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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 approximately 72% of WML and we operate the Wynn Macau and Wynn Palace resorts, which we refer to as our Macau Operations. In Las Vegas, Nevada, with the exception of the majority of the retail space, we own 100% of and operate Wynn Las Vegas or what we also refer to as Las Vegas Operations. We are currently constructing Wynn Boston Harbor, an integrated casino resort in Everett, Massachusetts.
Macau Operations
Wynn Macau features two luxury hotel towers with a total of 1,008 guest rooms and suites, approximately 284,000 square feet of casino space, eight food and beverage outlets, approximately 31,000 square feet of meeting and convention space, approximately 57,000 square feet of retail space, a rotunda show and recreation and leisure facilities.
On August 22, 2016, we opened Wynn Palace, an integrated resort in the Cotai area of Macau. Wynn Palace features a luxury hotel tower with 1,706 guest rooms, suites and villas, approximately 420,000 square feet of casino space, 10 food and beverage outlets, approximately 40,000 square feet of meeting and convention space, approximately 105,000 square feet of retail space, public attractions, including a performance lake and floral art displays, and recreation and leisure facilities.
Las Vegas Operations
Wynn Las Vegas features two luxury hotel towers with a total of 4,748 guest rooms, suites and villas, approximately 189,000 square feet of casino space, 33 food and beverage outlets, an on-site 18-hole golf course, approximately 290,000 square feet of meeting and convention space, approximately 99,000 square feet of retail space, as well as two showrooms, three nightclubs, a beach club, and recreation and leisure facilities.
In December 2016, we formed a joint venture with Crown Acquisitions Inc. ("Crown") to own and operate approximately 88,000 square feet of existing retail space (of which we own 50.1%) and signed an agreement with Crown to form a joint venture to own and operate approximately 73,000 square feet of additional retail space that is currently under construction at Wynn Las Vegas. We expect to open the additional retail space in the first quarter of 2018. For more information on the joint venture, see Item 8—"Financial Statements and Supplementary Data," Note 3, "Retail Joint Venture."
Future Development
In November 2014, we were awarded a gaming license to develop and construct Wynn Boston Harbor, an integrated resort in Everett, Massachusetts, adjacent to Boston along the Mystic River. The resort will contain a hotel, a waterfront boardwalk, meeting and convention space, casino space, a spa, retail offerings and food and beverage outlets. The total project budget, including gaming license fees, construction costs, capitalized interest, pre-opening expenses and land costs, is estimated to be approximately $2.4 billion. As of December 31, 2016, we have incurred approximately $466.8 million in total project costs. We expect to open Wynn Boston Harbor in mid-2019.
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 revenues. |
| • | 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 revenues. |
| • | 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 percentages at our resorts.
In our VIP operations in Macau, customers primarily purchase non-negotiable chips, commonly referred to as rolling chips, from the casino 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 operations is recorded as turnover and provides a base for calculating VIP win percentage. It is customary in Macau to measure VIP play using this rolling chip method. We expect our win as a percentage of turnover from these operations to be within the range of 2.7% to 3.0%. In our mass market operations in Macau, customers may purchase cash chips at either the gaming tables or at the casino cage.
The measurements from our VIP and mass market operations are not comparable as the measurement method used in our mass market operations tracks the initial purchase of chips at the table and at the casino cage, while the measurement method from our VIP operations tracks the sum of all losing wagers. Accordingly, the base measurement from the VIP operations is much larger than the base measurement from the mass market operations. As a result, the expected win percentage with the same amount of gaming win is smaller in the VIP operations when compared to the mass market operations.
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, | |||||||||||
| 2016 | 2015 | 2014 | |||||||||
| Net revenues | $ | 4,466,297 | $ | 4,075,883 | $ | 5,433,661 | |||||
| Net income attributable to Wynn Resorts, Limited | 241,975 | 195,290 | 731,554 | ||||||||
| Diluted net income per share | 2.38 | 1.92 | 7.18 | ||||||||
| Adjusted Property EBITDA | 1,259,327 | 1,185,789 | 1,773,278 |
During the year ended December 31, 2016, our net income attributable to Wynn Resorts, Limited was $242.0 million, an increase of 23.9% over $195.3 million in the same period of 2015, resulting in diluted earnings per share of $2.38. The increase in net income attributable to Wynn Resorts, Limited was primarily due to a loss on extinguishment of debt in 2015 that was not experienced in 2016. Adjusted Property EBITDA increased year-over-year by 6.2%, from $1.19 billion for the year ended December 31, 2015 to $1.26 billion for the same period of 2016, primarily due to the new operations associated with the opening of Wynn Palace, partially offset by a decrease of 3.8% from Wynn Macau driven by a continued decrease in business volumes.
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 $731.6 million in the same period of 2014, resulting in diluted earnings per share of $1.92. The decrease in net income attributable to Wynn Resorts, Limited was primarily due to weaker performance from Wynn Macau, driven by a 46.4% reduction in VIP turnover compared to 2014, along with a loss on extinguishment of debt we experienced
during the year. Adjusted Property EBITDA decreased year-over-year by 33.1%, from $1.77 billion for the year ended December 31, 2014 to $1.19 billion for the same period of 2015, primarily as a result of the weaker performance from Wynn Macau previously discussed.
Financial results for the year ended December 31, 2016 compared to the year ended December 31, 2015.
Net revenues
The following table presents net revenues from our Macau and Las Vegas Operations (dollars in thousands):
| Years Ended December 31, | ||||||||||
| 2016 | 2015 | Percent Change | ||||||||
| Net revenues | ||||||||||
| Macau Operations: | ||||||||||
| Wynn Macau | $ | 2,264,087 | $ | 2,463,092 | (8.1 | ) | ||||
| Wynn Palace (1) | 583,336 | — | — | |||||||
| Total Macau Operations | 2,847,423 | 2,463,092 | 15.6 | |||||||
| Las Vegas Operations | 1,618,874 | 1,612,791 | 0.4 | |||||||
| $ | 4,466,297 | $ | 4,075,883 | 9.6 |
(1) Wynn Palace opened on August 22, 2016.
