Boyd Gaming Q2 2008 Earnings Call Transcript

Aug. 4.08 | About: Boyd Gaming (BYD)

Boyd Gaming (NYSE:BYD)

Q2 2008 Earnings Call

August 1, 2008 12:00 pm ET

Executives

Keith Smith – President, Chief Executive Officer

Paul Chakmak - Chief Operating Officer

Analysts

Larry Klatzkin - Jefferies

Steve Kent - Goldman Sachs

Celeste Brown - Morgan Stanley

Dennis Forst - KeyBanc

Rachael Rothman - Merrill Lynch

Bill Lerner – Deutsche Bank

Joe Greff – JP Morgan

Felicia Hendrix - Lehman Brothers

David Katz - Oppenheimer

Justin Sebastiano - Morgan Joseph

Kevin Coin - Goldman Sachs

John Maxbough – Merrill Lynch.

Operator

Good day, ladies and gentlemen, and welcome to the second quarter 2008 Boyd Gaming earnings conference call. (Operator Instructions) I would now like to turn the call over to Mr. Keith Smith, President and Chief Executive Officer.

Keith Smith

Thank you, operator and good morning, everyone. Welcome to our second quarter conference call. Joining me on the call is Paul Chakmak, our Executive Vice President and Chief Operating Officer.

Before we begin, I need to remind you that our comments today will include statements relating to our future results, including the future outlook and expectations for our third quarter 2008; our expansion and development projects; and other market, business and property trends that are forward-looking statements within the Private Securities Litigation Reform Act.

The company undertakes no obligation to update or revise the forward-looking statements whether as a result of new information, future events, or otherwise. Actual results may differ materially from those projected in any forward-looking statements as a result of certain risks and uncertainties including, but not limited to those noted in our earnings release, our periodic reports and our other filings with the SEC.

I’d also like to remind everyone that during our call today we will make reference to non-GAAP financial measures. For a complete reconciliation of historical non-GAAP to GAAP financial measures please refer to our earnings press release and our Form 8-K furnished to the SEC today, both of which are available in the investor section of our website at www.boydgaming.com.

We do not provide a reconciliation of forward-looking measures due to our inability to project special charges and certain expenses, including preopening expenses. Finally, as a reminder we are broadcasting this call on our website at boydgaming.com and streetevents.com.

Earlier this morning we released our second quarter results. In addition, we also had a couple of important announcements that I’d like to review with you before we get into the second quarter results. First, as part of this morning’s release, we announced our decision to delay Echelon. The decision to delay is not a reflection of the merits of this development nor the accomplishments of our professional development team, but rather the challenges we, and many other businesses, face in today’s uncertain business climate. Our expectation is that we will resume construction three to four quarters from now, but that all depends on improvements in the economy and especially the credit markets.

Our joint venture with Morgans Hotel Group has been unable to secure financing in favorable conditions and we have not been able to change that despite repeated efforts over the past several months. Additionally, our GGP joint venture faces challenges inherent in leasing retail space in a down economy. We are in discussions with Morgans and GGP to modify our existing agreements as both joint venture partners remain interested in Echelon.

The delay will allow these joint ventures the opportunity to secure financing under more favorable conditions. It will also provide additional time for our joint venture with GGP for the High Street retail promenade to take advantage of an improved leasing environment once economic conditions moderate.

From the beginning, we strategically designed Echelon to be developed in a single phase. This schedule adjustment allows us to preserve the holistic integrity of the project and ensure that the wholly-owned aspects of the project do not get too far ahead of the construction of our joint venture components.

Additionally, the delay will allow us to restore momentum in our core business and provide some time for consumers in general to regain their footing and their confidence. As we manage through this difficult environment, I’d again like to assure you that we remain fully committed to Echelon and convinced that it will produce long-term sustainable growth for our company in the years to come. We’re only changing the timing in response to a very difficult economic environment and we look forward to resuming construction as soon as we’re able to do so. We are not anticipating any significant write-offs in the third quarter as a result of the decision to extend the development timeline of Echelon.

I’d also like to point out that we still have the benefit of our $4 billion credit facility which carries exceptionally favorable terms and pricing. This is an extremely valuable asset, one many companies do not have in this time of uncertainty. This facility offers us great flexibility and the ability to pursue a wide range of options for maximizing shareholder value.

