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Arnold M. Knightly


Buyout sends Station to loss

7 Mar 2008

By Arnold M. Knightly

LAS VEGAS, Nevada -- Station Casinos lost money for the quarter and the year because of costs from a management-led buyout of the company, the gaming company announced Thursday.

One gaming analyst, however, said he suspected that growing softness in Southern Nevada's economy may have contributed to the loss.

Station Casinos, the dominant player in the locals-oriented gaming market, posted a $417.4 million loss for the fourth quarter that ended Dec. 31, compared with earnings of $23.1 million in the same quarter in 2006, according to the company's federal filings.

For all of 2007, Station Casinos reported a net loss of $375.6 million, reversing net income of $110.2 million in 2006. In a filing with the Securities and Exchange Commission, Station Casinos said the losses were driven by a 167 percent increase in operating costs and expenses in the fourth quarter, including $299.2 million in corporate expenses, up from $15.7 million in 2006.

The expenses were tied largely to the immediate vesting of executive ownership shares in the new, privately owned company. Station Casinos went private Nov. 7 through a $5.4 billion buyout led by members of the Fertitta family, which founded the company.

Additional costs of $143.3 million related to the buyout also hit during the quarter, according to a company statement. Because Station Casinos is no longer listed on the New York Stock Exchange, the company did not hold a conference call for investors and gaming analysts.

Even without the one-time expenses, an economic slowdown is reflected in the company's quarterly net revenues of $357.5 million, a decrease of $1.2 million from a year ago.

Station Casinos' cash flow, described as earnings before interest, taxes, depreciation and amortization, decreased for the second straight quarter, dropping 6.9 percent to $131.7 million, compared with $141.5 million for the quarter.

Station Casinos confirmed in February that the slowing economy had forced some employee layoffs and hour reductions. The company declined to disclose how many people across the company's 17 properties were affected.

Wachovia Capital Markets bond analyst Dennis Farrell Jr. said the fourth-quarter numbers show the slumping economy's effect on the gaming sector.

"Looking back over the past three quarters, it is apparent that net revenue growth is slowing due to the weakening ... locals economy," Farrell said in a note to investors. "We believe this trend has accelerated into the first quarter of 2008, painting a challenging operating environment for most locals' operators."

However, Farrell concludes that the company has a flexible enough debt structure "providing a small buffer zone" to operate in the slowing economy.

For the year, net revenues increased 8 percent, to approximately $1.4 billion from approximately $1.3 billion in 2006. Cash flow also increased 3.3 percent, to $552.5 million from $534.9 million in 2006.

The yearly numbers, however, reflect a skewing from revenues generated by the $925 million Red Rock Resort, which opened April 18, 2006, giving the company 41/2 months of noncomparable numbers.

Quarterly gaming revenues fell 1.3 percent, to $255.6 million from $258.9 million in 2006 while food and beverage revenues increased 5.8 percent to $63.8 million.

However, the cost-of-business increases outpaced revenues in the quarter, rising 8.2 percent in the casino and 5.9 percent in food and beverage.

Not directly reflected in the quarterly earnings were $173.7 million in capital expenditures. The total includes the acquisition of 45 acres in the Henderson community of Inspirada for $71 million, $68 million for additional land acquisitions, $6 million on expansion work at Red Rock Resort, and $3.6 million for an expansion at Fiesta Henderson.

Station Casinos owns or leases 263 acres for development in Clark County over seven sites, 203 acres on two sites in Reno and 147 acres in Northern California.

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