PENN Entertainment Inc (PENN) 2005 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Penn National Gaming third quarter results conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. (Operator Instructions). As a reminder, this conference is being recorded today, Thursday, October 27, 2005.

I would now like to turn the conference over to Mr. Joe Jiffoni. Please go ahead.

Thank you, operator. Good morning everyone and thank you for joining Penn National's 2005 third quarter conference call. Will get to management's presentation and comments momentarily as well as your q-and-a, but first I need to read the Safe Harbor disclosure.

In addition to historical facts or statements of current conditions, today's conference call contains forward-looking statements that involve risks and uncertainties within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements reflect the Company's current expectations and beliefs but are not guarantees of future performance. As such, actual results may vary materially from expectations. The risks and uncertainties associated with the forward-looking statements are described in today's news announcement and in the Company's filings with the Securities and Exchange Commission, including the Company's reports on Form 10-K and 10-Q.

Penn National assumes no obligation to publicly update or revise any forward-looking statements. Today's call and webcast may include non-GAAP financial measures within the meaning of SEC regulation G. When required, a reconciliation of all non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP can be found in today's press release as well as on the Company's web site.

Peter Carlino, the Company's Chairman and CEO, will now start the call and he's joined by others members of management. Peter?

Joe, thanks very much and good morning everyone. We are happy to report another excellent quarter here at Penn National. And before I begin, let looking to my left, introduce all of our staff who are present. To my left, Kevin DeSanctis, Bill Clifford, Steve Snyder, Jordan Savage, Len DeAngelo and Robert Ippolito. We always assemble our principal folks here. As you know, we've done over the years so that we can answer any and all questions that you might ask.

At the outset obviously, we have finally closed our Argosy transaction and we can also report pretty good performance for virtually all of our locations. Despite this, the performance of our stock over the last month or so has been disappointing. In fact, some of us were wondering here if some of you, our investors, knew some things that we did not because we've been scratching our heads trying to figure this out. I suppose that much of this has to do with uncertainty and a significant number of issues that we're going to talk about today.

So our primary goal today is to remove as much of that uncertainty as we possibly can and we're going just roll through a list of stuff. Normally, as you know, we go quickly to questions, but let's take a few minutes and tell you about what's going on here and we intend to stay to the last second of the last call until you're all satisfied.

First, of course, we're going to talk about the effects of Katrina on our Gulf Coast properties, then we will spend a little time talking about our Argosy closing our plans for the future there. We will visit Maine and Pennsylvania and we will talk a little bit about our operations across the country and finally take a look at CapEx as we expect it to unfold at our various properties.

First, let's take a look at the Gulf Coast. As you know, our properties, or most of you know, our properties at Bay St. Louis, Casino Magic and Boomtown in Biloxi were significantly damaged. And at Bay St. Louis for example, our (indiscernible) you recall that we have a tower connected to the Casino on our main property, and then we have what we call the Inn (ph), about 200 units across the parking lot, that was the original hotel there, was totally destroyed. And in fact, it will be razed. And the barge was essentially destroyed, completely, and the entire first floor areas of the property through all of new work that we did are wiped out entirely.

The good news about this and about Boomtown is that we have a pretty good clarity right now about what we want to do and we're going to share that would you. Some of the numbers will be a bit fuzzy, but we Bill walk through some of that with you.

With respect to Casino Magic, it's our intention to raise the Inn to move very, very quickly to get the hotel up and operating again, although there is damage on virtually all floors. Essentially, wind damage, rain driven through any crack that it can find. The hotel is structurally fine, but it's going to take a fair amount of time to get it up and running.

The intention is to repair the hotel, repair all of the common areas of foodservice outlets and the like and to open as soon as practical -- believe me, this won't be real fast -- that might be nine months. I shouldn't even probably put a number out there, a year -- it will take the time it takes to get that core property open. We have no intention of immediately reopening the Inn. Obviously, we would likely, if the business warrants, build a second tower from which that property was designed before we would go open an Inn across the parking lot.

So it's kind of full speed ahead, it's going to take time. The cleanup process is going very, very well. In fact, it's virtually complete today and we'll be proceeding and are proceeding to reconstruct the tower and the common areas. So we would expect to open with a temporary facility possibly in the 10,000 square feet area of our ballroom. At the same time, we've engaged architects to design a land-based product that would be an adjunct to that. Obviously that would come later and this process is all underway.

So at Boomtown, the situation is a little bit different. Again, significant damage on the first floor areas. All of the cleanup -- I think at Boomtown, we can say it is virtually done. They've been through the property entirely and we're ready to move ahead. The barge itself was dislocated from the property, the gaming barge, and we have temporarily moored back in its former position. However, it is our intention to send the barge actually away for repairs. It's going to away for some been indeterminate period of time. Have it rebuilt and reconstructed and then parked, when it returns, at an adjacent property that we -- and begin operating just as soon as practical.

With respect to the market in Biloxi, I think we feel a little bit more bullish about activity down in that part of the world. We would be happy to get a property open there sooner rather than later. I will say that Bay St. Louis is probably a little more complex because there's a lot more damage to devastation to peoples' homes and businesses in that part of the world. So fortunately or not, that is a project at Bay St. Louis it's going to take a little longer to do, just as it will probably take the market a little longer to come back. So the timing there is good.

With respect to Biloxi, I think we feel a little bit more bullish about that market, and as luck would have it, we believe we can get back to operating there in some shorter period of time. I'm going to ask Bill to talk a little bit about insurance and to give you a framework for what's going on there.

Thanks, Peter. As we look at the insurance, one, let me touch on the accounting processes for the insurance. In the third quarter, our operating results were down and Bay St. Louis clearly had no operating results from September, although we did include these results from the months of July and August.

Going forward, the business interruption portion we have not included anything in our guidance in the fourth quarter and nor do we intend to include any proceeds in our guidance next year until we have a definitive timeline on exactly when we expect those properties to be open.