Additionally, at the end of the second quarter our leverage ratio was 4.7X and with one of the strongest capital structures in our industry we are ideally positioned to weather the current economic climate and plan to make the most of this opportunity in the future

We also announced today a significant change in how we will return capital to our shareholders. We have suspended our quarterly dividend program and will focus instead on share repurchases. Our board has increases our existing share repurchase program to $100 million. Based on recent trading levels and our valuation relative to other gaming stocks, it is clear the market assigned little value to our dividend. Also, we do not believe that our stock price reflects the long-term value of this company. The repurchase of shares in the current market is not only a good investment for the company, it reflects our confidence in the future of our company.

Before I turn things over to Paul, I’d like to offer some closing thoughts. In times like this it is difficult to keep things in perspective. Our economy runs in cycles, and while this is one of the deepest downturns we’ve seen in quite some time, we know from past experience that this climate will not last forever. We are working hard to manage the day-to-day business through this difficult period to keep our core operations strong and we remain convinced that better days do lie ahead.

Now I’d like to turn the call over to Paul Chakmak, our Chief Operating Officer, to provide some color on the second quarter and share with you our outlook for the third quarter. Thank you for your time this morning.

Paul Chakmak

Thanks, Keith. Hello, everybody. In the first six months of the year where other industries are posting significant losses, Boyd Gaming has recorded $63 million in adjusted earnings, paid out over $26 million in dividends and has generated approximately $250 million in adjusted EBITDA. We achieved overall property EBITDA margins of 25.6% during the second quarter, down just 80 basis points from the same quarter last year. The fact that we were able to protect our margins to this extent in such a difficult environment highlights the effectiveness of the structural changes we made during this difficult period. Yes, times are tough, but the fundamentals of our company are strong.

Looking at our individual business units, Las Vegas Locals second quarter EBITDA was down 6.6% from prior year results. The decline was directly attributable to a $13.3 million or 6.3% decrease in revenues as current economic factors continue to weigh heavily on consumers in the Las Vegas Valley, where unemployment and the housing downturn have exceeded national trends. Nonetheless, two key indicators showed encouraging results. Our rated play from the top two tiers of our Players Club increased 18% over prior year results, which indicates strength in our core business. Furthermore, despite the decrease in revenues we posted a 31.5% margin, down just 10 basis points from the same period last year.

With regard to our new One Card program, we have seen some positive trends since we launched it in January. In comparing results for the first six months of this year over the prior year, new club sign-ups have increased 12%. Additionally, we drove a 40% increase in cross-property play within the Las Vegas Locals region. These results validate that our Club Coast program is attracting new guests and demonstrates the value of our program with our most loyal customers.

Our downtown Las Vegas properties generated net revenues of $63 million and adjusted EBITDA of $10.3 million for the second quarter 2008. Net revenues were down 3.1% and the $2.8 million decrease in adjusted EBITDA was attributable to a number of factors including higher fuel costs which adversely affected leisure travel from our Hawaiian feeder markets. We look forward to adding the downtown properties of our nationwide players program late this quarter.

Our Midwest and South region continue to face new comps as new competition has severely affected our Blue Chip operation. Excluding Blue Chip, the Midwest and South revenues declined $11.2 million or 6.8% while EBITDA was down marginally at $1.6 million or 4.6%. Again excluding Blue Chip, the Midwest and South improved EBITDA margins by approximately 50 basis points over prior year results.

We implemented our Be Connected One Card program in May and June, so it’s a little premature to gauge the results from our efforts, however, we did launch Play Your Way to Vegas, a cross-property promotion which drove a meaningful number of room nights to our Las Vegas-based properties. Finally, in Indiana we’re moving forward with our $130 million expansion of Blue Chip. This project remains on budget and on schedule for an opening around the 1st of the year.

In Atlantic City we have completed and opened the Water Club. Our grand opening celebration was held on June 27 and was a great success. We’re very encouraged by the feedback we are receiving on this first of its kind hotel in the evolving Atlantic City market.

In the second quarter, higher than normal operating expenses due to the ramp-up phase of the Water Club contributed to an adjusted EBITDA decline of 17.1%. Also contributing to the decline was the increased competition from slot operations in Pennsylvania as well as the slowing economy. Nonetheless, Borgata was able to increase its total casino win market share by 1% from 14.6% in 2Q07 to 15.6% in 2Q08.

As I stated before, though the current economic environment has had an undeniable effect on our year-to-date 2008 results, the fundamentals of the company are strong. Even in this very difficult marketplace, our properties are producing significant free cash flows. With the delay in Echelon’s construction, those cash flows will continue to bolster what is already one of the strongest balance sheets in gaming.

