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LAS VEGAS, Nevada -- Harrah's Entertainment is moving ahead with a $1 billion expansion at Caesars Palace, company officials said Friday, despite reporting a net loss in the second quarter and even as competitors slow or halt construction of several Strip projects.
Privately held Harrah's said it lost $97.6 million in the quarter, compared with a net profit of $237.5 million in the same quarter a year ago. Revenues in the second quarter were $2.6 billion, a 3.7 percent decline compared with $2.7 billion in the second quarter of 2007.
For the first six months of the year, Harrah's net loss is $285.4 million, compared with a net income of $422.8 million in 2007. Revenues declined 2.9 percent to $5.2 billion.
Las Vegas-based Harrah's is no longer publicly traded after a $30.7 billion buyout in January by private equity firms Apollo Management Group and Texas Pacific Group that included a cash payment of $17.3 billion and the assumption of $12.4 billion in debt. The buyout doubled Harrah's interest expenses in the quarter to $468 million, which was associated with the higher debt levels.
However, the slumping national economy and challenging operating conditions in Las Vegas and several of Harrah's key markets were the main reasons for Harrah's results. The company operates 36 casinos in 12 states.
"Overall, the company indicated that the demand environment is tough, and they were not willing to estimate when the market would trough," Stifel Nicolaus Capital Markets gaming analyst Steven Wieczynski said in note to investors.
During a conference call with analysts, Harrah's Chief Executive Officer Gary Loveman said the company didn't consider stopping construction of the expansion at Caesars Palace, which includes a new hotel tower and convention space.
Boyd Gaming said this month that it was delaying its $4.8 billion Echelon development for up to a year because of the sagging credit markets. Australian-based Crown Casinos ended plans to build a project on the north end of the Strip, while Elad Group's plans for a $5 billion version of New York's Plaza Hotel on the site of the former New Frontier are seemingly on hold.
Loveman said Caesars needs to expand because the project is strategically important in the market, given the upcoming opening of the $2.3 billion Encore at Wynn Las Vegas, the opening this year of the $1.9 billion Palazzo and the planned 2009 opening of the $9.2 billion CityCenter.
Loveman said trends in the Las Vegas market are much tougher to forecast than ever before. Rising gasoline prices and reduced consumer spending have sent Las Vegas gaming revenues to some of their biggest declines in history.
Loveman said the challenging operating environment will continue, possibly through the end of the year.
"The first half of the year presented us with the most turbulent economic conditions the casino industry has faced in years," Loveman said. "Customer visitation fell in the second quarter as consumers coped with higher fuel costs, declining asset values, the impact of widespread flooding in the Midwest and other financial challenges."
Wieczynski said lower end rooms are being discounted heavily in Las Vegas and the booking window is shrinking, making it more difficult to predict future demand levels.
KDP Investment Advisors gaming analyst Barbara Cappaert told investors that Harrah's may be contemplating buying back some its debt.
"Management refused to discuss this, which only increases speculation that in fact this is something that is seriously being considered or is already under way," Cappaert said.
Despite the challenging economy, the company continued to invest in expansions and rebranding at some properties.
Harrah's completed a $485 million expansion at Horseshoe Hammond in Northern Indiana and a $565 million expansion of Harrah's Atlantic City. Harrah's also completed the rebranding of Caesars Indiana to Horseshoe Southern Indiana and Grand Tunica to Harrah's Casino Tunica.
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