The next piece -- I think it's important for everybody to understand how we are viewing the situation down in the Gulf Coast. For all practical purposes, we have insurance proceeds between property damage as well as business interruption that we think are going to be more than adequate in order for us to reopen our businesses. So in effect, we have two gaming opportunities, greenfield opportunities, from our perspective which will yield some what we think very encouraging results when they reopen, and effectively, will cost us nothing from today. The reality is, all of those costs will be recaptured or paid for (indiscernible) insurance (indiscernible).

Relative to what we're going to price (ph) on insurance proceeds, when we get those, we will receive business interruption proceeds at some point in time. We don't know how much today, we don't know exactly when the timing of those are. When we do record those, they will get reflected as operating income but it will be at some indeterminate time in the future. And I guess the less point I'd like to raise on the insurance is, clearly, we will not be completely absolved from any disputes from insurance companies. I think it's going very well today. I think the two sides are cooperating very nicely. But at this point in time, we're on a fact-finding mission. We're (indiscernible) making estimates et cetera, et cetera. At some point in time when the rubber hits the road, there's going to be some dispute without any doubt relative to the value of the damages and the characterizations of the damages. But having done that and taking a fairly thorough review from our perspective, we're pretty comfortable that at the end of the day we're going to be fine relative to the proceeds versus the outlays.

I'm sure there will be questions following up on that, but I think Bill presented a very good summary and I hope left you with the idea that we believe in the end, we will be okay.

Let's move onto Argosy. As you know, that closing has finally occurred. I cannot say the path was as swift or as smooth as we might have liked it to be, but the reality is it's done. We have closed on the Baton Rouge property and we have moved very quickly to proceed with integrating those properties into our own.

We just recently had a general manager's meeting here at our home office in Wyomissing and are well down a path to making that company part of Penn National. And I have every reason to believe that's going to go extremely well and we're quite pleased with that.

We are evaluating ongoing construction with respect to some of the Argosy projects, and we'll visit that as we look at capital spending a little later. But that process of review is underway. And we are considering our options, which is the best way I can describe it right now as we look at the possibility, or probability, whichever way it might go, of divesting two of our Illinois properties.

The best way I can characterize it is suggest that we did what we felt we had to do to get the closing. Obviously we were not in the position and didn't feel like we could jeopardize the entire Argosy transaction with a dispute, or let's say an extended debate over what might have happened in the State of Illinois. The commission there had suggested that we should not really be in a hurry because by their analysis, we had until December to actually get this thing closed and that we made the case that time was of the essence. It was obvious to us that we weren't going to get there any too quickly. So we did what we had to do to get to closing.

But that having been said, there are a number of options open to us and you can be assured that we're looking at all of those carefully. Let me ask Kevin, who was much involved with the -- on the groundwork there in the state, just to make a couple comments about that process.

(multiple speakers). I think Peter really articulated it pretty well. If you look at the high points, we were not dealing with an experienced Gaming Board. You have to remember, this was an entirely new Board. Every member was new. They had no historical perspective, they don't understand the industry. They were and are immersed in the Emerald litigation and they viewed the Penn-Argosy merger as a precedent-setting situation. They were under a lot of pressure.

They ultimately, I believe in order to avoid a decision, placed conditions upon us which I think they understood we could not live with in order to prolong the process. As Peter said, they were in no hurry to make a decision.

Giving up Alton while not optimum for us and something we really did not want to do and giving up Joliet which was absolutely something we did not want to do unfortunately was a requirement. They stated to us in no uncertain terms that we had to sell either Hollywood Aurora or the (indiscernible) Joliet in order for them to approve the merger. And if we did not sell one of those assets, they would absolutely not approve the marcher. While we did not then and do not now believe that they had any right to do that or to put those conditions upon us, we did not have the luxury of time.

We believed at the time that the conditions, in addition to asking us or requiring us to sell Empress Joliet or Hollywood Aurora, they put some conditions on us even with the sale of one of those assets that we did not believe we could total (ph) it. I believe that if we did not put our ultimate proposal in front of them, we could still be in discussions today. And I think that while difficult, we put a recommendation in front of the Board that allowed us to get through the merger. And if you look at this from sort of a 10,000-foot level, I think ultimately the Board was not malicious. I don't think that they did this trying to hurt Penn. I really to believe that they felt they were in a situation they were totally uncomfortable with. And ultimately, they come back with a ruling in terms of our divestiture of the assets that I think was fair. They've given us 15 months in which to get to a definitive sales agreement. And frankly, I think we've maintain a fairly good relationship with the Board, which is going to be important on a going forward basis. And as Peter said, we're now evaluating all of our options, which there are several. I don't believe we're going to go into them on this call because I think it's important for us to be able to do that and work with the Board on this and hopefully get to a satisfactory conclusion. Peter?

Kevin, that says it pretty well. You have gotten pretty much color more than frankly in some respects we were anxious to share, but you said now a pretty good sense of what went on and what our feelings are and I hope that is helpful.

With respect to the general political climate in the State of Illinois, it's worth at least a comment that the recent suggestion to outlaw gaming in the state is of course preposterous and rather unbelievable. It's discouraging -- first let me say at the outset, I don't think it has any -- it's not going anywhere and I don't think anybody seriously believes it is. But it is discouraging as an industry, and what does it say to you our shareholders to our thousands of employees in the state and those of other companies when this kind of silly debate goes on. This is an industry that employs thousands and thousands of people, it generates nearly $1 billion of revenue for the state, and yet this kind of silly posturing, which has more to do with politics than it has to do with us.

So that's unfortunate, but we -- hang on -- Kevin just handed me a note. I guess this is the latest political intelligence, but this could actually get through the House. But again, it's not to go anywhere, that is our clear recognition. This is all about politics, and our objection here as using our industry or any industry as a pawn in a greater process.

So we find that very discouraging and I think that we're patient, I guess our fondest hope is that a state like Illinois, which is incredibly unstable, will finally figure out we're an important, significant part of the state and the business community and get over this stuff and move on. And this has happened just about everywhere else. So it's still a bit unstable there, but I think I would not read anything into that for the future.

