee of MOP 2.3 million (approximately $0.3 million).
U.S. and Corporate Related Debt
Our U.S. related debt consists of first mortgage notes, senior notes and the Wynn America Credit Facilities. The Corporate related debt consists of the Redemption Price Promissory Note ("Redemption Note").
The first mortgage notes (the "2022 Notes") were issued by Wynn Las Vegas, LLC and Wynn Las Vegas Capital Corp., an indirect wholly owned subsidiary of Wynn Resorts, Limited (together, the "Issuers"). The 2022 Notes are senior obligations of the Issuers and are unsecured (except by the first priority pledge by Wynn Las Vegas Holdings, LLC of its equity interests in Wynn Las Vegas, LLC (the "Holdings pledge")). These issuances rank pari passu in right of payment with the 2023 Notes and the 2025 Notes (defined below) and are not guaranteed by any of our subsidiaries. If the Issuers undergo a change of control (as defined in the applicable indenture), they must offer to repurchase the first mortgage notes at 101% of the principal amount, plus accrued and unpaid interest. The indentures governing the first mortgage notes contain customary negative covenants and financial covenants, including, but not limited to, covenants that restrict Wynn Las Vegas, LLC's ability to: pay dividends or distributions or repurchase equity; incur additional debt; make investments; create liens on assets to secure debt; enter into transactions with affiliates; enter into sale-leaseback transactions; merge or consolidate with another company; and transfer and sell assets or create dividend and other payment restrictions affecting subsidiaries.
In May 2013, the Issuers completed the issuance of $500.0 million aggregate principal amount of 4 1/4% Senior Notes due 2023 (the "2023 Notes") pursuant to an indenture, dated as of May 22, 2013 (the "2023 Indenture"), among the Issuers, the Guarantors (as defined below) and U.S. Bank National Association, as trustee.
The 2023 Notes will mature on May 30, 2023 and bear interest at the rate of 4 1/4% per annum. The Issuers may, at their option, redeem the 2023 Notes, in whole or in part, at any time or from time to time prior to their stated maturity. The redemption price for 2023 Notes that are redeemed before February 28, 2023 will include a make-whole premium. The 2023 Notes are also subject to mandatory redemption requirements imposed by gaming laws and regulations of gaming authorities in Nevada.
The 2023 Notes are the Issuers' senior unsecured obligations and rank pari passu in right of payment with the Issuers' first mortgage notes and 2025 Notes (as defined below). The 2023 Notes are unsecured (except by the Holdings pledge). The Holdings pledge also secures the first mortgage notes and the 2025 Notes. If Wynn Resorts, Limited receives an investment grade rating from one or more ratings agencies, the first priority pledge securing the 2023 Notes will be released.
The 2023 Notes are jointly and severally guaranteed by all of the Issuers' subsidiaries, other than Wynn Las Vegas Capital Corp. which was a co-issuer (the "Guarantors"). The guarantees are senior unsecured obligations of the Guarantors and rank senior in right of payment to all of their existing and future subordinated debt. The guarantees rank equally in right of payment with all existing and future liabilities of the Guarantors that are not so subordinated and will be effectively subordinated in right of payment to all of such Guarantors' existing and future secured debt (to the extent of the collateral securing such debt).
The 2023 Indenture contains covenants limiting the Issuers' and the Guarantors' ability to create liens on assets to secure debt; enter into sale-leaseback transactions; and merge or consolidate with another company. These covenants are subject to a number of important and significant limitations, qualifications and exceptions.
Events of default under the 2023 Indenture include, among others, the following: default for 30 days in the payment when due of interest on the 2023 Notes; default in payment when due of the principal of, or premium, if any, on the 2023 Notes; failure to comply with certain covenants in the 2023 Indenture; and certain events of bankruptcy or insolvency. In the case of an event of default arising from certain events of bankruptcy or insolvency with respect to the Issuers or any Guarantor, all 2023 Notes then outstanding will become due and payable immediately without further action or notice.
On February 18, 2015, the Issuers completed the issuance of $1.8 billion aggregate principal amount of 5 1/2% Senior Notes due March 1, 2025 (the "2025 Notes") pursuant to an indenture, dated as of February 18, 2015 (the "2025 Indenture"), among the Issuers, Guarantors and U.S. Bank National Association, as trustee.
