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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 0-24206

PENN NATIONAL GAMING, INC.

(Exact name of registrant as specified in its charter)

Pennsylvania		23-2234473
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

825 Berkshire Blvd., Suite 200

Wyomissing, PA 19610

(Address of principal executive offices) (Zip Code)

610-373-2400

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address, and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☒ Accelerated filer ◻Non-accelerated filer ◻ (Do not check if a smaller reporting company)

Smaller reporting company ◻ Emerging growth company ◻

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Title		Outstanding as of July 27, 2018
Common Stock, par value $.01 per share		92,386,523 (includes 435,271 shares of restricted stock)

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This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can be identified by the use of forward looking terminology such as “expects,” “believes,” “estimates,” “projects,” “intends,” “plans,” “seeks,” “may,” “will,” “should” or “anticipates” or the negative or other variations of these or similar words, or by discussions of future events, strategies or risks and uncertainties. Specifically, forward-looking statements may include, among others, statements concerning: our expectations of future results of operations and financial condition; expectations for our properties or our development projects; the timing, cost and expected impact of planned capital expenditures on our results of operations; our expectations with regard to the impact of competition; our expectations with regard to acquisitions and development opportunities, as well as the integration of any companies we have acquired or may acquire; the outcome and financial impact of the litigation in which we are or will be periodically involved; the actions of regulatory, legislative, executive or judicial decisions at the federal, state or local level with regard to our business and the impact of any such actions; our ability to maintain regulatory approvals for our existing businesses and to receive regulatory approvals for our new businesses; our expectations relative to margin improvement initiatives; our expectations regarding economic and consumer conditions; and our expectations for the continued availability and cost of capital. As a result, actual results may vary materially from expectations. Although we believe that our expectations are based on reasonable assumptions within the bounds of our knowledge of our business, there can be no assurance that actual results will not differ materially from our expectations. Meaningful factors that could cause actual results to differ from expectations include, but are not limited to, risks related to the following: the ability of our operating teams to drive revenue and margins; the impact of significant competition from other gaming and entertainment operations; our ability to obtain timely regulatory approvals required to own, develop and/or operate our facilities, or other delays, approvals or impediments to completing our planned acquisitions or projects, construction factors, including delays, and increased costs; the passage of state, federal or local legislation (including referenda) that would expand, restrict, further tax, prevent or negatively impact operations in or adjacent to the jurisdictions in which we do or seek to do business (such as a smoking ban at any of our facilities or the award of additional gaming licenses proximate to our facilities); the effects of local and national economic, credit, capital market, housing, and energy conditions on the economy in general and on the gaming and lodging industries in particular; the activities of our competitors and the rapid emergence of new competitors (traditional, internet, social, sweepstakes based and video gaming terminals (“VGTs”) in bars and truck stops); increases in the effective rate of taxation for any of our operations or at the corporate level; our ability to identify attractive acquisition and development opportunities (especially in new business lines) and to agree to terms with, and maintain good relationships with partners/municipalities for such transactions; the costs and risks involved in the pursuit of such opportunities and our ability to complete the acquisition or development of, and achieve the expected returns from, such opportunities; our ability to maintain market share in established markets and to continue to ramp up operations at our recently opened facilities; our expectations for the continued availability and cost of capital; the impact of weather; changes in accounting standards; the risk of failing to maintain the integrity of our information technology infrastructure and safeguard our business, employee and customer data; factors which may cause the Company to curtail or suspend the share repurchase program; with respect to our Plainridge Park Casino in Massachusetts, the ultimate location and timing of the other gaming facilities in the state and the region; with respect to our interactive gaming endeavors, risks related to the commencement of real money online gaming in the state of Pennsylvania and our entry into this new line of business, significant competition in the social gaming industry, employee retention, cyber-security, data privacy, intellectual property and legal and regulatory challenges, as well as our ability to successfully develop innovative products that attract and retain a significant number of players in order to grow our revenues and earnings; with respect to Illinois Gaming Investors, LLC, d/b/a Prairie State Gaming, risks relating to potential changes in the VGT laws, our ability to successfully compete in the VGT market, our ability to retain existing customers and secure new customers, risks relating to municipal authorization of VGT operations and the implementation and the ultimate success of the products and services being offered; with respect to our proposed Pennsylvania casinos in York and Berks or Lancaster Counties, risks related to the ultimate location of other gaming facilities in the state; risks related to the acquisition of Pinnacle Entertainment, Inc. (“Pinnacle”) by Penn National and the integration of the businesses and assets to be acquired; the possibility that the proposed Pinnacle transaction does not close when expected or at all because required regulatory or other approvals are not received or other conditions to the closing are not satisfied on a timely basis or at all; the risk that the financing required to fund the Pinnacle transaction is not obtained on the terms anticipated or at all; the possibility that the Boyd Gaming Corporation and/or Gaming and Leisure Properties, Inc. (“GLPI”) transactions do not close in a timely fashion or at all; potential adverse reactions or changes to business or employee relationships, including those resulting from the announcement or completion of the Pinnacle transaction; potential litigation challenging the Pinnacle transaction; the possibility that the anticipated benefits of the transaction are not realized when expected or at all, including as a result of the impact of, or issues arising from, the integration of the two companies; the possibility that the anticipated divestitures are not completed in the anticipated timeframe or at all; the possibility that additional divestitures may be required; the possibility that the Pinnacle transaction may be more expensive to complete than anticipated, including as a result of unexpected factors or events; diversion of management’s attention from ongoing business operations and opportunities; litigation

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relating to the Pinnacle transaction; and risks associated with increased leverage from the Pinnacle transaction; with respect to our management contract at Casino Rama, risks relating to the transition of management of this facility on July 18, 2018 to a newly selected operator; with respect to our pending acquisition of the Margaritaville Resort Casino (“Margaritaville”) operations, the possibility that the proposed Margaritaville transaction does not close when expected or at all because required regulatory or other approvals are not received or other conditions to the closing are not satisfied on a timely basis or at all; potential adverse reactions or changes to business or employee relationships, including those resulting from the announcement or completion of the Margaritaville transaction; potential litigation challenging the Margaritaville transaction; the possibility that the anticipated benefits of the Margaritaville transaction are not realized when expected or at all, including as a result of the impact of, or issues arising from, the integration of the companies and our ability to realize potential synergies or projected financial results; with respect to our proposed sports betting operations, risks relating to expanding this line of business, including our ability to establish relationships with key partners or vendors and generate sufficient returns on investment, as well as risks relating to potential legislation in various jurisdictions; and other factors as discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, each as filed with the United States Securities and Exchange Commission. We do not intend to update publicly any forward-looking statements except as required by law.

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PENN NATIONAL GAMING, INC. AND SUBSIDIARIES

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PART I.	FINANCIAL INFORMATION	5

ITEM 1.	FINANCIAL STATEMENTS (Unaudited)	5
	Condensed Consolidated Balance Sheets – June 30, 2018 and December 31, 2017	5
	Condensed Consolidated Statements of Income —Three and Six Months Ended June 30, 2018 and 2017	6
	Condensed Consolidated Statements of Comprehensive Income — Three and Six Months Ended June 30, 2018 and 2017	7
	Condensed Consolidated Statements of Changes in Shareholders’ (Deficit) Equity – Six Months Ended June 30, 2018	8
	Condensed Consolidated Statements of Cash Flows — Six Months Ended June 30, 2018 and 2017	9
	Notes to the Condensed Consolidated Financial Statements	10

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	30

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	49

ITEM 4.	CONTROLS AND PROCEDURES	50

PART II.	OTHER INFORMATION	51

ITEM 1.	LEGAL PROCEEDINGS	51

ITEM 1A.	RISK FACTORS	51

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	51

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	51

ITEM 4.	MINE SAFETY DISCLOSURES	51

ITEM 5.	OTHER INFORMATION	51

ITEM 6.	EXHIBITS	52

SIGNATURES		53

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Penn National Gaming, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data) (unaudited)


	June 30,		December 31,
	2018		2017
Assets
Current assets
Cash and cash equivalents	$	200,151	$	277,953
Receivables, net of allowance for doubtful accounts of $3,215 and $2,983 at June 30, 2018 and December 31, 2017, respectively		54,969		62,805
Prepaid expenses		37,321		43,780
Other current assets		16,064		16,494
Total current assets		308,505		401,032
Property and equipment, net		2,680,565		2,756,669
Other assets
Investment in and advances to unconsolidated affiliates		146,593		148,912
Goodwill		1,008,891		1,008,097
Other intangible assets, net		475,317		422,606
Deferred income taxes		384,777		390,943
Loan to the JIVDC, net of allowance for loan losses of $64,052 at December 31, 2017		—		20,900
Other assets		87,182		85,653
Total other assets		2,102,760		2,077,111
Total assets	$	5,091,830	$	5,234,812

Liabilities
Current liabilities
Current portion of financing obligation to GLPI	$	34,329	$	56,248
Current maturities of long-term debt		37,087		35,612
Accounts payable		24,131		26,048
Accrued expenses		132,589		125,688
Accrued interest		12,513		13,528
Accrued salaries and wages		90,767		111,252
Gaming, pari-mutuel, property, and other taxes		63,074		69,645
Income taxes		2,451		—
Insurance financing		3,131		2,404
Other current liabilities		89,272		89,584
Total current liabilities		489,344		530,009

Long-term liabilities
Long-term financing obligation to GLPI, net of current portion		3,471,726		3,482,573
Long-term debt, net of current maturities and debt issuance costs		1,041,368		1,214,625
Noncurrent tax liabilities		36,421		34,099
Other noncurrent liabilities		25,215		46,652
Total long-term liabilities		4,574,730		4,777,949

Shareholders' equity (deficit)
Series B Preferred stock ($.01 par value, 1,000,000 shares authorized, no shares issued and outstanding at June 30, 2018 and December 31, 2017)		—		—
Series C Preferred stock ($.01 par value, 18,500 shares authorized, no shares issued and outstanding at June 30, 2018 and December 31, 2017)		—		—
Common stock ($.01 par value, 200,000,000 shares authorized, 94,363,678 and 93,392,635 shares issued, and 92,196,285 and 91,225,242 shares outstanding at June 30, 2018 and December 31, 2017, respectively)		943		933
Treasury stock, at cost (2,167,393 shares held at June 30, 2018 and December 31, 2017)		(28,414)		(28,414)
Additional paid-in capital		1,018,723		1,007,606
Retained deficit		(962,043)		(1,051,818)
Accumulated other comprehensive loss		(1,453)		(1,453)
Total shareholders' equity (deficit)		27,756		(73,146)
Total liabilities and shareholders' equity (deficit)	$	5,091,830	$	5,234,812

See accompanying notes to the condensed consolidated financial statements.

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Penn National Gaming, Inc. and Subsidiaries

Condensed Consolidated Statements of Income

(in thousands, except per share data)

(unaudited)


	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017

Revenues
Gaming	$	665,094	$	680,979	$	1,319,588	$	1,342,235
Food, beverage, hotel and other		133,664		152,148		264,633		299,889
Management service fees		2,968		2,932		5,406		5,259
Reimbursable management costs		25,187		6,387		53,371		13,145
Revenues		826,913		842,446		1,642,998		1,660,528
Less promotional allowances		—		(45,983)		—		(87,841)
Net revenues		826,913		796,463		1,642,998		1,572,687

Operating expenses
Gaming		350,694		345,156		691,210		677,209
Food, beverage, hotel and other		95,112		105,231		188,092		206,306
General and administrative		132,659		130,096		253,922		255,911
Reimbursable management costs		25,187		6,387		53,371		13,145
Depreciation and amortization		58,559		68,969		118,949		139,205
(Recovery) provision for loan loss and unfunded loan commitments to the JIVDC and impairment losses		(16,985)		5,635		(16,367)		5,635
Insurance recoveries		(68)		—		(68)		—
Total operating expenses		645,158		661,474		1,289,109		1,297,411
Income from operations		181,755		134,989		353,889		275,276

Other income (expenses)
Interest expense		(115,873)		(116,768)		(231,613)		(231,764)
Interest income		241		235		490		2,881
Income from unconsolidated affiliates		5,734		5,021		11,095		9,569
Loss on early extinguishment of debt and modification costs		(2,579)		—		(3,461)		(23,390)
Other		(48)		(173)		(44)		(1,966)
Total other expenses		(112,525)		(111,685)		(223,533)		(244,670)

Income from operations before income taxes		69,230		23,304		130,356		30,606
Income tax provision		15,242		6,225		30,931		8,423
Net income	$	53,988	$	17,079	$	99,425	$	22,183

Earnings per common share:
Basic earnings per common share	$	0.59	$	0.19	$	1.09	$	0.24
Diluted earnings per common share	$	0.57	$	0.18	$	1.05	$	0.24

See accompanying notes to the condensed consolidated financial statements.

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Penn National Gaming, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(in thousands) (unaudited)


	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
Net income	$	53,988	$	17,079	$	99,425	$	22,183
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment during the period		—		1,217		—		1,654
Other comprehensive income (loss)		—		1,217		—		1,654
Comprehensive income	$	53,988	$	18,296	$	99,425	$	23,837

See accompanying notes to the condensed consolidated financial statements.

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Penn National Gaming, Inc. and Subsidiaries

Condensed Consolidated Statements of Changes in Shareholders’ (Deficit) Equity

(in thousands, except share data) (unaudited)


													Accumulated
									Additional				Other		Total
	Preferred Stock			Common Stock			Treasury		Paid-In		Retained		Comprehensive		Shareholders’
	Shares		Amount	Shares		Amount	Stock		Capital		(Deficit)		(Loss)		(Deficit ) Equity
Balance, December 31, 2017	—		—	91,225,242		933		(28,414)		1,007,606		(1,051,818)		(1,453)		(73,146)
Share-based compensation arrangements	—		—	971,043		10		—		11,117		—		—		11,127
Cumulative-effect adjustment upon adoption of ASC 606 "Revenue from Contracts with Customers"	—		—	—		—		—		—		(9,650)		—		(9,650)
Net income	—		—	—		—		—		—		99,425		—		99,425
Balance, June 30, 2018	—	$	—	92,196,285	$	943	$	(28,414)	$	1,018,723	$	(962,043)	$	(1,453)	$	27,756

See accompanying notes to the condensed consolidated financial statements.

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Penn National Gaming, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands) (unaudited)


Six Months Ended June 30,	2018		2017

Operating activities
Net income	$	99,425	$	22,183
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		118,949		139,205
Amortization of items charged to interest expense and interest income		3,143		3,275
Change in fair values of contingent purchase price		1,337		3,922
Loss on sale of property and equipment		3		7
Income from unconsolidated affiliates		(11,095)		(9,569)
Distributions from unconsolidated affiliates		13,300		13,000
Deferred income taxes		8,210		2,087
Charge for stock-based compensation		5,932		3,974
(Recovery) provision for loan loss and unfunded loan commitments to the JIVDC and impairment losses		(16,367)		5,635
Write off of debt issuance costs and discounts		3,461		5,377
Loss on early extinguishment and modification of debt		—		18,012
Decrease (increase), net of businesses acquired
Accounts receivable		5,766		7,378
Prepaid expenses and other current assets		(5,081)		(4,829)
Other assets		(1,553)		(2,876)
(Decrease) increase, net of businesses acquired
Accounts payable		(2,014)		(3,929)
Accrued expenses		(3,987)		8,895
Accrued interest		(1,015)		6,751
Accrued salaries and wages		(20,485)		(9,177)
Gaming, pari-mutuel, property and other taxes		(6,571)		(3,997)
Income taxes		14,091		14,657
Other current and noncurrent liabilities		1,636		(6,063)
Net cash provided by operating activities		207,085		213,918
Investing activities
Project capital expenditures		(1,661)		(14,673)
Maintenance capital expenditures		(31,297)		(28,287)
Insurance remediation proceeds		—		577
Loan to the JIVDC		(338)		(372)
Receipts applied against nonaccrual loan to the JIVDC		512		2,720
Proceeds from the sale of loan to the JIVDC		15,186		—
Proceeds from sale of property and equipment		218		477
Additional contributions to joint ventures		(500)		—
Consideration paid for acquisitions of businesses, gaming licenses, and other intangibles, net of cash acquired		(61,236)		(126,653)
Net cash used in investing activities		(79,116)		(166,211)
Financing activities
Proceeds from exercise of options		5,195		3,721
Repurchase of common stock		—		(5,794)
Principal payments on financing obligation with GLPI		(32,766)		(29,328)
Proceeds from issuance of long-term debt, net of issuance costs		—		1,174,362
Proceeds from revolving credit facility draws		54,000		196,435
Increase to financing obligation in connection with acquisition		—		82,603
Repayments on long-term debt		(170,750)		(1,091,726)
Prepayment penalties and modification payments incurred with debt refinancing		—		(18,012)
Repayments on revolving credit facility		(54,000)		(337,435)
Payments of other long-term obligations		(7,636)		(28,189)
Payments of contingent purchase price		(541)		(41)
Proceeds from insurance financing		8,541		8,768
Payments on insurance financing		(7,814)		(8,182)
Net cash used in financing activities		(205,771)		(52,818)
Net decrease in cash and cash equivalents		(77,802)		(5,111)
Cash and cash equivalents at beginning of year		277,953		229,510
Cash and cash equivalents at end of period		200,151		224,399

Supplemental disclosure
Interest expense paid, net of amounts capitalized	$	230,023	$	222,641
Income taxes paid (refunds received)	$	6,507	$	(5,659)

Non-cash investing activities
Accrued capital expenditures	$	4,089	$	9,595
Accrued advances to Jamul Tribe	$	—	$	1,274

Non-cash transactions: On January 1, 2018, the Company adopted the new revenue standard ASC 606, “Revenue from Contracts with Customers,” and all the related amendments to all contracts using the modified retrospective method. See Note 2 for further information regarding the net non-cash impact of the January 1, 2018 adoption.

See accompanying notes to the condensed consolidated financial statements.