So that having been said, let me move on to what is next. Let's talk about Maine and Pennsylvania. In Maine, we are happy to confirm that we will open our temporary facility in Bangor on November 4, and that is an initial 475 machines. We are expecting to start construction on the permanent facility by the second quarter of '06, so that Maine is very near at hand and we're excited about that.

And with the opening of this temporary facility, I want to point out that we will be paying the balance of our payment to Sean Scott (ph), which will bring our total payment up to $51 million, which is our price of entry into the state. And of course, that price of entry is to be the only licensed gaming facility in the state of Maine, which we think is a very nice opportunity.

I want to point out though that the $51 million is arrived at by a formula tied to the tax rate in Maine. And we have previously announced that our total payment will be somewhere between 50 and $80 million, depending upon the final legislative tax rate. We are satisfied that our calculation is correct. There is the possibility that on the other side, Mr. Scott could have a different view of that, but that's a subject we may have to face later. But that's the reality of it. We will make that final payment and get underway. If there is any change to that, of course we will let you know.

Pennsylvania, wow, I realize there's a lot of unsettled feelings about Pennsylvania. It is awfully disappointing that this legislation sits in place, that we could all be well underway today. The state could be closer to receiving a very significant contribution from gaming that it expects and will receive. This is as most of you know tied to a number of political issues, essentially political issues. Nominally, as best we can determine, it has to do with the distributorships and as you might guess, we kind of don't care whether there's 0, 1, 5 or 10, we just need to be able to procure a slot machine in the state and get going.

To that end, you should know that we have constructed a temporary facility, which is 25,000 square feet. It has long been under roof. We expect it to be absolutely complete by -- call it December some time and ready for operation. The purpose of that facility is twofold. It is that place which will become our simulcast center, if you will, as we raise the Penn National Racetrack. The intention is, is we have been asked previously to tear down the track with the recognition that building a grand and wonderful new fully-integrated gaming and racing facility is the way to go, perhaps a little bit more costly. We have announced the $30 million more costly, but I think in the end, we're going to have a fabulous new facility at Penn National. Concepts and layout and all that stuff have long been set. We're probably 65 to 70% through the blue line, the line drawings for the project, so that those drawings are going to be finished well before we will be able to put a spade in the ground. The temporary facility will be finished. If things to seem to be moving on well in the state, although we may not quite have our licenses yet, we will probably proceed -- and I hasten to add, with the approval of the Racing Commission -- to demolish the racetrack building, move operations to the new simulcast center and be prepared to charge ahead with a new facility just as soon as the legislation permits.

So I realize this is frustrating for everybody and it is kind of a huge waste of time. We have no fears of course that there will be gaming in Pennsylvania. It's going to happen. So this is one where you just kind of take a deep breath and do the things that you can do, and we will just sort of wait it out and hope that we can get these issues solved. But it is beyond our control, we've done everything we can do. It will get settled, but in some indeterminate time. So that rests with the Legislature. I think that's for Pennsylvania.

I'm going to have line over here (ph) to talk generally about our operations, but I'm going to let that pass, so you can direct this where you like if you have questions about the performance in a particular facility. Let's just take a look at, talk about capital spending and look at some of the principal projects.

We have issued, I think Bill did a very good job of organizing a lot of (indiscernible) perhaps in this last business presentation, the press release today. Much of this speaks for itself. So Hollywood Grantville -- the Hollywood facility in Grantville is what it is. I'm not going to going to that now, I just talked about it a moment ago. Let me talk about the ones that we ourselves haven't had to deal with before, and that would be the Argosy projects in Kansas City and in Lawrenceburg.

In Kansas City, there is a new hotel that is under construction underway and one to which we intend to just carry through conclusion. So what you see there is pretty much what you can expect to get. They've done some very nice improvements, as many of you may know, in Kansas City and the performance of that facility has been very good. So we are just going to follow through with the process that has already begun.

The big question I suspect with you would be the Lawrenceburg project and the $266 million that's projected to be spent there. That project is underway. As a matter of fact, the new barge, gigantic new one-story -- essentially two stories, but all gaming will be on one and the second story will offer actually an expansion opportunity, if warranted. The barge is actually under construction, and archeological work, looking for historical artifacts and all of that kind of stuff, it's vital first, have long since been done. The project has two parts -- a new parking garage, and then of course a new facility that will go up in essentially a new basin and be complete before the old boat is actually taken out of service.

We are still evaluating that project, though at the same time, allowing it to proceed so that there will be some cardinal points where we get to make some judgments for seed (ph) or not. I might let Bill or Kevin volunteer to talk about that, but if we spend -- I think the first point would be this. But if we chose to go ahead and spend the balance of the $266 billion, we are satisfied that that still would be an excellent project, an excellent project. We measure that against the prospect of stopping everything, going back to the tables and completely reevaluating a project that the Argosy folks took quite a few years to study and understand, pulling the plug, losing several years. And if I had to give you a gut feeling right now, it will probably carry on. The project made sense and we're probably going to do it. But I will say that we still look at it very, very carefully. We have had some leadtime on this. Obviously over the last year, we've had a chance to look at it and talk to management. So what don't I ask, Bill, just take a few seconds to talk about the strength of the market and why we probably will proceed.

Thank you Peter. I think the point that gets us very comfortable with the whole Cincinnati market is, we have talked about it before and our analysis relative to penetration of the market. We think the market is absolutely underpenetrated and underserved and it needs more capacity. And clearly, we think that the expansion that we're talking about (indiscernible) take us from roughly 2800 positions to over 4000. And that would not be the end of it, that would just simply be what you can get in on the first floor. There's actually some opportunity for even more capacity on the barge as it's designed. We think the market would absorb that and would have almost no impact on our competitors.