Net revenues increased 9.6%, or $390.4 million, for the year ended December 31, 2016, compared to the same period of 2015. The increase was primarily due to $583.3 million from Wynn Palace and an increase of $6.1 million from our Las Vegas Operations, partially offset by a decrease of $199.0 million from Wynn Macau.
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 (dollars in thousands):
| Years Ended December 31, | |||||||||
| 2016 | 2015 | Percent Change | |||||||
| Net revenues | |||||||||
| Casino revenues | $ | 3,268,141 | $ | 2,932,419 | 11.4 | ||||
| Non-casino revenues | 1,198,156 | 1,143,464 | 4.8 | ||||||
| $ | 4,466,297 | $ | 4,075,883 | 9.6 |
Casino revenues were 73.2% of total net revenues for the year ended December 31, 2016, compared to 71.9% for the same period of 2015, while non-casino revenues were 26.8% of total net revenues, compared to 28.1% for the same period of 2015.
Casino revenues
Casino revenues increased 11.4%, or $335.7 million, for the year ended December 31, 2016, compared to the same period in 2015. The increase was primarily due to casino revenues of $519.9 million from Wynn Palace, partially offset by a $177.7 million decrease from Wynn Macau. The decline in casino revenues from Wynn Macau was driven by a decrease in business volumes from both our VIP and mass market operations, with decreases in VIP turnover of 18.8%, table drop of 5.6% and slot handle of 14.5%. The business volume decrease for Wynn Macau was primarily driven by the continued impact from the current economic and political conditions in Macau and China, as well as impact from recent resort openings in the Cotai area of Macau, including Wynn Palace. We experienced a VIP win as a percentage of turnover of 3.29% for the year ended December 31, 2016, compared to 2.87% for the same period of 2015, which partially offset the business volume decrease in our VIP operations.
Prior to the opening of Wynn Palace, the Gaming Inspection and Coordination Bureau of Macau authorized 100 new table games for operation at Wynn Palace with 25 additional table games authorized for operation on January 1, 2017, and a further 25 new table games for operation on January 1, 2018, for a total of 150 new table games in the aggregate. In addition, we have and will continue to transfer table games between Wynn Macau and Wynn Palace, subject to the aggregate cap, to optimize our casino operations. As of February 15, 2017, we had a total of 303 table games at Wynn Macau and 304 at Wynn Palace.
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, | ||||||||||||||
| 2016 | 2015 | Increase/ (Decrease) | Percent Change | |||||||||||
| Macau Operations: | ||||||||||||||
| Wynn Macau: | ||||||||||||||
| Total casino revenues | $ | 2,135,193 | $ | 2,312,925 | $ | (177,732 | ) | (7.7 | ) | |||||
| VIP: | ||||||||||||||
| Average number of table games | 149 | 230 | (81 | ) | (35.2 | ) | ||||||||
| VIP turnover | $ | 47,048,754 | $ | 57,917,060 | $ | (10,868,306 | ) | (18.8 | ) | |||||
| Table games win | $ | 1,547,261 | $ | 1,659,683 | $ | (112,422 | ) | (6.8 | ) | |||||
| VIP win as a % of turnover | 3.29 | % | 2.87 | % | 0.42 | |||||||||
| Table games win per unit per day | $ | 28,332 | $ | 19,785 | $ | 8,547 | 43.2 | |||||||
| Mass market: | ||||||||||||||
| Average number of table games | 216 | 228 | (12 | ) | (5.3 | ) | ||||||||
| Table drop | $ | 4,585,476 | $ | 4,857,804 | $ | (272,328 | ) | (5.6 | ) | |||||
| Table games win | $ | 881,797 | $ | 951,458 | $ | (69,661 | ) | (7.3 | ) | |||||
| Table games win % | 19.2 | % | 19.6 | % | (0.4 | ) | ||||||||
| Table games win per unit per day | $ | 11,131 | $ | 11,431 | $ | (300 | ) | (2.6 | ) | |||||
| Average number of slot machines | 802 | 708 | 94 | 13.3 | ||||||||||
| Slot machine handle | $ | 3,386,973 | $ | 3,961,115 | $ | (574,142 | ) | (14.5 | ) | |||||
| Slot machine win | $ | 145,680 | $ | 191,164 | $ | (45,484 | ) | (23.8 | ) | |||||
| Slot machine win per unit per day | $ | 497 | $ | 740 | $ | (243 | ) | (32.8 | ) | |||||
| Wynn Palace (1): | ||||||||||||||
| Total casino revenues | $ | 519,877 | $ | — | $ | 519,877 | — | |||||||
| VIP: | ||||||||||||||
| Average number of table games | 81 | — | 81 | — | ||||||||||
| VIP turnover | $ | 14,480,023 | $ | — | $ | 14,480,023 | — | |||||||
| Table games win | $ | 396,954 | $ | — | $ | 396,954 | — | |||||||
| VIP win as a % of turnover | 2.74 | % | — | % | 2.74 | — | ||||||||
| Table games win per unit per day | $ | 37,009 | $ | — | $ | 37,009 | — | |||||||
| Mass market: | ||||||||||||||
| Average number of table games | 245 | — | 245 | — | ||||||||||
| Table drop | $ | 1,000,881 | $ | — | $ | 1,000,881 | — | |||||||
| Table games win | $ | 211,146 | $ | — | $ | 211,146 | — | |||||||
| Table games win % | 21.1 | % | — | % | 21.1 | — | ||||||||
| Table games win per unit per day | $ | 6,527 | $ | — | $ | 6,527 | — | |||||||
| Average number of slot machines | 962 | — | 962 | — | ||||||||||
| Slot machine handle | $ | 738,907 | $ | — | $ | 738,907 | — | |||||||
| Slot machine win | $ | 40,664 | $ | — | $ | 40,664 | — | |||||||
| Slot machine win per unit per day | $ | 320 | $ | — | $ | 320 | — |
(1) Wynn Palace opened on August 22, 2016.
