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Pinnacle Entertainment (NYSE:PNK)

Q3 2009 Earnings Call

October 29, 2009 1:00 pm ET

Executives

Chris Plant - Vice President, Treasurer

Lewis Fanger - Vice President, Investor Relations

Stephen H. Capp - Chief Financial Officer, Executive Vice President

Carlos Ruisanchez - Executive Vice President - Strategic Planning and Development

Daniel R. Lee - Chairman of the Board, Chief Executive Officer

Analysts

Joe Gref - JPM

Steve Ossibrenda - Sidoti & Company

David Katz – Oppenheimer

Justin Sebastiano - Morgan Joseph

Dennis Forst – KeyBanc

Operator

Good afternoon. My name is Felicia and I will be your conference operator today. At this time, I would like to welcome everyone to the Pinnacle third quarter 2009 earnings conference call. (Operator instructions) At this time, I would like to turn the call over to Mr. Chris Plant, Vice President and Treasurer. Mr. Plant, you may begin your conference.

Chris Plant

Thank you and good morning, everyone. Welcome to our third quarter 2009 earnings conference call. Earlier this morning, we released our third quarter and year-to-date 2009 financial results. If you do not have a copy of the announcement and would like one sent to you, please contact us at 702-784-7777 or at investors@pnkmail.com. In a few moments, you will hear from and have an opportunity to ask questions of our Chairman and CEO, Dan Lee; and other executive management team members.

Now, let me remind you that during the course of this conference call management may state beliefs and make projections or other forward-looking statements regarding the future events and future financial performance of the company. We wish to caution you that such statements are just projections and expectations and that actual events results or events may differ materially. I refer you to the Safe Harbor statement that is included in today's press release and to our Annual Report on Form 10-K, quarterly reports on Form 10-Q, and our press releases and documents filed with the SEC.

With that said, I will turn the call over to our Lewis Fanger, Vice President of Investor Relations.

Lewis Fanger

Thank you, Chris. Good morning, everyone. We had a pretty solid quarter overall. Revenues were up 1% to about $265 million this year. EBITDA was up about 8% to $43.1 million -- pretty solid given the state of the world today but digging into the properties a little bit, Lumiere Place continues to perform quite well and more specifically continues to outperform the St. Louis market. We set a bunch of new records during the quarter there, including a new record quarterly performance for both net revenues and adjusted EBITDA.

During the third quarter, we did manage to grow our market share, which rose to 19.3% from 15.5% last year. Net revenues climbed 22% from last year up to about $56 million. Adjusted EBITDA reached a record $11 million in this year’s third quarter, rising pretty significantly over last year due mostly to us running a more efficient property today relative to the early quarters just after opening and in part also due to the passage of Proposition A last November.

At L'Auberge du Lac, revenues and adjusted EBITDA also rose over last year. Revenues this year were about $86 million, a 4.9% increase from last year. Adjusted EBITDA rose to $19.2 million from $18.6 million last year. Our comparisons versus last year were a little bit easier due to two brief hurricane disruptions in the 2008 third quarter. Adjusted EBITDA margins at L’Aubegre this year were in the same range as last year’s third quarter.

Over in Bossier City, our Boomtown Bossier property continues to outperform in its market as well. Revenues increased about 3.5% to $23 million and adjusted EBITDA rose over 12% to $5.1 million. We were the only property in that market to improve gaming revenues versus the third quarter of 2008 and we saw our market share increase to 12.2% this year from 10.6% last year. That was helped out in part by higher table games sold, which was about 25% in the quarter versus about 18% last year and before you guys ask, it was about $200,000 in incremental EBITDA there. Nonetheless, Barry [Regula] and his team in Bossier, as well as our corporate operations and marketing teams here in Vegas have done a great job in controlling costs and finetuning our marketing efforts over in Bossier City.

At Belterra, we are pleased with Belterra’s performance in the face of recent enhancements and expansions at some of our competitors. Revenues for the 2009 third quarter were about $42 million. Adjusted EBITDA was $7.2 million. Win per admission did decline as you would expect with some enhanced competition but the number of admissions actually increased in the quarter. They were up 2.2% versus last year’s third quarter. Hotel occupancy also increased, rising to a very strong 96% compared to 92% last year.

