Significant Accounting Policies

6 Months Ended

Jun. 30, 2019

Principles of Consolidation: The unaudited Condensed Consolidated Financial Statements include the accounts of Penn National Gaming, Inc. and its subsidiaries. Investments in and advances to unconsolidated affiliates that do not meet the consolidation criteria of the authoritative guidance for voting interest, controlling interest or variable interest entities (“VIEs”), are accounted for under the equity method. All intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates: The preparation of unaudited Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) the disclosure of contingent assets and liabilities at the date of the financial statements, and (iii) the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.

Segment Information: We view each of our gaming and racing properties as an operating segment with the exception of our two properties in Jackpot, Nevada, which we view as one operating segment. We view our combined VGT operations as an operating segment. See Note 16, “Segment Information,” for further information. For financial reporting purposes, we aggregate our operating segments into the following reportable segments:



	Location	Real Estate Assets Lease or Ownership Structure
Northeast segment
Ameristar East Chicago	East Chicago, Indiana	Pinnacle Master Lease
Greektown Casino-Hotel ⁽¹⁾	Detroit, Michigan	Greektown Lease
Hollywood Casino Bangor	Bangor, Maine	Penn Master Lease
Hollywood Casino at Charles Town Races	Charles Town, West Virginia	Penn Master Lease
Hollywood Casino Columbus	Columbus, Ohio	Penn Master Lease
Hollywood Casino Lawrenceburg	Lawrenceburg, Indiana	Penn Master Lease
Hollywood Casino at Penn National Race Course	Grantville, Pennsylvania	Penn Master Lease
Hollywood Casino Toledo	Toledo, Ohio	Penn Master Lease
Hollywood Gaming at Dayton Raceway	Dayton, Ohio	Penn Master Lease
Hollywood Gaming at Mahoning Valley Race Course	Youngstown, Ohio	Penn Master Lease
Meadows Racetrack and Casino	Washington, Pennsylvania	Meadows Lease
Plainridge Park Casino	Plainville, Massachusetts	Pinnacle Master Lease

South segment⁽²⁾
1^st Jackpot Casino	Tunica, Mississippi	Penn Master Lease
Ameristar Vicksburg	Vicksburg, Mississippi	Pinnacle Master Lease
Boomtown Biloxi	Biloxi, Mississippi	Penn Master Lease
Boomtown Bossier City	Bossier City, Louisiana	Pinnacle Master Lease
Boomtown New Orleans	New Orleans, Louisiana	Pinnacle Master Lease
Hollywood Casino Gulf Coast	Bay St. Louis, Mississippi	Penn Master Lease
Hollywood Casino Tunica	Tunica, Mississippi	Penn Master Lease
L’Auberge Baton Rouge	Baton Rouge, Louisiana	Pinnacle Master Lease
L’Auberge Lake Charles	Lake Charles, Louisiana	Pinnacle Master Lease
Margaritaville Resort Casino ⁽³⁾	Bossier City, Louisiana	Margaritaville Lease

West segment
Ameristar Black Hawk	Black Hawk, Colorado	Pinnacle Master Lease
Cactus Petes and Horseshu	Jackpot, Nevada	Pinnacle Master Lease
M Resort	Henderson, Nevada	Penn Master Lease
Tropicana Las Vegas	Las Vegas, Nevada	Owned
Zia Park Casino	Hobbs, New Mexico	Penn Master Lease

Midwest segment
Ameristar Council Bluffs	Council Bluffs, Iowa	Pinnacle Master Lease
Argosy Casino Alton ⁽⁴⁾	Alton, Illinois	Penn Master Lease
Argosy Casino Riverside	Riverside, Missouri	Penn Master Lease
Hollywood Casino Aurora	Aurora, Illinois	Penn Master Lease
Hollywood Casino Joliet	Joliet, Illinois	Penn Master Lease
Hollywood Casino at Kansas Speedway ⁽⁵⁾	Kansas City, Kansas	Owned - JV
Hollywood Casino St. Louis	Maryland Heights, Missouri	Penn Master Lease
Prairie State Gaming⁽⁶⁾	Illinois	N/A
River City Casino	St. Louis, Missouri	Pinnacle Master Lease


(1)	Acquired on May 23, 2019


(2)	Resorts Casino Tunica closed on June 30, 2019, but remains subject to the Penn Master Lease.


(3)	Acquired on January 1, 2019


(4)	The riverboat is owned by us and not subject to the Penn Master Lease.


