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Howard Stutz

Pinnacle Opens Louisiana Casino

26 May 2005

LOUISIANA -- Two weeks on the job and already Dan Lee had a problem. He'd just become chairman and chief executive officer of Pinnacle Entertainment when the Louisiana gaming authorities told him he'd have to devise a development plan for a 227-acre company-controlled land parcel in Lake Charles. If Lee didn't act quickly, regulators warned, Pinnacle risked losing the state's last available riverboat gaming license.

With attention focused on a $37 million renovation of the company's flagship Belterra casino in southeastern Indiana, the last thing Lee wanted to worry about was a potential gambling site in the tough Louisiana gaming market.

But once he visited the area known as Contraband Bayou, off Interstate 10, about 135 miles east of Houston and the city's 4.5 million residents, he believed Pinnacle had found a golden chance.

"I didn't even have to look a the site," Lee recalled recently of his spring 2002 discovery. "I just saw the traffic on I-10 going and coming between Houston. That's all we needed to know."

Today, nearly three years to the date Lee first visited Lake Charles, Las Vegas-based Pinnacle will open its most ambitious project: the $365 million L'Auberge du Lac.

Lee believes the sprawling complex, which includes a 26-story, 750-room hotel; a 30,000-square-foot floating casino (riverboat casinos in Louisiana are anchored dockside); restaurants; a spa; and an 18-hole country club-style golf course, raises Pinnacle into a new echelon of casino operators.

Wall Street gaming analysts and Louisiana casino authorities share Lee's assessment.

"Without exception, this will be nicest riverboat casino in the Louisiana market," CRT Capital Group gaming analyst Steve Ruggiero said. "This will be a property that is much more than the typical riverboat property. L'Auberge du Lac is truly a vacation retreat, and it's going to move Pinnacle to another level."

Pinnacle, which doesn't operate a casino in Las Vegas, has six regional properties, including two other riverboats in Louisiana and the Boomtown Casino in Reno.

The company's stock has traded between $10 and $20 for much of the past year. Pinnacle shares fell 12 cents, or 0.7 percent, Wednesday to close at $17.07.

Ruggiero said he plans to initiate coverage on Pinnacle with a "buy" recommendation and a target price of $26 a share, based on L'Auberge du Lac's opening.

Deutsche Bank gaming analyst Marc Falcone was as upbeat as Ruggiero about Pinnacle and its newest property.

"The opening of this casino will be a company transforming event for Pinnacle," Falcone said. "It has the potential of elevating the company's profits and diversifies their exposure in terms of cash flow. It puts Pinnacle on track for substantial growth over the next few quarters."

Wade Duty, executive director of the Casino Association of Louisiana, said L'Auberge du Lac is his state's second-most expensive casino, trailing only Harrah's land-based gambling hall in New Orleans in building costs. The new resort is expected to give competing casinos in Lake Charles -- riverboats operated by Isle of Capri Casinos and Harrah's Entertainment -- significant competition.

A rivalry will also ensue from the nearby Delta Downs racetrack and casino in Vinton, which Boyd Gaming Corp. operates and which recently underwent a $65 million expansion to add hotel rooms and other amenities.

In April, Lake Charles casinos -- including Delta Downs -- reported casino revenues of $40.3 million. As a whole, Louisiana reported game revenues of 189.4 million during the month.

"This property is a whole different dynamic for Louisiana," Duty said. "We think it will significantly grow the gaming market."

L'Auberge du Lac is French for "inn on the lake." But to Pinnacle executives, a better meaning might be "inn catering to Texas residents with disposable income."

The company is spending most of its marketing budget on attracting folks from Texas, which does not have casino gaming, who want a quick getaway. Houston is a two-hour drive along I-10, and Pinnacle is buying a seaplane that will shuttle wealthy Texans from around the state to Lake Charles.

Lee believes 80 percent of the casino's customers will be Texans.

"The average resident of Houston is going to see our television ads nine times in the next month," Lee said. "That's like the marketing for a beer commercial. Our idea is to bring a Las Vegas-type experience to Lake Charles."

Duty said that 63 percent of Louisiana's casino customers come from Texas, which fits well into Pinnacle's designs for the resort.

Lee said the property's architects and decorators -- Las Vegas-based Joel Bergman and Todd Avery-Lenahan -- spent months traveling around Texas to determine what would be an appropriate look.

"We wanted to see what were the most successful hotels and what were the most successful restaurants and country clubs," Lee said.

He said Texan focus groups picked the property's name.

"When they come to Louisiana, they expect a name that was Louisiana French," Lee said.

Lee spent seven years as the chief financial officer of Mirage Resorts and said the opening of L'Auberge du Lac has the feel of a Las Vegas casino unveiling.

The golf course -- Contraband Bayou Golf Club -- was designed by famed golf course architect Tom Fazio, who designed the ultraexclusive Shadow Creek for Steve Wynn and the recently opened course at Wynn Las Vegas, at which a round of golf costs $500.

In Lake Charles, golfers will be able to play the Fazio course for less than $100 a round, Lee said.

Texans who vacation in Jackson Hole, Wyo., will find a familiar dining experience at L'Auberge du Lac: an outlet of the Snake River Grill, an award-winning restaurant.

The idea is similar to Las Vegas, where celebrity chefs and world-renowned restaurants have opened locations.

"I hope people are impressed by how thoughtful we have been," Lee said. "Our goal was to bring a Las Vegas quality project to one of the second-tier gaming markets."

L'Auberge du Lac's opening is a milestone for Pinnacle. In 2007, the company expects to open the first of its two casinos in the St. Louis market, including one near the famous Gateway Arch.

While $365 million is not a lot of money by Las Vegas standards -- two similar-size properties, Red Rock Station and South Coast are being built for $800 million and $600 million, respectively -- Lee said casino analysts will judge L'Auberge du Lac on its own merits.

"I would love for us to be known as a creative company with small budgets in the same way Steve Wynn is seen as being creative with big budgets," Lee said. "From the name, to the style, to the choice of materials, we tried to be thoughtful in the way we built it. I think it puts us on the map as a company with a management team that as a group, has the expertise to do interesting projects."