| Years Ended December 31, | ||||||||||||||
| 2016 | 2015 | Increase/ (Decrease) | Percent Change | |||||||||||
| Las Vegas Operations: | ||||||||||||||
| Total casino revenues | $ | 613,071 | $ | 619,494 | $ | (6,423 | ) | (1.0 | ) | |||||
| Average number of table games | 235 | 232 | 3 | 1.3 | ||||||||||
| Table drop | $ | 1,838,479 | $ | 2,060,189 | $ | (221,710 | ) | (10.8 | ) | |||||
| Table games win | $ | 465,041 | $ | 490,920 | $ | (25,879 | ) | (5.3 | ) | |||||
| Table games win % | 25.3 | % | 23.8 | % | 1.5 | |||||||||
| Table games win per unit per day | $ | 5,406 | $ | 5,786 | $ | (380 | ) | (6.6 | ) | |||||
| Average number of slot machines | 1,893 | 1,866 | 27 | 1.4 | ||||||||||
| Slot machine handle | $ | 3,148,610 | $ | 2,969,327 | $ | 179,283 | 6.0 | |||||||
| Slot machine win | $ | 208,024 | $ | 206,626 | $ | 1,398 | 0.7 | |||||||
| Slot machine win per unit per day | $ | 300 | $ | 303 | $ | (3 | ) | (1.0 | ) |
Non-casino revenues
Non-casino revenues increased 4.8%, or $54.7 million, to $1.20 billion for the year ended December 31, 2016, from $1.14 billion for the same period of 2015, primarily due to the opening of Wynn Palace during the third quarter of 2016 and an increase of 5.7% in room revenues from our Las Vegas Operations, partially offset by a 14.4% decline in non-casino revenues at Wynn Macau.
Room revenues increased 12.0%, or $64.8 million, to $603.3 million for the year ended December 31, 2016, from $538.5 million in the same period of 2015, primarily attributable to $54.8 million from Wynn Palace and an increase of $23.5 million from our Las Vegas Operations, partially offset by a decrease of $13.5 million from Wynn Macau. The increase experienced by our Las Vegas Operations was driven by an ADR increase of 3.9% while the decrease from Wynn Macau was a result of an ADR decline of 9.3% and a 2.1 percentage point decrease in 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, | ||||||||||
| 2016 | 2015 | Percent Change (1) | ||||||||
| Macau Operations: | ||||||||||
| Wynn Macau: | ||||||||||
| Total room revenues (dollars in thousands) | $ | 111,817 | $ | 125,348 | (10.8 | ) | ||||
| Occupancy | 94.4 | % | 96.5 | % | (2.1 | ) | ||||
| ADR | $ | 293 | $ | 323 | (9.3 | ) | ||||
| REVPAR | $ | 277 | $ | 312 | (11.2 | ) | ||||
| Wynn Palace (2): | ||||||||||
| Total room revenues (dollars in thousands) | $ | 54,843 | $ | — | — | |||||
| Occupancy | 83.2 | % | — | % | — | |||||
| ADR | $ | 276 | $ | — | — | |||||
| REVPAR | $ | 230 | $ | — | — | |||||
| Las Vegas Operations: | ||||||||||
| Total room revenues (dollars in thousands) | $ | 436,613 | $ | 413,152 | 5.7 | |||||
| Occupancy | 85.3 | % | 85.2 | % | 0.1 | |||||
| ADR | $ | 296 | $ | 285 | 3.9 | |||||
| REVPAR | $ | 252 | $ | 243 | 3.7 |
(1) Except occupancy, which is presented as a percentage point change.
(2) Wynn Palace opened on August 22, 2016.
Food and beverage revenues increased slightly by 0.7%, or $4.4 million, to $601.5 million for the year ended December 31, 2016, from $597.1 million for the same period of 2015, primarily due to $27.1 million from Wynn Palace, partially offset by decreases of $12.0 million and $10.7 million from our Las Vegas Operations and Wynn Macau, respectively. Our Las Vegas Operations decreased primarily due to a decline in revenues at our nightclubs and the decrease from Wynn Macau was mainly from a decline in revenues at our restaurants.
Entertainment, retail and other increased 3.7%, or $12.8 million, to $363.4 million for the year ended December 31, 2016, from $350.6 million for the same period of 2015. The increase was primarily due to $38.0 million from Wynn Palace, partially offset by a $19.3 million decrease in revenue from retail shops at Wynn Macau.
Promotional allowances increased 8.0%, or $27.3 million, to $370.1 million for the year ended December 31, 2016, from $342.7 million for the same period of 2015. As a percentage of total casino revenues, promotional allowances were 11.3% for the year ended December 31, 2016, compared to 11.7% for the same period of 2015.
Operating costs and expenses
Operating costs and expenses increased 15.4%, or $527.6 million, to $3.94 billion for the year ended December 31, 2016, from $3.42 billion for the same period of 2015, driven primarily by increases in casino expenses of $217.1 million, general and administrative expenses of $83.3 million, depreciation and amortization of $82.1 million and pre-opening costs of $77.1 million, all mainly due to the opening of Wynn Palace.
