Boyd Gaming Corp (BYD) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2008 Boyd Gaming earnings conference call. My name is Melanie, and I'll be your coordinator today. At this time, all participants are in a listen-only mode. (OPERATOR INSTRUCTIONS). As a reminder, today's call is being recorded for replay purposes. I would now like to turn the call over to Mr. Keith Smith, President and Chief Executive Officer. Please proceed.

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 would 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 in our Form 8-K, furnished to the SEC today, both of which are available in the Investor section of our website at boydgaming.com. We do not provide a reconciliation of forward-looking measures due to our inability to project special charges and certain expenses, including pre-opening 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 would like to review with you before we get in to 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 it all depends on improvements in the economy and especially the credit markets. Our joint venture with Morgan's 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 challenge inherent in leasing retail space in a down economy. We are in discussions with Morgan's 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 would 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 are only changing the timing in response to a very difficult economic environment. 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 would also like 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 4.7 times; 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 increased 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 would 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 have 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 would 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.

Thanks, Keith. Hello, everybody. In the first six monks 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 Player's Club increased 18% over prior-year results, which indicate 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 signups 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 to our nationwide Player's Program late this quarter. Our Midwest and South region continue to face tough comps, as new competition has severely impacted 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 B Connected One Card program in May and June, so it's a little premature to gauge the results from our efforts. However, with 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 are moving forward with our $130 million expansion of Blue Chip. This project remains on budget and on schedule for an opening around the first of the year. In Atlantic City, we have completed and opened the Water Club. Our grand-opening celebration was held on June 27th, 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 one full percent, from 14.6% in Q2 '07 to 15.6% in Q2 '08. 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 market place, 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 toward third quarter guidance, I would 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 stop capitalizing interest as of today, we are projecting $3 million in capitalized interest for the quarter. This translates into a $10 million -- 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.

Yes, sir. (OPERATOR INSTRUCTIONS). And our first question comes from the line of Larry Klatzkin with Jefferies. Go ahead.

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

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

Okay. And 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 depression, so maybe a 5 or 6 basis point gain in margin?

Larry, this is Keith. With respect to the Water Club, you know, we have 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 weekend, little less so midweek, and it's going to take a while for that property to ramp-up, so.

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

Yes, when you look at that and also you look at other things going on -- and you have seen the Atlantic City numbers -- through June anyway, and the market's a little soft, I would probably expect a little less than what you have seen historically.

Okay. 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?

Well, we have spent really a significant amount of capital in various projects, and there's 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, brand new poker room and significant amount of improved slot areas that have opened already this year and continue to open, a repositioning of restaurants with ongoing construction there of a TJI Friday's, as there is the same going on at the Sun Coast and the Gold Coast. So been a fairly significant amount of capital investment relative to the overall physical plan. They'll be very well positioned to compete on the Boulder strip with the Cannery and the rest of the product that is out there, and, you know, we'll be ready to go when other folks join the market.

Okay. Cool. And then did you buy any shares back in the second quarter?

We did not buy shares back in the second quarter.

And how about -- can you say if you've -- in the last month?

We have been in a blackout Larry, really, since a couple of weeks before earnings, so until that's lifted early part of next week, we can not be in the market.

Okay. That's good to know. As far as -- what's available in the line of credit today?

Well availability, I guess I would 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 -- to the leverage ratio covenant package that it has in it.

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

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 4.7 times. The covenant for the balance of the year is 6 times, so that gives us quite a bit of capacity.

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

Larry, we still have a 50/50 joint venture agreement. Obviously, the news is new. We have been speaking with them. They still remain interested in the project and, you know, 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 and they do remain interested, so.

All right. That's fair. Thanks, guys. By the way, I think the delay was well thought out and a good move.

Thank you, Larry.

Our next question comes from the line of Steve Kent with Goldman Sachs. Go ahead.

Hi, good morning. I guess we have just never -- I've never seen this before where somebody put a project on hold of this size. So could you just 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? And then finally, I know you have said how strong your balance sheet is, but I mean, can you really do very much with it, because this is just a delay and you at some point have to use this balance sheet again?

With respect to the -- the kind of wind down of the business, it's obviously a very complicated process and one that started this morning. We'll be -- spend obviously the remainder of the day and 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, you know, stopping a project of this size or magnitude, so, you know, we're working our way through it. And when we know more, you know, we'll update the market; but we really don't have, you know, cost estimates to provide you today with respect to, you know, what that will be.

With respect to our balance sheet, obviously this is a delay, and that -- you know, 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 have grown the Company opportunistically, and if something were to present itself we would certainly look at it.

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 -- you know, 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.