The 2025 Notes will mature on March 1, 2025 and bear interest at the rate of 5 1/2% per annum. The Issuers may, at their option, redeem the 2025 Notes, in whole or in part, at any time or from time to time prior to their stated maturity. The redemption price for 2025 Notes that are redeemed before December 1, 2024 will be equal to the greater of (a) 100% of the principal amount of the 2025 Notes to be redeemed and (b) a "make-whole" amount described in the 2025 Indenture, plus in either case accrued and unpaid interest, if any, to, but not including, the redemption date. The redemption price for the 2025 Notes that are redeemed on or after December 1, 2024 will be equal to 100% of the principal amount of the 2025 Notes to be redeemed, plus accrued and unpaid interest, if any, to, but not including, the redemption date. In the event of a change of control triggering event, the Issuers will be required to offer to repurchase the 2025 Notes at 101% of the principal amount, plus accrued and unpaid interest, if any, to, but not including, the repurchase date. The 2025 Notes also are subject to mandatory redemption requirements imposed by gaming laws and regulations of gaming authorities in Nevada.
The 2025 Notes are the Issuers' senior unsecured obligations and rank pari passu in right of payment with the Issuers' 2022 Notes and 2023 Notes (together, the "Existing Notes"). The 2025 Notes are unsecured (except by the Holding pledge). The equity interests in Wynn Las Vegas also secure the Existing Notes. If Wynn Resorts, Limited receives an investment grade rating from one or more ratings agencies, the first priority pledge securing the 2025 Notes will be released.
The 2025 Notes are jointly and severally guaranteed by all of the Issuers' subsidiaries. The guarantees are senior unsecured obligations and rank senior in right of payment to all of their existing and future subordinated debt. The guarantees rank equally in right of payment with all existing and future liabilities of the Issuers' subsidiaries that are not so subordinated and will be effectively subordinated in right of payment to all of such existing and future secured debt (to the extent of the collateral securing such debt).
The 2025 Indenture contains covenants limiting the Issuers' and Guarantors' ability to create liens on assets to secure debt; enter into sale-leaseback transactions; and merge or consolidate with another company. These covenants are subject to a number of important and significant limitations, qualifications and exceptions.
Events of default under the 2025 Indenture include, among others, the following: default for 30 days in the payment when due of interest on the 2025 Notes; default in payment when due of the principal of, or premium, if any, on the 2025 Notes; failure to comply with certain covenants in the 2025 Indenture; and certain events of bankruptcy or insolvency. In the case of an event of default arising from certain events of bankruptcy or insolvency with respect to the Issuers or Issuers' subsidiaries (as guarantors), other than Wynn Las Vegas Capital Corp., all 2025 Notes then outstanding will become due and payable immediately without further action or notice.
On November 20, 2014, Wynn America, an indirect wholly owned subsidiary, and certain subsidiaries of Wynn America entered into a $1.25 billion senior secured credit facility. The revolving credit facility matures in November 2019. The term loan facility matures in November 2020 and will require quarterly principal payments, scheduled to begin in June 2018. Subject to certain exceptions, the Wynn America Credit Facilities bear interest at either base rate plus 0.75% per annum or the reserve adjusted eurodollar rate plus 1.75% per annum. The annual fee required to pay for unborrowed amounts, if any, is 0.30% per annum, payable quarterly in arrears, calculated based on the daily average of the unborrowed amounts under such credit facilities.
The Wynn America Credit Facilities contain customary representation and warranties, events of default and negative and affirmative covenants, including, among other things, limitations on: indebtedness; investments; restricted payments; mergers and acquisitions; payments of indebtedness; negative pledges; liens; transactions with affiliates and sales of assets. In addition, Wynn America is subject to financial covenants including maintaining a Maximum Consolidated Senior Secured Net Leverage Ratio and a Minimum Consolidated EBITDA, each as defined in the Wynn America Credit Facilities. Commencing with the second full fiscal quarter ending after the fiscal quarter in which the opening of the Wynn resort in Massachusetts occurs, the Maximum Consolidated Senior Secured Net Leverage Ratio is not to exceed 2.75 to 1. Commencing with the fiscal quarter ending December 31, 2015, the Minimum Consolidated EBITDA is not to be less than $200.0 million.