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Penn National Gaming, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

1. Organization and Basis of Presentation

Penn National Gaming, Inc. (“Penn”) and together with its subsidiaries (collectively, the “Company,” “we,” “our,” or “us”) is a diversified, multi-jurisdictional owner and manager of gaming and racing facilities and video gaming terminal operations with a focus on slot machine entertainment. We have also expanded into social online gaming offerings via our Penn Interactive Ventures, LLC (“Penn Interactive Ventures”) division and our acquisition of Rocket Speed, Inc. (“Rocket Speed”) and into retail gaming in Illinois with our Prairie State Gaming subsidiary. On May 1, 2017, we completed our acquisition of 1st Jackpot Casino Tunica (formerly known as Bally’s Casino Tunica, (“1st Jackpot”)) and Resorts Casino Tunica (“Resorts”). As of June 30, 2018, the Company owned, managed, or had ownership interests in twenty-eight facilities in the following sixteen jurisdictions: Florida, Illinois, Indiana, Kansas, Maine, Massachusetts, Mississippi, Missouri, Nevada, New Jersey, New Mexico, Ohio, Pennsylvania, Texas, West Virginia and Ontario, Canada.

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.

The unaudited condensed consolidated financial statements include the accounts of Penn and its subsidiaries. Investment 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 (“VIE”), are accounted for under the equity method. All intercompany accounts and transactions have been eliminated in consolidation.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses for the reporting periods. Actual results could differ from those estimates.

Operating results for the three and six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. The notes to the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2017 should be read in conjunction with these condensed consolidated financial statements. The December 31, 2017 financial information has been derived from the Company’s audited consolidated financial statements.

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2. New Accounting Pronouncements

Accounting Pronouncements Implemented in 2018

ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” - On January 1, 2018, the Company adopted the new revenue standard ASC 606, “Revenue from Contracts with Customers (Topic 606),” and all the related amendments (“new revenue standard”) to all contracts using the modified retrospective method. As part of the adoption, the Company utilized a practical expedient that permits the evaluation of incomplete contracts (such as our loyalty point obligations) as completed contracts. The Company recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The Company does not expect the adoption of the new revenue standard to have a material impact to its net income on a continuing basis and did not have a material effect for the three and six months ended June 30, 2018.

In accordance with the new revenue standard requirement, the disclosure of the impact of adoption on our condensed consolidated statements of income and condensed consolidated balance sheets at and for the period ended June 30, 2018 are as follows (in thousands):


	Three Months Ended June 30, 2018 As Reported		Loyalty Point Impact (1)		Promotional Allowance (Discretionary Comps) Impact (2)		Promotional Allowance (Point Redemptions) Impact (2)		Reimbursable Expense - Casino Rama Impact (3)		Racing Reveue Impact (4)		Balances Without Adoption of ASC 606		Effect of Change Higher / (Lower)
Income Statement

Revenues
Gaming	$	665,094	$	(563)	$	35,424	$	-	$	-	$	-	$	699,955	$	(34,861)
Food, beverage, hotel and other		133,664		(29)		-		6,730		-		9,866		150,231		(16,567)
Management service fees		2,968		-		-		-		-		-		2,968		-
Reimbursable management costs		25,187		-		-		-		(21,068)		-		4,119		21,068
Revenues		826,913		(592)		35,424		6,730		(21,068)		9,866		857,273		(30,360)
Less: promotional allowances		-		-		(35,424)		(6,730)		-		-		(42,154)		42,154
Net Revenue		826,913		(592)		-		-		(21,068)		9,866		815,119		11,794

Operating expenses
Gaming		350,694		(408)		-		-		-		-		350,286		408
Food, beverage, hotel and other		95,112		-		-		-		-		9,866		104,978		(9,866)
General and administrative		132,659		-		-		-		-		-		132,659		-
Reimbursable management costs		25,187		-		-		-		(21,068)		-		4,119		21,068
Depreciation and amortization		58,559		-		-		-		-		-		58,559		-
Recovery for loan loss and unfunded commitments to the JIVDC		(16,985)		-		-		-		-		-		(16,985)		-
Insurance recoveries		(68)		-		-		-		-		-		(68)		-
Total operating expenses		645,158		(408)		-		-		(21,068)		9,866		633,548		11,610
Income from operations		181,755		(184)		-		-		-		-		181,571		184

Income from operations before income taxes		69,230		(184)		-		-		-		-		69,046		184
Income tax provision (benefit)		15,242		(40)		-		-		-		-		15,202		40
Net income	$	53,988	$	(144)	$	-	$	-	$	-	$	-	$	53,844	$	144

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	Six Months Ended June 30, 2018 As Reported		Loyalty Point Impact (1)		Promotional Allowance (Discretionary Comps) Impact (2)		Promotional Allowance (Point Redemptions) Impact (2)		Reimbursable Expense - Casino Rama Impact (3)		Racing Reveue Impact (4)		Balances Without Adoption of ASC 606		Effect of Change Higher / (Lower)
Income Statement

Revenues
Gaming	$	1,319,588	$	(1,982)	$	69,063	$	-	$	-	$	-	$	1,386,669	$	(67,081)
Food, beverage, hotel and other		264,633		(98)		-		13,354		-		18,826		296,715		(32,082)
Management service fees		5,406		-		-		-		-		-		5,406		-
Reimbursable management costs		53,371		-		-		-		(42,912)		-		10,459		42,912
Revenues		1,642,998		(2,080)		69,063		13,354		(42,912)		18,826		1,699,249		(56,251)
Less: promotional allowances		-		-		(69,063)		(13,354)		-		-		(82,417)		82,417
Net Revenue		1,642,998		(2,080)		-		-		(42,912)		18,826		1,616,832		26,166

Operating expenses
Gaming		691,210		(1,436)		-		-		-		-		689,774		1,436
Food, beverage, hotel and other		188,092		-		-		-		-		18,826		206,918		(18,826)
General and administrative		253,922		-		-		-		-		-		253,922		-
Reimbursable management costs		53,371		-		-		-		(42,912)		-		10,459		42,912
Depreciation and amortization		118,949		-		-		-		-		-		118,949		-
Recovery for loan loss and unfunded commitments to the JIVDC and impairment losses		(16,367)		-		-		-		-		-		(16,367)		-
Insurance recoveries		(68)		-		-		-		-		-		(68)		-
Total operating expenses		1,289,109		(1,436)		-		-		(42,912)		18,826		1,263,587		25,522
Income from operations		353,889		(644)		-		-		-		-		353,245		644

Income from operations before income taxes		130,356		(644)		-		-		-		-		129,712		644
Income tax provision (benefit)		30,931		(153)		-		-		-		-		30,778		153
Net income	$	99,425	$	(491)	$	-	$	-	$	-	$	-	$	98,934	$	491

As a result of the adoption of the new revenue standard, the following areas resulted in significant changes to the Company’s accounting:

(1)

The new revenue standard changed the accounting for loyalty points earned by our customers. The Company’s loyalty reward programs allow 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 casino properties. Under the new revenue standard, the Company is required to utilize a deferred revenue model and defer revenue at the estimated fair value when the loyalty points are earned by our customers and recognize revenue when the loyalty points are redeemed. The deferred revenue liability is based on the estimated standalone selling price of the loyalty points earned after factoring in the likelihood of redemption. Prior to the adoption of the new revenue standard, the estimated liability for unredeemed points was accrued based on expected redemption rates and the estimated costs of the service or merchandise to be provided.

(2)

The new revenue standard changed the accounting for promotional allowances. Under the new revenue standard, the Company will no longer be permitted to report revenue for goods and services provided to customers for free as an inducement to gamble as gross revenue with a corresponding reduction in promotional allowances to arrive at net revenues. The new revenue standard requires complimentaries related to an inducement to gamble to be recorded as a reduction to gaming revenues, and as such promotional allowances provided to customers as an inducement to gamble is no longer netted on our condensed consolidated statements of income.

In addition, the new revenue standard changed the accounting for promotional allowances with respect to non-discretionary complimentaries (i.e., a customer’s redemption of loyalty points). Under the new revenue standard, the Company is no longer permitted to report revenue for goods and services provided to a customer resulting from loyalty point redemption with a corresponding reduction in promotional allowances to arrive at net revenue, as the new revenue standard requires the utilization of a deferred revenue model in which previously deferred revenue is recognized as revenue when the loyalty points are

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redeemed. As such, promotional allowances related to a customer’s redemption of loyalty points is no longer netted on our condensed consolidated statements of income.

(3)

The Company revised its accounting for reimbursable costs associated with our management service contract for Casino Rama. Under the new revenue standard, reimbursable costs, which primarily consist of payroll costs, must be recognized as revenue on a gross basis, with an offsetting amount charged to reimbursable management costs within operating expenses, as we are the controlling entity to the arrangement. Prior to this revision, the Company recorded these reimbursable amounts on a net basis.

(4)

The new revenue standard changed the accounting for racing revenues. Under the new revenue standard, we concluded that the Company is not the controlling entity to the arrangement(s), but rather functions as an agent to the pari-mutuel pool. As such, fees and obligations related to the Company’s share of purse funding requirements, simulcasting fees, tote fees, certain pari-mutuel taxes and other fees directly related to the Company’s racing operations must be reported on a net basis and included as a deduction to food, beverage, hotel and other revenue. Prior to the adoption of the new revenue standard, the Company recorded these fees and obligations in food, beverage, hotel and other expense.

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	As Reported At June 30, 2018	Balances Without the Adoption of ASC 606	Effect of Change Higher (Lower)
Balance Sheet

Other assets
Deferred income taxes	384,777	383,092	1,685

Current liabilities
Accrued expenses	132,589	121,539	11,050

Shareholders' equity
Retained deficit	(962,043)	(953,505)	(8,538)

The cumulative effect of the changes made to our consolidated January 1, 2018 balance sheet for the adoption of ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” were as follows (in thousands):


	Balance at December 31, 2017	Adjustment Due to ASU 2014-09	Balance at January 1, 2018

Balance Sheet

Other assets
Deferred income taxes	390,943	2,044	392,987

Current liabilities
Accrued expenses	125,688	11,694	137,382

Shareholders' (deficit)
Retained deficit	(1,051,818)	(9,650)	(1,061,468)

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In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Clarification of Certain Cash Receipts and Cash Payments.” The amendments are intended to address diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments provide guidance on the following specific cash flow issues: (a) debt prepayment or debt extinguishment costs; (b) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; (c) contingent consideration payments made after a business combination; (d) proceeds from the settlement of insurance claims; (e) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (f) distributions received from equity method investees; (g) beneficial interest in securitization transactions; and (h) separately identifiable cash flows and application of the predominance principle. The new guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. The Company adopted this new guidance on January 1, 2018 on a retrospective basis. As a result of adopting this new guidance, the impact to the comparative period ended June 30, 2017 was an increase to net cash provided by operating activities and an increase to net cash used in financing activities of $18.0 million, respectively, within the Company’s Condensed Consolidated Statement of Cash Flows.

New Accounting Pronouncements to be Implemented in Fiscal Year 2019

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” which will require, among other items, lessees to recognize a right-of-use asset and a lease liability for most leases. Extensive quantitative and qualitative disclosures, including significant judgments made by management, will be required to provide greater insight into the extent of expenses recognized and expected to be recognized from existing contracts. The accounting applied by a lessor is largely unchanged from that applied under the current standard. The standard must be adopted using a modified retrospective transition approach and provides for certain practical expedients. In January 2018, the FASB issued ASU No. 2018-1, “Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842,” that provides an optional transitional practical expedient regarding land easements. The new guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. Management has not yet completed its assessment of the impact of the new standard on the Company’s consolidated financial statements, however, the Company has numerous operating leases which, under the new standard, will need to be reported as an asset and a liability on our consolidated balance sheet. The precise amount of this asset and liability will be determined based on the leases that exist at the Company on the date of adoption. The adoption of this standard is expected to have a material impact on our consolidated financial statements as the Company has significant operating lease commitments that are off-balance sheet in accordance with current U.S. GAAP.

3. Summary of Significant Accounting Policies

Revenue Recognition and Promotional Allowances

The Company’s revenue from contracts with customers consists of gaming wagers, food and beverage transactions, retail transactions, hotel room sales, racing wagers, management services related to our management of external casinos, and reimbursable costs associated with our management contracts.

The transaction price for a gaming wagering contract is the difference between gaming wins and losses, not the total amount wagered. The transaction price for food and beverage, hotel and retail contracts is the net amount collected from the customer for such goods and services. Sales tax and other taxes collected on behalf of governmental authorities are accounted for on the net basis and are not included in revenues or expenses. The transaction price for our racing operations, inclusive of live racing events conducted at our racing facilities and our import and export arrangements, is the commission received from the pari-mutuel pool less contractual fees and obligations primarily consisting of purse funding requirements, simulcasting fees, tote fees and certain pari-mutuel taxes that are directly related to the racing operations. The transaction price for our management service contracts is the amount collected for services rendered in accordance with the contractual terms. The transaction price for our reimbursable costs associated with our management contracts is the gross amount of the reimbursable expenditure, which primarily consists of payroll costs, incurred by the

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Company for the benefit of the managed entity. The Company is the controlling entity to the arrangement, therefore the reimbursement is recorded on a gross basis with an offsetting amount charged to operating expense.

Gaming revenue contracts involve two performance obligations for those customers earning points under the Company’s loyalty reward programs and a single performance obligation for customers that do not participate in the programs. The Company applies a practical expedient by accounting for its gaming contracts on a portfolio basis as such wagers have similar characteristics and the Company reasonably expects the effects on the condensed consolidated financial statements of applying the revenue recognition guidance to the portfolio to not differ materially from that which would result if applying the guidance to an individual wagering contract. For purposes of allocating the transaction price in a wagering contract between the wagering performance obligation and the obligation associated with the loyalty points earned, the Company allocates an amount to the loyalty point contract liability based on the stand-alone selling price of the points earned, which is determined by the value of a point that can be redeemed for slot play and complimentaries such as food and beverage at our restaurants, lodging at our hotels and products offered at our retail stores, less estimated breakage. The allocated revenue for gaming wagers is recognized when the wagering occurs as all such wagers settle immediately. The loyalty reward contract liability amount is deferred and recognized as revenue when the customer redeems the loyalty points for slot play and complimentaries and such goods and services are delivered to the customer.

Food and beverage, hotel and retail services have been determined to be separate, standalone performance obligations and the transaction price for such contracts is recorded as revenue as the good or service is transferred to the customer over their stay at the hotel or when the delivery is made for the food and beverage or retail product. Cancellation fees for hotel and meeting space services are recognized upon cancellation by the customer and are included in food, beverage, hotel and other revenue.

Racing revenue contracts, inclusive of the Company’s (i) host racing facilities, (ii) import arrangements that permit the Company to simulcast in live racing events occurring at other racetracks and (iii) export arrangements that permit the Company’s live racing event to be simulcast at other racetracks, provide access to and the processing of wagers into the pari-mutuel pool. The Company has concluded it is not the controlling entity to the arrangement, but rather functions as an agent to the pari-mutuel pool. Commissions earned from the pari-mutuel pool less contractual fees and obligations are recognized on a net basis which is included within food, beverage, hotel and other revenue.

Management services have been determined to be separate, standalone performance obligations and the transaction price for such contracts is recorded as services are performed. The Company records revenues on a monthly basis calculated by applying the contractual rate called for in the contract.

Penn Interactive Ventures generates in-app purchase and advertising revenues from free-to-play social casino games which can be downloaded to mobile phones and tablets from digital storefronts. Players can purchase virtual playing credits within our social casino games which allows for increased playing opportunities and functionality. Penn Interactive Ventures records deferred revenue from the sale of virtual playing credits and recognizes this revenue over the average redemption period of the credits which is approximately three days. Advertising revenues are recognized in the period when the advertising impression, click or install delivery occurs. Penn Interactive Ventures also generates

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revenue from revenue sharing arrangements with third party content providers whereby revenues are recognized on a net basis since Penn Interactive Ventures is not the controlling entity in the arrangement.

Promotional Allowances

The retail value of accommodations, food and beverage, and other services furnished to guests for free as an inducement to gamble is included in food, beverage, hotel and other revenue and offset as a deduction to gaming revenue in accordance with the new revenue standard and consists of the following for the period ended June 30, 2018:


Three Months Ended June 30,	2018
	(in thousands)
Lodging	$	10,616
Food and beverage		23,775
Other		1,033
Total amount recorded in food, beverage, hotel and other revenues and offset to gaming revenues	$	35,424


Six Months Ended June 30,	2018
	(in thousands)
Lodging	$	20,303
Food and beverage		46,750
Other		2,010
Total amount recorded in food, beverage, hotel and other revenues and offset to gaming revenues	$	69,063

The estimated cost of providing such complimentary services to guests for free as an inducement to gamble is included in food, beverage, hotel and other expenses and consists of the following for the period ended June 30, 2018:



Three Months Ended June 30,	2018
	(in thousands)
Lodging	$	1,541
Food and beverage		8,857
Other		283
Total cost of complimentary services included in food, beverage, hotel and other expense	$	10,681


Six Months Ended June 30,	2018
	(in thousands)
Lodging	$	2,818
Food and beverage		17,467
Other		576
Total cost of complimentary services included in food, beverage, hotel and other expense	$	20,861

Revenue Disaggregation

The Company is a geographically diversified, multi-jurisdictional owner and manager of gaming and racing facilities and video gaming terminal operations. Our operations are focused in regional gaming markets located within the Northeastern, South/Western and Midwestern United States. We also manage a casino for another entity in Canada. We generate revenues at our owned and operated properties by providing the following types of services: (i) gaming, (ii)

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food and beverage, (iii) lodging, (iv) racing, (v) reimbursable management costs and (vi) other. Our revenue disaggregation by type of revenue and geographic location is as follows (in thousands):


Three Months Ended June 30, 2018	Northeast		South/West		Midwest		Other		Total

Gaming	$	364,137	$	99,762	$	201,195	$	-	$	665,094
Food and beverage		19,570		29,625		15,224		318		64,737
Lodging		2,299		24,019		8,964		-		35,282
Racing		4,890		99		-		1,661		6,650
Reimbursable management costs		21,068		4,119		-		-		25,187
Other		11,024		5,746		5,077		8,116		29,963
Total net revenues	$	422,988	$	163,370	$	230,460	$	10,095	$	826,913


Six Months Ended June 30, 2018	Northeast		South/West		Midwest		Other		Total

Gaming	$	719,922	$	197,310	$	402,356	$	-	$	1,319,588
Food and beverage		38,750		57,903		31,145		582		128,380
Lodging		4,266		47,620		16,917		-		68,803
Racing		10,167		106		-		3,188		13,461
Reimbursable management costs		42,912		10,459		-		-		53,371
Other		21,138		11,267		10,127		16,863		59,395
Total net revenues	$	837,155	$	324,665	$	460,545	$	20,633	$	1,642,998

Customer-related Liabilities

The Company has two general types of liabilities related to contracts with customers: (i) our loyalty credit obligation and (ii) advance payments on goods and services yet to be provided or for unpaid wagers.