As we look to our third quarter guidance, I’d like to provide some additional detail on interest expense as some accounting implications accompany our decision on Echelon. Prior to our decision to delay Echelon, we would have projected Q3 capitalized interest expense of $13 million. Assuming we stopped capitalizing interest as of today, we are projecting $3 million in capitalized interest for the quarter. This translates into $10 million of additional interest expense during Q3 or a reduction of about $0.07 to EPS. Therefore, our projected interest expense for the quarter is estimated to be between $34 million and $36 million on a projected September 30 debt balance ranging between $2.7 billion and 2.8 billion.

With those factors in mind, for the third quarter 2008 we’re estimating adjusted EPS from continuing operations to be between $0.18 and $0.23 per share and a corresponding adjusted EBITDA of $110 million to $120 million.

Operator, at this time we’d be happy to take some questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Larry Klatzkin - Jefferies.

Larry Klatzkin - Jefferies

On the Pay to Play Las Vegas, what facility are they choosing when they come to Vegas out of what you have there?

Paul Chakmak

Well all four of the major Las Vegas Local properties are certainly part of the program. As you’d expect, Larry, the Orleans is the most popular with the Gold Coast being second, I think really directly attributable to the proximity to the strip

Larry Klatzkin - Jefferies

In Atlantic City, usually there’s about a 400 basis point or 4 point gain in margins between the second and third quarter given the seasonality. You had real low margin in the second quarter because of the start-up of the Water Club. Should we think about a 4 point gain in margin, plus some recovery in the Water Club? So maybe a 5 or 6 basis point gain in margin?

Keith Smith

With respect to the Water Club, we’ve got four or five weeks of history under our belt and much like the Borgata, it will take some time to ramp up. These types of facilities don’t ramp up overnight. We’re seeing good demand and strong demand for occupancies on weekends, a little less so mid-week, and it’s going to take a while for that property to ramp up.

Larry Klatzkin - Jefferies

So should we even not expect the normal seasonal 4 point gain in margins?

Keith Smith

When you look at that and at other things going on, and you’ve seen the Atlantic City numbers through June anyway, and the market is a little soft, I would probably expect a little less than what you’ve seen historically

Larry Klatzkin - Jefferies

The Cannery effect, when that opens in August, are you guys doing anything to prepare for that and what are you expecting for the effect?

Paul Chakmak

Well, we’ve spent really a significant amount of capital in various projects and there are some projects still underway at Sam’s Town, both improvements to our casino product with a brand new race and sports book that opened last year; a brand new poker room and a significant amount of improved slot areas that have opened already this year and continue to open. Repositioning of restaurants with ongoing construction there of a TGI Friday’s as there is the same going on at the Sun Coast and the Gold Coast.

So it’s been a fairly significant amount of capital investment relative to the overall physical plan. It will be very well-positioned to compete on the Boulder strip with the Cannery and the rest of the product that is out there, and we’ll be ready to go when other folks join the market.

Larry Klatzkin - Jefferies

Did you buy any shares back in the second quarter?

Paul Chakmak

We did not buy shares back in the second quarter.

Larry Klatzkin - Jefferies

Can you say in the last month?

Paul Chakmak

We’ve been in a blackout, Larry, really since a couple weeks before earnings so until that’s lifted early part of next week; we could not be in the market

Larry Klatzkin - Jefferies

That’s good to know. What’s available in the line of credit today?

Paul Chakmak

Availability, I guess I’d say outstanding on the line of credit today is about $1.6 billion of the total $4 billion, and obviously availability is subject to the leverage ratio covenant package that it has in it.

Larry Klatzkin - Jefferies

That was my last question on the covenants, how are you on the covenants and how tight is it getting? Should this really free things up with the construction stopping?

Paul Chakmak

I think obviously debt levels have a significant impact on that. As Keith mentioned in his comments, leverage at the end of the second quarter was 4.7X the covenant for the balance of the year is 6X, so that gives us quite a bit of capacity.

Larry Klatzkin - Jefferies

Excellent. Morgans said in the press release, right before you had your call, that they’re looking to renegotiate a new deal. Are we seeing any major changes in how this looks between you and them or are you still talking about a 50-50 joint venture?

Keith Smith

We still have a 50-50 joint venture agreement. Obviously the news is new. We’ve been speaking with them. They still remain interested in the project and we’ll be having those conversations over the coming weeks and months to figure out what that future looks like. That’s about all I can say today, but we have been speaking with them, they do remain interested.

Larry Klatzkin - Jefferies

By the way I think the delay was well thought out and a good move.

Keith Smith

Thank you, Larry.

Operator

Your next question comes from Steve Kent - Goldman Sachs.