Having said that, if for some reason that assumption were to be inaccurate, and for whatever reason the market isn't as strong and deep as we think it is, we think that the geographic advantage that the property in Lawrenceburg has to competitors, primarily Rising Sun, which is roughly 10 or 15 miles down the road, and then (indiscernible), which is even further down the road, that we would in effect cannibalize those properties and ensure the success of this property. I think we're very comfortable with the return that we're going to get. Clearly, I think Peter alluded to it very well. I think clearly we might have gotten to a different position had we been involved from the outgoing or beginning set (ph), but we clearly acknowledge that there is a need for more capacity and this is a viable plan that will get us there. And given what we've talked about in terms of some costs and the amount of time that we would lose starting over, the most prudent step is to move forward with the project as currently designed.

And in the end, we'll have a spectacular project. So by any measure, this is going to be a pretty impressive facility.

So with that, I think we've giving you as much background or probably more than you needed, so why don't we, operator, open the floor to questions.

(Operator Instructions). Larry Klatzkin, Jeffries & Co.

Hey, guys. I first wanted compliment Bill on a phenomenal press release. This is really detailed and really, really helpful and I think all of us appreciate that. I wish all companies would do as good a job with the document. A couple of things. As far as Baton Rouge goes, initial indications are that you guys are benefiting a lot from Biloxi being down. At this point in time, you guys seeing a long-term -- a real benefit here, and what should we expect?

We definitely have noticed an increase in Baton Rouge, and I think if you look at most of the markets that are still up and running surrounding the affected areas, most of those operations have derived some type of benefit. We continue to see very strong results in Baton Rouge but I think we would caution everyone to just temper their enthusiasm a little bit. We don't know how long this will last. We have anecdotal information that overall demographics in Baton Rouge will improve over what they were pre-hurricane, but it is anecdotal at this point in time. So I think that, yes, it's accurate, that we're doing very well in Baton Rouge and we continue to see that. But it's very difficult to project that that will continue over an indeterminate amount of time.

But fourth quarter, we could see you being up 20, 30% in cash flow at that property. Is that possible?

Anything is possible, Larry. We think things are going very well right now. But I just don't believe that we're in a position to say that this will continue through the entire fourth quarter into the first quarter. We just don't know at this point in time. The results are just too good to be true right now.

Second thing is, as far as our forecasting goes, we should just put a zero down for Mississippi and your insurance recovery is going to be the lump sum as it comes in and we're really should not count that in our forecast?

Well I think, how you guys want to handle it, it's really your call, and I think I touched a little bit earlier on how we're viewing it as, we look at it as a receivable from the insurance companies that we're going to be using to fund the construction of the new project. Certainly, we have earnings power that's going to kick in upon the reopening of those properties and whether you include it as zero now, I think that's appropriate, and then as we will record those items as they come in and as we get agreement with the insurance companies. How you guys want to value that or reflect that in the stock is your call.

Alright. As far the sale of the two properties, obviously you can't see what you're going to get in timing. But one, when you get that money in, what's your plans on how you're going to use it? Just pay down debt at that point?

Yes, certainly that would be the immediate plan, is we would use that to reduce our existing senior credit facilities.

Is there any chance the legislation rules that you guys don't have to sell them? Is there some chance of that at all?

You know Larry, I think we're going to proceed in a very deliberate manner in Illinois. At this point in time, I think the most conservative approach for everyone listening is to assume that we have to -- we have made an agreement and we will get to a definitive sales agreement in the time allotted to us. Anything else that happens obviously would probably be a positive.

Bill, just going forward, debt levels, CapEx, capitalized interest in corporate and also what we expect for the fourth quarter maybe next year? It's also maintenance. You've given project, but also maintenance?

I'm going to pause that. I will run through some stuff and then when I'm done here, you can tell me whether I've missed anything. Cash on hand at the end of 9/30 was 173, almost 174 million. Our maintenance CapEx was roughly 8.7 million. Project CapEx was roughly 8 million for a total of 16.8 million.

Looking forward to the fourth quarter, we have 84.8 million in project CapEx. That's inclusive of the Sean Scott payment. Maintenance CapEx we're projecting to be roughly 25.2 million. On debt structure, we have the 625 million of existing Penn bonds. We have a revolver balance roughly -- immediately after the acquisition of 217 million, term loan A of 325 million, term loan B of 1.650 billion. The terms on that at the open was roughly LIBOR plus 200. As we've indicated in the press release based on the terms in our credit facility upon our first certification of our total of debt to EBITDA, we expect that the term loan B will step down to LIBOR plus 175. We have entered into some hedges for 960 million with a blended rate of 4.71%. Those are mixed between three, four and five-year hedges. There's a -- we'll have roughly 515 million of undrawn revolver that has a carrying cost of roughly 50 basis points. We have roughly $17 million worth of letters of credit which I can margin for a cost of 225 basis points, and then we have deferred financing fees which will aggregate on an annual basis to roughly $4.9 million, giving us a blended cost of capital on our senior credit facility all-in of roughly 6.7%. What else did I miss?

Corporate expense.

Corporate expense, I think that speaks obviously somewhat to the synergies. We're looking at the fourth quarter, we're looking at corporate expense roughly of 9.4 million. We project out next year's corporate expense to be roughly in the $43 to $46 million range. If you add together 10 -- 2005 corporate overhead as well as Argosy's corporate overhead, which on an LTM basis, ran 37 million, we are going to come in very close to the $20 million synergies that we expected.

Alright, that was good. Any chance you do a temporary casino in Biloxi, get something up sooner?

The quick answer is no. There's much too much work to be done and we don't see any advantage -- well the quick answer is no, because remember, we're on a barge there. That barge is going to go down river to be repaired and we just cannot do anything with it until it comes back.

The last is, Pennsylvania has I guess a hearing session on Monday. Any chance (indiscernible) whether the distributorships or anything else positive to come out of the session?

Larry, we know nothing more than you know.

I would caveat that a little bit. We don't expect anything on the distributorships to come out, Larry. We don't believe there's, at least in the immediate future, any legislative fix to the distributorship issue.