The Company’s loyalty reward programs allow members to utilize their reward membership cards to earn loyalty points that are redeemable for slot play and complimentaries such as food and beverages at our restaurants, lodging at our hotels and products offered at our retail stores across the vast majority of the Company’s casino properties. The Company accounts for the loyalty credit obligation utilizing a deferred revenue model, which defers revenue at the estimated fair value when the loyalty points are earned by our customers. Revenue associated with the loyalty credit obligation is subsequently recognized into revenue when the loyalty points are redeemed. The deferred revenue liability is based on the estimated standalone selling price of the loyalty points earned after factoring in the likelihood of redemption.

The Company’s loyalty credit obligation was $21.7 million at June 30, 2018 compared to $24.7 million upon the adoption of the new revenue standard at January 1, 2018. Our loyalty credit obligations are generally settled within six months of issuance. Changes between the opening and closing balances primarily relate to the timing of the customer’s election to redeem loyalty points for complimentaries and products offered at our food and beverage outlets, hotels and retail stores.

The Company’s advance payments on goods and services yet to be provided or 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 visitation (i.e. 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

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racing tickets and gaming tokens with customers and generally represents 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 or for unpaid wagers were $20.6 million and $21.2 million at June 30, 2018 and December 31, 2017, respectively, of which $1.0 million and $1.3 million are classified as long-term, 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. The Company records gaming tax expense at the Company’s estimated effective gaming tax rate for the year, considering estimated taxable gaming revenue and the applicable rates. Such estimates are adjusted each interim period. If gaming tax rates change during the year, such changes are applied prospectively in the determination of gaming tax expense in future interim periods. For the three and six months ended June 30, 2018, these expenses, which are recorded primarily within gaming expense in the condensed consolidated statements of income, were $253.0 million and $500.4 million, respectively, as compared to $252.5 million and $498.9 million, respectively for the three and six months ended June 30, 2017.

Long-term Asset Related to the Jamul Indian Village

On May 25, 2018, the Company entered into a purchase agreement (the “Purchase Agreement”) with the senior lender under the credit facility for the property to sell them all of the Company’s outstanding rights and obligations under the Term Loan C and the Jamul Indian Village Development Corporation (“JIVDC”) Commitments. Pursuant to the Purchase Agreement and related agreements, the Company received cash proceeds of $15.2 million from the sale and has been relieved of all rights and obligations with respect to the JIVDC. The sale of the loan resulted in a recovery of loan losses and unfunded loan commitments of $17.0 million for the three month period ended June 30, 2018.

Earnings Per Share

The Company calculates earnings per share (“EPS”) in accordance with ASC 260, “Earnings Per Share” (“ASC 260”). Basic EPS is computed by dividing net income applicable to common stock by the weighted-average number of common shares outstanding during the period. Diluted EPS reflects the additional dilution for all potentially-dilutive securities such as stock options and unvested restricted shares.

The following table reconciles the weighted-average common shares outstanding used in the calculation of basic EPS to the weighted-average common shares outstanding used in the calculation of diluted EPS for the three and six months ended June 30, 2018 and 2017:


	Three Months Ended June 30,	Three Months Ended June 30,	Six Months Ended June 30,	Six Months Ended June 30,
	2018	2017	2018	2017
	(in thousands)		(in thousands)
Determination of shares:
Weighted-average common shares outstanding	91,468	90,928	91,330	90,840
Assumed conversion of dilutive employee stock-based awards	3,319	2,230	3,299	1,629
Assumed conversion of restricted stock	208	81	205	74
Diluted weighted-average common shares outstanding	94,995	93,239	94,834	92,543

Options to purchase 660,958 and 653,673 shares and 55,062 and 1,598,500 were outstanding during the three and six months ended June 30, 2018 and 2017, respectively, but were not included in the computation of diluted EPS because they were antidilutive.

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The following table presents the calculation of basic and diluted EPS for the Company’s common stock for the three and six months ended June 30, 2018 and 2017 (in thousands, except per share data):


	Three Months Ended June 30,		Three Months Ended June 30,		Six Months Ended June 30,		Six Months Ended June 30,
	2018		2017		2018		2017
Calculation of basic EPS:
Net income applicable to common stock	$	53,988	$	17,079	$	99,425	$	22,183
Weighted-average common shares outstanding		91,468		90,928		91,330		90,840
Basic EPS	$	0.59	$	0.19	$	1.09	$	0.24

Calculation of diluted EPS using two-class method:
Net income applicable to common stock	$	53,988	$	17,079	$	99,425	$	22,183
Diluted weighted-average common shares outstanding		94,995		93,239		94,834		92,543
Diluted EPS	$	0.57	$	0.18	$	1.05	$	0.24

Stock-Based Compensation

The Company accounts for stock compensation under ASC 718, “Compensation-Stock Compensation,” which requires the Company to expense the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. This expense is recognized ratably over the requisite service period following the date of grant.

The fair value for stock options is estimated at the date of grant using the Black-Scholes option-pricing model, which requires management to make certain assumptions. The risk-free interest rate was based on the U.S. Treasury spot rate with a term equal to the expected life assumed at the date of grant. Expected volatility was estimated based on the historical volatility of the Company’s stock price over a period of 5.30 years, in order to match the expected life of the options at the grant date. Historically, at the grant date, there has been no expected dividend yield assumption since the Company has not paid any cash dividends on its common stock since its initial public offering in May 1994 and since the Company intends to retain all of its earnings to finance the development of its business for the foreseeable future. The weighted-average expected life was based on the contractual term of the stock option and expected employee exercise dates, which was based on the historical and expected exercise behavior of the Company’s employees. The Company granted 661,175 and 1,475,224 stock options during the six months ended June 30, 2018 and 2017, respectively.

Stock-based compensation expense for the three and six months ended June 30, 2018 was $3.0 million and $5.9 million, respectively, as compared to $1.8 million and $4.0 million for the three and six months ended June 30, 2017, respectively, and is included within the condensed consolidated statements of income under general and administrative expense.

The Company’s cash-settled phantom stock unit awards (“PSUs”), which vest over a period of four years, entitle employees and directors to receive cash based on the fair value of the Company’s common stock on the vesting date. The PSUs are accounted for as liability awards and are re-measured at fair value each reporting period until they become vested with compensation expense being recognized over the requisite service period in accordance with ASC 718-30, “Compensation—Stock Compensation, Awards Classified as Liabilities.” The Company had a liability, which is included in accrued salaries and wages within the condensed consolidated balance sheets, associated with its PSUs of $2.1 million and $4.8 million at June 30, 2018 and December 31, 2017, respectively, primarily due to payouts on the awards. For PSUs, there was $6.2 million of total unrecognized compensation cost at June 30, 2018 that will be recognized over the grants remaining weighted average vesting period of 2.47 years. For the three and six months ended June 30, 2018, the Company recognized $1.4 million and $1.5 million, respectively, of compensation expense associated with these awards, as compared to $4.6 million and $8.9 million, respectively, for the three and six months ended June 30, 2017. The changes are primarily due to the final vesting of the Company’s Transition Award Program on July 23, 2017 as well as changes in Penn’s stock prices at June 30 compared to December 31 in both years. Amounts paid by the Company for the three and six months ended June 30, 2018 on these cash-settled awards totaled $0.1 million and $4.2

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million, respectively, as compared to $0.1 million and $3.6 million for the three and six months ended June 30, 2017, respectively.

For the Company’s cash-settled stock appreciation rights (“SARs”), the fair value of the SARs is calculated during each reporting period and estimated using the Black-Scholes option pricing model based on the various inputs discussed below. The Company’s SARs, which vest over a period of four years, are accounted for as liability awards since they will be settled in cash. The Company had a liability, which is included in accrued salaries and wages within the condensed consolidated balance sheets, associated with its SARs of $22.6 million and $24.0 million at June 30, 2018 and December 31, 2017, respectively. For SARs, there was $15.8 million of total unrecognized compensation cost at June 30, 2018 that will be recognized over the awards remaining weighted average vesting period of 2.40 years. For the three and six months ended June 30, 2018, the Company recognized compensation expense of $9.8 million and $5.8 million, respectively, associated with these awards, as compared to compensation expense of $4.6 million and $8.6 million for the three and six months ended June 30, 2017, respectively. The changes are primarily due to changes in Penn’s stock prices at June 30 compared to December 31 in both years. Amounts paid by the Company for the three and six months ended June 30, 2018 on these cash-settled awards totaled $4.5 million and $7.5 million, respectively, as compared to $1.5 million and $2.6 million, respectively, for the three and six months ended June 30, 2017.

In addition to the variances in cash-settled awards explained above, accrued salaries and wages decreased during the six months ended June 30, 2018 due to the payment of 2017 bonuses.

The following are the weighted-average assumptions used in the Black-Scholes option-pricing model for stock option awards granted during the six months ended June 30, 2018 and 2017, respectively:


Six months ended June 30,	2018		2017
Risk-free interest rate	2.26	%	1.97	%
Expected volatility	30.80	%	30.67	%
Dividend yield	—		—
Weighted-average expected life (years)	5.30		5.30

Segment Information

The Company’s Chief Executive Officer, who is the Company’s Chief Operating Decision Maker (“CODM”), as that term is defined in ASC 280 “Segment Reporting,” measures and assesses the Company’s business performance based on regional operations of various properties grouped together based primarily on their geographic locations.

The Northeast reportable segment consists of the following properties: Hollywood Casino at Charles Town Races, Hollywood Casino Bangor, Hollywood Casino at Penn National Race Course, Hollywood Casino Toledo, Hollywood Casino Columbus, Hollywood Gaming at Dayton Raceway, Hollywood Gaming at Mahoning Valley Race Course, and Plainridge Park Casino. It included the Company’s Casino Rama management service contract, which ended on July 18, 2018.

The South/West reportable segment consists of the following properties: Zia Park Casino, Hollywood Casino Tunica, Hollywood Casino Gulf Coast, Boomtown Biloxi, M Resort, Tropicana Las Vegas and 1st Jackpot and Resorts which were acquired on May 1, 2017. It also included a management service contract with the JIVDC, which terminated at the end of May 2018.

The Midwest reportable segment consists of the following properties: Hollywood Casino Aurora, Hollywood Casino Joliet, Argosy Casino Alton, Argosy Casino Riverside, Hollywood Casino Lawrenceburg, Hollywood Casino St. Louis, and Prairie State Gaming, and includes the Company’s 50% investment in Kansas Entertainment, LLC (“Kansas Entertainment”), which owns the Hollywood Casino at Kansas Speedway.

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Company is successful in obtaining gaming operations at these locations, they would be assigned to one of the Company’s regional executives and reported in their respective reportable segment. The Other category also includes the Company’s corporate overhead operations, which does not meet the definition of an operating segment under ASC 280. Additionally, the Other category includes Penn Interactive Ventures, the Company’s wholly-owned subsidiary that represents its social online gaming initiatives, including Rocket Speed. Penn Interactive Ventures is also anticipated to include Penn’s real money online gaming operations in Pennsylvania. Penn Interactive Ventures meets the definition of an operating segment under ASC 280, but is quantitatively not significant to the Company’s operations as it represents less than 2% of net revenues and income from operations for the three and six months ended June 30, 2018, and its total assets represent less than 2% of the Company’s total assets at June 30, 2018.

Management uses adjusted EBITDA as an important measure of the operating performance of its segments, including the evaluation of operating personnel and believes it is especially relevant in evaluation large, long-lived casino projects because it provides a perspective on the current effects of operating decisions separated from the substantial non-operational depreciation charges and financing costs of such projects. Adjusted EBITDA is a non-GAAP financial measure. The Company defines adjusted EBITDA as earnings before interest, taxes, stock compensation, debt extinguishment and financing charges, impairment charges, insurance recoveries and deductible charges, depreciation and amortization, changes in the estimated fair value of our contingent purchase price obligations, gain or loss on disposal of assets, the difference between budget and actual expense for cash-settled stock-based awards, preopening and significant transaction costs and other income or expenses. Adjusted EBITDA is also inclusive of income or loss from unconsolidated affiliates, with our share of non-operating items (such as depreciation and amortization) added back for our joint venture in Kansas Entertainment. Adjusted EBITDA excludes payments associated with our Master Lease agreement with GLPI as the transaction was accounted for as a financing obligation.

In the first quarter of 2018, we changed the definition of adjusted EBITDA to exclude preopening costs, significant transaction costs and the variance between our budgeted and actual costs incurred on cash-settled stock based awards which are required to be marked to market each reporting period. We determined to exclude preopening costs and significant transaction costs to more closely align the Company’s calculation of adjusted EBITDA with our competitors. Preopening costs and significant transaction costs are also excluded from adjusted EBITDA for bonus calculation purposes. We have excluded the favorable or unfavorable difference between the budgeted expense and actual expense for our cash-settled stock-based awards as it is non-operational in nature. Additionally, this variance is excluded from adjusted EBITDA for bonus calculation purposes. In connection with the change to the definition of adjusted EBITDA, we reclassified our prior period results to conform to the current period presentation.

Adjusted EBITDA should not be construed as an alternative to operating income, as an indicator of the Company’s operating performance, as an alternative to cash flows from operating activities, as a measure of liquidity, or as any other measure of performance determined in accordance with GAAP. The Company has significant uses of cash flows, including capital expenditures, interest payments, taxes and debt principal repayments, which are not reflected in adjusted EBITDA.

See Note 7: “Segment Information” for further information with respect to the Company’s segments.

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4. Property and Equipment

Property and equipment, net, consists of the following:


	June 30,		December 31,
	2018		2017
	(in thousands)

Property and equipment - non-Master Lease
Land and improvements	$	294,716	$	294,695
Building and improvements		431,253		429,015
Furniture, fixtures and equipment		1,387,069		1,385,889
Leasehold improvements		131,440		130,801
Construction in progress		27,000		15,617
		2,271,478		2,256,017
Less Accumulated depreciation		(1,391,172)		(1,345,147)
		880,306		910,870
Property and equipment - Master Lease
Land and improvements		424,700		424,700
Building and improvements		2,258,577		2,258,577
		2,683,277		2,683,277
Less accumulated depreciation		(883,018)		(837,478)
		1,800,259		1,845,799
Property and equipment, net	$	2,680,565	$	2,756,669

Property and equipment, net decreased by $76.1 million for the six months ended June 30, 2018 primarily due to depreciation expense, which is partially offset by maintenance capital expenditures, as well as improvements to food and beverage offerings at Tropicana Las Vegas.

Depreciation expense, for property and equipment including assets under capital leases, totaled $54.4 million and $110.3 million and $63.7 million and $128.7 million for the three and six months ended June 30, 2018 and 2017, respectively, of which $22.9 million and $46.2 million and $23.0 million and $45.7 million related to assets under the Master Lease, respectively. No interest was capitalized in connection with major construction projects for the three and six months ended June 30, 2018, as compared to $0.1 million for the three and six months ended June 30, 2017.

5. Intangible Assets

Indefinite‑life intangible assets consist primarily of gaming licenses. The table below presents the gross carrying value, accumulated amortization, and net book value of each major class of other intangible assets at June 30, 2018 and December 31, 2017:


	June 30, 2018						December 31, 2017
	(in thousands)
	Gross						Gross
	Carrying		Accumulated		Net Book		Carrying		Accumulated		Net Book
	Value		Amortization		Value		Value		Amortization		Value
Indefinite-life intangible assets	$	433,005	$	—	$	433,005	$	375,405	$	—	$	375,405
Other intangible assets		135,195		92,883		42,312		131,483		84,282		47,201
Total	$	568,200	$	92,883	$	475,317	$	506,888	$	84,282	$	422,606

Total other intangible assets increased by $52.7 million for the six months ended June 30, 2018 primarily due to the purchase of two Category 4 gaming licenses to operate up to 750 slot machines and initially up to 30 table games in York County, Pennsylvania for $50.1 million and in Berks/Lancaster County, Pennsylvania for $7.5 million, partially

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offset by $8.6 million in amortization of definite-lived intangible assets. Other intangible assets have a weighted average remaining amortization period of approximately 4.4 years.

The Company’s intangible asset amortization expense was $4.1 million and $8.6 million, for the three and six months ended June 30, 2018, respectively, as compared to $5.3 million and $10.5 million for the three and six months ended June 30, 2017, respectively.

The following table presents expected intangible asset amortization expense based on existing intangible assets as of June 30, 2018 (in thousands):


Remaining 2018	$	6,092
2019		9,897
2020		6,777
2021		3,869
2022		3,635
Thereafter		12,042
Total	$	42,312

6. Long-term Debt

Long-term debt, net of current maturities, is as follows:


	June 30,		December 31,
	2018		2017
	(in thousands)

Senior secured credit facility	$	590,000	$	760,000
$400 million 5.625% senior unsecured notes due January 15, 2027		400,000		400,000
Other long-term obligations		111,674		119,310
Capital leases		140		891
		1,101,814		1,280,201
Less current maturities of long-term debt		(37,087)		(35,612)
Less discount on senior secured credit facility Term Loan B		(1,557)		(2,558)
Less debt issuance costs		(21,802)		(27,406)
	$	1,041,368	$	1,214,625

The following is a schedule of future minimum repayments of long-term debt as of June 30, 2018 (in thousands):


Within one year	$	37,087
1-3 years		96,814
3-5 years		255,687
Over 5 years		712,226
Total minimum payments	$	1,101,814

Senior Secured Credit Facility

On January 19, 2017, the Company entered into a new senior secured credit facility. The new senior secured credit facility consists of a five year $700 million revolver, a five year $300 million Term Loan A facility, and a seven year $500 million Term Loan B facility (the “Amended Credit Facilities”). The Term Loan A facility was priced at LIBOR plus a spread (ranging from 3.00% to 1.25%) based on the Company’s consolidated total net leverage ratio as defined in the new senior secured credit facility. The Term Loan B facility was priced at LIBOR plus 2.50%, with a 0.75% LIBOR floor. At June 30, 2018, the Company’s senior secured credit facility had a gross outstanding balance of $590.0 million, consisting of a $281.3 million Term Loan A facility and a $308.7 million Term Loan B facility. No

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amounts were outstanding on the revolving credit facility at June 30, 2018. Additionally, the Company had conditional obligations under letters of credit issued pursuant to the senior secured credit facility with face amounts aggregating $22.0 million, resulting in $678.0 million of available borrowing capacity as of June 30, 2018 under the revolving credit facility. In connection with the repayment of the previous senior secured credit facility, the Company recorded $1.7 million in refinancing costs and a $2.3 million loss on the early extinguishment of debt for the six months ended June 30, 2017 related to the write-off of deferred debt issuance costs and the discount on the Term Loan B facility of the previous senior secured credit facility. In connection with Term Loan B principal prepayments, the Company recorded a $2.6 million and $3.5 million loss on the early extinguishment of debt for the three and six months ended June 30, 2018.