At Boomtown New Orleans, revenues and adjusted EBITDA for the 2009 third quarter were $32.6 million and $7.8 million respectively. Last year’s results in comparison were $37.4 million and $11.3 million respectively. Residents of New Orleans have seen a significant increase in marketing from casinos along the Mississippi Gulf Coast and that has in turn affected our business at Boomtown. The good news is that with October now largely complete, it appears that revenues have stabilized at Boomtown New Orleans. With revenues now stable, we will use the remainder of the year to focus on bringing margins back up at the property.

In Reno, according to the monthly revenue statistics put out by the state, the entire Reno market continued to see declines in gaming revenues during the 2009 third quarter, caused by both additional Native American casinos in Northern California and general economic conditions. We were not immune to that trend. Based on recent trends, however, it does appear that gaming revenues are starting to stabilize for Boomtown Reno. For the current quarter, revenues and adjusted EBITDA were $11.5 million and negative $146,000. Last year’s third quarter Boomtown generated revenues of $15 million and approximately $500,000 of EBITDA.

Casino Magic Argentina revenues and adjusted EBITDA were about $9.1 million and $2.4 million this year compared to $11.4 million and $3.7 million last year. Currency exchange rates have continued to be weaker in recent months. Inflation has also affected some of our costs, especially on the labor side, and there were some limitations on entry into our Argentine casinos due to the H1N1 flu epidemic.

By the way, we don’t expect to get the same phenomenon here locally in the U.S. due to the wider availability of H1N1 vaccination here locally.

The President Casino in St. Louis, adjusted EBITDA and margins improved versus 2008. We continue to view the President Casino as a long-term business for the company and lastly for corporate expense, we continue to trim costs versus the prior year. For the third quarter, corporate costs were down 2.3% and on a [inaudible] basis, we are down almost 14%.

So I kind of flew through all that but --

Chris Plant

Turn it over to Steve to talk about the balance sheet.

Stephen H. Capp

Good morning. Liquidity remains quite strong in the company. The number you are seeing on the press release of $164 million really ought to be viewed a little bit differently than that gross number. We’ve got about $10 million of that that is restricted cash for an insurance program, so it is 154 is closer. Another $10 million of that, 9.5 specifically, is dedicated to the repayment, the final repayment of the 8.75s stub bond which was called this month. That indenture is now extinguished, by the way. But that leaves about 145 of net cash. We use about 70 in ops, day-to-day ops, so there is about 75 or so of excess cash that we maintain, plus or minus that amount in the company, as we have done for a number of years now. So liquidity, very strong.

I wanted to spend a couple of minutes -- I won't belabor it but there was a lot of activity and a low of news around the balance sheet in the quarter. Some of this came out on our previous earnings call for the second quarter but it all adds up to a better story than that, and I’ll just recap it briefly. And it’s all been covered in our press release, et cetera, but just to recap quickly, we did amend the bank deal in July. We picked up covenant flexibility, we picked up the ability to issue senior notes. And we picked up the ability to amend and extend our revolver as well, and those were significant in the context of credit facilities. The cost of that was -- we popped our LIBOR spread by 50 bps. We paid 50 bps up front and we reduced the line by 15% down to its current level of $531 million. At approximately the same time, we did achieve two-to-one interest coverage under our various bond indentures and we did reclass $200 million of outstanding bank debt as two-to-one debt. That has basically found liquidity to the company. We covered this in Q2. Those were very nice, very solid measures of progress for the company. And then as publicized, we proceeded to issue $450 million of 8&5/8s bonds, those were at a discount -- 8&7/8s was our effective yield. And with those proceeds, we paid down the bank yield completely at that time to zero. We paid out or paid off the 8.75s bonds which had the most restrictive indenture, and that indenture is now extinguished, and we paid down from $275 million, $75 million of the 8.25% bonds and started to chip away, continued to chip away at that note as well. That’s got a 2012 maturity.

Today we’ve got some modest outstandings under the bank deal, mostly for liquidity purposes. That recent bond yield did contribute to a higher interest expense, gross interest expense in the quarter by about $3 million. It also drove the $8.8 million debt extinguishment charge on the balance sheet. That of course is a non-cash charge to us. But by and large, we’ve made some improvements to the balance sheet that taken as a whole, really support the company and its not only ongoing operations but continued growth and so some really measurable progress there.

And then finally from a CapEx perspective and then I’ll be finished, our total cash CapEx in the quarter was about $58 million, and of that, 44 was attributed on a cash basis to River City and approximately 4 as well to Sugar Cane Bay, the rest in miscellaneous CapEx around the company and that’s all I wanted to say. I’ll pass it over to Carlos for some development updates.

