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Howard Stutz

Pinnacle's Quarterly Earnings Soar

2 August 2006

Pinnacle Entertainment on Tuesday announced a large gain in second-quarter earnings compared to a year ago due to prosperous times at its New Orleans casino and three full months of results from its year-old casino in Lake Charles, La.

A net payment of $44.8 million from Aztar Corp. to cover the companies' terminated merger agreement also boosted Pinnacle in the quarter.

But those figures didn't help the company's stock.

Shares in Las Vegas-based Pinnacle Entertainment fell $2.43 on the earnings news, closing at $25 in trading on the New York Stock Exchange, off 8.86 percent. More than 2.1 million shares were traded, three-and-a-half times the average daily volume.

Gaming analysts said Pinnacle, which operates casinos in Louisiana, Indiana, Argentina, the Bahamas and the Boomtown outside Reno, is a company that investors focus more of their attention on cash flow, described as earnings before interest, taxes, depreciation and amortization.

For the quarter, Pinnacle Entertainment had adjusted cash flow of $54.5 million, an increase of 80 percent compared with $30.2 million for the same period last year, which included just five weeks of results from L'Auberge du Lac, the company's Lake Charles casino.

"Pinnacle's EBITDA was kind of on the low end of what analysts thought they would do," CRT Capital Group gaming analyst Steve Ruggiero said. "And in this market, if something like that happens, the company gets taken out to the woodshed. I really don't think Pinnacle deserved the reaction it received."

Pinnacle posted earnings of $46 million in the quarter that ended June 30, or 93 cents a share.

Analysts polled by Thomson First Call collectively expected Pinnacle to earn 31 cents a share in the quarter, but hadn't accounted for the payment from Aztar or other development costs.

A year ago, Pinnacle lost $4.2 million or 10 cents a share, due largely to the costs associated with opening L'Auberge du Lac.

In the past year, L'Auberge has become Pinnacle's flagship property, reporting revenues of $77.6 million in second quarter. Companywide, Pinnacle had revenues of $228.8 million, a 51 percent increase compared with $151.5 million a year ago, including L'Auberge's brief results.

"Since its opening, L'Auberge has quickly become one of the leading casinos in the south," Pinnacle Chairman Dan Lee said.

The company expects to begin building a 250-room hotel expansion to L'Auberge before the end of the third quarter, which will give the resort 1,000 hotel rooms. In addition, Pinnacle announced in June it would spend $350 million to build a second hotel-casino next to L'Auberge, Sugarcane Bay, which is expected to open in 2009.

Meanwhile, Pinnacle's Boomtown New Orleans casino continues to benefit as the area recovers from Hurricane Katrina a year ago. The casino reported revenues of $52 million in the quarter, an 82 percent increase compared with $28.6 million for the same period last year.

Lee said the hurricane-related closure of casinos on the Mississippi Gulf Coast following Katrina, coupled with an influx of recovery workers in New Orleans seeking entertainment opportunities, have boosted the casino's fortunes.

Harrah's New Orleans, the state's largest casino, reopened in February and several casinos are planning to reopen in Biloxi and Bay St. Louis in the coming weeks, which Lee believes could cut into Boomtown's success.

Pinnacle tried unsuccessful to buy Aztar between March and May, signing two different merger agreements with company. When Aztar tore up the final agreement in favor of deal with Columbia Sussex Corp., the company paid Pinnacle a combined $78 million to cover a break fee and expenses.

Pinnacle said investment banking and legal fees left the company $44.8 million.

Analysts like Ruggiero believe Pinnacle will use those funds to finance various expansion projects. He said the company has more than $1 billion in capital expenditures planned over the next few years. Pinnacle is opening two casinos in St. Louis, one in 2007 and one in 2008 and it's second casino in Lake Charles in 2009.

Also, the company is planning hotel expansions in New Orleans and Indiana.

"Their big earnings aren't really going to kick in until the fourth quarter of 2007 or be anything meaningful until 2008," Ruggiero said. "But that might make the market impatient."