We provided a completion guaranty in favor of the lenders under the Wynn America Credit Facilities to support the development and opening of the Wynn resort in Massachusetts. Wynn America and the guarantors have entered into a security agreement in favor of the lenders under the Wynn America Credit Facilities pursuant to which, subject to certain exceptions, Wynn America and the guarantors have pledged all equity interests in the guarantors to the extent permitted by applicable law and granted a first priority security interest in substantially all of the other existing and future assets of the guarantors.
Based on the Board of Director's finding of "unsuitability," on February 18, 2012, we redeemed and canceled Aruze's 24,549,222 shares of Wynn Resorts' common stock. Following a finding of "unsuitability," our articles of incorporation authorize redemption at "fair value" of the shares held by unsuitable persons. Pursuant to the articles of incorporation, we issued the Redemption Note to Aruze, a former stockholder and related party, in redemption of the shares. The Redemption Note has a principal amount of approximately $1.94 billion, matures on February 18, 2022 and bears interest at the rate of 2% per annum, payable annually in arrears on each anniversary of the date of the Redemption Note. We may, in our sole and absolute discretion, at any time and from time to time, and without penalty or premium, prepay the whole or any portion of the principal or interest due under the Redemption Note. In no instance shall any payment obligation under the Redemption Note be accelerated except in the sole and absolute discretion of Wynn Resorts or as specifically mandated by law. The indebtedness evidenced by the Redemption Note, is subordinated to the prior payment in full of all existing and future obligations of Wynn Resorts and any of its affiliates in respect of indebtedness for borrowed money of any kind or nature. Aruze, Universal Entertainment Corporation and Kazuo Okada have challenged the redemption of Aruze's shares and we are currently involved in litigation with those parties as well as related shareholder derivative litigation. The outcome of these various proceedings cannot be predicted. Any adverse judgments or settlements involving payment of a material sum of money could cause a material adverse effect on our financial condition and results of operations and could expose us to additional claims by third parties, including current or former investors or regulators. Any adverse judgments or settlements would reduce our profits and could limit our ability to operate our business. See Item 1A—"Risk Factors" and Item 8—"Financial Statements and Supplementary Data," Note 17 "Commitments and Contingencies."
Other Factors Affecting Liquidity
Wynn Resorts is a holding company and, as a result, our ability to pay dividends is highly dependent on our ability to obtain funds and our subsidiaries' ability to provide funds to us. Wynn Las Vegas, LLC, Wynn America, LLC and Wynn Macau SA debt instruments contain customary negative covenants and financial covenants, including, but not limited to, covenants that restrict their ability to pay dividends or distributions.
Wynn Las Vegas, LLC intends to fund its operations and capital requirements from cash on hand and operating cash flow. We cannot assure you however, that our Las Vegas Operations will generate sufficient cash flow from operations or the availability of additional indebtedness will be sufficient to enable us to service and repay Wynn Las Vegas, LLC's indebtedness and to fund its other liquidity needs. Similarly, we expect that our Macau Operations will fund Wynn Macau SA and WML's debt service obligations with existing cash, operating cash flow and availability under the Wynn Macau Credit Facilities. However, we cannot assure you that operating cash flows will be sufficient to do so. We may refinance all or a portion of our indebtedness on or before maturity. We cannot assure you that we will be able to refinance any of the indebtedness on acceptable terms or at all.
Legal proceedings in which we are involved also may impact our liquidity. No assurance can be provided as to the outcome of such proceedings. In addition, litigation inherently involves significant costs. For information regarding legal proceedings, see Item 8—"Financial Statements and Supplementary Data," Note 17 "Commitments and Contingencies".
Our Board of Directors has authorized an equity repurchase program of up to $1.7 billion. The repurchase program may include repurchases from time to time through open market purchases, in privately negotiated transactions, and under plans complying with Rules 10b5-1 and 10b-18 under the Exchange Act. As of December 31, 2015, we had purchased a cumulative total of 12,804,954 shares of our common stock for a net cost of $1.1 billion under the program, with no purchases made under this program during the years ended December 31, 2015, 2014 and 2013.
