NON-RECOURSE OBLIGATIONS OF VARIABLE INTEREST ENTITY

The non-recourse obligations of variable interest entity represent the outstanding debt of LVE and is comprised of the following:



	June 30,		December 31,
	2012		2011
	(In thousands)
Non-recourse obligations of variable interest entity, current:
Notes payable to members	$	31,621	$	29,686

Non-recourse obligations of variable interest entity, long-term:
Construction and term loan facility	$	119,479	$	119,980
Tax-exempt variable rate bonds	73,000		73,000
	192,479		192,980
Total non-recourse obligations of variable interest entity	$	224,100	$	222,666

Assets serving as collateral for these debt obligations, primarily consist of certain assets held for development, and restricted investments that had a carrying value of $163.8 million and $21.4 million at both June 30, 2012 and December 31, 2011.

The condensed consolidated statements of operations for the three months ended June 30, 2012 and 2011 includes income of less than $0.1 million and a loss of $2.6 million, respectively, related to LVE. The condensed consolidated statements of operations for the six months ended June 30, 2012 and 2011 include a loss of $0.6 million and a loss of $1.0 million, respectively, related to LVE. The condensed consolidated statements of cash flows for the six months ended June 30, 2012 and 2011 reflect $1.4 million and $6.1 million of net operating cash outflows, respectively, related to this consolidated variable interest entity. None of the offsetting consolidated income or operating cash inflows are available to service this debt, which is non-recourse and non-guaranteed by Boyd.

Construction and Term Loan Facility

In December 2007, LVE entered into a construction and term loan facility with two commercial banks with a committed amount of up to $143.5 million, of which $119.5 million and $120.0 million were outstanding at June 30, 2012 and December 31, 2011, respectively. Proceeds from the construction loan were used to finance the construction of the central energy center and district energy system. The loan is secured by the assets of LVE and does not contain financial covenants. The original loan maturities were as follows: $4.2 million in 2011; $83.1 million in 2012 and the remainder in 2013.

The construction loan bears interest at a variable rate based on the London InterBank Offered Rate ("LIBOR"). LVE entered into an interest rate swap with scheduled increases in the notional amount designed to fix the LIBOR portion of the interest rate on this debt until its maturity in November 2013, which was hedged against the outstanding debt. However, due to the construction delays, the outstanding amount of debt did not increase as fast as the contractual increases in notional amount of the swap, which rendered a portion of the swap ineffective, and as a result the swap was de-designated in July 2011.

Tax-exempt Variable Rate Bonds

In December 2007, LVE issued $100.0 million of tax-exempt variable rate bonds through the State of Nevada Department of Business and Industry, which mature in October 2035. Unused proceeds from the tax-exempt, variable rate bonds are required to be escrowed pending approved construction expenditures. Such unused funds are reported as restricted investments on our consolidated balance sheet.

The tax-exempt variable rate bonds bear interest at rates that are determined by a remarketing agent on a weekly basis. LVE entered into an interest rate swap with a total notional amount of $100.0 million that effectively fixes the underlying interest rate index on these bonds until November 2013. Investors in these bonds receive liquidity and credit support provided by a letter of credit from a commercial bank. This letter of credit expires in November 2013, but can be accelerated by the bank in the event of a default under the construction and term loan facility.

In July 2011, LVE retired $27.0 million of these tax-exempt bonds, using funds in its restricted investment account, which is held in escrow.

Events of Default

The central energy center and district energy system are being financed by LVE with debt that is non-recourse to us. The construction loan was to be converted to a term loan in the fourth quarter of 2010 assuming the district energy system and central energy center were completed. The district energy system and central energy center were not completed by the fourth quarter of 2010 and consequently, the full amount of the construction loan became due and payable in December 2010. However, in March 2011, the banks that are financing the energy facilities agreed not to exercise their rights under the financing agreements resulting from the event of default discussed above through December 2013, provided that no additional events of default occur. The members of LVE have provided a total of $10 million in letters of credit to the banks to support LVE’s obligations. Under the March 2011 agreement, LVE is obligated to use any excess funds, after paying fees and interest on the tax-exempt bonds and the construction loan, to reduce the outstanding balance of the construction loan. The banks have waived all existing defaults under the financing agreements and were relieved of their commitment to provide additional funding.

LVE intends to seek additional financing to complete the facility once construction of the resort resumes.