(5)	Pursuant to a joint venture with International Speedway Corporation (“International Speedway”) and includes the Company’s 50% investment in Kansas Entertainment, LLC (“Kansas Entertainment”), which owns the Hollywood Casino at Kansas Speedway.


(6)	VGT route operations

Revenue Recognition: The Company’s revenue from contracts with customers consists of gaming wagers, food and beverage transactions, retail transactions, hotel room sales, racing wagers, sports betting wagers, and management services related to the management of external casinos and reimbursable costs associated with management contracts. During the second quarter of 2018, our management contract was terminated for Hollywood Casino-Jamul San Diego, which is located on the Jamul Tribe’s trust land in San Diego, California. In addition, our management contract was terminated for Casino Rama, which is located in Ontario, Canada, during the third quarter of 2018.

Complimentaries associated with Gaming Contracts

Food and beverage, hotel, and other services furnished to patrons for free as an inducement to gamble or through the redemption of our customers’ loyalty points are recorded as food and beverage, hotel, and other revenues, at their estimated standalone selling prices with an offset recorded as a reduction to gaming revenues. The cost of providing complimentary goods and services to patrons as an inducement to gamble as well as for the fulfillment of our loyalty point obligation is included in food, beverage, hotel, and other expenses. Revenues recorded to food and beverage, hotel, and other and offset to gaming revenues were as follows:



	For the three months ended June 30,				For the six months ended June 30,
(in thousands)	2019		2018		2019		2018
Food and beverage	$	64,102	$	23,775	$	128,580	$	46,750
Hotel	40,848		10,616		77,444		20,303
Other	4,521		1,033		8,793		2,010
Total complimentaries associated with gaming contracts	$	109,471	$	35,424	$	214,817	$	69,063

Revenue Disaggregation

We generate revenues at our owned, managed, or operated properties principally by providing the following types of services: (i) gaming, (ii) food and beverage, (iii) hotel, (iv) racing, (v) reimbursable management costs and (vi) other. In addition, we assess our revenues based on geographic location of the related properties, which is consistent with our reportable segments (see Note 16, “Segment Information,” for further information). Our revenue disaggregation by type of revenue and geographic location was as follows:



	For the three months ended June 30, 2019
(in thousands)	Northeast		South		West		Midwest		Other		Total
Revenues:
Gaming	$	528,906	$	206,841	$	96,498	$	229,889	$	5	$	1,062,139
Food and beverage	37,584		39,551		29,548		19,624		397		126,704
Hotel	10,498		26,521		31,631		11,592		—		80,242
Racing	6,987		—		84		—		1,533		8,604
Other	15,111		9,275		6,489		7,055		7,475		45,405
Total revenues	$	599,086	$	282,188	$	164,250	$	268,160	$	9,410	$	1,323,094



	For the three months ended June 30, 2018
(in thousands)	Northeast		South		West		Midwest		Other		Total
Revenues:
Gaming	$	398,719	$	49,213	$	50,550	$	166,612	$	—	$	665,094
Food and beverage	23,321		8,657		20,967		11,473		319		64,737
Hotel	5,316		3,119		20,900		5,947		—		35,282
Racing	4,890		—		99		—		1,661		6,650
Reimbursable management costs	21,068		—		4,119		—		—		25,187
Other	11,971		1,629		4,116		4,130		8,117		29,963
Total revenues	$	465,285	$	62,618	$	100,751	$	188,162	$	10,097	$	826,913



	For the six months ended June 30, 2019
(in thousands)	Northeast		South		West		Midwest		Other		Total
Revenues:
Gaming	$	1,016,633	$	426,932	$	189,321	$	463,644	$	120	$	2,096,650
Food and beverage	73,381		79,741		57,418		40,662		696		251,898
Hotel	17,652		49,501		63,272		21,226		—		151,651
Racing	13,512		—		101		—		3,067		16,680
Other	28,486		17,956		12,792		13,890		15,662		88,786
Total revenues	$	1,149,664	$	574,130	$	322,904	$	539,422	$	19,545	$	2,605,665



	For the six months ended June 30, 2018
(in thousands)	Northeast		South		West		Midwest		Other		Total
Revenues:
Gaming	$	790,997	$	100,189	$	97,121	$	331,281	$	—	$	1,319,588
Food and beverage	46,624		17,087		40,816		23,271		582		128,380
Hotel	10,036		5,599		42,021		11,147		—		68,803
Racing	10,167		—		106		—		3,188		13,461
Reimbursable management costs	42,912		—		10,459		—		—		53,371
Other	23,268		3,073		8,194		7,997		16,863		59,395
Total revenues	$	924,004	$	125,948	$	198,717	$	373,696	$	20,633	$	1,642,998