Carlos Ruisanchez

Good morning, everybody. We’ll be brief in regard to the update -- River City continues to move along on time and the same basic budget that we previously outlined. The cash portion of that budget continues to be $357 million, of which we spent to date $228 million, approximately. And the timing of the project is expected to open in the spring of 2010 and we feel very good about the prospects of that property upon opening next year.

And Sugar Cane Bay, we started driving piles earlier this month to put in the foundation for the project. The project had actually started last year when we started doing the road. That expanded. The availability or visibility of our property in access at L'Auberge and that would also be the road to Sugar Cane Bay. With a project budget is on a cash basis at $391 million. We expect to be on that pace and progress on that project as we move through the fourth quarter and into next year.

On Baton Rouge, as it was well publicized, we went to the Louisiana Gaming Control Board and asked for some extensions on the specific milestones of dates for that project. The Louisiana Gaming Control Board did grant those extensions earlier this month and basically allows us to provide for a guaranteed maximum [supplies] contract by the end of the first quarter of 2010, and we will start construction of that project promptly after the approval of that contract, which we would expect will happen in May of next year.

And we feel very good about the timeframe that we outlined for them and the milestones and the conditions that were approved by the commission and feel very good about the prospects of Baton Rouge overall and our ability to actually make a good project for us there and starting construction next year.

With that, I’ll turn it over to Dan.

Daniel R. Lee

I guess we’ll open it for questions. Operator.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Joe Gref of JPM.

Joe Gref - JPM

A question for you -- you had mentioned third quarter you saw some heightened competition in select markets. Could you comment if some of those, those heightened promotions as competitive forces, if they have abated here so far in October? And then Dan or Steve, could you just talk about how you are thinking about CapEx spend for next year for Sugar Cane Bay in terms of how we should be thinking about modeling it and then how much, I know it’s not going to be a lot, but for Baton Rouge, how to think about that for 2010? Thank you.

Daniel R. Lee

Let me address the competition and then I think Carlos can pull together the CapEx, or Steve you got it -- either one of you have it, so -- the most obvious was actually up at Belterra where [inaudible] opened a $300 million plus replacement of their original 14-year-old riverboat and the new one is bigger and more on one floor than the old one. And then also very early in the quarter, or maybe late in the second quarter, Indiana Live opened their permanent facility, which was head and shoulders better than the temporary tent they had before that. So Belterra actually faced a lot of new competition in its market and I think we did -- I think our management team did real well there while holding their own. We are still the market leader in terms of quality. It’s clearly the best casino hotel experience in Southern Indiana and so the fact that other guys are bigger but not better allowed us to pretty much hold their own and we are up some but given the magnitude of the increase in competition, I thought we did pretty well, especially given the economy and that is a part of the world where the economy has not done well.

In New Orleans, we had several weak months over the summer and we had a bunch of focus groups where we invited in customers who we had seen less of and the whole management team went down and listened to what our customers told us on why we were seeing them less. I actually expected them to talk about the road because the road leading to us has been under construction with the new flood wall and so on and it turns out the road wasn’t that big an issue. And the economy was one thing we kept hearing but the other thing we kept hearing was promotions that were being offered along the Mississippi Gulf Coast, and I think a little bit of what happened there, and we’ve seen it -- you know, we live in Las Vegas, even though we don’t have a casino here, the group travel business and convention business last year just dropped off a cliff, as AIG [got criticized] for their corporate boondoggles and so on, and so the resort casino hotels in Las Vegas and along the Gulf Coast like [Beau Rivage] and others saw their occupancies drop off rather dramatically. And beginning last spring, they started competing back by discounting their rooms, and so frankly this summer in Las Vegas, you could get rooms at hotel for $150 a night, with a $50 meal coupon and that same room a year before would have been $500. And I think in a small way, you saw a lot of that on the Mississippi Gulf Coast and that doesn’t mean that their numbers were up -- it just means they were -- they are sitting there with these large hotels trying to figure out how to fill the rooms and so they started sending out free overnight stays or cheap overnight stays at the locals market in New Orleans and that cut into our play zone there.

Now there’s also some stuff we did marketing wise but I think we can improve on and have improved on and we’ve got it stabilized, but I think the major single factor other than the economy that affected New Orleans was competition from the Mississippi Gulf Coast, which is not very far away, as they tried to figure out how to keep their hotels filled since they weren’t getting people from Florida or Atlanta anymore, they just reached out for people who are an hour away.