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

We have not been approached.

Okay. Thank you.

You're welcome.

Our next question comes from the line of Celeste Brown with Morgan Stanley. Go ahead.

Hi, guys. First to follow up on Steve's question. I thought one of the reasons you were able to keep your -- the cost for Echelon in check was that you pre-bought steel. Would you just sort of put that in a warehouse now? And then how much would that be of the commitments that you've listed in your 10-K?

We certainly have -- you know, 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 will be obviously taking possession of those or owning those and waiting to move forward.

So --

I don't have an estimate for you as to what that total is.

Okay. So the -- so you don't have the estimate of the 800 or so that's committed -- I mean, it would be a fraction, I guess, of what you actually have to follow up on now for now at least spending-wise?

Celeste, I gave you a range of debt balances at the end of the third quarter.

Uh-huh.

And 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, you know, an estimate for materials that have been purchased and committed to.

Okay. And then on a -- a more positive note, Paul, can you talk some more about the local margins? I think you guys in the past had said that you -- you see margin declines as revenues decline, but they -- you know, you mentioned in the commentary that they were really flat with last year despite a pretty big revenue decline.

Well, I mean it just comes with a lot of hard work and dedication from the teams at the properties, in working through ways to -- you know, create efficiencies on the expense side that 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 those numbers.

And do the numbers reflect at all a more rational or even -- I guess it wasn't too irrational before -- but even a better promotional environment in the market?

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

Okay. Thank you.

Our next question comes from the line of Dennis Forst with KeyBanc. Go ahead.

Yes. Good morning. I had 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?

You know, I think the -- the -- the quote was --

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

How many tiers are there in total?

Three.

Okay. So -- and the top two tiers account for about what percentage of play?

Well, I think -- you know, like -- like in any business, the -- you know, kind of 20% of your customers account for 80% of your revenues.

So the vast majority of the revenues.

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

Yes, 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?

Really depends property to property, and region to region. Obviously --

No, I'm just talking about the Locals now.

Well, I think when you look at the revenue numbers, Dennis, obviously slots has a lot to do with what is in our revenues that show up for, in this case, the LVL region --

Yes.

-- and that group was down, and that is attributable to the fact that, to my earlier point, unrated was certainly down year-over-year.

Okay. So that's what I was trying to reconcile. The $13 million decline in revenues, yet an 18% increase from your top two tiers.

Once again, we're seeing -- we're seeing our loyal customers continuing to show up and play. We're seeing unrated play, and, you know, the lower-end customer not show up, and the destination business, also people having to coming from out of state -- what we refer to as the destination business simply is off.

Okay.

So the combination of the two create a decline.

Okay. Got it. Then on Echelon, Keith, what exactly do you mean by modifying agreements? It's in the press release. You mentioned it on your presentation. Can you define for us what modify might mean?

With respect to our joint ventures?

Yes.

I don't think we'll know that until we finish the conversations with both Morgan's and GGP. Once again, we have been in conversation with them over the last several weeks. They understand where we are headed and why we're here. They are supportive of it. And, you know, 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.

Okay. But just thinking out loud, if for some reason Morgan's 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?

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 that those two hotels are important to the overall -- success of the overall project, and we thought that Morgan's had some great brands, we're very excited about that.

Uh-huh.

And we still look to keep them as part of the project. If that weren't to happen -- we were unable to move that project forward -- we'd certainly look for other brands to bring to the table that could replace those.

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

You know, I don't have an exact count for you. You know, we're just in the process now of obviously this morning notifying all of the contractors, sitting down 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 stop, if you will -- or I should stay not a permanent stop. So we're working through that, and much like the cost conversation, I just don't -- sitting here this morning a couple of hours into this -- have a real good (multiple speakers).

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

No, no.

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

That's all. Okay. Good. Okay. And then any -- in your third quarter guidance of $0.18 to $0.23, is there -- Paul, is there anything in there for Echelon costs to -- to tie this up and get it -- get it delayed?

Well, 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 --

Right.

-- if it wasn't for the stopping of the Echelon project.

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

That would be net. That would be -- I'm trying to give you the interest expense number that's going to show up on the income statement.

Okay. So that's after the $3 million. Got you. Thank you very much.

You're welcome.

Our next question comes from the line of Rachael Rothman with Merrill Lynch. Go ahead.

Hi. Good afternoon. 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 macroenvironment as opposed to the credit constraints?

Well, I think -- I'm not sure you can really separate those. The -- I think the biggest issue for us were the credit markets and our inability to secure financing for the joint ventures, as well as other elements, you know, of the project. Certainly the overall macroenvironment, I think, plays in to 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 are still -- you know, they are still strong and substantial. We have a strong balance sheet, and it really was about being able to secure financing going forward, and thought that this was the most prudent decision at this point in time not to go forward with a capital market that's effectively closed.