Alright. When you reopen Bay St. Louis with a smaller facility, (indiscernible) interruption insurance going to supplement you to back up your formal level for a period of time?

Yes. There is a tail on the insurance proceeds. The tail lasts roughly six months. And obviously, that will be subject to a considerable amount of discussion, but we're certainly entitled to that.

Let me make a comment again about Pennsylvania. The issues we believe are far more than just the distributorship. That's phenomenal issue that's out there. But you can bet that there is a lot of political stuff behind the scenes at the various caucuses, the Ds and Rs in the House, the Ds and Rs in the Senate, are discussing. And behind the scenes, all of this is the going. There's things we know, probably a whole bunch of stuff we don't know. And when those guys get to some agreement among themselves, and that's all this is about, the issue will get settled. that's why as I say, there's really not much we can tell you. I'm giving you the flavor, but what actually will happen and when it happen, we have no clue. So you ought to take the view and realize we're all anxious for the growth and we want to see it happen. But, A, it's going to happen, and you might as well just relax and look at other things until the day comes when they say go ahead and we'll say quite happily, great, we're ready to roll, let's go. But worrying about it in the meantime frankly just it's worth it.

Alright, thank you, guys, good job.

Ryan Worst, CL King.

Thanks, good morning, guys. Just a question for, a couple of questions for Bill. One, the replacement flood insurance, the charge you guys took in the quarter, could you explain that? What kind of time period does that cover? Is that supplemental insurance, new insurance or what?

That is a charge we have to replace the flood in insurance that we believe was obviously primarily used up. Our flood insurance is an annual aggregate flood insurance that we obviously believe that the bulk of that, substantially all of it, was eaten up with Hurricane Katrina. And so at that point in time, we were what I will call, pardon the phrase, but naked going forward for the rest of the year. So this was the premium that we were required to pay in order to re-up and basically get -- make sure that the Company has flood insurance for the balance of our insurance period.

So it's for the next year?

It's really to -- well, we had insurance that was obviously going to cover for the full year. That got used up, so this was what I would call replacement insurance for what Hurricane Katrina used up. For the period, the period covers the balance of '05 through August of next year.

And then, Bill, you said you're comfortable about the proceeds from the insurance will cover your outlays to build the facility, but are you also comfortable that the insurance proceeds from business interruption will cover your lost income and cash flow from those properties?

I think that's -- and my comment is going to cover both. That's -- the only reason I'm hedging on that is because obviously it's way too early to call exactly how this is all going to settle out with the insurance companies. We certainly believe in the way we're looking at, again, as we're starting forum the perspective of the greenfield, with adequate insurance proceeds to get us back up and running and to cover our out-of-pocket expenses. I do believe it will exceed that. I am not at this point completely comfortable that I can give everybody 100% insurance that will cover both.

But theoretically, it's supposed to, right?

There is a lot of negotiations and a lot of issues here on valuations and there's just a lot of things that are going to happen as you work yourself through the insurance adjustment period that should and will become problematic without any doubt in my mind (indiscernible) the nature of what has happened down there. (MULTIPLE SPEAKERS)

Looking at the fourth quarter, it seems like your EBITDA guidance was a lot higher than what I was looking for. And obviously Baton Rouge probably plays a part in that. But have guys looked at any operational changes at the Argosy properties, or is Tunica also doing much better than it had been previous?

I will touch real quickly, then Kevin can comment on the pieces. Certainly, we got information relevant to what's going on in the Gulf Coast and we obviously know where we stand through yesterday or basically the day before yesterday which was when we finalized our guidance for the quarter. We don't have anything in there for, any EBITDA results for Bay St. Louis or Biloxi. And I tell you in my guidance that we have not incorporated any radical changes on the Argosy properties.

(indiscernible) we're pretty much in alignment. We're totally in alignment with what Bill said. I think if you look at our properties in the third quarter, the pre-Argosy properties if you will, Charles Town, Aurora, Rouge and Tunica all did a very nice job, casino Rama did a very nice job and the two real pressure points for the Company were really are two smaller operations, which was Bullwhacker's and Penn National. And obviously with Penn National, we're ramping up with expenses, we have a little bit of a revenue decline, but the reality is we've been ramping up with a lot of expenses in anticipation of Pennsylvania ultimately coming online with our new facility. But when you look at our existing operations, I think they are all performing very well and we expect that to continue.

In terms of our Lawrenceburg property, Riverside properties, (indiscernible) Argosy properties. We don't expect any changes in the fourth quarter to be made at this point. We're working with their management. As Peter said earlier, we have had them in (ph), they're starting to understand our expectations. But really I think as we look into '06, if there are any changes to be made in terms of the way they approach their business model, I think we'd see more of that into '06, and that's going to be something that really is more of an evolutionary concept.

One final question. Have you guys seen any impact from your consumer due to the higher gas prices, maybe fewer visits or lower spend per customer at any of your properties?

I will hit that, and Bill, Len, anybody else can chime in. That's a question we've been asked many times. And the reality is, it's very, very difficult to be able to identify any impact at all. You can look at our numbers and frankly when we look at them on a little more detailed basis, we just aren't able to discern any impact if there is one. So maybe it's happening, maybe we should be growing a little higher rate, maybe we should have a little more customer visitation, but there's nothing that we can really put our finger on.

Where I do think that we get concerned is not necessarily on the gas prices. I'm sure there will be a point where between gas prices and utility costs, people are pretty significantly impacted. But really where we concern ourselves mostly is with employment. We find that most pressure at our properties comes when there is an employment problem in our primary customer base, if you will. So that's really where we're more concerned and we have seen that in a few areas and we watch it very closely. Bill?