Casino expenses increased 11.7%, or $217.1 million, to $2.08 billion for the year ended December 31, 2016, from $1.86 billion for the same period of 2015. The increase was commensurate with the 11.4% increase in casino revenues.
Room expenses increased 6.0%, or $8.9 million, to $157.9 million for the year ended December 31, 2016, from $149.0 million for the same period of 2015. The increase was primarily due to $16.4 million from Wynn Palace and a $4.3 million increase from our Las Vegas Operations, partially offset by an $11.6 million decrease from Wynn Macau.
Food and beverage expenses increased 3.9%, or $14.0 million, to $375.2 million for the year ended December 31, 2016, from $361.2 million for the same period of 2015, primarily related to Wynn Palace.
Entertainment, retail and other expenses increased 2.4%, or $3.7 million, to $161.1 million for the year ended December 31, 2016, from $157.4 million for the same period of 2015. The increase was primarily due to $8.9 million from Wynn Palace, partially offset by a decrease of $4.8 million from Wynn Macau.
General and administrative expenses increased 17.9%, or $83.3 million, to $548.1 million for the year ended December 31, 2016, from $464.8 million for the same period of 2015. The increase was primarily due to $73.9 million from Wynn Palace, as well as increases in general and administrative expenses from our Las Vegas Operations and corporate related expenses.
Provision for doubtful accounts decreased $2.9 million, or 26.2%, to $8.2 million for the year ended December 31, 2016, from $11.1 million for the same period of 2015. The change in the provision was primarily due to increased collections of casino accounts receivable at Wynn Macau.
Pre-opening costs were $154.7 million for the year ended December 31, 2016, compared to $77.6 million for the same period of 2015. During the year ended December 31, 2016, we incurred $129.8 million related to Wynn Palace, $22.7 million related to Wynn Boston Harbor, and $2.3 million related to our Las Vegas Operations. During the year ended December 31, 2015 we incurred pre-opening costs of $55.1 million and $22.6 million related to Wynn Palace and Wynn Boston Harbor, respectively.
Depreciation and amortization increased 25.4%, or $82.1 million, to $404.7 million for the year ended December 31, 2016, from $322.6 million for the same period of 2015. The increase was attributable to $105.9 million from Wynn Palace, primarily from the opening and associated building and furniture, fixtures and equipment placed in service, partially offset by a decrease of $14.1 million at Wynn Macau. The majority of the Wynn Macau decrease was due to a change in estimated useful lives of buildings and improvements, which was effective September 1, 2015, to more accurately reflect the estimated periods during which these assets are expected to remain in service.
Property charges and other were $54.8 million for the year ended December 31, 2016, compared to $10.5 million for the same period of 2015. During the year ended December 31, 2016, we incurred a $15.5 million exit fee for the right to procure energy from the wholesale energy markets instead of from the local public electric utility by our Las Vegas Operations and $14.1 million for the write-down of the carrying value to the purchase price of an aircraft we sold in January 2017. In addition, we incurred expenses of $10.1 million in abandonment charges related to current construction of additional retail space at our Las Vegas Operations and $5.5 million for the write-off of show production costs due to the closing of Steve Wynn's ShowStoppers in December 2016.
Interest expense, net of capitalized interest
The following table summarizes information related to interest expense (dollars in thousands):
| Years Ended December 31, | ||||||||||
| 2016 | 2015 | Percent Change | ||||||||
| Interest expense | ||||||||||
| Interest cost, including amortization of deferred financing costs and original issue discount and premium | $ | 383,497 | $ | 354,233 | 8.3 | |||||
| Capitalized interest | (94,132 | ) | (53,327 | ) | 76.5 | |||||
| $ | 289,365 | $ | 300,906 | (3.8 | ) | |||||
| Weighted average total debt balance | $ | 9,564,845 | $ | 8,214,598 | ||||||
| Weighted average interest rate | 4.0 | % | 4.3 | % |
Interest cost increased $29.3 million for the year ended December 31, 2016, compared to the same period of 2015, primarily due to an increase in our weighted average total debt balance, partially offset by a decrease in our weighted average interest rate. Capitalized interest increased $40.8 million for the year ended December 31, 2016, primarily due to the $25.6 million correction of an immaterial amount during 2016 as well as the construction of Wynn Palace. During the first quarter of 2016, we corrected immaterial amounts of additional interest of $25.6 million that should have been capitalized instead of being expensed during the years ended December 31, 2015 and 2014. Had these amounts been corrected in the appropriate periods, the capitalized interest for the year ended December 31, 2015, would have been $21.9 million higher. For further information, see Item 1—"Notes to Consolidated Financial Statements," Note 2 "Summary of Significant Accounting Policies."
Other non-operating income and expenses
We incurred gains of $65.0 million and $52.0 million for the years ended December 31, 2016 and 2015, respectively, from the change in fair value of the Redemption Note. The change in fair value was a result of changes in certain variables to calculate the estimated fair value. For further information on the fair value of the Redemption Note, see Item 1—"Notes to Consolidated Financial Statements," Note 2 "Summary of Significant Accounting Policies."
We incurred a loss of $126.0 million on the extinguishment of debt for the year ended December 31, 2015, in connection with the cash tender offer for the 7 7/8% First Mortgage Notes due May 1, 2020 and the 7 3/4% 2020 First Mortgage Notes due August 15, 2020 (together the "2020 Notes"), subsequent redemption of the untendered 2020 Notes and the amendment of our Wynn Macau credit facilities. We expensed $98.9 million for the consideration paid to holders who tendered the 2020 Notes, $17.2 million of unamortized deferred financing costs and original issue discount and $0.1 million in other fees incurred. In connection with the redemption of the remaining principal amount of the untendered 2020 Notes, we recorded a loss for the premium portion of the consideration of $5.9 million and expensed $1.8 million of unamortized deferred financing costs and original discount. In connection with the amendment of the Wynn Macau credit facilities, we expensed $2.1 million of unamortized deferred financing costs. We incurred no loss on extinguishment of debt for the year ended December 31, 2016.