Redemption of 5.875% Senior Subordinated Notes

In the first quarter of 2017, the Company redeemed all of its $300 million 5.875% senior subordinated notes, which were due in 2021 (“5.875% Notes”). In connection with this redemption, the Company recorded a $21.1 million loss on the early extinguishment of debt for the six months ended June 30, 2017 related to the difference between the reacquisition price of the 5.875% Notes compared to its carrying value.

5.625% Senior Unsecured Notes

On January 19, 2017, the Company completed an offering of $400 million 5.625% senior unsecured notes that mature on January 15, 2027 (the “5.625% Notes”) at a price of par. Interest on the 5.625% Notes is payable on January 15th and July 15th of each year. The 5.625% Notes are senior unsecured obligations of the Company. The 5.625% Notes will not be guaranteed by any of the Company’s subsidiaries except in the event that the Company in the future issues certain subsidiary‑guaranteed debt securities. The Company may redeem the 5.625% Notes at any time on or after January 15, 2022, at the declining redemption premiums set forth in the indenture governing the 5.625% Notes, and, prior to January 15, 2022, at a “make-whole” redemption premium set forth in the indenture governing the 5.625% Notes. In addition, prior to January 15, 2020, the Company may redeem the 5.625% Notes with an amount equal to the net proceeds from one or more equity offerings, at a redemption price equal to 105.625% of the principal amount of the 5.625% Notes redeemed, together with accrued and unpaid interest to, but not including, the redemption date, so long as at least 60% of the aggregate principal amount of the notes originally issued under the indenture remains outstanding and such redemption occurs within 180 days of closing of the related equity offering.

The Company used a portion of the proceeds from the issuance of the 5.625% Notes to retire its existing 5.875% Notes and to fund related transaction fees and expenses.

The Company used loans funded under the Amended Credit Facilities and a portion of the proceeds of the 5.625% Notes to repay amounts outstanding under its then existing credit agreement and to fund related transaction fees and expenses and for general corporate purposes.

Covenants

The Company’s senior secured credit facility and $400 million 5.625% senior unsecured notes require it, among other obligations, to maintain specified financial ratios and to satisfy certain financial tests, including fixed charge coverage, interest coverage, senior leverage and total leverage ratios. In addition, the Company’s senior secured credit facility and $400 million 5.625% senior unsecured notes restrict, among other things, its ability to incur additional indebtedness, incur guarantee obligations, amend debt instruments, pay dividends, create liens on assets, make investments, engage in mergers or consolidations, and otherwise restrict corporate activities.

At June 30, 2018, the Company was in compliance with all required financial covenants.

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7. Segment Information

The following tables (in thousands) present certain information with respect to the Company’s segments. Intersegment revenues between the Company’s segments were not material in any of the periods presented below.


		Three months ended June 30,				Six months ended June 30,
		2018		2017		2018		2017

Net Revenues
Northeast	$	422,988	$	405,099	$	837,155	$	798,564
South/West		163,370		153,151		324,665		292,970
Midwest		230,460		224,847		460,545		453,185
Other (1)		10,095		13,366		20,633		27,968
Total Reportable Segment Net Revenues		826,913		796,463		1,642,998		1,572,687


Adjusted EBITDA
Northeast		136,927		129,876		268,934		256,451
South/West		46,648		35,049		91,697		71,390
Midwest		79,010		75,490		160,165		153,596
Other (1)		(15,479)		(13,011)		(31,144)		(26,588)
Total Reportable Segment Adjusted EBITDA		247,106		227,404		489,652		454,849

Other operating costs and other expenses (income)
Depreciation and amortization		58,559		68,969		118,949		139,205
Unconsolidated non-operating costs - Kansas JV		1,279		1,309		2,572		3,260
Interest expense		115,873		116,768		231,613		231,764
Interest income		(241)		(235)		(490)		(2,881)
(Gain) loss on disposal of assets		(52)		52		3		7
(Recovery) provision for loan loss and unfunded loan commitments to the JIVDC and impairment losses		(16,985)		5,635		(16,367)		5,635
Insurance recoveries		(68)		—		(68)		—
Cash-settled stock award variance		7,800		6,092		338		11,255
Pre-opening and significant transaction costs		5,879		2,174		11,972		2,746
Loss on early extinguishment of debt and modification costs		2,579		—		3,461		23,390
Other		48		173		44		1,966
Contingent purchase price		202		1,362		1,337		3,922
Charge for stock compensation		3,003		1,801		5,932		3,974
Income before income taxes		69,230		23,304		130,356		30,606
Income taxes		15,242		6,225		30,931		8,423
Net income	$	53,988	$	17,079	$	99,425	$	22,183

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		Northeast		South/West		Midwest		Other (1)		Total

Three months ended June 30, 2018
Capital expenditures	$	7,989	$	5,324	$	5,644	$	2,188	$	21,145

Three months ended June 30, 2017
Capital expenditures	$	5,533	$	11,924	$	7,345	$	1,002	$	25,804

Six months ended June 30, 2018
Capital expenditures	$	11,476	$	8,736	$	9,376	$	3,370	$	32,958

Six months ended June 30, 2017
Capital expenditures	$	9,523	$	20,546	$	11,676	$	1,215	$	42,960

Balance sheet at June 30, 2018
Total assets (1)	$	811,308	$	758,891	$	1,071,518	$	2,450,113	$	5,091,830
Investment in and advances to unconsolidated affiliates		105		—		86,950		59,538		146,593
Goodwill		21,242		244,695		674,558		68,396		1,008,891
Other intangible assets, net		360,643		799		99,898		13,977		475,317

Balance sheet at December 31, 2017
Total assets (1)	$	821,649	$	794,274	$	1,070,204	$	2,548,685	$	5,234,812
Investment in and advances to unconsolidated affiliates		102		—		88,296		60,514		148,912
Goodwill		21,242		244,695		674,558		67,602		1,008,097
Other intangible assets, net		303,043		1,623		101,698		16,242		422,606

(1) Other also includes corporate overhead operations as well as Penn Interactive Ventures, which is a wholly-owned subsidiary that is focused on the Company’s interactive gaming strategy. Total assets include the real property assets under the Master Lease with GLPI. Net revenues and adjusted EBITDA relate to the Company’s stand-alone racing operations, namely Sanford Orlando Kennel Club and the Company’s joint venture interests in Texas and New Jersey which do not have gaming operations.

8. Fair Value Measurements

ASC 820, “Fair Value Measurements and Disclosures,” establishes a hierarchy that prioritizes fair value measurements based on the types of inputs used for the various valuation techniques (market approach, income approach, and cost approach). The levels of the hierarchy are described below:

Level 1: Observable inputs such as quoted prices in active markets for identical assets or liabilities.

Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; these include quoted prices for similar assets or liabilities in active markets, such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions, as there is little, if any, related market activity.

The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of assets and liabilities and their placement within the fair value hierarchy.

The following methods and assumptions are used to estimate the fair value of each class of financial instruments for which it is practicable to estimate:

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Cash and cash equivalents

The fair value of the Company’s cash and cash equivalents approximates the carrying value of the Company’s cash and cash equivalents, due to the short maturity of the cash equivalents and as such is a Level 1 measurement.

Loan to the JIVDC

The fair value of the Company’s loan to the JIVDC at December 31, 2017 was based on the present value of the projected future cash flows discounted at 14%, which we believe approximates the return a market participant would require. Since the projections are based on management’s internal projections, the Company concluded that this instrument should be classified as a Level 3 measurement.

Long-term debt

The fair value of the Company’s Term Loan A and Term Loan B components of its senior secured credit facility and senior unsecured notes are estimated based on quoted prices in active markets and as such is a Level 1 measurement. The fair value of the remainder of the Company’s senior secured credit facility approximates its carrying value as it is revolving, variable rate debt and as such is a Level 2 measurement.

Other long-term obligations at June 30, 2018 included the relocation fees for Hollywood Gaming at Dayton Raceway and Hollywood Gaming at Mahoning Valley Race Course and the repayment obligation of a hotel and event center located near Hollywood Casino Lawrenceburg. The fair value of the relocation fees for Hollywood Gaming at Dayton Raceway and Hollywood Gaming at Mahoning Valley Race Course and the repayment obligation for the hotel and event center are estimated based on rates consistent with the Company’s credit rating for comparable terms and debt instruments and as such are Level 2 measurements.

Other liabilities

Other liabilities at June 30, 2018 and December 31, 2017 are primarily comprised of the contingent purchase price consideration related to the purchases of Plainridge Racecourse. The fair value of the Company’s contingent purchase price consideration related to its Plainridge Racecourse acquisition is estimated based on a discounted cash flow model and as such is a Level 3 measurement. At each reporting period, the Company assesses the fair value of these liabilities and changes in their fair values are recorded in earnings. The amount related to the change in fair value of these obligations resulted in a charge to general and administrative expense of $0.2 million and $1.3 million for the three and six months ended June 30, 2018, respectively, as compared to $1.4 million and $3.9 million for the three and six months ended June 30, 2017, respectively.

The carrying amounts and estimated fair values by input level of the Company’s financial instruments at June 30, 2018 and December 31, 2017 are as follows (in thousands):


	June 30, 2018
	Carrying
	Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	200,151	$	200,151	$	200,151	$	—	$	—
Financial liabilities:
Long-term debt
Senior secured credit facility		567,349		591,945		591,945		—		—
Senior unsecured notes		399,291		375,000		375,000		—		—
Other long-term obligations		111,674		106,402		—		106,402		—
Other liabilities		23,592		23,592		—		—		23,592

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	December 31, 2017
	Carrying
	Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	277,953	$	277,953	$	277,953	$	—	$	—
Loan to the JIVDC		20,900		16,533		—		—		16,533
Financial liabilities:
Long-term debt
Senior secured credit facility		730,787		760,456		760,456		—		—
Senior unsecured notes		399,249		412,000		412,000		—		—
Other long-term obligations		119,310		113,460		—		113,460		—
Other liabilities		22,696		22,696		—		—		22,696

The following table summarizes the changes in the fair value of the Company’s Level 3 liabilities (in thousands):


	Six Months Ended
	June 30, 2018
	Liabilities
	Contingent
	Purchase Price
Balance at January 1, 2018	$	22,696
Additions		—
Payments		(441)
Included in earnings		1,337
Balance at June 30, 2018	$	23,592

The following table summarizes the significant unobservable inputs used in calculating fair value for the Company’s Level 3 liabilities:


	Valuation	Unobservable
	Technique	Input	Discount Rate
Contingent purchase price - Plainridge	Discounted cash flow	Discount rate	7.60	%

9. Investment in Unconsolidated Affiliates

The Company has a 50% investment in Kansas Entertainment, which is a joint venture with International Speedway Corporation. Kansas Entertainment owns Hollywood Casino at Kansas Speedway which is a Hollywood themed facility featuring 244,791 of property square footage with 2,000 slot machines, 41 table games and 12 poker tables, a 1,253 space parking structure, as well as a variety of dining and entertainment facilities. For the year ended December 31, 2017, the Company’s investment in Kansas Entertainment met the requirements of S-X Rule 4-08(g) to provide summarized financial information. The following table provides summary income statement information for Kansas Entertainment as required under S-X Rule 1-02(bb) for the comparative periods presented in the Company’s unaudited condensed consolidated statements of income.


	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
Net revenues	$	40,206	$	38,924	$	79,491	$	77,770
Operating expenses		27,924		28,352		55,582		57,190
Income from operations		12,282		10,572		23,909		20,580
Net income	$	12,282	$	10,572	$	23,909	$	20,580

Net income attributable to Penn	$	6,141	$	5,286	$	11,955	$	10,290

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10. Income Taxes

In December 2017, the President of the United States signed into law comprehensive tax reform legislation commonly known as Tax Cuts and Jobs Act (the “Tax Act”), which introduced significant changes to the previous tax law. This new legislation reduced the federal corporate income tax rate from 35% to 21%, effective January 1, 2018. In December 2017, the Company recorded an increase to deferred tax expense of approximately $261.3 million on the date of enactment primarily relating to a reduction of our net deferred tax asset because of the rate change. The adjustments related to the application of the Tax Act continue to be provisional amounts to the extent that they are reasonably estimable and the Company will refine them as more information becomes available. The Company has not made any material measurement period adjustments related to these items in the six month period ended June 30, 2018. In accordance with Staff Accounting Bulletin No. 118, any adjustments to the provisional changes will be included in income tax expense or benefit in the appropriate period.

The Company calculates the provision for income taxes during interim reporting periods by applying an estimate of the annual effective tax rate to the full year projected pretax book income or loss excluding certain discrete items. The effective tax rate (income taxes as a percentage of income from operations before income taxes) including discrete items was 22.02% and 23.73% for the three and six months ended June 30, 2018, respectively, as compared to 26.71% and 27.52% for the three and six months ended June 30, 2017, respectively, primarily due to the reduced federal income tax rate as a result of the Tax Act and higher earnings before income taxes.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our Operations

We are a leading, diversified, multi-jurisdictional owner and manager of gaming and racing facilities and video gaming terminal operations. In addition, over the last two years, we have implemented our interactive gaming strategy through our subsidiary, Penn Interactive Ventures, and have expanded our social gaming offerings with the acquisition of Rocket Speed, a leading developer of social casino games, while also expanding into retail gaming in Illinois through our Prairie State Gaming subsidiary. On May 1, 2017, we completed our acquisition of 1st Jackpot and Resorts casinos in Tunica, Mississippi. As of June 30, 2018, we owned, managed, or had ownership interests in twenty-eight facilities in the following sixteen jurisdictions: Florida, Illinois, Indiana, Kansas, Maine, Massachusetts, Mississippi, Missouri, Nevada, New Jersey, New Mexico, Ohio, Pennsylvania, Texas, West Virginia, and Ontario, Canada. We believe that our portfolio of assets provides us the benefit of geographically diversified cash flow from operations.

The vast majority of our revenue is gaming revenue, derived primarily from gaming on slot machines (which represented approximately 87% of our gaming revenue in 2017 and 2016) and to a lesser extent, table games, which is highly dependent upon the volume and spending levels of customers at our properties. Other revenues are derived from our management service fees from Casino Rama, our hotels, dining, retail, admissions, program sales, concessions and certain other ancillary activities, and our racing operations. Our racing revenue includes our share of pari-mutuel wagering on live races after payment of amounts returned as winning wagers, our share of wagering from import and export simulcasting, and our share of wagering from our off-track wagering facilities, net of expenses.

Key performance indicators related to gaming revenue are slot handle and table game drop (volume indicators) and “win” or “hold” percentage. Our typical property slot hold percentage is in the range of 6% to 10% of slot handle, and our typical table game win percentage is in the range of 16% to 26% of table game drop. Slot handle is the gross amount wagered for the period cited. The win or hold percentage is the net amount of gaming wins and losses, with liabilities recognized for accruals related to the anticipated payout of progressive jackpots. Given the stability in our slot hold percentages, we have not experienced significant impacts to earnings from changes in these percentages.

For table games, customers usually purchase cash chips at the gaming tables. The cash and markers (extensions of credit granted to certain credit worthy customers) are deposited in the gaming table’s drop box. Table game win is the amount of drop that is retained and recorded as casino gaming revenue, with liabilities recognized for funds deposited by customers before gaming play occurs and for unredeemed gaming chips. As we are primarily focused on regional

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gaming markets, our table win percentages are fairly stable as the majority of these markets do not regularly experience high-end play, which can lead to volatility in win percentages. Therefore, changes in table game win percentages do not typically have a material impact to our earnings.

Our properties generate significant operating cash flow, since most of our revenue is cash-based from slot machines, table games, and pari-mutuel wagering. Our business is capital intensive, and we rely on cash flow from our properties to generate operating cash to satisfy our obligations under the Master Lease, repay debt, fund maintenance capital expenditures, fund new capital projects at existing properties and provide excess cash for future development and acquisitions.

We continue to expand our gaming operations through the implementation and execution of a disciplined capital expenditure program at our existing properties, the pursuit of strategic acquisitions and the development of new gaming properties, particularly in attractive regional markets. Additional information regarding our capital projects is discussed in detail in the section entitled “Liquidity and Capital Resources—Capital Expenditures” below.

Segment Information

The Northeast reportable segment consists of the following properties: Hollywood Casino at Charles Town Races, Hollywood Casino Bangor, Hollywood Casino at Penn National Race Course, Hollywood Casino Toledo, Hollywood Casino Columbus, Hollywood Gaming at Dayton Raceway, Hollywood Gaming at Mahoning Valley Race Course, and Plainridge Park Casino. It also included the Company’s Casino Rama management service contract, which ended on July 18, 2018.

The Other category consists of the Company’s standalone racing operations, namely Sanford-Orlando Kennel Club, the Company’s joint venture interests in Sam Houston Race Park, Valley Race Park, and Freehold Raceway. If the Company is successful in obtaining gaming operations at these locations, they would be assigned to one of the Company’s regional executives and reported in their respective reportable segment. The Other category also includes the Company’s corporate overhead operations, which does not meet the definition of an operating segment under ASC 280. Additionally, the Other category includes Penn Interactive Ventures, the Company’s wholly-owned subsidiary that represents its social online gaming initiatives, including Rocket Speed. Penn Interactive Ventures is also anticipated to include Penn’s real money online gaming operations in Pennsylvania. Penn Interactive Ventures meets the definition of an operating segment under ASC 280, but is quantitatively not significant to the Company’s operations as it represents less than 2% of net revenues and income from operations for the three and six months ended June 30, 2018, and its total assets represent less than 2% of the Company’s total assets at June 30, 2018.