We have in the past repurchased, and in the future, we may periodically consider repurchasing our outstanding notes for cash. The amount of any notes to be repurchased, as well as the timing of any repurchases, will be based on business, market and other conditions and factors, including price, contractual requirements or consents, and capital availability.
New business developments or other unforeseen events may occur, resulting in the need to raise additional funds. We continue to explore opportunities to develop additional gaming or related businesses in domestic and international markets. There can be no assurances regarding the business prospects with respect to any other opportunity. Any new development would require us to obtain additional financing. We may decide to conduct any such development through Wynn Resorts or through subsidiaries separate from the Las Vegas or Macau-related entities.
Off Balance Sheet Arrangements
We have not entered into any transactions with special purpose entities nor do we engage in any derivatives except for previously discussed interest rate swaps. We do not have any retained or contingent interest in assets transferred to an unconsolidated entity. At December 31, 2015, we had outstanding letters of credit totaling $11.7 million.
Contractual Obligations and Commitments
The following table summarizes our scheduled contractual commitments at December 31, 2015 (dollars in millions):
| Payments Due By Period | |||||||||||||||||||
| Less Than 1 Year | 1 to 3 Years | 4 to 5 Years | After 5 Years | Total | |||||||||||||||
| Long-term debt obligations | $ | — | $ | 123.3 | $ | 1,193.0 | $ | 7,978.6 | $ | 9,294.9 | |||||||||
| Fixed interest payments | 277.2 | 554.4 | 554.4 | 658.7 | 2,044.7 | ||||||||||||||
| Estimated variable interest payments (1) | 61.8 | 119.2 | 152.7 | 23.0 | 356.7 | ||||||||||||||
| Operating leases | 16.4 | 32.1 | 25.6 | 64.0 | 138.1 | ||||||||||||||
| Construction contracts and commitments | 274.2 | 52.0 | — | — | 326.2 | ||||||||||||||
| Leasehold interest in land | 16.0 | — | — | — | 16.0 | ||||||||||||||
| Employment agreements | 62.5 | 61.4 | 12.1 | — | 136.0 | ||||||||||||||
| Other (2) | 126.5 | 122.9 | 63.0 | 57.7 | 370.1 | ||||||||||||||
| Total commitments | $ | 834.6 | $ | 1,065.2 | $ | 2,000.8 | $ | 8,782.1 | $ | 12,682.8 |
| (1) | Amounts for all periods represent our estimated future interest payments on our debt facilities based upon amounts outstanding and LIBOR or HIBOR rates at December 31, 2015. Such rates continue at historical lows as of December 31, 2015. Actual rates will vary. |
| (2) | Other includes open purchase orders, future charitable contributions, fixed gaming tax payments in Macau and other contracts. As further discussed in Item 8—"Financial Statements and Supplementary Data," Note 16 "Income Taxes" of this report, we had $88.3 million of unrecognized tax benefits as of December 31, 2015. Due to the inherent uncertainty of the underlying tax positions, it is not practicable to assign this liability to any particular year and therefore it is not included in the table above as of December 31, 2015. |
Critical Accounting Policies and Estimates
Management's discussion and analysis of our results of operations and liquidity and capital resources are based on our consolidated financial statements. Our consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States of America. A summary of our significant accounting policies are presented in Item 8—"Financial Statements and Supplementary Data," Note 2 "Summary of Significant Accounting Policies." Certain of our accounting policies require management to apply significant judgment in defining the appropriate assumptions integral to financial estimates. On an ongoing basis, management evaluates those estimates, including those relating to the estimated lives of depreciable assets, asset impairment, allowances for doubtful accounts, accruals for customer loyalty programs, contingencies, litigation and other items. Judgments are based on historical experience, terms of existing contracts, industry trends and information available from outside sources, as appropriate. However, by their nature, judgments are subject to an inherent degree of uncertainty, and therefore actual results could differ from our estimates.
Development, Construction and Property and Equipment Estimates
During the construction and development of a resort, pre-opening or start-up costs are expensed when incurred. In connection with the construction and development of our resorts, significant start-up costs are incurred and charged to pre-opening costs through their respective openings. Once our resorts open, expenses associated with the opening of the resorts are no longer charged as pre-opening costs.