In Lake Charles, Lake Charles is a pretty interesting market. Houston is still one of the least penetrated cities in the country. Gaming per capita in the Houston area is about $100 per capita per year, which is about half the U.S. average and about a third of what it is in California, for example. And that’s a big part of why we are building Sugar Cane Bay. L’Auberge runs $400 per slot machine per day. Delta Downs runs $300 per slot machine per day. That’s probably the highest grossing casino in terms of win per slot machine per day in the entire [void] portfolio, for example. And if you take into consideration that all they have is a tiny hotel and no tables, they probably run pretty good margins and I’m guessing the Delta Downs is about half their profit in that region. And so on their earnings call a day or two ago, they said they expect their future quarters not to be as rosy as the ones in the past and that basically we shouldn’t build Sugar Cane Bay. Well, in Louisiana, you are limited in the size of your casino so our casino is at its maximum size at L’Auberge. Their casino is at its maximum size in the -- in terms of the number of slot machines they can cram under the grandstand, which is basically all Delta Downs is, and they live to a large extent on the overflow from L’Auberge. So of course they’d rather us not build Sugar Cane Bay because in effect, it’s an expansion of L’Auberge.

But when you look at the numbers, it’s a very good market. L’Auberge at this point is -- well, for nine months, we’ve got $64 million of EBITDA in a place with 1,000 rooms. That’s a pretty darn strong number and so if it continues at that pace, we’ll be up in the mid-80s on an investment that is around $450 million and that’s despite a pretty crummy economy.

But what did happen in Lake Charles was Delta Downs got very aggressive with their promotions earlier this year. They took some market share from us. We got more aggressive in the recent quarter and I think we’ve gotten our market share back. That hurt our margins a little bit, so we’ve had a little bit of a promotions battle going on between us and Delta Downs. We are twice their size, more than twice their size and I think we will continue to show good results at L’Auberge as we have.

Otherwise, obviously in Argentina the Peso hurt us, as Lewis mentioned, and the economy. The entire Reno market is still hurting from Indian casinos in California more than anything else and we are making progress in Reno. We hope to get profitable in the next let’s say 12 months going forward and hopefully improve from there, and I guess that’s it. I guess that addresses the competition in each place. Do you want to address the CapEx?

Carlos Ruisanchez

In regard to CapEx, we expect Sugar Cane Bay next year to run us somewhere around $225 million on a cash basis, excluding cap interest. And I’ll go through the rest -- Baton Rouge, that number is somewhere near $60 million, and you have 40 or so of maintenance CapEx across the portfolio.

Joe Gref - JPM

Thank you, guys.

Operator

Your next question comes from the line of Steve [Ossibrenda] of Sidoti & Company.

Steve Ossibrenda - Sidoti & Company

Can you just talk a little bit about your level of comfort on moving forward with these projects with the bank facility not yet rolled over?

Daniel R. Lee

We think we will have the bank facility rolled over and extended before ordering the steel.

Steve Ossibrenda - Sidoti & Company

Okay.

Daniel R. Lee

There’s no guarantees on that but that is our plan.

Steve Ossibrenda - Sidoti & Company

Okay, and then just a last one, in terms of the budget for Sugar Cane and Baton Rouge, given what we have seen in terms of unemployment, input costs coming down, is there no way to bring these budgets down a little bit?

Daniel R. Lee

We’d like to but I think it is probably a little unrealistic. We hope to get pretty good value for our money, I guess is another way of putting it. You know, at the end of the day, is it a more competitive market? Yeah, but you know, like a general contractor in really heady times gets a 4% or 5% margin. Maybe we can squeeze them down to a 3% margin and that saves us 1% or 2% and that’s about it. So it -- there are some things -- sometimes we can -- asphalt is a lot cheaper than it was last year because the price of oil is down but now we are seeing some of the price of steel might be rising.

Stephen H. Capp

We are watching the indices pretty close -- thought I’d just answer this question -- we’ve been watching the indices pretty close and although they have been migrating down a little bit, the forecast for things like steel in the near-term is not real positive. It’s neutral right now based on the last quarter or so but there is anticipation that those prices would migrate up just a little bit. We are being more competitive about what we are doing. We think we are buying harder. We think we are doing a better job of that. The price of gas hasn’t gone down much and the price of milk hasn’t gone down very much, so unfortunately we are not seeing huge leaps and bounds in the construction industry.