I think I will make the comment that in all of the announcements that we've tried to do to correlate all of our business levels to gasoline prices, is that we find that it's an impossible correlation. It just doesn't -- it moves contrary sometimes, moves in line other times. There just isn't any particular hard correlation. We find -- quite candidly, we find a significantly better correlation to whether there is something -- and this is a horrible way to put it -- but something incredibly interesting on CNN; seems to have a dramatic impact on our business levels, and fortunately those are temporary. But it's totally an impact when -- whether it was Hurricane Katrina or 9/11 or any of the other (indiscernible) -- invasion of Iraq. We clearly see an impact on our business at (indiscernible).

Let me make this comment. I have been around the sort of the stadium or the fill-the-seats kind of business for a long time at Penn National now virtually 35 years. And it's kind of fun to watch what operators say about their performance. It's too hot, it's too cold, it's too dry, every excuse on planet. And the reality is year-to-year, there are always variables, stuff that happens. But none of these things, even the economy has no effect on what people do. They give up, and this is my personal view, their entertainments last, almost before bread and water.

It sounds silly but that has been my decades of experience around this kind of thing. Kevin put his finger on the only thing that really has an impact, and that's jobs. If people are employed, they could otherwise be hurting, but they really, really, really give up there entertainments last. That's just my empirical experience. So we're not overly worried about that. It's an issue in a place like Bay St. Louis when you go down there will recognize that there's no "there" there. And it's going to awhile for that to come back. That's a concern. As I say, fortunately, the timing of what we're going to be doing and the requirements of development there are going to push us out to a point where it's also going to correspond with when people are coming back, will be back in homes and jobs and so forth. So with that caveat, we don't see any impact.

Okay, thanks.

Dennis Forst, KeyBanc.

Good morning. I wanted to ask Bill for a clarification on some of the business interruption insurance or just the way the accounting is going to be handled for Mississippi. First of all, you said that business interruption -- when you get the checks, that'll go through operating income, Bill, so it will show up in cash flow of the property?

Yes. I have not 100% gotten a satisfying answer in terms of whether it should be recognized at the property or recognized at a corporate level. But the guidance I gave before didn't include -- so that we're clear on the 43 to 46 -- didn't include any hurricane offsets in corporate. But it will run through, it will definitely run through the income statement.

And what about depreciation at those two properties? Do they go to zero, do they get cut in half?

They go to zero until they're back up and running.

So we should model zero depreciation for those two properties. And then what about ongoing labor costs for those employees that you're going to keep longer-term? We've already set up a reserve for maintaining payroll and benefits to effectively (technical difficulty) beyond (MULTIPLE SPEAKERS). I'm finished, go ahead.

The way that will get accounted for is, GAAP does provide that we can establish for out-of-pocket expenses while the properties are under reconstruction, that we can recognize the insurance proceeds to the extent of those out-of-pocket expenses. So we will be setting up a receivable from the insurance company equivalent to the amount of the out-of-pocket labor costs prior to the property investment.

Okay. And then on the debt, I think if I added up your four components, there was about $2.8 billion at the end of the quarter, and then I net out 125 million for the sale of their Baton Rouge boats. So today, you should be around 2.7 of long-term debt?

That's correct.

And lastly, I wanted to ask Peter if he could just address your level of interest or Penn's level of interest in Atlantic City. Have you commented recently about what your intentions are, given that you're going into Pennsylvania, do you have more or less interest in Atlantic City than you used to? Or any interest?

Let's be consistent with what I've said all along and those of you who have followed these calls for years know that there was a time when I would not even acknowledge the word Atlantic City product Las Vegas or any of those kind of things. It's clear that as we continue to grow that Atlantic City looms larger on the horizon. And I will pick that first, because again, consistent with our strategy, I would rather do business across the street than across the country, and of course across the country before around the world, and that's just sort of a goal here.

We think Atlantic City will become stronger and ever stronger. Don't see Pennsylvania as a threat. I think there could be some short-term impact, but remember, we're in a higher tax environment here, we have limited gaming, it's slots, and that -- this is my belief, and Kevin may feel differently, that Atlantic City is not going anywhere. It may have to buckle down, become a little bit more aggressive, have a little more capital spend, sort of change the mix of what they are down there. But it's not going anywhere. So I think that we take Atlantic City very seriously and that we keep our eyes open, and that is consistent with what we have always done. So if it had been on the far horizon, I won't say it is on the near horizon, but it is certainly within our focus.

Okay great. And if I can ask just one more question about Illinois. Did the Illinois Board approved the acquisition of Argosy with just a verbal commitment on your part to dispose of the two assets, or is there some formal agreement that you will not been licensed if you do not make arrangements to sell those properties by December '06?

There's a formal agreement.

So you have to. If you choose to fight that, they can pull your license?

I don't think we would ever choose to fight anything. We could choose to talk about, discuss. Again, we're in a much better position to do those sorts of things now than we were before. Kevin I think quite ably described that there was a lot of pressure there, that pressure's now gone. We are going to do all of the things that we need to do to prepare those assets for sale. But at the same time, we can go down parallel paths in much more comfortable way. So that is kind of where we are.

Okay, thanks a lot.

Let me squeeze in with one comment that occurred to me I think we're saying. You know, we've talked about Mississippi. And we really did not highlight the fact that we actually have a land-based opportunity there, just sort of glossed over that. That will have a real impact at Bay St. Louis. Obviously, we have the ground to do that there. It may or may not be an opportunity for us in Biloxi with Boomtown.

I want to say just a general comment on the call, and this is more academic than valuable to you, that Mississippi was a very interesting experience. Governor Barber there provided just incredible leadership to stand up early and stand behind this legislation. I had a number of conversations with him in groups and individually, and I was frankly astonished, the degree to which he understood what was going on on the Gulf Coast. He not only had a sense of what happened to the industry, he could even talk about specific properties. He knew where Boomtown was, he knew what the back bay was, he knew the nuances of the struggles that the different properties faced. It was really quite incredible. So I wrote him a note to thank him and I'm publicly saying that what he did there in that state and continues to do is really quite remarkable. So we do have a land-based opportunity and we're going to pursue. Operator, next question.

Smedes Rose, Callion (ph).