During the construction and development stage, direct costs such as those incurred for the design and construction of our resorts, including applicable portions of interest, are capitalized. Accordingly, the recorded amounts of property and equipment increase significantly during construction periods. Depreciation is provided over the estimated useful lives of the assets using the straight-line method. We determine the estimated useful lives based on our experience with similar assets, estimate of the
usage of the asset, and other factors specific to the asset. Depreciation expense related to capitalized construction costs is recognized when the related assets are placed in service. Upon the opening of our resorts, we began recognizing depreciation expense on the resort's fixed assets.
We review remaining estimated useful lives of our property and equipment on an ongoing basis. In our review of estimated useful lives of buildings and improvements for Wynn Macau, we consider factors such as liberalization of the gaming industry in Macau, market expansion and actions taken by the Macau government regarding concession renewals. This review indicated that our estimated useful lives of buildings and improvements extend beyond the current expiration of the gaming concession in June 2022 and land concession in August 2029. As a result, effective September 1, 2015, we have changed our estimate of the remaining useful lives of Wynn Macau assets to better reflect the estimated periods during which these assets are expected to remain in service.
Costs of repairs and maintenance are charged to expense when incurred. The cost and accumulated depreciation of property and equipment retired or otherwise disposed of are eliminated from the respective accounts and any resulting gain or loss is included in property charges and other.
We also evaluate our property and equipment and other long-lived assets for impairment in accordance with applicable accounting standards. For assets to be disposed of we recognize the asset at the lower of carrying value or fair market value less costs of disposal, as estimated based on comparable asset sales, solicited offers, or a discounted cash flow model. For assets to be held and used, we review for impairment whenever indicators of impairment exist. In reviewing for impairment, we compare the estimated future cash flows of the asset, on an undiscounted basis, to the carrying value of the asset. If the undiscounted cash flows exceed the carrying value, no impairment is indicated. If the undiscounted cash flows do not exceed the carrying value, an impairment is recorded based on the fair value of the asset, typically measured using a discounted cash flow model. If an asset is still under development, future cash flows include remaining construction costs. All recognized impairment losses, whether for assets to be disposed of or assets to be held and used are recorded as operating expenses.
Redemption Price Promissory Note
We record the Redemption Note at its fair value in accordance with applicable accounting guidance. As of December 31, 2015 and 2014, the fair value of the Redemption Note was $1.88 billion and $1.94 billion, respectively. We utilized an independent third party valuation to assist in the determination of this fair value. In determining this fair value, we estimated the Redemption Note's present value using discounted cash flows with a probability-weighted expected return for redemption assumptions and a discount rate, which included time value and non-performance risk adjustments commensurate with the risk of the Redemption Note.
Considerations for the redemption assumptions included the stated maturity of the Redemption Note, uncertainty of the related cash flows as well as potential effects of the following: uncertainties surrounding the potential outcome and timing of pending litigation with the Okada Parties (see Item 8—"Financial Statements and Supplementary Data," Note 17 "Commitments and Contingencies"); the outcome of on-going investigations of Aruze by the United States Attorney's Office, the U.S. Department of Justice and the Nevada Gaming Control Board; and other potential legal and regulatory actions. In addition, in the furtherance of various future business objectives, we considered our ability, at our sole option, to prepay the Redemption Note at any time in accordance with its terms without penalty. Accordingly, we reasonably determined that the estimated life of the Redemption Note could be less than the contractual life of the Redemption Note.
In determination of the appropriate discount rate to be used in the estimated present value, the Redemption Note's subordinated position and credit risk relative to all other debt in our capital structure and credit ratings associated with our traded debt were considered. Observable inputs for the risk free rate based on Federal Reserve rates for U.S. Treasury securities and credit risk spread based on a yield curve index of similarly rated debt were used.
Investments and Fair Value
We have made investments in domestic and foreign corporate debt securities and commercial paper. Our investment policy requires investments to be investment grade and limits the amount of exposure to any one issuer with the objective of minimizing the potential risk of principal loss. We determine the appropriate classification (held-to-maturity/available-for-sale) of our investments at the time of purchase and reevaluate such designation as of each balance sheet date. Our investments are reported at fair value, with unrealized gains and losses, net of tax, reported in other comprehensive income (loss). Adjustments are made for amortization of premiums and accretion of discounts to maturity computed under the effective interest method. Such amortization is included in interest income together with realized gains and losses and the stated interest on such securities.