We incurred a gain of $0.4 million and a loss of $5.3 million from the change in the fair value of our interest rate swaps for the years ended December 31, 2016 and 2015, respectively. 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 $13.5 million for the year ended December 31, 2016, compared to $7.2 million for 2015. During the years ended December 31, 2016 and 2015, our short-term investment strategy was 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, 2016 and 2015, we recorded a tax expense of $8.1 million and $7.7 million, respectively, primarily related to an increase in our deferred tax liabilities.
Wynn Macau SA has received a five-year exemption from the Macau Complementary Tax on casino gaming profits through December 31, 2020. For the years ended December 31, 2016 and 2015, we were exempt from the payment of $27.3 million and $41.6 million, respectively, in such taxes. 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 July 2011, Wynn Macau SA received an extension of its agreement with the Macau government that provides for an annual payment of 15.5 million Macau patacas (approximately $1.9 million) as complementary tax due by shareholders on dividend distributions. This agreement on dividends was effective through December 31, 2015. In August 2016, Wynn Macau SA received an extension of the agreement for an additional five years applicable to tax years 2016 through 2020. The extension agreement provides for an annual payment of 12.8 million Macau patacas (approximately $1.6 million).
We have participated in the Internal Revenue Service ("IRS") Compliance Assurance Program ("CAP") for the 2012 through 2016 tax years and will continue to participate in the IRS CAP for the 2017 tax year. In February 2016, the IRS completed an examination of the 2014 U.S. tax return and had no changes.
In April 2016, the Financial Services Bureau commenced an examination of the 2011 and 2012 Macau income tax returns of Palo. In June 2016, the Financial Services Bureau concluded its examination with no changes.
Net income attributable to noncontrolling interests
Net income attributable to noncontrolling interests was $60.5 million for the year ended December 31, 2016, compared to $86.2 million for the year ended December 31, 2015. These amounts are primarily related to the noncontrolling interests' share of net income from WML.
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 (dollars in thousands):
| Years Ended December 31, | ||||||||||
| 2015 | 2014 | Percent Change | ||||||||
| Net revenues | ||||||||||
| Wynn Macau | $ | 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 $4.08 billion for the year ended December 31, 2015, from $5.43 billion for the same period in 2014. The decline in net revenues was primarily driven by a decrease of 35.5%, or $1.27 billion, in casino revenue 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 (dollars 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 $2.93 billion for the year ended December 31, 2015, from $4.27 billion in the same period of 2014. The decline was 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 $3.59 billion to $2.31 billion. Our VIP gaming operations drove the decline 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 Macau Operations' mass market gaming contributed to the decline 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 as of December 31, 2014 to 190 as of December 31, 2015, based on the 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: | ||||||||||||||
| Wynn Macau: | ||||||||||||||
| Total casino revenues | $ | 2,312,925 | $ | 3,586,781 | $ | (1,273,856 | ) | (35.5 | ) | |||||
| 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 | ) | (38.7 | ) | |||||
| 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 $1.14 billion for the year ended December 31, 2015, from $1.16 billion 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 (1) | ||||||||
| Macau Operations: | ||||||||||
| Wynn Macau: | ||||||||||
| Total room revenues (dollars 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 (dollars 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 |
(1) 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 was 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 $3.42 billion for the year ended December 31, 2015, from $4.17 billion for the same period of 2014, mainly from a decrease in casino expenses.
Casino expenses decreased 30.2%, or $804.3 million, to $1.86 billion for the year ended December 31, 2015, from $2.67 billion for the same period of 2014, primarily due to lower gaming taxes from the 39% 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 was primarily a result of higher costs in the current period for entertainment at Wynn Las Vegas 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 was 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 Wynn Boston Harbor. Pre-opening costs for the year ended December 31, 2014 related to Wynn Palace.
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 was 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 during 2015.
Interest expense, net of capitalized interest
The following table summarizes information related to interest expense (dollars 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 | ) | |||||
| Weighted average total debt balance | $ | 8,214,598 | $ | 7,174,054 | ||||||
| Weighted average interest rate | 4.3 | % | 4.8 | % |
Our interest cost increased $5.7 million to $354.2 million for the year ended December 31, 2015, due to an increase in our weighted average total debt balance, partially offset by a decrease in our weighted average interest rate. 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. Financing activities during 2015 include the issuance of the 5 1/2% Senior Notes due 2025 ("2025 Notes"), cash tender offer and subsequent redemption of the 2020 Notes and the amendment of the Wynn Macau credit facilities. Financing activities during 2014 include the issuance of 5 1/4% Senior Notes due 2021.
Other non-operating income and expenses
We incurred losses of $126.0 million on the extinguishment of debt for the year ended December 31, 2015, compared to losses of $9.6 million in 2014. During the year ended December 31, 2015, in connection with the cash tender offer and subsequent redemption of the untendered 2020 Notes, we incurred a loss of $123.9 million associated with the premium paid, the write-off of unamortized deferred financing costs and original issue discount and other fees. 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 the 2020 Notes through open market transactions and the write-off of related unamortized deferred financing costs and original issue discount.
For 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.
We incurred losses 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.
Interest income was $7.2 million for the year ended December 31, 2015, compared to $20.4 million in 2014. During 2015 and 2014, our short-term investment strategy was 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, 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 was primarily related to an increase in our deferred tax liabilities. For the year ended December 31, 2014, our income tax benefit was primarily related to a release of valuation allowance on prior year foreign tax credits resulting from the implementation of a tax planning strategy.