Steve Kent - Goldman Sachs

I’ve never seen this before where somebody put a project on hold of this size. Could you walk us through what the costs you have associated with putting Echelon on hold? Are you going to have to pay any fees to any of the partners? Do you have to pay anything to the construction people? Are you locked in on pricing logistics?

Finally, I know you’ve said how strong your balance sheet is, but can you really do very much with it because this is just a delay and you at some point have to do this balance sheet again?

Keith Smith

With respect to the winddown of the business, it’s obviously a very complicated process and one that started this morning. We’ll spend obviously the remainder of the day and in the coming weeks speaking with each of the contractors who’s doing work on the site to manage our way through those contracts.

Sitting here today I cannot give you an estimate as to what those costs are to wind that down. We’re working our way through it. We ourselves have not been through the process of stopping a project of this size or magnitude, so we’re working our way through it and when we know more, we’ll update the market. But we really don’t have cost estimates to provide you today with respect to what that will be.

With respect to our balance sheet, obviously this is a delay and we are looking to restart this project when the opportunity arises, when the credit markets reopen and we’re able to go back to the market and get some financings that we need. Having said that, in the interim we’ve grown the company opportunistically and if something were to present itself, we’d certainly look at it.

Paul Chakmak

I would like to add on that, I mean the way construction contracts are designed, certainly there’s been significant dollars committed through those contracts; there are termination provisions within those contracts that we are able to exercise so you shouldn’t get caught up in some of the commitment numbers that we have published before as, you must have to spend it. There’s certainly a way to eliminate spend that obviously has not been incurred and services have not been provided.

Steve Kent - Goldman Sachs

And just one other thing. Were you approached at any point by any other entity to buy Echelon or to buy 50% of it and how does the board feel about that opportunity now?

Keith Smith

We have not been approached.

Operator

Your next question comes from Celeste Brown - Morgan Stanley.

Celeste Brown - Morgan Stanley

To follow up on Steve’s question, I thought one of the reasons you were able to keep the costs for Echelon in check was that you prebought steel. Would you just put that in a warehouse now? How much would that be of the commitments that you’ve listed in your 10-K?

Keith Smith

Steel is one of the items that we currently own that we have committed to and yes, we will take possession of that and store it for the restart. There are other materials in other contracts that we have committed to where we actually own some of the materials and we’ll be obviously taking possession of those or owning those and waiting to move forward. I don’t have an estimate for you as to what that total is.

Celeste Brown - Morgan Stanley

So you don’t have an estimate of the 800 or so that’s committed? It would be a fraction I guess of what you actually have to follow-up on for now at least?

Paul Chakmak

Celeste, I gave you a range of debt balances at the end of the third quarter. We believe within some reasonable expectations that is a good estimate of the amount of cash that has to be spent obviously for services provided as well as an estimate for materials that have been purchased and committed to.

Celeste Brown - Morgan Stanley

On a more positive note, Paul, can you talk some more about the local margins? I think you guys in the past have said you’ve see margin declines and revenues decline, but you mentioned in the commentary that they were really flat with last year despite a pretty big revenue decline?

Paul Chakmak

Well, I mean it comes with a lot of hard work and dedication from the teams at the properties. In working through ways to create efficiencies on the expense side, they’ve got to pretty close to a dollar-for-dollar reduction in expense to revenues. It’s simply trying to run the business smarter and more efficiently and that’s what shows up in the numbers.

Celeste Brown - Morgan Stanley

Do the numbers reflect at all a more rational or even it wasn’t too irrational before, but even a better promotional environment in the market?

Paul Chakmak

I would say it’s a similar promotional environment relative to the past.

Operator

Our next question comes from the line of Dennis Forst - KeyBanc.

Dennis Forst - KeyBanc

I wanted to go after the same subjects. Starting on the Locals market, Paul you had said that the top two tiers had shown an 18% increase in gaming activity. Is that in gaming win or slot drop? What was that 18% exactly?

Keith Smith

The 18% increase was in slot win itself and we look at the top two tiers as our loyal customers, customers that have played with us for a while and continue to come back and participate with us on a frequent basis.

Dennis Forst - KeyBanc

How many tiers are there in total?

Paul Chakmak

Three.

Dennis Forst - KeyBanc

And the top two tiers account for about what percentage of play?

Keith Smith

Well, I think like in any business, 20% of your customers account for 80% of your revenue.

Dennis Forst - KeyBanc

So it’s the vast majority of the revenues?

Paul Chakmak

But obviously a small population of overall customers. I would add to that like I think some of our competitors have mentioned, at the lower level and for that matter at the unrated level, obviously that’s where you’ve seen consumers pinched the most.