Great. I appreciate that. And then if I could just ask one bigger-picture question, I guess. Going back to the decision to amend the by laws to require super majority voting to call a special meeting, can you talk a little bit about what motivated that decision and the timing?

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

That provision, Rachael, really put out in line with other companies in our industry that had similar terms.

Great. Thank you. I appreciate it.

Our next question comes from the line of Grant Goverson with Deutsche Bank. Go ahead.

Hey, guys, it's Bill. How are you doing?

Good. How are you, Bill?

Hey there. One quick one on -- I guess more practically speaking on Echelon, you know, what -- as you maybe find this out going forward -- or maybe you have done a little bit of work -- 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? You know, and then how does the planning board sort of react to stuff like this? I mean, there's clearly incremental risk that the project never gets done, in theory. So I'm just curious about those two things.

Well, first of all, we're looking at this as a three or four-quarter delay, and we have certainly talked to all of the appropriate agencies and we are having all of the appropriate conversations. We're working with our, you know, construction experts and advisors at Tishman to understand all of those ramifications. There are an awful lot of buildings that are made of concrete that exist today, and so -- you know, if there are risks of, you know, 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 the markets allow us to. So 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.

Okay. Thanks, Keith.

Our next question comes from the line of Joe Greff with JPMorgan. Go ahead.

Hey, guys. I have been in and out of this call, but did you ever update us with what the latest all-in budget was for the Echelon project?

It hasn't changed, you know, in quite some time , the wholly-owned portion

Budget that you communicated to the Street, you know, hasn't changed. But internally, how much is it now versus since when you originally forecasted -- I mean since -- I think you originally gave us a number, you had Cosmopolitan City Center, Fontain Bleau, you know, upped their construction costs. I'm presuming you are moving in the same direction -- or have moved in the same direction.

You shouldn't take that away. The project to this point, you know, was on time and on budget. We said, I think, on our last earnings a call a quarter ago that we were on time and on budget to our previously announced budgets. We continue to be on time and on budget, and I wouldn't certainly take away that increased costs at other projects reflect on our budget. They do not. You know, we had a $3.3 billion announced budget. It remains at $3.3 billion, and we have been able to manage through the various issues that we have encountered with respect to acquiring steel and the other issues, so we're still on budget.

Okay. And 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?

No, the fourth quarter should be substantially similar to where we see the third quarter.

So the incremental in the debt balance, 3Q over 2Q is what we should see -- or what you guys -- results would be in the fourth quarter?

Principally, yes.

Okay. And is then is there anything that's pulled down to the 1Q?

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

Okay. Great. Thanks, guys.

Our next question comes from the line of Felicia Hendrix with Lehman Brothers. Go ahead.

Hi, good morning, guys. 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 have 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?

I don't know that Blue Chip -- Blue Chip is being capitalized, but it's a relatively small number given the overall scope. The $3 million, I think the easiest way to think about it is that that is the capitalized interest for the month of July.

Okay. That was my next question. 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?

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

Right, okay. That's what I was getting to. Okay. Now I'm just -- I'm wondering -- and I know you've talked about in your release and you've talked about it in your prepared remarks and also some of these questions, and I hear you that you've wanted to approach this product -- project from -- you know, a holistic approach, but -- you know, given some of the delays from your -- 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 stages? I would think you would want to be able to get some cash flow as soon as possible.

Well, it has to do with how the project was designed; and as I said in the release and in my prepared remarks, and in my earlier comments, it was designed for all of the parts and pieces to be integrated and work together; and today, given that design, you cannot simply pull out a piece or two, such as Morgan's 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 that was the right approach for us.

Now let's just be -- and I know this isn't popular, but let's just be really bearish for a moment. Let's just say there's not a recovery in three to four quarters, and it's out another year, are you guys working on perhaps -- or maybe it's too late to redesign some aspects of it so you could at least maybe open some parts earlier?

Well, we're not there yet. I mean, we believe and certainly are planning that the next three to four quarters we will 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 -- you know, we're kind of dealing with the hand that we have today. We're not looking for an 18 month or two-year delay.

Okay. And just getting to your business, the declines in downtown are obvious and understandable. They -- they might clearly not abate for a while. I'm wondering do you think the Player's Card will be enough to help that? Or are you doing anything else to mitigate the declines there?

We run a very efficient operation downtown. I think everyone has known that for sometime. We believe the Player's 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 -- 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 our 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 have seen that in the numbers already in the properties we've rolled the program out, too. And is just yet another way that we can look in a tough economic environment to improving results.