Daniel R. Lee

Maybe some. The other thing I would characterize, back in ’05, ’06, ’07, construction inflation in the U.S. averaged 16% a year, so you had a 50% increase over three years. And we got caught in that a little bit at Lumiere Place where we were doing a design build project that didn’t have a guaranteed maximum price and went $100 million over budget.

We get -- at River City, we made real sure to get a guaranteed maximum price contract so we don’t have that happen to us again. We are going to do the same thing in both Lake Charles and Baton Rouge and we are pretty close to it on Lake Charles now and we should have Baton Rouge shortly. So I guess what I am saying is, is our ability to build it for what we have said is much enhanced and even our friends down the street here with city center, part of what they got caught with was starting construction without a guaranteed maximum price going into a period of unprecedented construction inflation. I don’t think we will have construction inflation going forward but we are not going to take that risk anyway. We will have guaranteed maximum prices before we order the steel on these.

Steve Ossibrenda - Sidoti & Company

Okay, and just last, quickly, are you seeing at L’Auberge any calming of the promotional environment?

Daniel R. Lee

It’s something we are looking at. We are trying to figure out -- we threw up a lot of different promotion programs in the last few months and now we are analyzing which ones seem to work the best and which ones don’t and so -- but we’ll continue to respond to our competition as we need to.

Steve Ossibrenda - Sidoti & Company

Okay, thanks, guys.

Operator

Your next question comes from the line of David Katz of Oppenheimer.

David Katz – Oppenheimer

I wanted to ask about Baton Rouge and if we could just get a little more follow-up on Joe’s question about the CapEx on Baton Rouge -- can you give us any sense about when at the moment it looks like that property is going to open? Is that 2011 event or is that some time beyond that?

Carlos Ruisanchez

The condition calls for an 18 month opening upon the approval of the beginning of construction, which is required to start within 30 days of their approval of the GMP, so that would put it in late 2011.

Daniel R. Lee

We hope to have the GMP submitted again [inaudible] March?

Carlos Ruisanchez

The GMP will be submitted by March. They will have to approve that. The soonest they could do so would be in the hearing in April, which would mean that in May, we would start. And then the 18-month clock will go on. As you know, and as everyone has experienced, construction projects, you know, there are certain elements of unpredictability as it relates to that process. The particular site that we are on creates certain challenges, because we are on the wet side of the levy and there are limitations as to when some of the work could be done there, so that’s going to have some influence on the time. We feel good about the timeframe that -- per the conditions but the reality is that until you are in it, you won't know for certain that the back-end of that will suffice. We believe it will.

Daniel R. Lee

The boat itself has to be built in the shipyard and moved into location. That’s going to be moved in during high water, so we may actually start laying the steel on the ship in the first quarter so that we have it ready to move into location during the high water of 2011.

It’s coming along.

David Katz – Oppenheimer

Perfect. And regarding St. Louis, I think the original notion when Lumiere was opening was that ultimately once River City came online that there would be some cannibalization of Lumiere. Is that -- what is your sort of updated view on that dynamic?

Daniel R. Lee

Well, as you can see, Lumiere Place is making really good progress and growth. If we never open River City, I think you’d continue to see strong growth with Lumiere Place but obviously River City will take a bite out of that and we think between the two, we’ll do, you know, at maturity, $120 million, $130 million a year EBITDA and maturity might be a couple of years away because there will be some disruption when we first open. We don’t really care which one makes most of that money as long as people are gambling in our places and in fact, that’s a big part of what we are doing internally, is to make sure people are focused on A, growing the market and B, taking customers out of our competition instead of out of each other. And so to the extent we can, we will focus on pulling people away from the others and really it doesn’t matter to us how much we make at each property, as long as the combined return is good.

We always knew the downtown property was a more challenged location. More people lived in the doughnut around St. Louis than downtown and so the gaming commission didn’t give us the choice of just building the one -- you had to build downtown as kind of the loss leader in order to get the license in the county. And so my guess is the ROI will be higher in the country but we never had the choice of only building in the county, so -- but the city is doing quite well and the River City project looks awesome. If you haven’t been through it, beat up on Lewis to show you around. I think it’s the prettiest casino we’ve ever built. It’s really pretty terrific and we are well on schedule to open in the spring, so --

David Katz – Oppenheimer

Okay. Lewis doesn’t need any beating -- he’s happy to do it any old time. If I can just ask one last quick one -- I’ve heard anecdotally conflicting messages about the Texas economy and specifically Houston. In a couple of cases, heard things are bouncing back strong; in other cases, heard things of significant weakness, particularly out of the energy industry and all of that. What does your data and other sort of anecdotal sources telling you at the moment?