Dennis Forst - KeyBanc

But an 18% increase from your top two tiers, would that indicate that slot win was actually up versus a year ago in the quarter?

Paul Chakmak

It really depends property to property and region to region.

Dennis Forst - KeyBanc

I’m just talking about the Locals now.

Paul Chakmak

I think when you look at the revenue numbers, Dennis, obviously slots has a lot to do with what’s in our revenues that show up for in this case the LVL region, and that group was down. That is attributable to the fact that to my earlier point unrated was certainly down year over year.

Dennis Forst - KeyBanc

That’s what I was trying to reconcile, the $13 million decline in revenues yet an 18% increase from your top two tiers.

Keith Smith

Once again we’re seeing our loyal customers continuing to show up and play. We’re seeing unrated play and the lower-end customer not show up and the destination business also, people having to come from out of state what we refer to as destination business, simply is off so the combination of the two create a decline.

Dennis Forst - KeyBanc

Then on Echelon, Keith, what exactly do you mean by modifying agreements? It is in the press release; you’ve mentioned it on your presentation. Can you define for us what modify might mean?

Keith Smith

With respect to our joint ventures?

Dennis Forst - KeyBanc

Yes.

Keith Smith

I don’t think we’ll know that until we finish the conversations with both Morgans and GGP. Once again we’ve been in conversation with them over the last several weeks. They understand where we’re headed and why we’re here. They’re supportive of it and we’ll work through those conversations to see what we need to do to revise those agreements to still keep them as part of the project.

Dennis Forst - KeyBanc

But just thinking out loud, if for some reason Morgans cannot go ahead are you committed to two boutique hotels being built by either yourselves or someone? Is that an integral part of the project that could not be eliminated?

Keith Smith

Yes, when you dial the clock back and you look at Echelon as I think I stated in the release, this was designed as a holistic project with many integrated parts that all work together. It was synergistic if you will, and those two hotels are important to the success of the overall project. We thought that Morgans has some great brands, we’re very excited about that and we still look to keep them as part of the project.

If that weren’t to happen and we were unable to move that project forward, we would certainly look for other brands to bring to the table that could replace those.

Dennis Forst - KeyBanc

My last question has to do with construction workers. How many construction workers will be furloughed when you put this on hold?

Keith Smith

I don’t have an exact count for you. We’re just in the process now of obviously this morning notifying all the contractors and sitting down and working through with them, creating the wind-down process, understanding what minimal level of work may continue going forward. Once again this is a delay, not a permanent stop. So we’re working through that, and much like the cost conversation, sitting here this morning a couple of hours into this I don’t have a real good --

Dennis Forst - KeyBanc

But I mean, is it 1,000 people, is it 5,000 people?

Keith Smith

No, no.

Paul Chakmak

Dennis, there’s about 800 construction workers on the job yesterday.

Dennis Forst - KeyBanc

In your third quarter guidance of $0.18 to $0.23, Paul, is there anything in there for Echelon costs to tie this up and get it delayed?

Paul Chakmak

Echelon costs would continue to be capitalized to the extent those costs went into the building and that is what we would estimate so it wouldn’t hit EPS. There is no estimated writedown. As Keith said, we don’t expect one in the third quarter, so that is not in those numbers but as I mentioned, and tying it back to that interest expense number, those would effectively have been $0.07 higher per share if it wasn’t for the stopping of the Echelon project

Dennis Forst - KeyBanc

The $34 million to $36 million interest expense, is that net of the $3 million or is that the gross?

Paul Chakmak

That would be net. We are trying to give you the interest number that’s going to show up on the income statement.

Dennis Forst - KeyBanc

So that’s after the $3 million.

Operator

Our next question comes from the line of Rachael Rothman - Merrill Lynch.

Rachael Rothman - Merrill Lynch

I just wanted to see if you could try to help parse for us as you thought about delaying the construction, what portion of that was possibly attributable to the weaker macro environment as opposed to the credit constraints?

Keith Smith

I’m not sure you can really separate those. I think the biggest issue for us was the credit markets and our inability to secure financing for the joint ventures as well as other elements of the project. Certainly the overall macro environment I think plays into that, but we have a strong core business as we reported for the second quarter and while our results are lower year over year, they’re still strong and substantial. We have a strong balance sheet and it really was about being able to secure financing going forward. We thought this was the most prudent decision at this point in time not to go forward with a capital market that’s effectively closed.

Rachael Rothman - Merrill Lynch

Going back to the decision to amend the bylaws to require super majority voting to call a special meeting, can you talk a little bit about what motivated that decision and the timing?