For the years ended December 31, 2015 and 2014, we were exempt from the payment of $41.6 million and $99.4 million, respectively, under our exemption from the Macau Complementary Tax on gaming profits. 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.
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.
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 (including 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, as well as a basis for determining certain incentive compensation. 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 attributable to Wynn Resorts, Limited.
| Years Ended December 31, | |||||||||||
| 2016 | 2015 | 2014 | |||||||||
| Wynn Macau | $ | 681,509 | $ | 708,623 | $ | 1,258,082 | |||||
| Wynn Palace (1) | 103,036 | — | — | ||||||||
| Las Vegas Operations | 474,782 | 477,166 | 515,196 |
(1) Wynn Palace opened on August 22, 2016.
Adjusted Property EBITDA at Wynn Macau decreased year-over-year by 3.8% for the year ended December 31, 2016, primarily due to casino revenue performance driven by year-over-year declines in VIP turnover, table drop and slot machine handle.
Adjusted Property EBITDA at Wynn Palace was $103.0 million since opening on August 22, 2016.
Adjusted Property EBITDA for our Las Vegas Operations was relatively flat for the year ended December 31, 2016, compared to the same period of 2015.
Adjusted Property EBITDA at Wynn Macau and for our 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.
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 receivable.
Net cash provided by operations for the year ended December 31, 2016 was $970.5 million, compared to $572.8 million for the same period of 2015. The increase was primarily due to the change in customer deposits and working capital accounts from our Macau Operations.
Net cash provided by operations for the year ended December 31, 2015 was $572.8 million, compared to $1.10 billion for the same period of 2014. The reduction was primarily due to lower operating income generated by our Macau Operations and from the change in working capital accounts.
Investing Activities
Net cash used in investing activities for the year ended December 31, 2016 was $1.29 billion, which was primarily attributable to $1.23 billion in capital expenditures, net of construction payables and retention. Capital expenditures, net of construction payables and retention, consisted primarily of $838.3 million for Wynn Palace and $212.2 million for Wynn Boston Harbor.
Net cash used in investing activities for the year ended December 31, 2015 was $1.89 billion, which was primarily attributable to $1.92 billion in capital expenditures, net of construction payables and retention, with $1.57 billion related to Wynn Palace.
Net cash used in investing activities for the year ended December 31, 2014 was $1.11 billion, which was primarily attributable to $1.22 billion in capital expenditures, net of construction payables and retention, with $982.4 million related to Wynn Palace. We also used $86.7 million in cash for payment of our Massachusetts gaming license.
Financing Activities
Net cash provided by financing activities was $691.9 million for the year ended December 31, 2016, which was primarily attributable to borrowings of $930.0 million under our Wynn America credit facility and proceeds of $217.0 million from the sale of a 49.9% ownership interest in a subsidiary, partially offset by $325.2 million for the payment of dividends.
Net cash provided by financing activities was $1.22 billion for the year ended December 31, 2015, which was primarily attributable to net borrowings of $1.62 billion under our amended Wynn Macau credit facilities, partially offset by $499.1 million for the payment of dividends. We also issued $1.8 billion of 2025 Notes and used the proceeds for the purchase of $1.6 billion of our 2020 Notes.
Net cash used in financing activities was $235.6 million for the year ended December 31, 2014, which was primarily attributable to the payment of dividends of $942.9 million and payments on our long-term debt, partially 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 the remaining principal on our note payable secured by aircraft.
Capital Resources
As of December 31, 2016, we had approximately $2.45 billion of cash and cash equivalents and $301.5 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 original maturities of less than 90 days. Of these amounts, WML and its subsidiaries (of which we own approximately 72%) held $334.2 million in cash. If our portion of this cash was repatriated to the U.S. on December 31, 2016, it would be subject to minimal U.S. taxes in the year of repatriation. Wynn Las Vegas, LLC held cash balances of $225.7 million. Wynn Resorts, Limited (including its subsidiaries other than WML and Wynn Las Vegas, LLC), which is not a guarantor of the debt of its subsidiaries, held $1.89 billion and $301.5 million of cash and available-for-sale investments, respectively.
The Wynn Macau credit facilities consist of a $2.30 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 fund the construction and development of Wynn Palace and will be used for general corporate purposes. As of December 31, 2016, we had $409.2 million of available borrowing capacity under the senior secured revolving credit facility.
The Wynn America credit facilities consist of a $375 million senior secured revolving credit facility and a $1.0 billion fully funded senior secured term loan facility (together, the "Wynn America Credit Facilities"). Borrowings under the Wynn America Credit Facilities are and will be used to fund the development, construction and pre-opening expenses of Wynn Boston Harbor and for general corporate purposes. On June 21, 2016, we amended the Wynn America Credit Facilities to extend the available borrowing period for $649.7 million of the delay draw senior secured term loan facility from June 30, 2016 to December 31, 2016. On July 1, 2016, we amended the Wynn America Credit Facilities to increase the existing $875 million senior secured term loan facility (the "WA Senior Term Loan Facility I") by a principal amount of $125 million with the available borrowing period ending on December 31, 2016 (such increase, the "WA Senior Term Loan Facility II"). As of December 31, 2016, the available borrowing capacity under the Wynn America Credit Facilities was $361.3 million, net of $13.7 million in outstanding letters of credit.
The WML Finance I, Limited credit facility consists of a HK$1.55 billion (approximately $199.7 million) cash-collateralized revolving credit facility ("WML Finance Credit Facility"). Borrowings under the WML Finance Credit Facility are in Hong Kong dollars and are used for working capital requirements and general corporate purposes. On October 25, 2016, we amended the WML Finance Credit Facility to increase the principal amount up to HK$3.87 billion (approximately $499.0 million). As of December 31, 2016, the Company had $309.4 million of available borrowing capacity under the WML Finance Credit Facility.