Daniel R. Lee

I think the Houston numbers show that it entered the recession later than most of the country and we would expect it to come out sooner than the rest of the country. And it’s not really driven by energy -- that’s actually not as big a part of the economy as most people think in Houston.

The other thing is the oil that is produced in Texas and even in the Gulf of Mexico is less expensive oil and so like the oil shale in Canada or the -- no, the oil shale is in Wyoming and the oil sands in Canada, that stuff costs a couple hundred dollars a barrel to produce and in Texas, the cost of production is very low. So when the price of oil shot way up for a while, all of a sudden Edmonton, Canada and Casper, Wyoming were starting to get boom towns and then when the price of oil dropped, it wasn’t economical to produce oil in those places whereas in Texas and the Gulf of Mexico, it’s been economical to produce oil for quite some time.

We actually deal a little bit with this in Argentina. Our casinos in Argentina are in a province which is the primary energy province of Argentina but down there, the federal government fixes the price of oil so the price of oil has been fixed at $42 a barrel. That’s what goes into the province and that is set so low that the oil exploration in the province of [Nyucan] has just come to a halt and that is part of what has hurt the economy of [Nyucan] and it’s a little frustrating because it’s all because of the federal government edict that the price of oil, irrespective of what is going on in the world stage, would be $42 a barrel.

There was an article not long I read and I don’t remember where, what popular press but it made a lot of sense to me. They cited Detroit as having been hurt pretty badly in the recession and they speculated that it would recover later and maybe never entirely, and that’s because as people close factories in a place like Detroit, when the economy recovers and they are looking to reopen, if you go to the sun belt states, they generally are more prone to be non-union. You can build a newer factory that is more efficient and a ready workforce and so some of the factories that close in the old cities of the north never reopen and instead people build new stuff in places like Houston. And that’s pretty striking if you look at the 20 largest cities in America and look at their 15 or 20 year growth rates. Houston, Dallas, Phoenix, Las Vegas until very recently, the cities in Florida, those are all at the top of the list in terms of population growth rates in the last 20 years, places like Detroit, Buffalo, New York, Syracuse New York, where I grew up, and Pittsburgh and even St. Louis are at the bottom of the list in terms of growth. And so I think just the sun belt phenomena will continue to favor Houston.

David Katz – Oppenheimer

Okay, thanks very much.

Operator

Your next question comes from the line of Justin Sebastiano of Morgan Joseph.

Justin Sebastiano - Morgan Joseph

You spent a lot of time on I guess Southwest Louisiana and Texas, but just so I am clear, because as you mentioned, one of your competitors was saying that there is slower growth out of that market, you do not agree with that? You don’t see that slower growth in Southwest Louisiana?

Daniel R. Lee

I think the reason for the slower growth is we are kind of capacity constrained. When you are doing $400 per slot machine per day at L’Auberge, which is a real resort -- I mean, that’s four times the Las Vegas strip average. And even Delta Downs, which is frankly a piss-ant little horse place with slot machines under the grandstand out in the tobacco fields 10 miles up the freeway is making $50 million a year. That’s a capacity constrained market. And we have the ability to add capacity because we bought the license from Harris. They don’t. So of course they would try to discourage us from building. I don’t blame them. They are just doing what’s rational.

Justin Sebastiano - Morgan Joseph

Okay, and then based on what you guys have seen so far in October, for L’Auberge, should we look at margins kind of keeping pace with what you guys turned in in third quarter or has the promotional environment gotten better?

Daniel R. Lee

I think it may take a couple of quarters for us to get the margins back up. We will eventually get up there. I don’t know if it will be the fourth quarter or not. Lake Charles is kind of a funny anomaly -- the one market I know of where December is actually a strong month. I think it’s just the weather patterns or something but -- I mean, even before New Year’s December is a pretty good month and so -- now October kind of continued the third quarter and so October was at a pace with third quarter but we are more optimistic on November and December.

Justin Sebastiano - Morgan Joseph

Okay, and then in New Orleans, you had mentioned that the Gulf Coast, Mississippi Gulf Coast properties were flooding the market with the cheap or free rooms. I mean, are you still seeing that phenomenon right now?