Keith Smith

I don’t think there was anything in particular. We review our bylaws from time to time and update them and this was just one of the normal reviews of the bylaws and updating them. I don’t think it was anything in particular

Paul Chakmak

I think that provision, Rachael, really put us in line with other companies in our industry that had similar terms.

Operator

Our next question comes from the line of Bill Lerner – Deutsche Bank.

Bill Lerner – Deutsche Bank

Just a quick one, more practically speaking on Echelon, what happens to the structural integrity of steel coming out of the ground and other elements of the development if you mothball this thing for a year or more? How does the planning board react to stuff like this? There’s clearly incremental risk that the project never gets done, in theory. So I’m just curious about those two things.

Keith Smith

First of all, we’re looking at this as a three or four quarter delay and we’ve certainly talked to all the appropriate agencies and are having all the appropriate conversations. We’re working with our construction experts and advisers at Tishman to understand all those ramifications. There are an awful lot of buildings that are made of concrete that exist today, and so if there are risks of deterioration of any of the product we will take the necessary steps to ensure that none of that happens, because once again we look forward to restarting this project as soon as the markets allow us to.

Once again, tough to answer at this point but we will take the necessary steps and precautions that we need to take and talk to the experts we need to talk to make sure that the building is safe and secured and wrapped up.

Operator

Our next question comes from the line of Joe Greff – JP Morgan.

Joe Greff – JP Morgan

Did you ever update us with what the latest all-in budget was for the Echelon project?

Keith Smith

It hasn’t changed in quite some time.

Joe Greff – JP Morgan

The budget you communicated to The Street hasn’t changed but internally how much is it now versus since when you originally forecasted it? I think you originally gave us a number and we have had Cosmopolitan, City Center, Fontainebleau, up their construction costs. I’m presuming you’re moving in the same direction, or have moved in the same direction.

Keith Smith

You shouldn’t think way. The project to this point is on time and on budget. We said I think on our last earnings call a quarter ago that we were on time and on budget to our previously announced budget. We continue to be on time and on budget. I wouldn’t certainly take away that increased costs at other projects reflect on our budget. They do not.

We had a $3.3 billion announced budget, it remains at $3.3 billion and we’ve been able to manage through the various issues that we’ve encountered with respect to acquiring steel and the other issues. So we’re still on budget.

Joe Greff – JP Morgan

Paul, I deduce from your comments earlier with regard to what you think the 3Q end of period debt balance is that in the fourth quarter you don’t see too much in the way of Echelon-related capital investment?

Paul Chakmak

The fourth quarter should be substantially similar to where we see the third quarter.

Joe Greff – JP Morgan

So the incremental debt balance 3Q over 2Q is what we should see or what your results are due in the fourth quarter?

Paul Chakmak

Principally, yes.

Joe Greff – JP Morgan

Is there anything that spilled out into the 1Q?

Paul Chakmak

No, nothing out of the ordinary. Debt balances should hang in there as pretty consistent until we make further decisions on expansion, capital expenditures.

Operator

Our next question comes from the line of Felicia Hendrix - Lehman Brothers.

Felicia Hendrix - Lehman Brothers

Just to touch back on the capitalized interest, that $3 million, Paul, it sounds like you can capitalize the interest of what’s already in your buildings, but the stuff that you’ve delayed, you cannot capitalize. So, in the $3 million part of that is what’s already in there and part of it is probably related to the Blue Chip project, correct?

Paul Chakmak

Blue Chip is being capitalized, but it’s a relatively small number given the overall scope. The $3 million, the easiest way to think about it is that is the capitalized interest for the month of July.

Felicia Hendrix - Lehman Brothers

So trying to get to my next question which is in the fourth quarter, the first quarter as we think forward, we should assume pretty much no capitalized interest?

Paul Chakmak

The only capitalized interest in the fourth quarter will be Blue Chip.

Felicia Hendrix - Lehman Brothers

You’ve talked about it in your release and you’ve talked about it in your prepared remarks and also in some of these questions, and I hear you that you’ve wanted to approach this project from a holistic approach, but given some of the delays that have been created both by the economy and from your partners and all of that, I’m just wondering why ultimately you chose not to open the project in phases? I would think you’d want to be able to get some cash flow as soon as possible.

Keith Smith

Well, it has to do with how the project was designed. As I said in the release and in my prepared remarks and in my earlier comments, it was designed for all the parts and pieces to be integrated and work together. Today, given that design, you cannot simply pull out a piece or two such as the Morgans’ piece or the retail piece and have the rest of the project be successful. It would cause a redesign of the project which would cause a delay which would cause probably an increase and we just didn’t believe at this point in time that was the right approach for us.