Customer-related Liabilities

The Company has two general types of liabilities related to contracts with customers: (i) the obligation associated with our mychoice program (loyalty points and tier status benefits) and (ii) advance payments on goods and services yet to be provided and for unpaid wagers. The Company’s mychoice program allows members to utilize their reward membership cards to earn loyalty points that are redeemable for slot play and complimentaries, such as food and beverage at our restaurants, lodging at our hotels and products offered at our retail stores across the vast majority of the Company’s properties. In addition, members of the mychoice program earn credit toward tier status, which entitles them to receive certain other benefits, such as gifts. The Company accounts for the obligation associated with our mychoice program utilizing a deferred revenue model, which defers revenue at the point in time when the loyalty points and tier status benefits are earned by our customers. Deferred revenue associated with the mychoice program is recognized at the point in time when the loyalty points are redeemed by our customers or at the point in time when our customers receive the tier status benefits. The obligation associated with our mychoice program is based on the estimated standalone selling price of the loyalty points and the tier status benefits earned after factoring in the likelihood of redemption.

The obligation associated with our mychoice program, which is included in “Accrued expenses and other current liabilities” within our unaudited Condensed Consolidated Balance Sheets, was $49.0 million and $39.9 million as of June 30, 2019 and December 31, 2018, respectively, and consisted principally of the obligation associated with the loyalty points. Our loyalty point obligations are generally settled within six months of issuance. Changes between the opening and closing balances

primarily relate to the timing of our customers’ election to redeem loyalty points as well as the timing of when our customers receive their earned tier status benefits.

The Company’s advance payments on goods and services yet to be provided and for unpaid wagers primarily consist of the following: (i) deposits on rooms and convention space, (ii) money deposited on behalf of a customer in advance of their property visit (referred to as “safekeeping” or “front money”), (iii) outstanding tickets generated by slot machine play or pari-mutuel wagering, (iv) outstanding chip liabilities, (v) unclaimed jackpots, and (vi) gift cards redeemable at our properties. Advance payments on goods and services are recognized as revenue when the good or service is transferred to the customer. Unpaid wagers primarily relate to the Company’s obligation to settle outstanding slot tickets, pari-mutuel racing tickets and gaming chips with customers and generally represent obligations stemming from prior wagering events, of which revenue was previously recognized. The Company’s advance payments on goods and services yet to be provided and for unpaid wagers were $30.7 million and $34.3 million as of June 30, 2019 and December 31, 2018, respectively, of which, $0.6 million and $0.7 million are classified as long-term, respectively. The current portion and long-term portion of our advance payments on goods and services yet to be provided and for unpaid wagers are included in “Accrued expenses and other current liabilities” and “Other noncurrent liabilities” within our unaudited Condensed Consolidated Balance Sheets, respectively.

Gaming and Racing Taxes: The Company is subject to gaming and pari-mutuel taxes based on gross gaming revenue and pari-mutuel revenue in the jurisdictions in which it operates. The Company primarily recognizes gaming and pari-mutuel tax expense based on the statutorily required percentage of revenue that is required to be paid to state and local jurisdictions in the states where or in which wagering occurs. In certain states in which the Company operates, gaming taxes are based on graduated rates. For the three and six months ended June 30, 2019, these expenses, which were recorded primarily within gaming expense within the unaudited Condensed Consolidated Statements of Operations, were $399.8 million and $786.3 million, respectively, as compared to $253.0 million and $500.4 million, respectively, for the three and six months ended June 30, 2018.

Correction of Cash Flow Classification: Subsequent to the issuance of the Company’s Form 10-Q for the quarterly period ended March 31, 2019, we concluded that the $261.1 million in proceeds from the Margaritaville Resort Casino sale-and-leaseback transaction was incorrectly classified as cash provided by financing activities rather than cash provided by investing activities within the Company’s unaudited Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2019. The accompanying unaudited Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2019 correctly reflects such amount as cash provided by investing activities.

The Company will correct the unaudited Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2019 when it files its Form 10-Q for the quarterly period ended March 31, 2020 with the SEC. The correction of this error had no effect on the Company’s net cash provided by operating activities or the accompanying unaudited Condensed Consolidated Balance Sheet, unaudited Condensed Consolidated Statement of Operations, unaudited Condensed Consolidated Statement of Comprehensive Income, or unaudited Condensed Consolidated Statement of Changes in Stockholders’ equity (deficit) as of and for the three months ended March 31, 2019.