Daniel R. Lee

It’s less important now -- you know, in the summer people are more prone to go away for a weekend. Now, people are kind of back to work and so on, so I think -- and we’ve got some new marketing programs that seem to be working pretty well. We have a new management team that has coalesced and is doing a good job there, so I think we are on a positive trend in New Orleans. I think we are just staring a positive trend now at L’Auberge. And those are -- you know, in a company like ours, which is pretty diverse, at any given quarter you’ve got one or two properties that are your focus and concern. And this past quarter, it was principally New Orleans and you kind of looked over your shoulder at L’Auberge and said gee, we better pay attention there too. But next quarter, I am hoping it’s not New Orleans and hopefully not L’Auberge, but I don’t know which it is. One of them will probably have a hiccup next quarter -- it’s the nature of a diversified company.

Justin Sebastiano - Morgan Joseph

Okay and then just lastly, when do you plan to order the steel for Sugar Cane Bay?

Daniel R. Lee

By year-end.

Justin Sebastiano - Morgan Joseph

Okay, so then we can anticipate you getting the bank credit extension --

Daniel R. Lee

Well, the --

Justin Sebastiano - Morgan Joseph

-- facility done by then?

Daniel R. Lee

You know, as we have always said, we are always looking for ways to improve the balance sheet, liquidity and so on, and we did a lot of stuff in the second quarter with the note offering and the facility amendment and all the debt repurchases and we have already said we are talking with our banks and those discussions are ongoing and so we’ll take advantage of market conditions whenever we can. Clearly for us to build all of this stuff, we are going to have to access the capital markets at some point and we will do so opportunistically when we think it makes sense.

Justin Sebastiano - Morgan Joseph

Okay, I just asked because -- I mean, you guys have done a great job with the balance sheet so far. It’s just I think if anybody points to any sort of balance sheet risk, it’s that the extension still hasn’t been done yet, so -- but if you think it’s going to happen by the end of the year, I mean, that should probably help a lot of people calm their fears with that, so --

Daniel R. Lee

Actually, I sometimes feel sorry for the investment bankers who have to call on us because Steve, Carlos, and I were all managing director of investment banks, so we kind of talk them under the table at lunch and so far it’s worked pretty well for us.

Justin Sebastiano - Morgan Joseph

All right, thanks, guys.

Operator

Your next question comes from the line of Dennis Forst of KeyBanc.

Dennis Forst – KeyBanc

I wanted to maybe focus a little bit more on the balance sheet. I just want to make sure I understand, Steve, the credit facility currently is LIBOR plus 300?

Stephen H. Capp

Well, it’s 275, Dennis, at present.

Dennis Forst – KeyBanc

Okay.

Daniel R. Lee

Of course, almost none is drawn, Dennis.

Stephen H. Capp

Yeah, we go 18.5 drawn today, none at quarter end, so it’s --

Daniel R. Lee

It was actually a little painful, Dennis, to do the note issue at 8&7/8s and use it to pay off debt that was at LIBOR plus a premium, because we -- but we did it to get the longer maturities and the better covenant structure to position us to do everything we hope to do.

Dennis Forst – KeyBanc

Okay, and then the 7.5s, is there 380 outstanding approximately now?

Stephen H. Capp

385 in principal amount, yeah.

Dennis Forst – KeyBanc

Okay, and you said you’ve been chipping away at the 8.25s -- as of today, what is that, 190 something?

Stephen H. Capp

It’s almost exactly 200, Dennis. It’s the same thing that we publicized in the press releases with the proceeds of the 8&5/8s. We took out approximately $75 million of that 275 issue.

Dennis Forst – KeyBanc

Okay, so that is really it with the debt with the 450, that is your total debt right now?

Stephen H. Capp

That’s [inaudible], 7.5s, 8.25s, and the 8&5/8s, that’s correct but we --

Dennis Forst – KeyBanc

-- covenants or -- tied to the credit facility?

Stephen H. Capp

I’m sorry, say again?

Dennis Forst – KeyBanc

The covenants are only related to the credit facility?

Stephen H. Capp

Well, the maintenance, financial covenants only apply to the credit facility, that’s right. Of course, we have the [inaudible] covenants and other types of covenants on the indentures but not cash flow based per se.

Dennis Forst – KeyBanc

Okay, and then talking about investments, Dan, you had talked about the two St. Louis properties together at maturity doing $130 million. If I do my math right, that’s somewhere around a 13%, 14% return. I assume in Lake Charles, where you are building a second property and you will have somewhere around $850 million invested, you’d get a better return and your total mature EBITDA would likely be north of that 130, at least that is what I would hope would be the case.