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 project, Wynn Boston Harbor, with the available borrowing capacity under our bank credit facilities.
Macau Related Debt
Our Macau related debt consists of senior notes, the Wynn Macau Credit Facilities, and the WML Finance Credit Facility.
2021 Notes. On March 20, 2014, WML 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 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 SA's 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.
Wynn Macau Credit Facilities. On September 30, 2015, we amended our Wynn Macau Credit Facilities. The borrowing availability was increased to $3.05 billion with the 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 be paid 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 is 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 5.5 to 1 for the fiscal year ending December 31, 2016, 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, 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 Credit 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 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, 2016, the guarantee was in the amount of MOP 300 million (approximately $37.6 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).
Borrowings under the WML Finance Credit Facility are in Hong Kong dollars and are used for working capital requirements and general corporate purposes. The WML Finance Credit Facility matures in July 2018, at which time any outstanding borrowings must be repaid. The WML Finance Credit Facility bears interest initially at 1.50% per annum, such rate calculated as the interest rate paid by the lender as the deposit bank for the cash collateral deposited and pledged with the lender plus a margin of 0.40%. Under terms of the agreement, mandatory repayment is required upon a Change in Control or Material Adverse Effect, as defined in the agreement. The terms of the increased principal amount under the amendment are equivalent to the terms of the original credit agreement.
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 Note.
Notes. Our first mortgage notes and senior notes rank pari passu in right of payment.
2022 Notes. In March 2012, Wynn Las Vegas, LLC and Wynn Las Vegas Capital Corp., an indirect wholly owned subsidiary of Wynn Resorts (“Capital Corp.” and, together with Wynn Las Vegas, the "Issuers"), issued $900 million aggregate principal amount of the 5 3/8% First Mortgage Notes due 2022 (the "2022 Notes") pursuant to an indenture, dated as of March 12, 2012 (the “2022 Indenture”), among the Issuers, the Guarantors (as defined below) and U.S. Bank National Association, as trustee (the “Trustee”). The 2022 Notes will mature on March 15, 2022 and bear interest at the rate of 5 3/8% per annum. The Issuers may, at their option, redeem the 2022 Notes, in whole or in part, at any time or from time to time on or after March 15, 2017, in accordance with a premium schedule set forth in the 2022 Indenture, plus accrued and unpaid interest. If the Issuers undergo a change of control (as defined in the 2022 Indenture), the Issuers will be required to offer to repurchase the first mortgage notes at 101% of the principal amount, plus accrued and unpaid interest.
2023 Notes. In May 2013, the Issuers issued $500 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 and the 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, plus accrued and unpaid interest. In the event of a change of control triggering event (as defined in the 2023 Indenture), the Issuers will be required to offer to repurchase the 2023 Notes at 101% of the principal amount, plus accrued and unpaid interest.
2025 Notes. In February 2015, the Issuers issued $1.8 billion aggregate principal amount of 5 1/2% Senior Notes due 2025 (the “2025 Notes”) pursuant to an indenture, dated as of February 18, 2015 (the "2025 Indenture"), among the Issuers, Guarantors and the 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 2023 Notes that are redeemed before December 1, 2024 will include a “make-whole” premium, plus accrued and unpaid interest. In the event of a change of control triggering event (as defined in the 2025 Indenture), the Issuers will be required to offer to repurchase the 2025 Notes at 101% of the principal amount, plus accrued and unpaid interest.
Each of the 2022 Notes, 2023 Notes and 2025 Notes are senior obligations of the Issuers and are unsecured, except by a first priority pledge by Wynn Las Vegas Holdings, LLC of its equity interests in Wynn Las Vegas, LLC. If Wynn Resorts receives an investment grade rating from one or more ratings agencies, the first priority pledge securing the 2023 Notes and 2025 Notes will be released.
Each of the 2023 Notes and 2025 Notes are jointly and severally guaranteed by all of the Issuers' subsidiaries, other than Capital Corp. which was a co-issuer (the "Guarantors"). 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 2022 Indenture contains customary negative covenants and financial covenants, including, but not limited to, covenants that restrict the Issuers' and the Guarantors' 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. Each of the 2023 Indenture and 2025 Indenture contains negative covenants and financial covenants, including, but not limited to, 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 each of the 2022 Indenture, 2023 Indenture and 2025 Indenture include, among others, the following: default for 30 days in the payment of interest when due on the applicable notes; default in payment of the principal, or premium, if any, when due on the applicable notes; failure to comply with certain covenants in the applicable 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 Guarantors, all notes then outstanding will become due and payable immediately without further action or notice.
Each of the 2022 Notes, 2023 Notes and 2025 Notes are also subject to mandatory redemption requirements imposed by gaming laws and regulations of gaming authorities in Nevada.
Wynn America Credit Facilities. Under the Wynn America Credit Facilities, the senior secured revolving credit facility matures in November 2019, the WA Senior Term Loan Facility I is repayable in quarterly installments of $21.9 million commencing June 2018, with a final installment of $656.3 million repayable in November 2020 and the WA Senior Term Loan Facility II matures in November 2020. 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 representations and warranties, events of default and negative and affirmative covenants, including, among other things, limitations on: indebtedness; investments; restricted payments; mergers and acquisitions; payment 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 Wynn Boston Harbor 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 Wynn Boston Harbor. 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.
Redemption Note. Based on the Board of Directors' 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, 2016, 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, 2016, 2015 and 2014.
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 interest rate swaps and foreign currency forward contracts. We do not have any retained or contingent interest in assets transferred to an unconsolidated entity. As of December 31, 2016, we had outstanding letters of credit totaling $13.7 million.
