Starwood 2006 Annual Report Download - page 42

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During 2004, we entered into a long-term management contract to manage the Westin Boston, Seaport Hotel in
Boston, Massachusetts, which opened in June 2006. In connection with this project, we agreed to provide up to
$28 million in mezzanine loans and other investments (all of which has been funded) as well as various guarantees,
including a principal repayment guarantee for the term of the senior debt which was capped at $40 million, a debt
service guarantee during the term of the senior debt, which was limited to the interest expense on the amounts drawn
under such debt and principal amortization and a completion guarantee for this project. The fair value of these
guarantees of $3 million is reflected in other liabilities in the accompanying consolidated balance sheets at
December 31, 2006 and 2005. In January 2007, this hotel was sold and the senior debt was repaid in full. As such,
we do not expect to fund under these guarantees. In addition, the $28 million in mezzanine loans and other
investments, together with accrued interest, was repaid in full.
Surety bonds issued on our behalf at December 31, 2006 totaled $122 million, the majority of which were
required by state or local governments relating to our vacation ownership operations and by our insurers to secure
large deductible insurance programs.
To secure management contracts, we may provide performance guarantees to third-party owners. Most of these
performance guarantees allow us to terminate the contract rather than fund shortfalls if certain performance levels
are not met. In limited cases, we are obliged to fund shortfalls in performance levels through the issuance of loans.
At December 31, 2006, excluding the Le Méridien management agreement mentioned below, we had six
management contracts with performance guarantees with possible cash outlays of up to $75 million, $50 million
of which, if required, would be funded over several years and would be largely offset by management fees received
under these contracts. Many of the performance tests are multi-year tests, are tied to the results of a competitive set
of hotels, and have exclusions for force majeure and acts of war and terrorism. We do not anticipate any significant
funding under these performance guarantees in 2007. In connection with the Le Méridien Acquisition, we assumed
the obligation to guarantee certain performance levels at one Le Méridien managed hotel for the periods 2007
through 2013. This guarantee is uncapped. However, we have estimated the exposure under this guarantee and do
not anticipate that payments made under the guarantee will be significant in any single year. The estimated fair value
of this guarantee of $6 million is reflected in other liabilities in the accompanying consolidated balance sheet at
December 31, 2006. We do not anticipate losing a significant number of management or franchise contracts in 2007.
In November 2005, we completed the Le Méridien Acquisition for a purchase price of approximately
$252 million. The purchase price was funded from available cash and the return of the original Le Méridien
investment. In connection with the Le Méridien Acquisition, we were indemnified for certain of Le Méridien’s
historical liabilities by the entity that bought Le Méridien’s owned and leased hotel portfolio. The indemnity is
limited to the financial resources of that entity. However, at this time, we believe that it is unlikely that we will have
to fund any of these liabilities.
In connection with the sale of 33 hotels to Host in 2006, we agreed to indemnify Host for certain liabilities,
including operations and tax liabilities. At this time, we believe that we will not have to make any material payments
under such indemnities.
We had the following contractual obligations outstanding as of December 31, 2006 (in millions):
Total
Due in Less
Than 1 Year
Due in
1-3 Years
Due in
3-5 Years
Due After
5 Years
Long-term debt ............................ $2,630 $805 $ 45 $447 $1,333
Capital lease obligations
(1)
................... 2 — — — 2
Operating lease obligations ................... 1,075 66 127 120 762
Unconditional purchase obligations
(2)
........... 184 60 78 42 4
Other long-term obligations................... 4 — — 3 1
Total contractual obligations .................. $3,895 $931 $250 $612 $2,102
(1) Excludes sublease income of $2 million.
(2) Included in these balances are commitments that may be satisfied by our managed and franchised properties.
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