Felicia Hendrix - Lehman Brothers

I know this isn’t popular, but let’s just be really bearish for a moment and let’s just say there’s not a recovery in three to four quarters and it’s out another year. Maybe it’s too late to redesign some aspects of it so that you could at least maybe open some parts earlier?

Keith Smith

Well, we’re not there yet. I mean we believe and certainly in our planning in the next three on four quarters we’ll reopen it. If we get to a point where it’s going to be an extended delay, we will deal with those issues at that point, but we’re dealing with the hand that we have today. We’re not looking for an 18 month or two year delay.

Felicia Hendrix - Lehman Brothers

The declines downtown are obvious and understandable. They might clearly not abate for a while. Do you think the Players Club will be enough to help that or are you doing anything else to mitigate the declines there?

Paul Chakmak

Well we run a very efficient operation downtown. I think everyone’s known that for some time. We believe the Players Club and being able to tie those properties of which one in particular, Main Street, does have a significant amount of local play attached to it, certainly will be helpful both in terms of cross-property visitation within the Nevada region overall just property to property, as well as obviously for a segment of the population coming in from out of town and are loyal Boyd guests also being able to use their rewards downtown.

So it’s certainly a net positive, there’s no question about it. We’ve seen that in the numbers already in the properties we’ve rolled the program out to and is just yet another way that we can look, in a tough economic environment, to improving results.

Felicia Hendrix - Lehman Brothers

As you look through the month of July, I am wondering if any of the trends we saw in the second quarter have improved in July?

Paul Chakmak

I’m not going to be specific to July, Felicia. We obviously gave guidance, as we do for the quarter that we’re in and that’s certainly reflective of July results to date.

Felicia Hendrix - Lehman Brothers

Finally, your corporate expense is lower than your guidance implied. I am wondering what drove that and then if you could just refresh your corporate expense and depreciation guidance for the full year?

Paul Chakmak

I think we’re prepared to refresh the guidance for the full year, but I would say just as we went through at the property level looking to create efficiencies, corporate was not immune to that and as a result we are just simply much more efficient at the corporate level and as a result its impact on EBITDA will be lessened, really throughout the balance of the year. I’d expect corporate expense to continue to decline. As we mentioned, there was launch costs related to both the Nevada region and the Midwest and South region player programs in corporate expense for the first two quarters that will not be there in the third and fourth quarter. As a result, that trending should continue to decline.

Felicia Hendrix - Lehman Brothers

Okay, but that fact was in your prior guidance assumed already, right?

Paul Chakmak

It was assumed, so really the reductions over previous guidance for corporate expense which I believe back when we did it was about $58 million, maybe $56 million, $58 million, if my memory’s right. It’s obviously running substantially below that and will continue to run below that level.

Operator

Our next question comes from the line of David Katz - Oppenheimer.

David Katz - Oppenheimer

In terms of either the ongoing support of the project, should we be leaving some nominal amount of CapEx in our models for the next year on Echelon even if it’s just a couple million bucks?

Paul Chakmak

David, There will be a small amount that will end up showing up in preopening as opposed to CapEx because it is our intention to maintain a good portion of the senior team there to continue the design work on the project and complete certain aspects to get ready for its restart.

Operator

Our next question comes from the line of Kevin Coin - Goldman Sachs.

Kevin Coin - Goldman Sachs

Just one question on the fully committed wording that was used before. Did you consider bringing in a JV partner on the project or were you approached by anyone?

Keith Smith

When we originally announced the project, we certainly had a couple of JV partners that we had selected for very strategic reasons to leverage up their abilities and also to help de-risk the project. We’ve not been approached by anybody, as I said earlier.

Kevin Coin - Goldman Sachs

I meant the wholly owned parts, other than the Morgans.

Keith Smith

No, we have not been approached by anybody, and that’s just kind of where we’re at

Kevin Coin - Goldman Sachs

It seems like you bought back some debt during the quarter. I was just wondering if you can let us know what amount that was and as you look out, obviously you’ll do the buy back. Are you considering buying back any notes? If you could comment, let’s say how restricted you may be by the credit agreement covenants on that?

Paul Chakmak

For the quarter we bought back about $14 million of debt. As it relates to covenants and debt repurchases, we really don’t have any limitations.

Kevin Coin - Goldman Sachs

It seems the maintenance covenants obviously were crafted around a 3Q, 4Q 2010 opening with obviously the flexibility of the covenant holiday where you can delay those with a three to four quarter stretch out. Are you going to be proactive in approaching your banks to amend those?