Contractual Obligations and Commitments
The following table summarizes our scheduled contractual commitments as of December 31, 2016 (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 | $ | — | $ | 677.3 | $ | 4,510.0 | $ | 5,136.4 | $ | 10,323.7 | |||||||||
| Fixed interest payments | 278.2 | 556.5 | 541.7 | 358.8 | 1,735.2 | ||||||||||||||
| Estimated variable interest payments (1) | 93.6 | 183.0 | 101.7 | — | 378.3 | ||||||||||||||
| Operating leases | 20.4 | 36.3 | 22.7 | 101.8 | 181.3 | ||||||||||||||
| Construction contracts and commitments | 357.9 | 22.9 | — | — | 380.8 | ||||||||||||||
| Employment agreements | 59.7 | 55.2 | 6.9 | — | 121.8 | ||||||||||||||
| Other (2) (3) | 141.9 | 146.8 | 70.6 | 14.7 | 374.1 | ||||||||||||||
| Total commitments | $ | 951.7 | $ | 1,677.9 | $ | 5,253.7 | $ | 5,611.8 | $ | 13,495.1 |
| (1) | Amounts for all periods represent our estimated future interest payments on our debt facilities based upon amounts outstanding and LIBOR or HIBOR rates as of December 31, 2016. Such rates continue at historical lows as of December 31, 2016. Actual rates will vary. |
| (2) | Other includes open purchase orders, future charitable contributions, fixed gaming tax payments in Macau, performance contracts and other contracts. As further discussed in Item 8—"Financial Statements and Supplementary Data," Note 16 "Income Taxes" of this report, we had $90.5 million of unrecognized tax benefits as of December 31, 2016. 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, 2016. |
| (3) | Other excludes community payments associated with the continuing operations of Wynn Boston Harbor, which commence upon the opening of the resort. These amounts are approximately $10.5 million per year with minimal annual increases. |
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 U.S. GAAP. 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 begin recognizing depreciation expense on the fixed assets. The remaining estimated useful lives of assets are periodically reviewed and adjusted as necessary.
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, 2016 and 2015, the fair value of the Redemption Note was $1.82 billion and $1.88 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 ongoing 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 determining 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.
Retail Joint Venture
On December 28, 2016, we formed a joint venture (the "Retail Joint Venture") with Crown to own and operate approximately 88,000 square feet of existing retail space at Wynn Las Vegas. In connection with the transaction, we transferred certain assets and liabilities with a net book value of $31.8 million associated with the existing Wynn Las Vegas retail stores from Wynn Las Vegas, LLC, to the Retail Joint Venture. We sold Crown a 49.9% ownership interest in the Retail Joint Venture for consideration of $292.0 million, which consisted of $217.0 million in cash and a $75.0 million interest-free note that matures in full on January 3, 2018. Wynn Las Vegas, LLC transferred all interests as lessor in third-party retail store leases to the Retail Joint Venture as part of the transaction and the majority of the retail stores previously operated by Wynn Las Vegas, LLC are now operated under a master lease agreement between a newly formed retail entity owned by Wynn Resorts, as lessee, and the Retail Joint Venture, as lessor. We maintain a 50.1% ownership interest in the Retail Joint Venture and are the managing member. Our responsibilities with respect to the Retail Joint Venture include day-to-day business operations, property management services and a role in the leasing decisions of the retail space.
We assessed our ownership in the Retail Joint Venture based on consolidation accounting guidance with an evaluation being performed to determine if the Retail Joint Venture is a variable interest entity (“VIE”), if we have a variable interest in the Retail Joint Venture and if we are the primary beneficiary of the Retail Joint Venture. The primary beneficiary is the party who has the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and who has an obligation to absorb losses of the entity or a right to receive benefits from the entity that could potentially be significant to the entity.
We concluded that the Retail Joint Venture is a VIE and we are the primary beneficiary based on our involvement in the leasing activities of the Retail Joint Venture. As a result, we consolidate all of the Retail Joint Venture’s assets, liabilities and results of operations. We will evaluate our primary beneficiary designation on an ongoing basis and will assess the appropriateness of the Retail Joint Venture’s VIE status when changes occur.
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 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, 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, 2016 and 2015, 88.1% and 85.1%, respectively, 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 to 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, | |||||||
| 2016 | 2015 | ||||||
| Casino accounts receivable | $ | 211,557 | $ | 190,294 | |||
| Allowance for doubtful casino accounts receivable | $ | 53,860 | $ | 66,109 | |||
| Allowance as a percentage of casino accounts receivable | 25.5 | % | 34.7 | % |
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, 2016 and 2015, 49.2% and 38.7%, respectively, of our outstanding casino accounts receivable balance originated at our Macau Operations.
As of December 31, 2016, 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 $2.1 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 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
Derivative financial instruments, including interest rate swaps and foreign currency forward contracts, are used to manage interest rate and foreign currency exposures. The fair value of derivative financial instruments is recognized as an asset or liability at each balance sheet date, with changes in fair value affecting net income as the Company's derivative financial instruments do not qualify for hedge accounting.
We seek to manage our interest rate risk associated with variable-rate borrowings, through balancing fixed-rate and variable-rate borrowings with the use of interest rate swaps. We currently have three interest rate swap agreements that convert a portion of our variable rate borrowings under the Wynn Macau Senior Term Loan Facility to a fixed rate. Under the agreements, we pay a fixed interest rate on notional amounts corresponding to borrowings in exchange for receipts on the same amount at a variable interest rate based on the applicable LIBOR or HIBOR at the time of payment.
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 the 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 2016 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 2016 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, 2016, we have a foreign tax credit ("FTC") carryover of $3.27 billion and we have recorded a valuation allowance of $3.20 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 and Adopted Accounting Standards
See related disclosure at Item 8—"Financial Statements and Supplementary Data," Note 2 "Summary of Significant Accounting Policies."
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