Executive Summary

The proliferation of new gaming facilities continues to impact the overall domestic gaming industry as well as our operating results in certain markets. However, the current economic environment, specifically low unemployment levels, strengths in residential real estate values, and higher levels of consumer confidence, have resulted in a relatively

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stable operating environment in recent periods. Our ability to continue to succeed in this environment will be predicated on operating our existing facilities efficiently and offering our customers additional gaming experiences through our multi-channel distribution strategy. We will also seek to continue to expand our customer database through accretive acquisitions and new offerings and capitalize on organic growth opportunities from our recent facility openings and new business lines. We have also recently implemented a margin improvement plan to enhance our profitability that has begun to positively impact our operations.

We operate a geographically diversified portfolio comprised largely of new and well maintained regional gaming facilities. This has allowed us to develop what we believe to be a solid base for future growth opportunities supported by a flexible and attractively priced capital structure. We have also made investments in joint ventures that we believe may allow us to capitalize on additional gaming opportunities in certain states if legislation or referenda are passed that permit and/or expand gaming in these jurisdictions and we are selected as a licensee.

Historically, the Company has been reliant on certain key regional gaming markets (for example, its results from Hollywood Casino at Charles Town Races and Hollywood Casino Lawrenceburg). Over the past several years, we have diversified our operations via development of new facilities and acquisitions and we anticipate further reducing our reliance on specific properties subsequent to the closing of the Pinnacle transaction, which is described below.

On December 18, 2017, Penn announced that it had entered into a definitive agreement under which it will acquire Pinnacle in a cash and stock transaction valued at approximately $2.8 billion at the announcement date. Under the terms of the agreement, Pinnacle shareholders will receive $20.00 in cash and 0.42 shares of Penn common stock for each Pinnacle share.

Coincident with the closing of the merger, we plan to divest the membership interests of certain Pinnacle subsidiaries which operate the casinos known as Ameristar Casino Resort Spa St. Charles (Missouri), Ameristar Casino Hotel Kansas City (Missouri), Belterra Casino Resort (Indiana), and Belterra Park (Ohio) to Boyd Gaming Corp (“Boyd”) for approximately $575 million in cash. These divestitures are anticipated to occur immediately prior to, and are conditioned upon, the completion of the Pinnacle acquisition. Additionally, at the closing of the merger, (i) GLPI will acquire the real estate associated with the Plainridge Park Casino for $250 million, and concurrently it will be leased back to Penn pursuant an amendment to Pinnacle’s master lease with GLPI, for a fixed annual rent of $25 million and (ii) GLPI will acquire the real estate assets of Belterra Park for approximately $65 million, which subsequently will be included in an amended master lease between GLPI and Boyd along with the other divested properties. The amended Pinnacle master lease will include an additional incremental rent of $13.9 million annually to adjust the rental obligation to market conditions.

On March 29, 2018, shareholders of both Penn National and Pinnacle overwhelmingly approved our proposed merger, with over 99% of all votes cast in favor of the transaction. Additionally, we have secured regulatory approvals, subject to customary conditions, from Pennsylvania (both the Gaming Control Board and the Racing Commission), West Virginia, Illinois, Mississippi, Indiana, Ohio and Louisiana. Over the coming months we will be appearing before additional regulatory bodies to seek their approvals. Based on our progress to date, we anticipate closing the transaction early in the fourth quarter of 2018.

On June 19, 2018, Penn announced it had entered into a definitive agreement to acquire the operations of Margaritaville in Bossier City, Louisiana in a cash transaction for approximately $115 million. The transaction is expected to close late in the fourth quarter of 2018. Simultaneous with the closing of the transaction, Penn will enter into a triple-net-lease agreement with VICI Properties, Inc. for Margaritaville.

Following the closing of the proposed transactions, we will enjoy significantly greater operational scale and geographic diversity from a combined 40 properties in 18 jurisdictions, including 15 of the top 30 metropolitan statistical areas in America.

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Financial Highlights:

We reported net revenues and income from operations of $826.9 million and $181.8 million, for the three months ended June 30, 2018, respectively, compared to $796.5 million and $135.0 million, for the corresponding period in the prior year and net revenues and income from operations of $1,643.0 million and $353.9 million, for the six months ended June 30, 2018, respectively, compared to $1,572.7 million and $275.3 million, for the corresponding period in the prior year. The major factors affecting our results for the three and six months ended June 30, 2018, as compared to the three and six months ended June 30, 2017, were:

During the three and six months ended June 30, 2018, net revenues increased $21.1 million and $43.1 million, respectively, due to reimbursable payroll costs associated with our management service contract for Casino Rama following the implementation of the new revenue accounting standard effective January 1, 2018. See Note 2 to the condensed consolidated financial statements for additional details.

In the fourth quarter of 2017, we announced a margin improvement plan that would enhance our profitability in future periods by executing on certain initiatives in various areas such as, but not limited to, procurement, marketing and labor. The first half of 2018 reflects favorable results in all of our segments from this implementation.

Lower depreciation and amortization expense of $10.4 million and $20.3 million for the three and six months ended June 30, 2018, respectively, as compared to the corresponding period in the prior year.

The acquisition of 1st Jackpot and Resorts on May 1, 2017 in our South/West segment, which increased net revenues of $5.2 million and $23.5 million for three and six months ended June 30, 2018, respectively.

Net income increased by $36.9 million and $77.2 million for the three and six months ended June 30, 2018, as compared to the three and six months ended June 30, 2017, primarily due to the variances discussed above, as well as a loan loss recovery of $17.0 million due to the sale of the JIVDC loan.

Segment Developments:

The following are recent developments that have had, may have or will have an impact on us by segment:

Northeast

In October 2017, Pennsylvania enacted gaming expansion legislation that authorized licenses for up to ten new Category 4 satellite casinos, VGTs at truck stops, online gaming, and other gaming offerings. The new casinos will have the ability to operate between 300 and 750 slot machines and up to 40 table games. Only Pennsylvania’s existing gaming operators may initially participate in the auctions for these new casinos, with a preference given to the Category 1 and Category 2 license holders in the first and second rounds. On January 10, 2018, Penn was awarded the first Category 4 satellite casino license to be located in York County for a $50.1 million license fee, which will compete with our Hollywood Casino at Penn National Race Course facility. On February 8, 2018, the third Category 4 satellite casino license was awarded in Lawrence County which is expected to compete with and have an adverse impact on our existing Hollywood Gaming at Mahoning Valley Race Course facility in Austintown, Ohio. On February 22, 2018 and April 4, 2018, the fourth and fifth, Category 4 satellite casino licenses, respectively, were awarded in Cumberland County and West Cocalico Township in Lancaster County (this was awarded to Penn for a $7.5 million license fee) which are expected to compete with and have an adverse impact on our Hollywood Casino at Penn National Race Course facility in Grantville, Pennsylvania. Penn also applied for a license to operate online real money gaming in Pennsylvania. Depending on our ability to successfully operate online gaming in Pennsylvania and on how many of the ten satellite casino licenses are ultimately issued, and the final locations, and scope of these satellite casinos, and the impact of VGT’s at truck stops and online gaming offerings, there may be additional negative impacts on our existing facilities in the Northeast segment.

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Hollywood Casino at Charles Town Races has faced increased competition from the Baltimore/Washington D.C. market, which includes Maryland Live!, Horseshoe Casino Baltimore, and MGM National Harbor, which opened in December 2016. Maryland Live! opened a new 258 room hotel in May 2018.

Construction of a tribal casino in Taunton, Massachusetts that was expected to open in 2017, is currently on hold following a judicial opinion. MGM Springfield in Western Massachusetts is expected to be completed in August 2018 and Wynn Everett in Eastern Massachusetts is scheduled to open in mid-2019. The increased competition in Massachusetts will have a negative impact on the operations of Plainridge Park Casino.

The management service contract with Casino Rama in Ontario, Canada ended on July 18, 2018.

South/West

On May 1, 2017, we acquired RIH Acquisitions MS I, LLC and RIH Acquisitions MS II, LLC, the holding companies for operations of 1st Jackpot and Resorts, in Tunica, Mississippi.

On October 10, 2016, we opened and began to manage Hollywood Casino Jamul – San Diego on the Jamul Tribe’s trust land in San-Diego California. During 2017, our loan to the JIVDC went into default and as a result Penn incurred impairment charges related to its loan and funding commitments of $89.8 million. In late February 2018, the Company and the Jamul Tribe mutually agreed that Penn would no longer manage the facility or provide branding and development services as of the end of May 2018. On May 25, 2018, Penn sold the JIVDC loan and was relieved of all future rights and obligations.

Midwest

On September 1, 2015, we acquired a leading Illinois VGT operator, Prairie State Gaming. As one of the largest VGT route operators in Illinois, Prairie State Gaming’s operations now include 1,738 terminals across a network of 377 bars and retail gaming establishments throughout Illinois.

Other

The Company has experienced adjusted EBITDA declines at Rocket Speed, which was acquired by the Company on August 1, 2016 and resulted in the creation of $67.0 million of goodwill. The decline in earnings at Rocket Speed are partially attributable to reductions in the number of daily active users and increased marketing spend that we anticipate will benefit the business in future periods. As a result, the Company evaluated if the goodwill at Rocket Speed was more likely than not impaired at June 30, 2018 and concluded the goodwill was not impaired as of June 30, 2018. To the extent the earnings projections at Rocket Speed are not met in future periods or its earnings continue to decline, the Company may need to write-off some or all of the goodwill associated with this business.

Critical Accounting Estimates

We make certain judgments and use certain estimates and assumptions when applying accounting principles in the preparation of our consolidated financial statements. The nature of the estimates and assumptions are material due to the levels of subjectivity and judgment necessary to account for highly uncertain factors or the susceptibility of such factors to change. We have identified the accounting for long lived assets, goodwill and other intangible assets and income taxes as critical accounting estimates, as they are the most important to our financial statement presentation and require difficult, subjective and complex judgments.

We believe the current assumptions and other considerations used to estimate amounts reflected in our consolidated financial statements are appropriate. However, if actual experience differs from the assumptions and other considerations used in estimating amounts reflected in our consolidated financial statements, the resulting changes could

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have a material adverse effect on our consolidated results of operations and, in certain situations, could have a material adverse effect on our consolidated financial condition.

The development and selection of the critical accounting estimates, and the related disclosures, have been reviewed with the Audit Committee of our Board of Directors.

For further information on our critical accounting estimates, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the notes to our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2017. There has been no material change to these estimates for the six months ended June 30, 2018.

Results of Operations

The following are the most important factors and trends that contribute to our operating performance:

Most of our properties operate in mature competitive markets. As a result, we expect a significant amount of our future growth to come from prudent acquisitions of gaming properties (such as our pending acquisitions of Pinnacle and Margaritaville, our August 2015 acquisition of Tropicana Las Vegas Hotel and Casino), jurisdictional expansions (such as our June 2015 opening of a slots only gaming facility in Massachusetts, the September 2014 opening of Hollywood Gaming at Mahoning Valley Race Course and the August 2014 opening of Hollywood Gaming at Dayton Raceway), expansions of gaming in existing jurisdictions (such as our pending Category 4 casino facilities that will be constructed in Pennsylvania), expansions/improvements of existing properties (such as Tropicana Las Vegas) and new growth opportunities (such as our acquisition of Prairie State Gaming, a leading video lottery terminal operator in Illinois, and our entry into the interactive and social gaming space through Penn Interactive Ventures, including our acquisition of Rocket Speed).

A number of states are currently considering or implementing legislation to legalize or expand gaming. Such legislation presents both potential opportunities to establish new properties and additional competition to our existing properties. For instance, there have been potential discussions around the legalization and implementation of sports betting on a state by state basis (such as Mississippi, West Virginia and Pennsylvania) and real money online gaming, such as in Pennsylvania.

The successful implementation of our margin enhancement initiatives.

The actions of government bodies can affect our operations in a variety of ways. For instance, the continued pressure on governments to balance their budgets could intensify the efforts of state and local governments to raise revenues through increases in gaming taxes and/or property taxes, or via an expansion of gaming. In addition, government bodies may restrict, prevent or negatively impact operations in the jurisdictions in which we do business (such as the implementation of smoking bans).

The continued demand for, and our emphasis on, slot wagering entertainment at our properties.

The successful execution of our development activities, as well as the risks associated with the costs, regulatory approval and the timing of these activities.

The risks related to economic conditions and the effect of sluggish conditions on consumer spending for leisure and gaming activities, which may negatively impact our operating results and our ability to continue to access financing at favorable terms.

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The consolidated results of operations for the three and six months ended June 30, 2018 and 2017 are summarized below:


	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
	(in thousands)
Revenues:
Gaming	$	665,094	$	680,979	$	1,319,588	$	1,342,235
Food, beverage, hotel and other		133,664		152,148		264,633		299,889
Management service fees		2,968		2,932		5,406		5,259
Reimbursable management costs		25,187		6,387		53,371		13,145
Revenues		826,913		842,446		1,642,998		1,660,528
Less promotional allowances		—		(45,983)		—		(87,841)
Net revenues		826,913		796,463		1,642,998		1,572,687

Operating expenses:
Gaming		350,694		345,156		691,210		677,209
Food, beverage, hotel and other		95,112		105,231		188,092		206,306
General and administrative		132,659		130,096		253,922		255,911
Reimbursable management costs		25,187		6,387		53,371		13,145
Depreciation and amortization		58,559		68,969		118,949		139,205
(Recovery) provision for loan loss and unfunded loan commitments to the JIVDC and impairment losses		(16,985)		5,635		(16,367)		5,635
Insurance recoveries		(68)		—		(68)		—
Total operating expenses		645,158		661,474		1,289,109		1,297,411
Income from operations	$	181,755	$	134,989	$	353,889	$	275,276

Certain information regarding our results of operations by segment for the three and six months ended June 30, 2018 and 2017 is summarized below:


	Net Revenues				Income (loss) from Operations
Three Months Ended June 30,	2018		2017		2018		2017
	(in thousands)

Northeast	$	422,988	$	405,099	$	121,746	$	108,119
South/West		163,370		153,151		55,352		20,062
Midwest		230,460		224,847		63,646		59,283
Other		10,095		13,366		(58,989)		(52,475)
Total	$	826,913	$	796,463	$	181,755	$	134,989


		Net Revenues			Income (loss) from Operations
Six Months Ended June 30,	2018		2017		2018		2017
	(in thousands)

Northeast	$	837,155	$	798,564	$	237,437	$	210,752
South/West		324,665		292,970		91,238		47,180
Midwest		460,545		453,185		129,163		120,813
Other		20,633		27,968		(103,949)		(103,469)
Total	$	1,642,998	$	1,572,687	$	353,889	$	275,276

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Revenues

Revenues for the three and six months ended June 30, 2018 and 2017 were as follows (in thousands):


							Percentage
Three Months Ended June 30,	2018		2017		Variance		Variance
Gaming	$	665,094	$	680,979	$	(15,885)	(2.3)	%
Food, beverage, hotel and other		133,664		152,148		(18,484)	(12.1)	%
Management service fees		2,968		2,932		36	1.2	%
Reimbursable management costs		25,187		6,387		18,800	294.3	%
Revenues		826,913		842,446		(15,533)	(1.8)	%
Less promotional allowances		—		(45,983)		45,983	(100.0)	%
Net revenues	$	826,913	$	796,463	$	30,450	3.8	%


							Percentage
Six Months Ended June 30,	2018		2017		Variance		Variance
Gaming	$	1,319,588	$	1,342,235	$	(22,647)	(1.7)	%
Food, beverage, hotel and other		264,633		299,889		(35,256)	(11.8)	%
Management service fees		5,406		5,259		147	2.8	%
Reimbursable management costs		53,371		13,145		40,226	306.0	%
Revenues		1,642,998		1,660,528		(17,530)	(1.1)	%
Less promotional allowances		—		(87,841)		87,841	(100.0)	%
Net revenues	$	1,642,998	$	1,572,687	$	70,311	4.5	%

In our business, revenue is driven by discretionary consumer spending. The proliferation of new gaming facilities has increased competition in many regional markets (including at some of our key facilities). We have no certain mechanism for determining why consumers choose to spend more or less money at our properties from period to period and as such cannot quantify a dollar amount for each factor that impacts our customers’ spending behaviors. However, based on our experience, we can generally offer some insight into the factors that we believe were likely to account for such changes. In instances where we believe one factor may have had a significantly greater impact than the other factors, we have noted that as well. However, in all instances, such insights are based only on our reasonable judgment and professional experience, and no assurance can be given as to the accuracy of our judgments.

Beginning January 1, 2018, the retail value of accommodations, food and beverage, and other services furnished to guests for free as an inducement to gamble is included in food, beverage, hotel and other revenue and offset as a deduction to gaming revenue in accordance with the new revenue standard. Our promotional allowance levels are determined based on various factors such as our marketing plans, competitive factors, economic conditions, and regulations. See Note 3: “Revenue Recognition and Promotional Allowances” to the condensed consolidated financial statements for more information.

Gaming revenue

Gaming revenue decreased by $15.9 million, or 2.3%, and $22.6 million, or 1.7%, for the three and six months ended June 30, 2018, respectively, as compared to the three and six months ended June 30, 2017, primarily due to the variances explained below.

Gaming revenue for our South/West segment decreased by $8.0 million, or 7.4%, and $4.1 million, or 2.1%, for the three and six months ended June 30, 2018, respectively, as compared to the three and six months ended June 30, 2017, primarily due to the impact of adopting the new revenue recognition standard which accounted for a decline of $16.9 million and $32.8 million, partially offset by higher gaming revenue for the three and six months ended June 30, 2018, respectively, primarily due to the acquisitions of 1st Jackpot and Resorts on May 1, 2017, which contributed a combined $14.6 million and $29.7 million of gaming revenue for the three and six months ended June 30, 2018, respectively, and increased gaming revenue at Zia Park Casino, as the local economy has shown improvement due to the increases in the price of oil since last year.

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Gaming revenue for our Midwest segment decreased by $6.4 million, or 3.1%, and $16.5 million, or 3.9%, for the three and six months ended June 30, 2018, respectively, as compared to the three and six months ended June 30, 2017, primarily due to the impact of adopting the new revenue recognition standard which accounted for $11.5 million and $21.8 million of the decline, partially offset by increased gaming revenue at Prairie State Gaming resulting from the acquisition of the assets of two smaller VGT route operators in Illinois during 2017 and organic growth in the number of locations serviced.

Gaming revenue for our Northeast segment decreased by $1.5 million, or 0.4%, and $2.1 million, or 0.3%, for the three and six months ended June 30, 2018, respectively, as compared to the three and six months ended June 30, 2017, primarily due to the impact of adopting the new revenue recognition standard which accounted for $6.4 million and $12.4 million of the decline and increased competition from the Maryland market, partially offset by increased gaming revenue at all four of our Ohio properties and Plainridge Park Casino, despite the negative impact of adopting the new revenue recognition standard as these newer properties continue to ramp.