Daniel R. Lee

I think we’ve been pretty open that we hope both Sugar Cane Bay and Baton Rouge do about a 15% cash on cash return. Now, L’Auberge was significantly above that, so -- but if you want to do the blended average, it’s probably in the high teens. Frankly, had we been able to build Lumiere Place for $100 million less, we would have had a 15% cash on cash return there too but we kind of got stuck sideways with the construction --

Dennis Forst – KeyBanc

Okay, and when you say Sugar Cane a 15% return, that is net of any cannibalization of L’Auberge or is that just 15 on its $400 million investment?

Daniel R. Lee

It’s 15 on the $400 million investment and so that would be an incremental $60 million of EBITDA above the --

Dennis Forst – KeyBanc

The 80 or so --

Daniel R. Lee

That 80 or 90 it is doing now, yes, the run rate I think is about 85, so --

Dennis Forst – KeyBanc

Yeah, but wouldn’t it be reasonable to assume that that 80 to 90 might be somewhat lower when Sugar Cane Bay opens?

Daniel R. Lee

Well frankly, you know, more so than any of the other properties, Sugar Cane Bay is going to be attached to L’Auberge. It will be run by Larry Lepinski and his team as one hotel. So to the public, it will look like two but the back of the house will look like one. I am not sure we will even break out what the profits are between the two. I’m not sure it’s worth it even internally to break out the profits between the two because it would be one hotel.

Dennis Forst – KeyBanc

Yeah, the way Wynn does with their two Vegas properties.

Daniel R. Lee

Yeah, because otherwise you’d be sitting there trying to say gee, this waiter worked in L’Auberge for three days and then they went over to Sugar Cane Bay for two days. Are we going to try to allocate the waiters’ salary between the two? That would drive you nuts. And Sugar Cane Bay is really a large expansion to L’Auberge. But we take it from 1,000 rooms to 1,400 rooms, we double the gaming capacity and that is really because of the economics of building one of these floating casinos when you have a cap on the size of casino, you are better off building the maximum size you can. And we’ve designed it so we can add more rooms later, just as we did at L’Auberge. But at least initially, we are increasing the guest rooms by 40% and we are doubling the gaming capacity. We are also adding a large entertainment venue which L’Auberge does not have now.

And so we have the land to build the second golf course but we are not building that now, so it really is a large expansion of L’Auberge.

Dennis Forst – KeyBanc

Okay, and it should open early to mid ’11?

Carlos Ruisanchez

Yeah, the condition has us doing at the end of next year that we will see how the construction goes but they -- our expectation is in 2011.

Daniel R. Lee

I was just proofreading our 10Q, which we will file shortly, and that we have some language in there that says the deadline with the Louisiana Gaming Commission has us opening year-end 2010 and it is unlikely we are going to reach that date, so we do anticipate going back to the Gaming Commission and asking for an extension on that date. We’ve had similar extensions in similar circumstances before. Never certain that you will get it but they want to see us get open as quickly as possible and we want to be open as quickly as possible, so I hope that we can work together on that.

Dennis Forst – KeyBanc

I’m not clear -- do you build a barge at Sugar Cane also like you are doing at Baton Rouge?

Daniel R. Lee

It will look like -- well, it’s more the technology we used in St. Louis. It’s a floating floor -- it’s a concrete barge. The floor floats. Are the walls on that barge? The walls -- like at L’Auberge, the walls stand on the barge and float with it. In St. Louis, the walls stand in dry land and only the floor floats. The one in Baton Rouge is a little fancier because it actually has to sit in the river on the wet side of the levy, but we wanted the floor of the casino to be level with the top of the levy because our valet parking is at the top of the levy, so we want you to be able to step out of your car and walk straight into the casino. So we are building a little different technology. We are truly building a boat and it has a big holding tank in it and as the river rises, we will fill the holding tanks so that the boat sits lower in the water and much like an oil tanker, sometimes they are high in the water, sometimes they are low in the water and so we will pump water in and out of the holding tank so that the level of the casino is always level with the top of the levy, but it will be a boat.

Dennis Forst – KeyBanc

Okay, and these are all going to be built at the same shipyard?

Daniel R. Lee

No, not necessarily. Whoever gives us the best deal. There’s a lot of shipyards around, so we make them bid against each other.

Dennis Forst – KeyBanc

Okay, good. Thanks for all the answers.

Operator

(Operator Instructions)

Daniel R. Lee

Okay. Thank you very much, everybody and we will continue to do what we are doing.

Operator

And this concludes today’s conference. You may now disconnect at this time.

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