Hurricane Hurts Harrah's

The catastrophic hurricane-related damages suffered by Harrah's Entertainment's Gulf Coast casinos came home to roost in the final quarter of 2005.

The Las Vegas-based casino operator said Wednesday it took $273.3 million in write-downs -- an accounting procedure that does not involve cash -- on four of its Louisiana and Mississippi gaming properties which, on paper at least, offset results for what was otherwise a successful fourth quarter.

During the three months ended Dec. 31, Harrah's casinos reported fourth-quarter revenue of $2.1 billion, an increase of 76.2 percent compared with revenue of $1.2 billion for the same quarter in 2004. The prior-year figure didn't include the casinos Harrah's acquired when the company bought Caesars Entertainment in June for $9 billion.

Revenue at casinos Harrah's operated a year ago rose 12.3 percent.

"Any businessman will tell you that same store sales growth of 3, 4 or 5 percent year over year is pretty good," said Harrah's Chairman Gary Loveman. "Double-digit growth in same store sales shows we're doing very well."

Cash flow at Harrah's casinos, defined as earnings before interests, taxes, depreciation and amortization, jumped 85.1 percent in the quarter to $534.5 million, compared with $288.7 million a year ago.

However, when the writedowns were figured into the equation, Harrah's earnings per share in the quarter was a loss per share of 78 cents, compared with diluted earnings per share of 68 cents a year ago. Analysts polled by Thomson First Call had estimated Harrah's would earn 56 cents a share in the quarter.

Harrah's fourth-quarter net income from operations was $111.5 million, but the company reported a fourth-quarter net loss of $142.2 million because of the writedowns.

"This is probably the most confusing earnings release we've ever had," Loveman said, expressing a concern that employees might not realize that business operations were up in the quarter.

"Reporting an earnings per share loss has nothing to do with our operations, which have been exceptional. But because, in the view of our auditors decisions were made in regards to Gulf Coast casinos, we had to take the writedowns before the end of the quarter," Loveman said.

Harrah's said the company is continuing to work with insurance carriers and claims adjusters to determine the full amount of insurance proceeds the company is due on the lost casinos. Once the insurance proceeds are received, Harrah's will report a gain on its balance sheet.

Hurricane Katrina and Hurricane Rita damaged four Harrah's casinos in August and September and the company has reported only minimal revenue from that region. Only Harrah's New Orleans, which reopened last week after being closed for more than five months, is operating once again.

Harrah's wrote off $88.7 million at the Grand Casino in Biloxi, Miss.; $78.6 million at the Grand Casino in Gulfport, Miss., which was sold in December; and $56.1 million at its two riverboat casinos in Lake Charles, La. The company also wrote off $49.9 million related to its under-performing Louisiana Downs racetrack.

Loveman said Harrah's wants to rebuild in Biloxi, but is looking at a possible exit from the Lake Charles market.

In its earnings release, Harrah's said the company's casinos in Las Vegas and Atlantic City had positive quarters while "momentum was building" at its Northern Nevada casinos and properties operating under the Horseshoe brand.

Loveman said the company expects to complete the integration of its Total Rewards customer marketing program into all its former Caesars properties by the end of April.

Wall Street wasn't disappointed by the Harrah's earnings report. The company's stock traded up on the New York Stock Exchange, closing at $72.72, up 36 cents, or 0.5 percent.

Gaming analysts also focused more on the company's overall earnings.

"While competitive issues in the North Central region affected results, we believe the strength in Las Vegas and Atlantic City is a harbinger of things to come from Harrah's, especially as the company's entire portfolio becomes integrated on Total Rewards by April," gaming analyst Felicia Kantor Hendrix of Lehman Bros. said in a note to investors.

"Further, we would anticipate that the rebranded Horseshoe property in Bluff's Run (Iowa) will also bolster results in the North Central Region," Hendrix said. "In summary, we believe this was a good, solid quarter that demonstrated the momentum behind Harrah's marketing muscle."

Stifel, Nicolaus Capital Markets gaming analyst Steven Wieczynski told investors in a note than Harrah's integration of the Caesars properties would help increase the company's market share and grow property visitation, similar to what the company experienced after it purchased the Horseshoe casinos in 2004.

"Results for the quarter were positive considering the company was without a number of properties impacted by hurricanes," Wieczynski said.