Food, beverage, hotel and other revenue

Food, beverage, hotel and other revenue decreased by $18.5 million, or 12.1%, and $35.3 million, or 11.8%, for the three and six months ended June 30, 2018, respectively, as compared to the three and six months ended June 30, 2017, primarily due to the impact of adopting the new revenue recognition standard across all of our properties which resulted in $16.6 million and $32.1 million of the decline as well as decreased revenue from our Other category due to lower revenue at Rocket Speed, partially offset by increases in the South/West segment due to the acquisition of 1st Jackpot and Resorts on May 1, 2017 and higher revenues from Tropicana Las Vegas and Zia Park Casino as the local economy, which is primarily tied to the price of oil, has improved since last year.

Reimbursable management costs

Reimbursable management costs increased by $18.8 million and $40.2 million for the three and six months ended June 30, 2018, respectively, primarily due to a revision in our accounting for reimbursable costs associated with our management service contract for Casino Rama. Under the new revenue standard adopted on January 1, 2018, reimbursable costs, which primarily consist of payroll costs, must be recognized as revenue on a gross basis, with an offsetting amount charged to reimbursable management costs within operating expenses, as we are the controlling entity to the arrangement. Prior to this revision, we recorded these reimbursable amounts on a net basis.

Promotional allowances

Promotional allowances decreased by $46.0 million, or 100.0%, and $87.8 million, or 100.0%, for the three and six months ended June 30, 2018, respectively, as compared to the three and six months ended June 30, 2017, due to the impact of adopting the new revenue recognition standard which no longer permits this treatment. Promotional allowances are now reported as direct reductions in gaming and food, beverage, hotel and other revenues. See Note 2: “New Accounting Pronouncements” and Note 3: “Revenue Recognition and Promotional Allowances” to the condensed consolidated financial statements for more information.

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Operating Expenses

Operating expenses for the three and six months ended June 30, 2018 and 2017 were as follows (in thousands):


							Percentage
Three Months Ended June 30,	2018		2017		Variance		Variance
Gaming	$	350,694	$	345,156	$	5,538	1.6	%
Food, beverage, hotel and other		95,112		105,231		(10,119)	(9.6)	%
General and administrative		132,659		130,096		2,563	2.0	%
Reimbursable management costs		25,187		6,387		18,800	294.3	%
Depreciation and amortization		58,559		68,969		(10,410)	(15.1)	%
(Recovery) provision for loan loss and unfunded loan commitments to the JIVDC		(16,985)		5,635		(22,620)	(401.4)	%
Insurance recoveries		(68)		—		(68)	N/A
Total operating expenses	$	645,158	$	661,474	$	(16,316)	(2.5)	%


							Percentage
Six Months Ended June 30,	2018		2017		Variance		Variance
Gaming	$	691,210	$	677,209	$	14,001	2.1	%
Food, beverage, hotel and other		188,092		206,306		(18,214)	(8.8)	%
General and administrative		253,922		255,911		(1,989)	(0.8)	%
Reimbursable management costs		53,371		13,145		40,226	306.0	%
Depreciation and amortization		118,949		139,205		(20,256)	(14.6)	%
(Recovery) provision for loan loss and unfunded loan commitments to the JIVDC and impairment losses		(16,367)		5,635		(22,002)	(390.5)	%
Insurance recoveries		(68)		—		(68)	N/A
Total operating expenses	$	1,289,109	$	1,297,411	$	(8,302)	(0.6)	%

Gaming expense

Gaming expense increased by $5.5 million, or 1.6%, and $14.0 million, or 2.1%, for the three and six months ended June 30, 2018, respectively, as compared to the three and six months ended June 30, 2017, primarily due to the variances explained below.

Gaming expense for our Midwest segment increased $3.6 million, or 3.5% and $4.5 million, or 2.2%, for the three and six months ended June 30, 2018, respectively, as compared to the three and six months ended June 30, 2017, primarily due to increased gaming taxes as a result of increased taxable gaming revenue at Prairie State Gaming resulting from the acquisition of the assets of two smaller VGT route operators in Illinois during 2017 and organic growth in the number of locations serviced.

Gaming expense for our South/West segment increased by $2.2 million, or 5.6% and $8.3 million, or 11.5%, for the three and six months ended June 30, 2018, respectively, as compared to the three and six months ended June 30, 2017, primarily due to increased gaming taxes resulting from the acquisitions of 1st Jackpot and Resorts on May 1, 2017 and increased gaming taxes as a result of increased taxable gaming revenue at Zia Park Casino, as the local economy has shown improvements since last year, partially offset by decreased gaming taxes as a result of decreased taxable gaming revenue at our other properties.

Gaming expense for our Northeast segment decreased by $0.2 million, or 0.1%, for the three months ended June 30, 2018, as compared to the three months ended June 30, 2017, primarily due to decreased gaming taxes as a result of decreased taxable gaming revenue at Hollywood Casino at Charles Town Races due to continued increased competition from the Maryland market, partially offset by increased gaming taxes as a result of increased taxable gaming revenue at all four of our Ohio properties and Plainridge Park Casino.

Gaming expense for our Northeast segment increased by $1.3 million, or 0.3%, for the six months ended June 30, 2018, as compared to the six months ended June 30, 2017, primarily due to increased gaming taxes as a result of

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increased taxable gaming revenue at all four of our Ohio properties and Plainridge Park Casino, partially offset by decreased gaming taxes as a result of decreased taxable gaming revenue at Hollywood Casino Charles Town due to continued increased competition from the Maryland market.

Food, beverage, hotel and other expenses

Food, beverage, hotel and other expenses decreased by $10.1 million, or 9.6%, and $18.2 million, or 8.8%, for the three and six months ended June 30, 2018, respectively, as compared to the three and six months ended June 30, 2017, primarily due to the impact of adopting the new revenue recognition standard across all of our properties which resulted in $9.8 million and $18.8 million of the decline as well as decreased expenses from our Other category partially offset by the South/West segment due to the acquisition of 1st Jackpot and Resorts on May 1, 2017.

General and administrative expenses

General and administrative expenses include items such as compliance, facility maintenance, utilities, property and liability insurance, surveillance and security, and certain housekeeping services, as well as all expenses for administrative departments such as accounting, purchasing, human resources, legal and internal audit. General and administrative expenses also include cash-settled stock based awards, development costs and lobbying expenses.

General and administrative expenses increased by $2.6 million, or 2.0%, for the three months ended June 30, 2018, as compared to the three months ended June 30, 2017, primarily due to the variances explained below.

General and administrative expenses for Other increased by $6.6 million, or 21.1%, for the three months ended June 30, 2018, as compared to the three months ended June 30, 2017, primarily due to an increase in corporate overhead costs of $7.4 million for the three months ended June 30, 2018, primarily due to higher cash-settled stock based award charges of $1.7 million from increases in Penn stock price during the second quarter of 2018 that were larger than the increases during the second quarter of 2017, increased transaction costs related to the pending acquisition of Pinnacle, increased payroll and benefit costs primarily due to higher severance and bonus accruals, partially offset by lower expenses at Rocket Speed due to lower provider share expenses resulting from lower revenue.

General and administrative expenses for our South/West segment decreased by $2.5 million, or 8.3%, for the three months ended June 30, 2018, as compared to the three months ended June 30, 2017, primarily due to cost saving measures and favorable general liability insurance reserve adjustments at M Resort and Tropicana Las Vegas, partially offset by the acquisition of 1st Jackpot and Resorts on May 1, 2017.

General and administrative expenses for our Northeast segment decreased by $1.1 million, or 2.8%, for the three months ended June 30, 2018, as compared to the three months ended June 30, 2017, primarily due to a favorable adjustment to accrued commissions at Casino Rama related to the termination of the management service contract.

General and administrative expense decreased by $2.0 million, or 0.8%, for the six months ended June 30, 2018, as compared to the six months ended June 30, 2017, primarily due to the variances explained below.

General and administrative expenses for Other decreased by $1.4 million, or 2.2%, for the six months ended June 30, 2018, as compared to the six months ended June 30, 2017, primarily due to lower expenses at Rocket Speed due to lower provider share expenses resulting from lower revenue, partially offset by higher corporate overhead costs of $1.6 million primarily due to increased transaction costs related to the pending acquisition of Pinnacle, partially offset by lower cash-settled stock based award charges of $10.9 million due to a reduction in the number of cash-settled stock based awards in 2018 compared to 2017.

General and administrative expenses for our Northeast segment decreased by $1.0 million, or 1.3%, for the six months ended June 30, 2018, as compared to the six months ended June 30, 2017, primarily due to a favorable adjustment to accrued commissions at Casino Rama related to the termination of the management service contract.

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General and administrative expenses for our South/West segment increased by $1.9 million, or 3.5%, for the six months ended June 30, 2018, as compared to the six months ended June 30, 2017, primarily due to the acquisition of 1st Jackpot and Resorts on May 1, 2017, partially offset by cost saving measures and favorable general liability experience at M Resort and Tropicana Las Vegas.

Depreciation and amortization expense

Depreciation and amortization expense decreased by $10.4 million, or 15.1%, and $20.3 million, or 14.6%, for the three and six months ended June 30, 2018, respectively, as compared to the three and six months ended June 30, 2017, primarily due to decreases at the majority of our properties due to assets becoming fully depreciated, partially offset by the acquisitions of 1st Jackpot and Resorts on May 1, 2017, and increased amortization from the write off of the management contract with the JIVDC.

Other income (expenses)

Other income (expenses) for the three and six months ended June 30, 2018 and 2017 were as follows (in thousands):


							Percentage
Three Months Ended June 30,	2018		2017		Variance		Variance
Interest expense	$	(115,873)	$	(116,768)	$	895	(0.8)	%
Interest income		241		235		6	2.6	%
Income from unconsolidated affiliates		5,734		5,021		713	14.2	%
Loss on early extinguishment of debt and modification costs		(2,579)		—		(2,579)	N/A
Other		(48)		(173)		125	(72.3)	%
Total other expenses	$	(112,525)	$	(111,685)	$	(840)	0.8	%


							Percentage
Six Months Ended June 30,	2018		2017		Variance		Variance
Interest expense	$	(231,613)	$	(231,764)	$	151	(0.1)	%
Interest income		490		2,881		(2,391)	(83.0)	%
Income from unconsolidated affiliates		11,095		9,569		1,526	15.9	%
Loss on early extinguishment of debt and modification costs		(3,461)		(23,390)		19,929	(85.2)	%
Other		(44)		(1,966)		1,922	(97.8)	%
Total other expenses	$	(223,533)	$	(244,670)	$	21,137	(8.6)	%

Interest expense

Interest expense decreased by $0.9 million, or 0.8%, for the three months ended June 30, 2018, as compared to the three months ended June 30, 2017, primarily due $0.9 million from lower borrowing levels and interest rates on the revolver portion of the senior secured credit facility and $0.2 million decline in interest expense and lower accretion on the relocation fees for Hollywood Gaming at Dayton Raceway and Hollywood Gaming at Mahoning Valley Race Course, partially offset by $0.4 million higher interest payments on the financing obligation with GLPI due to the acquisition of 1st Jackpot and Resorts on May 1, 2017. The Company anticipates an annual rent reduction of approximately $12 million which will be effective November 1, 2018, in connection with the varialble rent reset provisions in the Master Lease. This benefit will likely be partially offset by a maximum annual rent escalator of $5.4 million which is also effective November 1, 2018, based on current projections.

Interest income

Interest income decreased by $2.4 million, or 83.0%, for the six months ended June 30, 2018, as compared to the six months ended June 30, 2017, primarily due to the cessation of interest accruals on our loan to the JIVDC beginning in the second quarter of 2017.

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Other

Other decreased by $1.9 million for the six months ended June 30, 2018 as compared to the six months ended June 30, 2017, primarily due to $1.8 million in costs related to the Company’s refinancing of its senior secured credit facility during of 2017.

Taxes

The Company calculates the provision for income taxes during interim reporting periods by applying an estimate of the annual effective tax rate to the full year projected pretax book income or loss excluding certain discrete items. The effective tax rate (income taxes as a percentage of income from operations before income taxes) including discrete items was 22.02% and 23.73% for the three and six months ended June 30, 2018, as compared to 26.71% and 27.52% for the three and six months ended June 30, 2017, primarily due to the reduced federal income tax rate as a result of the Tax Act and higher earnings before income taxes.

The Company’s effective income tax rate can vary from period to period depending on, among other factors, the geographic and business mix of our earnings, the level of our tax credits and the realizability of our deferred tax assets. Certain of these and other factors, including our history and projections of pretax earnings, are taken into account in assessing our ability to realize our net deferred tax assets.

Adjusted EBITDA

In addition to GAAP financial measures, adjusted EBITDA and adjusted EBITDA after Master Lease payments are used by management as important measures of the Company’s operating performance.

We define adjusted EBITDA as earnings before interest, taxes, stock compensation, debt extinguishment and financing charges, impairment charges, insurance recoveries and deductible charges, depreciation and amortization, changes in the estimated fair value of our contingent purchase price obligations, gain or loss on disposal of assets, the difference between budget and actual expense for cash-settled stock-based awards, preopening and significant transaction costs and other income or expenses. Adjusted EBITDA is also inclusive of income or loss from unconsolidated affiliates, with our share of non-operating items (such as depreciation and amortization) added back for our joint venture in Kansas Entertainment. Adjusted EBITDA excludes payments associated with our Master Lease agreement with GLPI as the transaction was accounted for as a financing obligation.

Adjusted EBITDA has economic substance because it is used by management as a performance measure to analyze the performance of our business, and is especially relevant in evaluating large, long-lived casino projects because they provide a perspective on the current effects of operating decisions separated from the substantial non-operational depreciation charges and financing costs of such projects. We also present adjusted EBITDA because it is used by some investors and creditors as an indicator of the strength and performance of ongoing business operations, including our ability to service debt, fund capital expenditures, acquisitions and operations. These calculations are commonly used as a basis for investors, analysts and credit rating agencies to evaluate and compare operating performance and value companies within our industry. In addition, gaming companies have historically reported adjusted EBITDA as a supplement to financial measures in accordance with GAAP. In order to view the operations of their casinos on a more stand-alone basis, gaming companies, including us, have historically excluded from their adjusted

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EBITDA calculations certain corporate expenses that do not relate to the management of specific casino properties. However, adjusted EBITDA is not a measure of performance or liquidity calculated in accordance with GAAP. Adjusted EBITDA information is presented as a supplemental disclosure, as management believes that it is a widely used measure of performance in the gaming industry, is used in the valuation of gaming companies, and that it is considered by many to be a key indicator of the Company’s operating results. Management uses adjusted EBITDA as an important measure of the operating performance of its segments, including the evaluation of operating personnel. Adjusted EBITDA should not be construed as an alternative to operating income, as an indicator of the Company’s operating performance, as an alternative to cash flows from operating activities, as a measure of liquidity, or as any other measure of performance determined in accordance with GAAP. The Company has significant uses of cash flows, including capital expenditures, interest payments, taxes and debt principal repayments, which are not reflected in adjusted EBITDA. It should also be noted that other gaming companies that report adjusted EBITDA information may calculate adjusted EBITDA in a different manner than the Company and therefore, comparability may be limited.

Adjusted EBITDA after Master Lease payments is a measure we believe provides useful information to investors because it is an indicator of the performance of ongoing business operations after incorporating the cash flow impact of Master Lease payments to GLPI. In addition, adjusted EBITDA after Master Lease payments is the metric that our executive management team is measured against for incentive based compensation purposes.

A reconciliation of the Company’s net income (loss) per GAAP to adjusted EBITDA and adjusted EBITDA after Master Lease payments, as well as the Company’s income (loss) from operations per GAAP to adjusted EBITDA, is included below. Additionally, a reconciliation of each segment’s income (loss) from operations to adjusted EBITDA is also included below. On a segment level, income (loss) from operations per GAAP, rather than net income (loss) per GAAP is reconciled to adjusted EBITDA due to, among other things, the impracticability of allocating interest expense, interest income, income taxes and certain other items to the Company’s segments on a segment by segment basis. Management believes that this presentation is more meaningful to investors in evaluating the performance of the Company’s segments and is consistent with the reporting of other gaming companies.

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The following table presents a reconciliation of the Company’s most directly comparable GAAP financial measures to adjusted EBITDA and adjusted EBITDA after Master Lease payments, for the three and six months ended June 30, 2018 and 2017 (in thousands):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Net income	$	53,988	$	17,079	$	99,425	$	22,183
Income tax (benefit) provision		15,242		6,225		30,931		8,423
Other (1)		2,627		173		3,505		25,356
Income from unconsolidated affiliates		(5,734)		(5,021)		(11,095)		(9,569)
Interest income		(241)		(235)		(490)		(2,881)
Interest expense		115,873		116,768		231,613		231,764
Income from operations	$	181,755	$	134,989	$	353,889	$	275,276
(Gain) loss on disposal of assets		(52)		52		3		7
(Recovery) provision for loan loss and unfunded loan commitments and impairment losses		(16,985)		5,635		(16,367)		5,635
Charge for stock compensation		3,003		1,801		5,932		3,974
Contingent purchase price		202		1,362		1,337		3,922
Cash-settled stock award variance		7,800		6,092		338		11,256
Pre-opening and significant transaction costs		5,879		2,174		11,972		2,745
Depreciation and amortization		58,559		68,969		118,949		139,205
Insurance recoveries		(68)		—		(68)		—
Income from unconsolidated affiliates		5,734		5,021		11,095		9,569
Non-operating items for Kansas JV		1,279		1,309		2,572		3,260
Adjusted EBITDA	$	247,106	$	227,404	$	489,652	$	454,849
Master Lease payments		(115,916)		(113,968)		(231,790)		(226,418)
Adjusted EBITDA, after Master Lease payments	$	131,190	$	113,436		257,862		228,431

(1)

June 30, 2017 six months figure includes loss on early extinguishment of debt, modification costs and financing charges of $25.1 million.