Okay. And then just as you look through the month of July, wondering if any of the trends we saw in the second quarter have improved in July?

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

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

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 it's impact on EBITDA will be lessened, really, throughout the balance of the year. I would 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, and as a result that trending should continue to decline.

Okay. But that -- that fact was in your prior guidance assumed already, right?

It was -- it was assumed, so, you know, really the reductions over previous guidance for corporate expense, which I believe back when we did it was about $58 million --

Uh-huh.

-- maybe $56 million, $58 million if my memory is right, is obviously running substantially below that and will continue to run below that level.

Okay, okay, great. Thank you.

You're welcome.

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

I think all of mine have been asked and answered, except one that I just want to be clear about. In terms of either the ongoing support of the project, is -- you know, should we be leaving some nominal amount of CapEx in our models for the next year on Echelon? You know, even if it's just a couple of million bucks?

David, there will be a small amount that really will end up showing up in pre-opening as opposed to CapEx. Because is it not -- it is our intention to maintain a portion of the -- a good portion of the senior team there to continue to do design work on the project, and complete, you know, certain aspects to get ready for it to restart.

Our next question comes from the line of Kevin Coyne with Goldman Sachs. Go ahead.

Hi, thank you for taking my call. Just one question on the fully committed wording that was used before. I was just wondering, did you consider bringing in a JV partner on the project, or were you approached by anyone?

Well, you know, 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 -- you know, their abilities and also to help de-risk the project. We have not been approached by anybody, as I said earlier, so --

Okay. All right. I meant the wholly owned part, but -- other than the Morgan's and GGP.

No, we have not been approached by anybody, and -- you know, it's just kind of where we're at.

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

Well, for the quarter we bought back about $14 million of debt, and as it relates to covenants and debt repurchases, we really don't have any limitations.

Okay. And then one more final. It seems the -- 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?

We don't believe we need any sort of amendment today. You are 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, and 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 in to 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 [proforma-ed] and annualized.

Okay. Great. Thank you.

Our next question comes from the line of Larry Haverty with GAMCO. Go ahead. Our next question comes from the line of John Macso with Merrill Lynch. Go ahead.

Hi, Paul, maybe just following up on that -- on that last question regarding your bank covenants. Since the -- your leverage steps up allowing you more leverage through 2010 or so, does that -- I guess you were talking about possible -- you know, looking at any opportunities that arise, or -- does that also possibly -- 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?

Well, I think, John, 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 have got a great portfolio of properties, a significant amount of availability, really only one practical covenant, that being the leverage covenant, no CapEx restrictions, and 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.

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

Well, really, 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 would 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 is something that continues to be on our list as part of the overall reinvestment in the Company.

Okay. And just lastly, is it too early to determine what a new budget for Echelon would be, or is -- is the thought that if it's -- if you start within the three to four quarters, your portion would still be the $3.3 billion?

Well, as I said a few moments ago, you know, as of this moment we are on time and on budget. Clearly, there will be some implemental expenses from the -- 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 that those could be included in the overall $3.3 billion wholly owned part of the budget, so we'll have to evaluate that when we get a little further down the line.

Okay. I appreciate it. Thank you.

Our next question comes from the line of Justin Sebastiano with Morgan Joseph. Go ahead.

Thanks. Good morning, guys.

Good morning.

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

I'm sorry you broke up a little bit there, Justin. Can you restate?

Yes, sure. The third quarter earnings guidance that you gave, does that assume share repurchases in August and September?

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

Right. And so what exact date can you begin to repurchase shares? I know you said you are restricted for a little bit.

We -- blackout is lifted on Tuesday, two days after the earnings release.

All right. And then, so you mentioned I think a little bit just before, but you -- you are still looking to recapitalize Borgata to take a dividend out of there, or is that something you'll wait on, I guess when you decide when to restart Echelon project and possibly help the finance out a little bit?

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 have made. Obviously the -- the capital markets, as we have talked about at length, are not very attractive today, and so we'll really just evaluate that simply based on where the markets are, and, you know, kind of overall corporate capital strategy.

Okay. But I guess -- based on your -- the strategy now, I mean, 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 markets not being where you would like them to be, you are pretty much going to wait to help finance Echelon with that; is that correct?

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, kind of 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.

Okay. All right. Thanks, guys.

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

Well, thank you for joining us this morning, and we look forward to updating you on our next conference call. Thank you. Have a good day.

Ladies and gentlemen, thank you for your participation in today's conference. That does conclude the presentation. You may disconnect. Have a wonderful day.