Hi, thanks. I'm sorry if you addressed this. I'm juggling various releases here. I just have two quick questions. You had initially guided to I think early '07 to have slots up and running in Pennsylvania. Have you revised that guidance at all, given legislative issues in the state now?

I think we have. I think what we've indicated, and it's again, it's reflected in the press release, we're indicating now we're more comfortable with third quarter '07. Clearly, (indiscernible) miraculously the political issues all get resolved quickly, we might win that number back (indiscernible). We think that's the best place to be based on the information today.

And then in Illinois, given -- can you talk about I guess the level of interest, or is there a concern about maximizing what you can sell these for, given that everyone knows that you have to sell them? Is that an issue, or can you just address that at all?

That's an interesting question. Look, we may have to sell them, but there is no shortage of buyers. And believe me, it's going to be a very, very competitive process.

There's one other point I think we should make. When you look at our what dates relative to development, they're all dependent upon start dates. So the end dates are all dependent upon start dates, whether you're looking at Bangor, whether you're looking at Pennsylvania, the two Argosy projects are pretty much in full swing. Clearly, when we put an end date in there, like Pennsylvania called it, what is it, second quarter, third quarter '07, that is dependent upon a probably 12 to 14 month build. So we would have to start 12 to 14 month before that, which would put us in the second quarter of '06. Once that moves, then obviously that other date would move also, whether it's quicker or longer. So I think that's important for people to pay attention to and stay on top of. Obviously we will update people as we get information.

Okay. So we would expect to see groundbreaking by 2Q '06 in order to meet a 3Q '07, and then just kind of work on that timeline?

Correct.

I guess that's, so you talked about the Illinois assets. I just am still curious, because it just seems like if you were a potential buyer and you know you have to sell them, why would someone offer what you could sell if you did not have to sell them? You know what I mean?

I think the best answer to that is, if there was only one buyer, you are right. But the reality is, if there is more than one interested player, the reality is, you have to pay as much as it takes to get the other guys to give. So as long as there is enough interest in the properties, I don't think it's going to be a problem in terms of optimizing the value. And based on preliminary indications and what I would call reverse calls, we see plenty of people who have expressed an interest in both properties (indiscernible) in Joliet as well as (indiscernible).

Take a look at the 10th license (indiscernible) that was one license. A lot of people wanted it. This is an established boat, a very large amount of supplemental property around it, great development potential, which is by the way we don't want to give it up. But it's going to cost someone dearly to get their hands on it and there's no shortage of people who want it.

Smedes, I don't want to act like we're piling on here, but I think it is important to understand that we absolutely did not want to sell Empress Joliet or Alton. This was a big disappointment for our company. And I think the primary reason we didn't want to sell these boats in because if you look just at Empress Joliet for a second, it's probably one of the best operations in the country on a pound for pound basis. We think the upside there is significant. And so I think anybody who understands this industry and takes a look at that marketplace will see the same potential. And I think we've demonstrated up to this point that we really don't spend a lot of time dealing with people who think that they're going to purchase something from us on a bargain basement level.

(indiscernible) a better opportunity in the country. If there's a better property in the country that you know that we can get good, call us please, because we would like to have it. We'd like to look at it. This is a major, major market. It's a big market property. There's no parallel to it anywhere in the country, which of course is why as Kevin said, we don't want to give it up. So look, enough said on that subject.

We apologize for our enthusiasm in fashion here.

Okay, thanks.

David Anders, Merrill Lynch.

Great, thank you very much. First off, Bill, for options for next year, do you have any ballpark number. I know it's a little off topic, but what your (indiscernible) will be associated with options?

No, first of all, I don't know how generous our Board is going to be, so it makes a very difficult prospect to indicate what that number is going to be. We will provide that with the next quarter's guidance.

And just for clarification on the Bay St. Louis side, so you're going to open it with a 10,000 square foot casino, and then eventually build out a land-based facility. Is that correct?

What we're suggesting is, we will take the ballroom, which is 10,000 square feet. Not suggesting there couldn't be some small supplement to it, but the point is the major new casino, whatever that will get to be, and that's really with the architects right now, is not only immediate horizon. We are focused on getting our principal property back together and looking attractive and getting some activity started there as soon as we reasonably can with the recognition that, if and as things go better, we could build another hotel tower, replace the 200 rooms we've lost, we can build an expanded casino facility. All of that's in the works. So we're just taking a deliberate, careful step-by-step, which is consistent with what we always, do (indiscernible) at Bay St. Louis. And we feel real good about that, but it's going to be staged carefully.

Just a follow-up. How many hotel rooms are in the tower you're going to keep?

It's like 292 or something. We call it 300, it's something like that.

That's fine. Thank you.

(Operator Instructions). Aimee Marcel, Jeffries & Co.

I got bumped off the call, I jumped on Aimee's line. Couple of questions (indiscernible) before. But one, as far as -- just because you're expanding in Cincinnati, what's going on in Ohio and Kentucky legislation and competition to you.

In terms of those places, Ohio and Kentucky. In terms of Kentucky, basically, we believe it has a less than 50% chance of happening. It's a citizen’s initiative type of state. So they have to basically have the question to see if whether or not they can put it on the ballot, and if they get it on the ballot, then we think it has about a 50% or less chance in Kentucky.

In terms of Ohio, same type thing. If it gets on the ballot, we think it could have a little bit more -- it's probably more like 50/50. So we don't really see either one of those states right now as providing any serious threat at this point in time. Obviously, we're keeping an eye on both.

Peter, you weren't implying that you like the governor of Mississippi better than the governor of Illinois, were you?

Larry, I don't want to try quoting Aristotelian logic, but you should not assume a negative from a statement of the positive. (indiscernible) let's focus on Mississippi.

I'm sorry about that. As far as the Illinois process goes, are you going to hire an investment bank and do a formal auction? How are you going to work that?