The reconciliation of each segment’s income (loss) from operations to adjusted EBITDA for the three and six months ended June 30, 2018 and 2017 was as follows (in thousands):



Three Months Ended June 30, 2018	Northeast		South/West		Midwest		Other (1)		Total
Income (loss) from operations	$	121,746	$	55,352	$	63,646	$	(58,989)	$	181,755
Charge for stock compensation		—		—		—		3,003		3,003
Recovery of loan loss and unfunded loan commitments to the JIVDC		—		(16,985)		—		—		(16,985)
Depreciation and amortization		14,911		8,396		8,012		27,240		58,559
Contingent purchase price		302		—		(100)		—		202
Cash-settled stock award variance		—		—		—		7,800		7,800
Pre-opening and significant transaction costs		—		—		—		5,879		5,879
(Gain) loss on disposal of assets		(32)		(47)		32		(5)		(52)
Insurance recoveries		—		(68)		—		—		(68)
Income (loss) from unconsolidated affiliates		—		—		6,141		(407)		5,734
Non‑operating items for Kansas JV		—		—		1,279		—		1,279
Adjusted EBITDA	$	136,927	$	46,648	$	79,010	$	(15,479)	$	247,106

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Three Months Ended June 30, 2017	Northeast		South/West		Midwest		Other (1)		Total
Income (loss) from operations	$	108,119	$	20,062	$	59,283	$	(52,475)	$	134,989
Charge for stock compensation		—		—		—		1,801		1,801
Provision for loss on loan to the JIVDC		—		5,635		—		—		5,635
Depreciation and amortization		21,525		9,353		9,508		28,583		68,969
Contingent purchase price		277		—		16		1,069		1,362
Cash-settled stock award variance		—		—		—		6,092		6,092
Pre-opening and significant transaction costs		—		—		—		2,174		2,174
(Gain) loss on disposal of assets		(45)		(1)		88		10		52
Income (loss) from unconsolidated affiliates		—		—		5,286		(265)		5,021
Non‑operating items for Kansas JV		—		—		1,309		—		1,309
Adjusted EBITDA	$	129,876	$	35,049	$	75,490	$	(13,011)	$	227,404



Six Months Ended June 30, 2018	Northeast		South/West		Midwest		Other (1)		Total
Income (loss) from operations	$	237,437	$	91,238	$	129,163	$	(103,949)	$	353,889
Charge for stock compensation		—		—		—		5,932		5,932
Insurance recoveries		—		(68)		—		—		(68)
Recovery of loan loss and unfunded loan commitments to the JIVDC and impairment losses		—		(16,985)		—		618		(16,367)
Depreciation and amortization		30,083		17,553		16,498		54,815		118,949
Contingent purchase price		1,404		—		(67)		—		1,337
Cash-settled stock award variance		—		—		—		338		338
Pre-opening and significant transaction costs		—		—		—		11,972		11,972
Loss (gain) on disposal of assets		10		(41)		45		(11)		3
Income (loss) from unconsolidated affiliates		—		—		11,954		(859)		11,095
Non-operating items for Kansas JV		—		—		2,572		—		2,572
Adjusted EBITDA	$	268,934	$	91,697	$	160,165	$	(31,144)	$	489,652



Six Months Ended June 30, 2017	Northeast		South/West		Midwest		Other (1)		Total
Income (loss) from operations	$	210,752	$	47,180	$	120,813	$	(103,469)	$	275,276
Charge for stock compensation		—		—		—		3,974		3,974
Provision for loss on loan to the JIVDC		—		5,635		—		—		5,635
Depreciation and amortization		44,548		18,570		19,179		56,908		139,205
Contingent purchase price		1,182		—		25		2,715		3,922
Cash-settled stock award variance		—		—		—		11,256		11,256
Pre-opening and significant transaction costs		—		—		—		2,745		2,745
(Gain) loss on disposal of assets		(31)		5		29		4		7
Income (loss) from unconsolidated affiliates		—		—		10,290		(721)		9,569
Non-operating items for Kansas JV		—		—		3,260		—		3,260
Adjusted EBITDA	$	256,451	$	71,390	$	153,596	$	(26,588)	$	454,849

Adjusted EBITDA for our South/West segment increased by $11.6 million, or 33.1% and $20.3 million, or 28.4%, for the three and six months ended June 30, 2018, respectively, as compared to the three and six months ended June 30, 2017, primarily due to the acquisitions of 1st Jackpot and Resorts on May 1, 2017 which contributed adjusted EBITDA of $4.8 million and $10.3 million for the three and six months ended June 30, 2018 and higher adjusted EBITDA at M Resort, Tropicana Las Vegas, Hollywood Casino Gulf Coast and Zia Park Casino, as the local economy has improved since last year primarily due to higher oil prices.

Adjusted EBITDA for our Northeast segment increased by $7.1 million, or 5.4%, and $12.5 million, or 4.9%, for the three and six months ended June 30, 2018, respectively, as compared to the three and six months ended June 30, 2017, primarily due to improved results at all four of our Ohio properties, Plainridge Park Casino and Casino Rama due

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to a favorable adjustment to accrued commissions due to the termination of the management service contract, partially offset by decreased results at Hollywood Casino at Penn National Race Course.

Adjusted EBITDA for our Midwest segment increased by $3.5 million, or 4.7%, and $6.6 million, or 4.3%, for the three and six months ended June 30, 2018, respectively, as compared to the three and six months ended June 30, 2017, primarily due to improved results at Argosy Casino Riverside, Hollywood Casino St. Louis, Hollywood Casino at Kansas Speedway and Prairie State Gaming resulting from the acquisition of two smaller VGT route operators in Illinois during 2017 and organic growth in the number of locations serviced, partially offset by lower adjusted EBITDA at Hollywood Casino Aurora and Hollywood Casino Lawrenceburg.

Adjusted EBITDA for Other decreased by $2.5 million, or 19.0%, and $4.6 million, or 17.1%, for the three and six months ended June 30, 2018, as compared to the three and six months ended June 30, 2017, primarily due to declines in adjusted EBITDA at Rocket Speed.

Liquidity and Capital Resources

Historically and prospectively, our primary sources of liquidity and capital resources have been and will be cash flow from operations, borrowings from banks and proceeds from the issuance of debt and equity securities.

Net cash provided by operating activities totaled $207.1 million and $213.9 million for the six months ended June 30, 2018 and 2017, respectively. The decrease in net cash provided by operating activities of $6.8 million for six months ended June 30, 2018, compared to the corresponding period in the prior year, was primarily comprised of, an increase in cash paid to suppliers and vendors of $47.7 million, primarily due to the acquisition of 1st Jackpot and Resorts on May 1, 2017, higher cash paid for taxes of $12.2 million, primarily due to refunds received in the prior year, increase in cash paid to employees of $8.7 million and higher cash paid for interest of $7.4 million, primarily due to the corporate debt refinancing in 2017 and the timing of payments, partially offset by an increase in cash receipts from customers of $68.6 million, primarily due to the acquisition noted above.

Net cash used in investing activities totaled $79.1 million and $166.2 million for the six months ended June 30, 2018 and 2017, respectively. The decrease in net cash used in investing activities of $87.1 million for the six months ended June 30, 2018, compared to the corresponding period in the prior year, was primarily due to the purchase of a Category 4 gaming licenses in York and Berks/Lancaster Counties, Pennsylvania for $57.6 million compared to acquisitions costs of $126.4 million related to acquisition of 1st Jackpot and Resorts on May 1, 2017, lower project capital expenditures of $10.0 million, and net higher proceeds from sale of the JIVDC loan of $13.0 million.

Net cash used in financing activities totaled $205.8 million and $52.8 million for the six months ended June 30, 2018 and 2017, respectively. The increase in net cash used in financing activities of $153.0 million for the six months ended June 30, 2018, compared to the corresponding period in the prior year, was primarily due to lower proceeds from the revolving credit facility and issuance of long-term debt of $1,316.8 million due to the refinancing of corporate debt in 2017, increased payments on our financing obligation with GLPI of $3.4 million compared to $82.6 million proceeds from GLPI for financing the acquisition of 1st Jackpot and Resorts on May 1, 2017, partially offset lower payments on the revolving credit facility and long-term debt of $1,222.4 million due to the previously mentioned refinancing, lower payments on other long-term obligations of $20.6 million, primarily due to the payoff of a corporate airplane loan in 2017, and $5.8 million for repurchases of common stock in 2017.

Capital Expenditures

Capital expenditures are accounted for as either project or maintenance (replacement) capital expenditures. Project capital expenditures are for fixed asset additions that expand an existing facility or create a new facility. Maintenance capital expenditures are expenditures to replace existing fixed assets with a useful life greater than one year that are obsolete, worn out or no longer cost effective to repair.

The following table summarizes our expected project capital expenditures by segment for the fiscal year ending December 31, 2018, and actual expenditures for the six months ended June 30, 2018 (excluding licensing fees and net of

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reimbursements). The table below should not be utilized to predict future expected project capital expenditures subsequent to 2018.


	Project Capital Expenditures
	Expected for Year		Expenditure for
	Ending December 31,		Six Months Ended		Balance to Expend
Segment	2018		June 30, 2018		in 2018
	(in millions)

Northeast	$	0.1	$	0.1	$	—
South/West		1.9		1.6		0.3
Midwest		—		—		—
Other		0.1		—		0.1
Total	$	2.1	$	1.7	$	0.4


	Maintenance Capital Expenditures
	Expected for Year		Expenditure for
	Ending December 31,		Six Months Ended		Balance to Expend
Segment	2018		June 30, 2018		in 2018
	(in millions)

Northeast	$	33.1	$	11.4	$	21.7
South/West		19.0		7.1		11.9
Midwest		30.2		9.4		20.8
Other		21.3		3.4		17.9
Total	$	103.6	$	31.3	$	72.3

Project capital expenditures for our South/West segment are for improvements to food and beverage offerings at the Tropicana Las Vegas.

In January 2018, the Company secured a Category 4 satellite casino license in York County, Pennsylvania and paid $50.1 million for the gaming license. In April 2018, the Company secured a second Category 4 satellite casino license in Berks/Lancaster County, Pennsylvania and paid $7.5 million for the gaming license. At the time of this filing, the timing and scope of our future investment of capital for these projects has not been determined and, as such, the table above does not include any amounts related to these projects.

Cash generated from operations and cash available under the revolving credit facility portion of our senior secured credit facility funded our project and maintenance capital expenditures in 2018 to date.

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Senior Secured Credit Facility

On January 19, 2017, the Company entered into a new senior secured credit facility. The new senior secured credit facility consists of a five year $700 million revolving credit facility, a five year $300 million Term Loan A facility, and a seven year $500 million Term Loan B facility (the “Amended Credit Facilities”). The Term Loan A facility was priced at LIBOR plus a spread (ranging from 3.00% to 1.25%) based on the Company’s consolidated total net leverage ratio as defined in the new senior secured credit facility. The Term Loan B facility was priced at LIBOR plus 2.50%, with a 0.75% LIBOR floor. At June 30, 2018, the Company’s senior secured credit facility had a gross outstanding balance of $590.0 million, consisting of a $281.3 million Term Loan A facility, and a $308.7 million Term Loan B facility. No amounts were outstanding on our revolving credit facility at June 30, 2018. Additionally, the Company had conditional obligations under letters of credit issued pursuant to the senior secured credit facility with face amounts aggregating $22.0 million, resulting in $678.0 million of available borrowing capacity as of June 30, 2018 under the revolving credit facility. In connection with the repayment of the previous senior secured credit facility, the Company recorded $1.7 million in refinancing costs and a $2.3 million loss on the early extinguishment of debt for the three and six months ended June 30, 2018 related to the write-off of deferred debt issuance costs and the discount on the Term Loan B facility of the previous senior secured credit facility. In connection with our decision to prepay Term Loan B principal loans, the Company recorded a $2.6 million and $3.5 million loss on the early extinguishment of debt for the three and six months ended June 30, 2018, respectively.

Redemption of 5.875% Senior Subordinated Notes

5.625% Senior Unsecured Notes

The Company used a portion of the proceeds from the issuance of the 5.625% Notes to retire its existing 5.875% Notes and to fund related transaction fees and expenses.

The Company used loans funded under the Amended Credit Facilities and a portion of the proceeds of the 5.625% Notes to repay amounts outstanding under its then existing Credit Agreement and to fund related transaction fees and expenses and for general corporate purposes.

Master Lease Financing Obligation with GLPI

The Company makes significant payments to GLPI under the Master Lease which totaled $115.9 million and $231.8 million for the three and six months ended June 30, 2018, respectively, and $114.0 million and $226.4 million for the three and six months ended June 30, 2017, respectively. As of June 30, 2018, the Company financed with GLPI real property assets associated with twenty of the Company’s gaming and related facilities used in the Company’s operations.

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Covenants

The Company’s senior secured credit facility and $400 million 5.625% Notes require it, among other obligations, to maintain specified financial ratios and to satisfy certain financial tests, including fixed charge coverage, interest coverage, senior leverage and total leverage ratios. In addition, the Company’s senior secured credit facility and senior unsecured 5.625% Notes restrict, among other things, its ability to incur additional indebtedness, incur guarantee obligations, amend debt instruments, pay dividends, create liens on assets, make investments, engage in mergers or consolidations, and otherwise restrict corporate activities.

At June 30, 2018, the Company was in compliance with all required financial covenants.

Outlook

Based on our current level of operations, we believe that cash generated from operations and cash on hand, together with amounts available under our senior secured credit facility, will be adequate to meet our financing obligation, debt service requirements, capital expenditures and working capital needs for the foreseeable future. However, we cannot be certain that our business will generate sufficient cash flow from operations, that our anticipated earnings projections will be realized, or that future borrowings will be available under our senior secured credit facility or otherwise will be available to enable us to service our indebtedness, including the senior secured credit facility and the $400 million 5.625% Notes, to retire or redeem the $400 million 5.625% Notes when required or to make anticipated capital expenditures. In addition, we expect a majority of our future growth to come from acquisitions of gaming properties at reasonable valuations, greenfield projects, jurisdictional expansions and property expansion in under-penetrated markets. If we consummate significant acquisitions in the future or undertake any significant property expansions, our cash requirements may increase significantly and we may need to make additional borrowings or complete equity or debt financings to meet these requirements. Our future operating performance and our ability to service or refinance our debt will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control. See “Risk Factors—Risks Related to Our Capital Structure” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 for a discussion of the risks related to our capital structure.

We have historically maintained a capital structure comprising a mix of equity and debt financing. We vary our leverage to pursue opportunities in the marketplace and in an effort to maximize our enterprise value for our shareholders. We expect to meet our debt obligations as they come due through internally generated funds from operations and/or refinancing them through the debt or equity markets prior to their maturity.

We expect to fund the anticipated acquisition of Pinnacle with a combination of proceeds from asset divestitures and the sale-leaseback of Plainridge Park Casino, existing cash on our balance sheet, new debt financing and internally generated cash flow prior to the acquisition. Penn has received commitments of senior secured term loan A totaling $430.2 million, senior secured term loan B totaling $1.17 billion and a $380 million unsecured bridge facility in connection with the acquisition. We anticipate that the additional cash flow resulting from the acquisition will allow us to pay down debt on an accelerated basis after closing.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The table below provides information at June 30, 2018 about our financial instruments that are sensitive to changes in interest rates. For debt obligations, the table presents notional amounts maturing during the period and the related weighted-average interest rates by maturity dates. Notional amounts are used to calculate the contractual

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payments to be exchanged by maturity date and the weighted-average interest rates are based on implied forward LIBOR rates at June 30, 2018.


	07/1/2018 -			07/01/19 -			07/01/20 -			07/01/21 -			07/01/22 -								Fair Value
	06/30/19			06/30/20			06/30/21			06/30/22			06/30/23			Thereafter			Total		06/30/18
	(in thousands)
Long-term debt:
Fixed rate	$	—		$	—		$	—		$	—		$	—		$	400,000		$	400,000	$	375,000
Average interest rate																	5.63	%

Variable rate	$	21,875		$	29,375		$	35,000		$	215,000		$	5,000		$	283,750		$	590,000	$	591,945
Average interest rate (1)		4.89	%		4.85	%		4.84	%		4.72	%		5.44	%		5.43	%		—

(1)

Estimated rate, reflective of forward LIBOR plus the spread over LIBOR applicable to variable-rate borrowing.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Controls and Procedures

The Company’s management, under the supervision and with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of June 30, 2018, which is the end of the period covered by this Quarterly Report on Form 10-Q. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well-designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2018 to ensure that information required to be disclosed by the Company in reports we file or submit under the Exchange Act is (i) recorded, processed, summarized, evaluated and reported, as applicable, within the time periods specified in the United States Securities and Exchange Commission’s rules and forms and (ii) accumulated and communicated to the Company’s management, including the Company’s principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures.

Changes in Internal Control over Financial Reporting

There were no changes that occurred during the fiscal quarter covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonable likely to materially affect, our internal controls over financial reporting.

Table of Contents

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are not aware of any new legal proceedings, which are required to be disclosed, or any material changes to any legal proceedings previously described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

ITEM 1A. RISK FACTORS

We have announced our intent to expand our sports betting operations. There can be no assurance that we will be able to compete effectively or that our expansion initiatives will be successful and generate sufficient returns on our investment.

During the second quarter of 2018, the U.S. Supreme Court overturned the Federal ban on sports betting. We anticipate accepting wagers on sporting events during the third quarter of 2018 at our casinos located in Mississippi, West Virginia, and potentially Pennsylvania. Our ability to be successful with our proposed sports betting operations is dependent on potential legislation in various jurisdictions that affect the sports betting industry in the United States. We continue to engage with state lawmakers in our other jurisdictions to advocate for the passage of sports betting laws with reasonable tax rates and license fees, similar to legislation enacted in West Virginia, Mississippi and Nevada.

Our sports betting operations will compete in a rapidly evolving and highly competitive market against an increasing number of competitors. In order to compete successfully, we may need to enter into agreements with strategic partners and other third party vendors and we may not be able to do so on terms that are favorable to us. The success of our proposed sports betting operations is dependent on a number of additional factors that are beyond our control, including the ultimate tax rates and license fees charged by jurisdictions across the United States; our ability to gain market share in a newly developing market; our ability to compete with new entrants in the market; changes in consumer demographics and public tastes and preferences; and the availability and popularity of other forms of entertainment. There can be no assurance that we will be able to compete effectively or that our expansion will be successful and generate sufficient returns on our investment.