Paul Chakmak

We don’t believe we need any sort of amendment today. You’re right, there is the ability to extend the covenants for one or two quarters if we so choose and we have to elect that before the end of the year. We’ll evaluate that as we get deeper into the year.

The covenant package itself peaks in the fourth quarter of 2010 so in all honesty it actually probably more accurately reflected a first quarter 2011 opening as opposed to the earlier opening we had projected once we got into the overall project.

As the covenant started to tier down in the first quarter of 2011 and the EBITDA associated with the project -- or for that matter any project -- is pro forma and annualized.

Operator

Our next question comes from the line of John [Maxbough] – Merrill Lynch.

John Maxbough – Merrill Lynch.

Hi, Paul, maybe just following up on that last question regarding your bank covenants, since your leverage steps up allowing you more leverage through 2010 or so, I guess you were talking about looking at any opportunities that arise. Do you rethink on spending on any other properties or at this point do you really just keep the powder dry for when you restart Echelon?

Paul Chakmak

Look, it gives us the flexibility to do an awful lot of things. Obviously the decision on Echelon today is a very current decision and we’ve got a great portfolio of properties, a significant amount of availability, really only one practical covenant, that being the leverage covenant, no CapEx restrictions. We’ll just evaluate it, and as I said in my comments, we’re positioned quite well to take advantage of whatever is out there for us in the meantime.

John Maxbough – Merrill Lynch.

Does restarting Echelon, is it a function of basically adding to this facility, or do you think you would have to redo the bank facility and get additional capital to restart Echelon?

Paul Chakmak

Obviously timing is going to have a lot to do with it. As mentioned, the covenants do step down at some point in contemplation of an opening after a significant capital spend, so absent any change in the existing business so you’d have to really evaluate it at the time.

In addition, we had always talked openly about recapitalizing Borgata and obviously capital markets aren’t at a point today where that’s very attractive but that’s something that continues to be on our list as part of the overall reinvestment of the company.

John Maxbough – Merrill Lynch.

Lastly, is it too early to determine what a new budget for Echelon would be, or is the thought that if you start within the three to fourth quarters your portion would still be the $3.3 billion?

Keith Smith

As I said a few moments ago, as of this moment we are on time and on budget. Clearly there will be some incremental expenses as a result of the delay to stop this project then to restart it. We don’t have an estimate as to what those are and whether or not those could be included in the overall $3.3 billion wholly owned part of the budget. We’ll have to evaluate that when we get a little further down the line.

Operator

Our next question comes from the line of Justin Sebastiano - Morgan Joseph.

Justin Sebastiano - Morgan Joseph

Paul, does the third quarter earnings guidance that you gave assume share repurchases during August and September?

Paul Chakmak

It does not make any assumption for share repurchases which, as you know, at these levels would be accretive.

Justin Sebastiano - Morgan Joseph

What exact date can you begin to repurchase shares? I know you said you’re restricted for a little bit.

Paul Chakmak

Blackout is lifted on Tuesday, two days after the earnings release.

Justin Sebastiano - Morgan Joseph

So you’re still looking to recapitalize Borgata to take a dividend out of there? Or is that something you’ll wait on when you decide when to restart the Echelon project and possibly help to finance that a little bit?

Paul Chakmak

My point was that I think all along we had said that we would redeploy dividend proceeds, effectively recapitalization proceeds, from Borgata into our wholly-owned business as part of overall capital strategy. That was anticipated for some time in the first half of next year, I think in various comments that we’ve made. Obviously the capital markets, as we’ve talked about at length, are not very attractive today and so we will really just evaluate that simply based on where the markets are and overall corporate capital strategy.

Justin Sebastiano - Morgan Joseph

Based on the strategy now, it would have really been just to help finance Echelon, right? So the fact that that’s pushed off, I would assume in addition to the capital marks not being where you’d like them to be, you’re pretty much going to wait to help finance Echelon with that. Is that correct?

Paul Chakmak

I think all things being equal you are absolutely right. Obviously I do not believe that having Echelon levered at just over three times is an efficient corporate finance strategy for that particular operation. At the same time, I by no means am interested in really what are incredibly onerous terms that are available in the debt market today.

Operator

Ladies and gentlemen, that does conclude the time that we have for Q& A today. I’d like to turn the call back over to Mr. Keith Smith for closing remarks. Please proceed.

Keith Smith

Thank you for joining us this morning. We look forward to updating you on our next conference call. Have a good day.

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