We measure certain of our financial assets and liabilities, such as cash equivalents, interest rate swaps, restricted cash, available-for-sale securities and the Redemption Note at fair value on a recurring basis pursuant to accounting standards for fair value measurements. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. These accounting standards establish a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
We obtain pricing information in determining the fair value of our available-for-sale securities from independent pricing vendors. Based on our inquiries, the pricing vendors use various pricing models consistent with what other market participants would use. The assumptions and inputs used by the pricing vendors are derived from market observable sources including: reported trades, broker/dealer quotes, issuer spreads, benchmark curves, bids, offers and other market-related data. We have not made adjustments to such prices. Each quarter, we validate the fair value pricing methodology to determine the fair value consistent with applicable accounting guidance and to confirm that the securities are classified properly in the fair value hierarchy. We also compare the pricing received from our vendors to independent sources for the same or similar securities.
Allowance for Estimated Doubtful Accounts Receivable
A substantial portion of our outstanding receivables relates to casino credit play. Credit play, through the issuance of markers, represents a significant portion of the table games volume at our Las Vegas Operations. While offered, the issuance of credit at our Macau Operations is less significant when compared to Las Vegas. Our goal is to maintain strict controls over the issuance of credit and aggressively pursue collection from those customers who fail to pay their balances in a timely fashion. These collection efforts may include the mailing of statements and delinquency notices, personal contacts, the use of outside collection agencies, and litigation. Markers issued at our Las Vegas Operations are generally legally enforceable instruments in the United States, and United States assets of foreign customers may be used to satisfy judgments entered in the United States.
The enforceability of markers and other forms of credit related to gaming debt outside of the United States varies from country to country. Some foreign countries do not recognize the enforceability of gaming related debt, or make enforcement burdensome. We closely consider the likelihood and difficulty of enforceability, among other factors, when issuing credit to customers who are not residents of the United States. In addition to our internal credit and collection departments, located in both Las Vegas and Macau, we have a network of legal, accounting and collection professionals to assist us in our determinations regarding enforceability and our overall collection efforts.
As of December 31, 2015 and 2014, 85.1% and 84.6% of our casino accounts receivable were owed by customers from foreign countries, primarily in Asia. In addition to enforceability issues, the collectability of markers given by foreign customers is affected by a number of factors including changes in currency exchange rates and economic conditions in the customers' home countries.
We regularly evaluate our reserve for bad debts based on a specific review of customer accounts and outstanding gaming promoter accounts as well as management's prior experience with collection trends in the casino industry and current economic and business conditions. In determining our allowance for estimated doubtful accounts receivable, we apply loss factors based on historical marker collection history to aged account balances and we specifically analyze the collectability of each account with a balance over a specified dollar amount, based upon the age, the customer's financial condition, collection history and any other known information.
The following table presents key statistics related to our casino accounts receivable (dollars in thousands):
| December 31, | |||||||
| 2015 | 2014 | ||||||
| Casino accounts receivable | $ | 190,294 | $ | 257,930 | |||
| Allowance for doubtful casino accounts receivable | $ | 66,109 | $ | 74,149 | |||
| Allowance as a percentage of casino accounts receivable | 34.7 | % | 28.7 | % | |||
| Percentage of casino accounts receivable outstanding over 180 days | 43.7 | % | 32.5 | % |
Our reserve for doubtful casino accounts receivable is based on our estimates of amounts collectible and depends on the risk assessments and judgments by management regarding realizability, the state of the economy and our credit policy. Our reserve methodology is applied similarly to credit extended at each of our resorts. As of December 31, 2015 and 2014, 38.7% and 28.2%, respectively, of our outstanding casino account receivable balance originated at our Macau Operations.
At December 31, 2015, a 100 basis point change in the allowance for doubtful accounts as a percentage of casino accounts receivable would change the provision for doubtful accounts by approximately $1.9 million.
As our customer payment experience evolves, we will continue to refine our estimated reserve for bad debts. Accordingly, the associated provision for doubtful accounts expense may fluctuate. Because individual customer account balances can be significant, the reserve and the provision can change significantly between periods, as we become aware of additional information about a customer or changes occur in a region's economy or legal system.