ITEM 2 . UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

On February 3, 2017, the Company announced a repurchase program pursuant to which the Board of Directors authorized the repurchase of up to $100 million of the Company’s common stock, which can be executed over a two-year period. During 2017, the Company repurchased a total of 1,264,149 shares at an average price of $19.59. The remaining maximum dollar value of shares that may still be repurchased under the program is $75.2 million. The Company did not repurchase any shares during the three and six months ended June 30, 2018. All of the repurchased shares have been retired.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

Table of Contents

ITEM 6. EXHIBITS

Exhibit		Description of Exhibit

2.1		Agreement and Plan of Merger dated as of June 18, 2018, among VICI Properties Inc., Riverview Merger Sub Inc., Penn Tenant II, LLC, Penn National Gaming, Inc., Bossier Casino Venture (HoldCo), Inc. and Silver Slipper Gaming, LLC. (Incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K, filed on June 19, 2018).

10.1#		Penn National Gaming, Inc. 2018 Long Term Incentive Compensation Plan. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on June 13, 2018).

10.2		Membership Interest Purchase Agreement dated as of June 18, 2018, among VICI Properties Inc., Riverview Merger Sub Inc., Penn Tenant II, LLC and Penn National Gaming, Inc. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on June 19, 2018).

10.3*		Fifth Amendment to the Master Lease.

31.1*		CEO Certification pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934.

31.2*		CFO Certification pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934.

32.1*		CEO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2*		CFO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101*		Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Condensed Consolidated Balance Sheets at June 30, 2018 and December 31, 2017, (ii) the Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2018 and 2017, (iii) the Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2018 and 2017, (iv) the Condensed Consolidated Statements of Changes in Shareholders’ Equity for the six months ended June 30, 2018, (v) the Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017 and (vi) the notes to the Condensed Consolidated Financial Statements, tagged as blocks of text.

# Compensation plans and arrangements for executives and others.

* Filed herewith

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	PENN NATIONAL GAMING, INC.

August 1, 2018	By:	/s/ Timothy J. Wilmott
		Timothy J. Wilmott
		Chief Executive Officer (Principal Executive Office and Duly Authorized Officer)

penn_Ex10_3

Exhibit 10.3

FIFTH AMENDMENT TO MASTER LEASE

THIS FIFTH AMENDMENT TO MASTER LEASE (this “Amendment”) is being entered into on this 19th day of June, 2018 (the “Effective Date”), by and between Landlord and Tenant, as more fully set forth herein, and shall amend that certain Master Lease, dated November 1, 2013, as amended to the date hereof (collectively, the “Master Lease”), by and among GLP Capital, L.P. (together with its permitted successors and assigns, “Landlord”) and Penn Tenant, LLC (together with its permitted successors and assigns, “Tenant”), pursuant to which Tenant leases certain Leased Property, as further defined in the Master Lease (the “Existing Leased Property”). Landlord and Tenant each desire to remove certain portions of the Existing Leased Property as identified and defined in Annex A attached hereto and incorporated herein (the “Removed Leased Property”) from the terms, covenants and conditions of the Master Lease. Capitalized terms used herein and not otherwise defined herein shall have the meaning ascribed to them in the Master Lease.

BACKGROUND:

WHEREAS, Landlord and Tenant each desire to amend the Master Lease as more fully described herein.

NOW, THEREFORE, in consideration of the provisions set forth in the Master Lease as amended by this Amendment, including, but not limited to, the mutual representations, warranties, covenants and agreements contained therein and herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby respectively acknowledged, and subject to the terms and conditions thereof and hereof, the parties, intending to be legally bound, hereby agree that the Master Lease shall be amended as follows:

ARTICLE I

REMOVAL OF REMOVED LEASED PROPERTY

1.1 Exhibit B to the Master Lease is hereby amended to remove the description of the Removed Leased Property as set forth in Annex A attached hereto and incorporated hereby by this reference from the description of the Land.

ARTICLE II

AMENDMENT TO MEMORANDUM OF LEASE

Landlord and Tenant shall enter into an amendment to any memorandum of lease which may have been recorded in accordance with Article XXXIII of the Master Lease against the Removed Leased Property, in form suitable for recording in the county or other application location in which a Removed Leased Property is located which amendment is pursuant to this Amendment. Landlord shall pay all costs and expenses of recording any such amendment to memorandum.

ARTICLE III

AUTHORITY TO ENTER INTO AMENDMENT

Each party represents and warrants to the other that: (i) this Amendment and all other documents executed or to be executed by it in connection herewith have been duly authorized and shall be binding upon it; (ii) it is duly organized, validly existing and in good standing under the laws of the state of its formation and is duly authorized and qualified to perform this Amendment and the Master Lease, as amended hereby, within the State(s) where any portion of the Leased Property is located, and (iii) neither this Amendment, the Master Lease, as amended hereby, nor any other document executed or to be executed in connection herewith violates the terms of any other agreement of such party.

ARTICLE IV

MISCELLANEOUS

4.1 Brokers. Tenant warrants that it has not had any contact or dealings with any Person or real estate broker which would give rise to the payment of any fee or brokerage commission in connection with this Amendment, and Tenant shall indemnify, protect, hold harmless and defend Landlord from and against any liability with respect to any fee or brokerage commission arising out of any act or omission of Tenant. Landlord warrants that it has not had any contact or dealings with any Person or real estate broker which would give rise to the payment of any fee or brokerage commission in connection with this Amendment, and Landlord shall indemnify, protect, hold harmless and defend Tenant from and against any liability with respect to any fee or brokerage commission arising out of any act or omission of Landlord.

4.2 Costs and Expenses; Fees. Each party shall be responsible for and bear all of its own expenses incurred in connection with pursuing or consummating this Amendment and the transactions contemplated by this Amendment, including, but not limited to, fees and expenses, legal counsel, accountants, and other facilitators and advisors.

4.3 Choice of Law and Forum Selection Clause. This Amendment shall be construed and interpreted, and the rights of the parties shall be determined, in accordance with the substantive Laws of the State of New York without regard to the conflict of law principles thereof or of any other jurisdiction.

4.4 Counterparts; Facsimile Signatures. This Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. In proving this Amendment, it shall not be necessary to produce or account for more than one such counterpart signed by the party against whom enforcement is sought. Any counterpart may be executed by facsimile signature and such facsimile signature shall be deemed an original.

4.5 No Further Modification. Except as modified hereby, the Master Lease remains in full force and effect.

[Signature Page to Follow]

IN WITNESS WHEREOF, this Amendment has been duly executed and delivered by each of the undersigned as of the date first above written.


	LANDLORD:

	GLP CAPITAL, L.P.

	By:	/s/Brandon J. Moore
		Brandon J. Moore
		SVP, General Counsel & Secretary


	TENANT:

	PENN TENANT, LLC

	By:	Penn National Gaming, Inc.
		its managing member

	By:	/s/ William J. Fair
	Name:	William J. Fair
	Title:	Executive Vice President and CFO

ANNEX A

LEGAL DESCRIPTION REMOVED FROM EXHIBIT B

(See attached)


	Page 1 of 3
RX252WL	Rev. 06/09


Ver. Date 06/22/2016	PID 93592

PARCEL 19-WLl

WOO/LUC-75-30.70/0.00

ALL RIGHT, TITLE AND INTEREST IN FEE SIMPLE

IN THE FOLLOWING DESCRIBED PROPERTY

INCLUDING LIMITATION OF ACCESS

Grantor/Owner, his heirs, executors, administrators, successors and assigns forever, are hereby divested of any and all abutter’s rights, including access rights in, over and to the within described real estate, including such rights with respect to any highway facility constructed thereon (as used herein, the expression “Grantor/Owner” includes the plural, and words in the masculine include the feminine or neuter).

[Surveyor’s description of the premises follows]

Situated in the State of Ohio, County of Lucas, City of Toledo, River Tract 85, U.S. Reserve T3, being part of a tract of land conveyed to GLP Capital, L.P as described in instrument number 201401080000326 in the Lucas County Recorder’s Office and being more specifically described as follows:

Being a parcel lying on the west side of the proposed centerline of right of way of Interstate Route 75 as part of the WOO/LUC-75-30.70/0.00 Centerline Plat made by Northwest Consultants, Inc. for the Ohio Department of Transportation as recorded in Instrument No. 201601270003448 of the records of Lucas County and being located within the following described points in the boundary thereof:

Commencing at an existing monument box at the intersection of Miami Street and Oregon Road being at station 28+44.85 of the centerline of Miami Street and 829.28 feet right of station 479+79.31 of the proposed centerline of right of way of Interstate Route 75;

Thence South 75 degrees 40 minutes 18 seconds West, 994.91 feet on the centerline of Miami Street to a point, said point being station 18+49.94 of the centerline of Miami Street and 156.41 feet left of station 478+35.1l of the proposed centerline of right of way of Interstate Route 75;

Thence North 14 degrees 19 minutes 42 seconds West, 234.20 feet to an iron pin set, said iron pin set being at 234.20 feet left of station 18+49.94 of the centerline of Miami Street and 190.00 feet left of station 480+60.11 of the proposed centerline of right of way of Interstate Route 75 and also being THE TRUE POINT OF BEGINNING for the parcel of land herein described;


	Page 2 of 3
RX252WL	Rev. 06/09

Thence, North 05 degrees 48 minutes 15 seconds East, 142.82 feet on the proposed limited access right of way line to an iron pin set, said iron pin set being 165.00 feet left of station 481+96.49 of the proposed centerline of right of way of Interstate Route 75;

Thence North 03 degrees 15 minutes 49 seconds West, 67.72 feet on the proposed limited access right of way line to an iron pin set, said iron pin set being 165.00 feet left of station 486+62.32;

Thence North 03 degrees 54 minutes 47 seconds East, 415.19 feet on the proposed limited access right of way line to a point, said point being 130.00 feet left of station 486+65.73;

Thence North 75 degrees 38 minutes 39 seconds East, 106.50 feet on the proposed limited access right of way line to a point, said point being 27.42 feet left of station 486+94.00;

Thence South 04 degrees 06 minutes 18 seconds West, 155.85 feet on the existing limited access right of way line to a point, said point being 36.93 feet left of station 485+39.28;

Thence South 81 degrees 57 minutes 05 seconds West, 34.35 feet on the existing limited access right of way line to a point, said point being 70.96 feet left of station 485+34.63;

Thence South 05 degrees 14 minutes 13 seconds West, 332.90 feet on the existing limited access right of way line to a point, said point being 111.99 feet left of station 482+09.4l;

Thence South 21 degrees 06 minutes 38 seconds West, 130.68 feet on the existing limited access right of way line to a point, said point being 167.54 feet left of station 480+93.94;

Thence South 27 degrees 59 minutes 23 seconds West, 41.49 feet on the existing limited access right of way line to the TRUE POINT OF BEGINNING and containing 0.917acres, of which 0.000 acres is PRO (Present Road Occupied), leaving a net take of 0.917 acres, more or less, subject to legal highways and other easements of record.

The existing LA R/W easement to the State of Ohio excepts and easement to the City of Rossford for sanitary sewer, and reserves the following rights to the grantor: ponds for grinding sand; access roads, railroad tracks, pipelines and utilities at any location between piers and abutments; access to maintain an existing sand sewer line along the north side of Miami Street. For complete details of the exceptions please see Deed Volume 1782 Page 87 in the Lucas County Recorder’s Office.

The above described area is contained within Lucas County Auditor’s permanent parcel number 18‑76138


	Page 3 of 3
RX252WL	Rev. 06/09

Grantors claim title by instruments recorded Instrument Number 201401080000326 in the Lucas County Recorder's Office.

Description based on a survey conducted by Northwest Consultants, Inc. during the summer of 2013 under the direction and supervision of Matthew J. Puhl, Registered Surveyor 8363 of the State of Ohio

Bearings used herein are based on Ohio State Plane Coordinate System, North Zone NAD83(2011) and are for this project use only.

All iron pins set referenced herein are 3/4 inch diameter x 30 inch long iron bars with 2-1/2 inch aluminum cap stamped “ODOT R/W, P.S. 8363”.

This description was prepared by Andrew M Bernhard and reviewed by Matthew J. Puhl, Registered Surveyor 8363 of the State of Ohio.



/s/ Matthew J. Puhl		06-22-2016
Matthew J. Puhl		Date
Registered Surveyor of Ohio: No. S-008363


	Page 1 of 3
RX252WL	Rev. 06/09


Ver. Date 01/28/2016	PID 93592

PARCEL 19-WL2

WOO/LUC-75-30.70/0.00

ALL RIGHT, TITLE AND INTEREST IN FEE SIMPLE

IN THE FOLLOWING DESCRIBED PROPERTY

INCLUDING LIMITATION OF ACCESS

Grantor/Owner, his heirs, executors, administrators, successors and assigns forever, are hereby divested of any and all abutter’s rights, including access rights in, over and to the within described real estate, including such rights with respect to any highway facility constructed thereon (as used herein, the expression “Granter/Owner” includes the plural, and words in the masculine include the feminine or neuter).

[Surveyor’s description of the premises follows]

Being a parcel lying on the east side of the proposed centerline of right of way of Interstate Route 75 as part of the WOO/LUC-75-30.70/0.00 Centerline Plat made by Northwest Consultants, Inc. for the Ohio Department of Transportation as recorded in Instrument No. 201601270003448 of the records of Lucas County and being located within the following described points in the boundary thereof:

Commencing at an existing monument box at the intersection of Miami Street and Oregon Road being at station 28+44.85 of the centerline of Miami Street and 829.28 feet right of station 479+79.3l of the proposed centerline of right of way of Interstate Route 75;

Thence South 75 degrees 40 minutes 18 seconds West, 327.88 feet on the centerline of Miami Street to a point, said point being station 25+16.98 of the centerline of Miami Street and 504.83 feet right of station 479+25.78 of the proposed centerline of right of way of Interstate Route 75;

Thence North 14 degrees 19 minutes 42 seconds West, 189.60 feet to an iron pin set, said iron pin set being at 189.60 feet right of station 25+16.98 of the centerline of Miami Street and 475.00 feet right of station 481+30.53 of the proposed centerline of right of way of Interstate Route 75 and also being THE TRUE POINT OF BEGINNING for the parcel of land herein described;


	Page 2 of 3
RX252WL	Rev. 06/09

Thence North 74 degrees 59 minutes 42 seconds West, 94.35 feet on the existing limited access right of way line to a point, said point being 385.84 feet right of station 481+63.90;

Thence North 37 degrees 17 minutes 15 seconds West, 132.10 feet on the existing limited access right of way line to a point, said point being 312.06 feet right of station 482+80.59;

Thence North 18 degrees 03 minutes 00 seconds West, 294.66 feet on the existing limited access right of way line to a point, said point being 226.98 feet right of station 485+76.67;

Thence North 04 degrees 29 minutes 57 seconds West, 90.07 feet on the existing limited access right of way line to an iron pin set, said iron pin set being 218.86 feet right of station 486+70.00;

Thence South 27 degrees 28 minutes 53 seconds East, 119.29 feet on the proposed limited access right of way line to an iron pin set, said iron pin set being 275.00 feet right of station 485+60.00;

Thence South 18 degrees 18 minutes 58 seconds East, 114.60 feet on the proposed limited access right of way line to an iron pin set, said iron pin set being 310.00 feet right of station 484+45.00;

Thence South 32 degrees 04 minutes 05 seconds East, 336.14 feet on the proposed limited access right of way line to the TRUE POINT OF BEGINNING and containing 0.623 acres, of which 0.000 acres is PRO (Present Road Occupied), leaving a net take of 0.623 acres, more or less, subject to legal highways and other easements of record.

The above described area is contained within Lucas County Auditor’s permanent parcel number 18-76138

Grantors claim title by instruments recorded Instrument Number 201401080000326 in the Lucas County Recorder's Office.

Description based on a survey conducted by Northwest Consultants, Inc. during the summer of 2013 under the direction and supervision of Matthew J. Puhl, Registered Surveyor 8363 of the State of Ohio

Bearings used herein are based on Ohio State Plane Coordinate System, North Zone NAD83(2011) and are for this project use only.

All iron pins set referenced herein are 3/4 inch diameter x 30 inch long iron bars with 2-1/2 inch aluminum cap stamped “ODOT R/W, P.S. 8363”.


	Page 3 of 3
RX252WL	Rev. 06/09

This description was prepared by Andrew M Bernhard and reviewed by Matthew J. Puhl, Registered Surveyor 8363 of the State of Ohio.



/s/ Matthew J. Puhl		01-28-2016
Matthew J. Puhl		Date
Registered Surveyor of Ohio: No. S-008363

penn_Ex31_1

Exhibit 31.1

CERTIFICATION PURSUANT TO RULE 13a-14(a) OR 15d-14(a) OF THE SECURITIES AND EXCHANGE ACT OF 1934

I, Timothy J. Wilmott, certify that:

I have reviewed this Quarterly Report on Form 10-Q of Penn National Gaming, Inc.;

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date: August 1, 2018	/s/ Timothy J. Wilmott
	Timothy J. Wilmott
	Chief Executive Officer

penn_Ex31_2

Exhibit 31.2

CERTIFICATION PURSUANT TO RULE 13a-14(a) OR 15d-14(a) OF THE SECURITIES AND EXCHANGE ACT OF 1934

I, William J. Fair, certify that:

I have reviewed this Quarterly Report on Form 10-Q of Penn National Gaming, Inc.;

(a)

(b)

(c)

(d)

(a)

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date: August 1, 2018		/s/ William J. Fair
		William J. Fair
		Chief Financial Officer

penn_Ex32_1

Exhibit 32.1

CERTIFICATION PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

18 U.S.C. SECTION 1350

In connection with the Quarterly Report of Penn National Gaming, Inc. (the “Company”) on Form 10-Q for the quarter ended June 30, 2018, as filed with the United States Securities and Exchange Commission on the date hereof (the “Report”), I, Timothy J. Wilmott, Chief Executive Officer of the Company, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that, to my knowledge:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

u
	/s/ Timothy J. Wilmott
	Timothy J. Wilmott
	Chief Executive Officer
	August 1, 2018

penn_Ex32_2

Exhibit 32.2

CERTIFICATION PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002,

18 U.S.C. SECTION 1350

In connection with the Quarterly Report of Penn National Gaming, Inc. (the “Company”) on Form 10-Q for the quarter ended June 30, 2018, as filed with the United States Securities and Exchange Commission on the date hereof (the “Report”), I, William J. Fair, Chief Financial Officer of the Company, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that, to my knowledge:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


	/s/ William J. Fair
	William J. Fair
	Chief Financial Officer
	August 1, 2018