Station Casinos to begin paying quarterly dividend

Wednesday, July 23, 2003 | 11:08 a.m.

Second quarter profits at Station Casinos Inc. more than doubled as the locals' casino operator avoided much of the tourism slump that has hurt the Strip and its Green Valley Ranch Station casino in Henderson saw strong gains.

Station Casinos raised its earnings forecasts for the year and also said it would begin paying a quarterly cash dividend of 12.5 cents per share on Sept. 4 to shareholders of record on August 14.

The company is the third gaming giant in recent weeks to announce a dividend, joining Mandalay Resort Group and slot maker International Game Technology. But Harrah's Entertainment Inc. and MGM MIRAGE said during recent days they have no immediate plans to pay dividends.

More companies are analyzing dividends after Congress cut taxes on payments, and analysts say gaming companies are positioned to pay dividends now that they are generating stronger cash flows and fewer spending projects are on the horizon than in previous years.

"The decision to pay a dividend reflects confidence in our ability to generate significant, reliable cash flows over the long term," Station Casinos Chief Financial Officer Glenn Christenson said.

Even after paying dividends, the company is generating enough consistent cash flow to take advantage of growth prospects in Las Vegas and elsewhere, Christenson said.

Cash flow is typically defined as earnings before interest, taxes, depreciation and amortization and is a key indicator of casino performance.

Some analysts raised their earnings estimates on the company today, saying the company's growth prospects look bright in light of the strong opening of the Thunder Valley Indian casino in California, which Station manages in partnership with a tribe.

"With a new casino opening expected in 2005, a Native American contract for 2007, the potential for an increase in slots allowed in casinos in California and growth in the local economy, we believe that (Station) is one of the few casino operators with a visible growth path over the next few years," Goldman, Sachs & Co. casino analyst Steven Kent wrote in a research note to investors.

The company revealed few performance details about its Thunder Valley Casino. While the tribe's financial details are confidential, the strong opening of the casino last month led Station to increase its 2003 management fee forecast from about $50 million to a range of $65 million to $75 million.

The casino opened June 9 with about 1,900 slot machines and 90 table games but expects to add about 18 more tables later this year when it opens a VIP gaming area and a pit of Asian games. A bingo parlor, coffee shop and Asian restaurant also are expected later this year. The tribe may enter a lottery drawing for more machines to it can offer up to the 2,000 slots now allowed under tribal-state compacts for casinos, executives said. The property can accommodate up to 3,000 machines.

Thunder Valley fees -- $4.9 million in about three weeks -- were higher than some analysts had predicted.

Other indicators show the casino is outpacing its locals' casino counterparts in Nevada.

Deutsche Bank Securities analyst Marc Falcone said he estimated the casino's "win per unit per day" -- or how much each slot machine netted from gamblers -- was about $650. That compares to the $100 or so generated by the average Nevada slot machine, experts say. Falcone's estimate of a 62 percent cash flow margin at Thunder Valley compares to the 20 to 30 percent margins typically generated by profitable Las Vegas casinos.

Station Casinos executives also said they are working with a tribe in Sonoma County, Calif., to seek alternative sites for that tribe's planned casino. The casino, proposed by the Federated Indians of Graton Rancheria at the south end of the county, is facing a firestorm of opposition from local politicians and residents who say the project will threaten an environmentally-sensitive wetlands in the San Francisco Bay Area and hurt their tourist-dependent winegrape region.

The search for alternative sites was triggered by the opposition as well as recent Congressional legislation by Sen. Dianne Feinstein and Rep. Lynn Woolsey that raises additional regulatory hurdles for the project, executives say.

The company is meeting with the congresswoman and expects the tribe to develop a plan that is palatable to local officials, Station Casinos Chief Legal Officer Scott Nielson said. In the end, the tribe is entitled to reservation land in Sonoma or Marin counties, where it originated, he said.

The casino -- planned on a potentially more lucrative site than Thunder Valley in that it is closer to San Francisco -- could be built in two to four years, executives say.

"The opposition has been vocal," Nielson said. Still, he said, "there are a lot of folks who don't want to do anything to take away tribal sovereignty."

Station's next project in Las Vegas, Red Rock Station casino at Charleston Avenue and the I-215 Beltway, is expected to break ground in mid-2004 and open in mid-2005. The company's improving profits and lower debt ratio means it will be able to pay for much of the project without raising additional capital, Christenson said.

The Summerlin community is growing faster than the Green Valley area feeding Green Valley Ranch Station, Christenson said. The Summerlin casino also will serve the entire west side of the Las Vegas Valley, which is now largely vacant of major casinos, he said.

Station Casinos reported earnings of $20.6 million, or 33 cents per share for the second quarter. That compares to earnings of about $8 million, or 13 cents per share, in the same quarter of last year.

Excluding certain one-time charges, the company earned $15.5 million compared to $10.9 million last year. On a per share basis, the company reported profits of 25 cents -- beating analysts' average estimate of 22 cents -- compared to 18 cents last year.

One time charges included half a million dollars related to a patent infringement lawsuit filed by Harrah's Entertainment Inc. over the company's slot club program. They also include $8.4 million for development fees and interest income related to Thunder Valley.

The company said it expected to earn 32 cents to 36 cents in the third quarter on cash flow of $74 to $78 million. It also expects to earn $1.21 to $1.31 per share in 2003 on cash flow of $290 million to $300 million, increases primarily reflecting the addition of management fees from Thunder Valley, the company said.

Station expects Thunder Valley management fees of about $65 million to $75 million for the year.

Company revenue for the quarter increased 6 percent from last year's quarter, to $210 million. Cash flow jumped 12 percent, to $68.1 million.

Same store revenue at casinos open at least a year rose 3 percent, to $227.3 million. Cash flow at those properties increased 4 percent, to $79.2 million.

Marketing programs -- especially the company's "Jumbo" bingo, poker and slot jackpot promotions -- helped boost same-store figures, the company said.

Station Casinos reported earnings from its Green Valley Ranch Station casino of $5.6 million, consisting of a $1.4 million management fee plus half of the property's operating income. Excluding management fees, the casino generated cash flow of $13.7 million, a 28 percent increase from last year's second quarter.

The Henderson casino is half owned by the Greenspun family, owner of the Las Vegas Sun.

During the quarter, the company exercised an option to buy 32 acres of land adjacent to 41 acres of land owned at the southwest corner of Durango Drive and I-215 for $10.7 million.

The company also purchased 19 acres adjacent to its Wild Wild West Gambling Hall & Hotel on Tropicana Avenue for $28.8 million.

The Durango site is intended for a future regional casino in the fast-growing Southwest Las Vegas area. The purchase next to Wild Wild West was aimed at controlling the site for future development.

Station Casinos shares rose more than 9 percent in early trading today, to $29.61.