Derivative Financial Instruments
We seek to manage our market risk, including interest rate risk associated with variable rate borrowings, through balancing fixed-rate and variable-rate borrowings and the use of derivative financial instruments. We account for derivative financial instruments in accordance with applicable accounting standards. Derivative financial instruments are recognized as assets or liabilities, with changes in fair value affecting net income. As of December 31, 2015, changes in our interest rate swap fair values are being recorded in our Consolidated Statements of Income, as the swaps do not qualify for hedge accounting.
We measure the fair value of our interest rate swaps on a recurring basis. We categorize our interest rate swap contracts as Level 2 in the hierarchy as described above. The fair value approximates the amount we would receive (pay) if these contracts were settled at the respective valuation dates. Fair value is estimated based upon current, and predictions of future, interest rate levels along a yield curve, the remaining duration of the instruments and other market conditions, and therefore is subject to significant estimation and a high degree of variability of fluctuation between periods. We adjust this amount by applying a non-performance valuation, considering our creditworthiness or the creditworthiness of our counterparties at each settlement date, as applicable.
Stock-Based Compensation
Accounting standards for stock-based payments establish standards for the accounting for transactions in which an entity exchanges its equity instruments for goods and services or incurs a liability in exchange for goods and services that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments. It requires an entity to measure the costs of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award and recognize that cost over the service period. We use the Black-Scholes option pricing model to determine grant-date fair value of our stock options. The Black-Scholes model uses assumptions of expected volatility, risk-free interest rates, the expected term of options granted, and expected rates of dividends. Management determines these assumptions by reviewing current market rates, making industry comparisons and reviewing conditions relevant to our Company.
The expected volatility and expected term assumptions can significantly impact the fair value of stock options. We believe that the valuation techniques and the approach utilized to develop our assumptions are reasonable in calculating the fair value of the options we grant. We estimate the expected stock price volatility using a combination of implied and historical factors related to our stock price in accordance with applicable accounting standards. As our stock price fluctuates, this estimate will change. A hypothetical 10% change in the volatility assumption for our options granted in 2015 would not have a material effect on the change in fair value. Expected term represents the estimated average time between the option's grant date and its exercise date. A hypothetical 10% change in the expected term assumption for our options granted in 2015 would not have a
material effect on the change in fair value. These assumed changes in fair value would have been recognized over the vesting schedule of such awards.
Accounting standards also require the classification of stock compensation expense in the same financial statement line items as cash compensation, and therefore impacts our departmental expenses (and related operating margins), pre-opening costs and construction in progress for our development projects, and our general and administrative expenses (including corporate expenses).
Income Taxes
We are subject to income taxes in the United States and other foreign jurisdictions where we operate. Accounting standards require the recognition of deferred tax assets, net of applicable reserves, and liabilities for the estimated future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on the income tax provision and deferred tax assets and liabilities is recognized in the results of operations in the period that includes the enactment date. Accounting standards require recognition of a future tax benefit to the extent that realization of such benefit is more likely than not. Otherwise, a valuation allowance is applied.
As of December 31, 2015, we have a FTC carryover of $3.32 billion and we have recorded a valuation allowance of $3.26 billion against this asset based on our estimate of future realization. The FTCs are attributable to the Macau special gaming tax, which is 35% of gross gaming revenue in Macau. The U.S. taxing regime only allows a credit for 35% of foreign source income. In assessing the need for a valuation allowance, we rely solely on the reversal of net taxable temporary differences that result in foreign source income during the 10-year foreign tax credit carryforward period.
Our income tax returns are subject to examination by the IRS and other tax authorities in the locations where we operate. We assess potentially unfavorable outcomes of such examinations based on accounting standards for uncertain income taxes. The accounting standards prescribe a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements.
Uncertain tax position accounting standards apply to all tax positions related to income taxes. These accounting standards utilize a two-step approach for evaluating tax positions. The tax benefit is measured as the largest amount of benefit that is more likely than not to be realized upon settlement.
As applicable, we recognize accrued penalties and interest related to unrecognized tax benefits in the provision for income taxes.
Recently Issued Accounting Standards
See related disclosure at Item 8—"Financial Statements and Supplementary Data," Note 2 "Summary of Significant Accounting Policies."
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