I think on a preliminary basis, what we're doing right now is we're moving forward with putting together a data room. We are in the process of retaining some people to put together a prospective, definitive sales agreement, and that process will take a bit of time. And quite candidly, we're not, we're going to be pursuing parallel paths in terms of what our other options are and we will the moving forward to get ready for the marketing process.

We do not have an investment banker retained. I don't believe we would have one until we got to the process of a formal auction process. At that point in time, we might retain an outside adviser to help us with that. In the interim period between the time that we would be prepared for that, we would entertain preemptive offers, which investment banks would be more than welcome to go through peer clients who would like to make incredibly compelling offers that we would obviously entertain selling an asset for, which we would entertain selling any asset at the right price. But totally, we're going to be pursuing both options simultaneously.

And then the question obviously would be that given the Rosemont auction process and everything, is it reasonable to think that you might get a (indiscernible)?

I'm there, but obviously, it's not our call. It's obviously a call in terms of what other people are willing to pay and how much they share our enthusiasm for the process of both properties handlings (ph).

Larry, let's say this. We're not in any hurry. We'll get on (ph), as Bill said, get the data room together. But I would not expect, and correct me Bill and Kevin if you disagree now, but I don't think we're going to be into an auction process until well into the next year.

The last question would be Pennsylvania. If the rules work, which obviously you don't pay 50 million up front for it, would you look at a temporary casino in Pennsylvania?

We had a temporary facility, it's up. It's one that will serve as a simulcast center, it can also serve to put a limited number of machines in place. But let's consider a couple of things. First, there's some practical issues. Do we have to pay the entire 50 million upfront, will it be justified by the number of machines that we can open with, will the guaranteed payment to the local municipality, which is as I read that, $10 million, that we would apply for just a handful of machines, will it be prorated? There's a lot of questions (indiscernible) is there a 1500-machine minimum tranche, which it would appear could be the case, and does the Board have the latitude to waive all of this staff in a temporary situation or a conditional situation. Nobody knows, nobody knows. So again, we're not losing a lot of sleep over any of these issues right now. We're prepared to go anyway, we're ready to roll. We're just going to have to let this unsold.

Well, thank you very much guys, and again, I will make sure the governor of Illinois knows you still love him.

I'm sure I do. By the way, we have no ongoing dispute with the governor (indiscernible). This one is in the Legislature right now I guess that's behind this whole question of abandoning gaming. I must assume the governor repeat some of that. So this one is really not about the governor.

Joel Simkins, Slater Capital.

Congratulations on another good quarter. I'm sorry to beat a horse here, but is there anything that would preclude you guys from spinning off Illinois potentially into some sort of a tracking stock? That is my first question. Second question is, it looks like the President St. Louis has become available again. What's your interest in that, because I know you've been on it in the past. And are we also getting any closer to tables in West Virginia?

I will take the first one. The spinoff is an option. There's a couple of limiting factors. For it to be a tax-free spin-off, we would have to own the assets for two years, although at that point in time, the assets would still be taxable as a dividend to the shareholders. We would need to own an asset for five years in order to be able to accomplish a spinoff were it tax-free to both the shareholders as well as the Company. So yes, it's an option.

There's nothing that precludes us from doing that, so as Bill indicated, there's some ramifications. What was the second one?

The President in St. Louis.

(multiple speakers) At the right price, sure, we'd take a look at the President. We were sort of surprised, at least around the table here, we were surprised when Columbia Sussex dropped out of it and haven't had really time to look into why. But sure, we think that's something that would be worth taking a look at. We've looked at it before, and as Peter is fond of saying, we've kissed a lot of frogs.

That was definitely a frog, (indiscernible) a toad.

So that is our (indiscernible) (MULTIPLE SPEAKERS). And the last one, in terms of table games in West Virginia, we've been very consistent on table games in West Virginia. We don't believe they're on the horizon at this point in time, but ultimately, I think they probably will be. If you look at West Virginia, the increase in West Virginia is all Charles Town at this point in time and the other three operations are down I believe on a year-to-date basis. And when Pennsylvania comes up, I think that some of the West Virginia operations will be impacted. And I think that's going to put a tremendous amount of pressure for the Legislature in West Virginia to act. But I do believe it's about timing and I think we have been consistent in saying that we think people need to be patient here, and these things will ultimately sort of play themselves out.

Peter, what is your (MULTIPLE SPEAKERS)

-- are going to be crunched by Pennsylvania. So we've taken a very patient view with this, get a sense that the right time is going to happen.

Let me make a comment about St. Louis. We have a number of boats that could roll quite nicely over the next couple of years into place down there, so we certainly consider that, and we could well be there.

Peter, once you guys complete the sale of the two or whatever you do with the Illinois processed (ph) properties, you're going to be sitting on a lot of cash, you're going to have a very strong balance sheet, a lot of free cash flow. What is your kind of global view as when you're willing to bite down on the next big acquisition? How soon would you think the Company would be ready for that?

Well look, we can't really answer that now. Suffice it to say that we are always looking at the prospects. That is a never-ending, relentless process here. It never stops. I will say that while Argosy was in doubt, we also remain pretty highly focused and forego all other forms of entertainment while that thing was hanging out there. But it's done, the integration, again, should not be busy, but not difficult. It's what we do. They are good properties, good people. So they're not expecting any problems. So I would say from this day forward, we can turn our attention to whatever is next and that's always the case here at Penn.

Thanks for clarifying that.

I hope that doesn't surprise anybody.

(technical difficulty), Wachovia Securities.

Good morning, sorry I came in a little bit late and I don't know if this question was asked, but can you give us a total headcount?

Headcount of employees?

Yes.

I don't have it offhand. You know, Jeff, if you give us a call, we'll give it to you. It was 15,000 and I don't know how many we had at the Argosy in total. It's a little bit -- there is a little bit of a difference in the number. We count Rama employees as our employees, but it's fundamentally a pass-through, and there's about 3000 employees there -- is that what it is, Len, 300 or so? So give us a call and we will give you the headcount. I don't what it is off the top of my head.

Okay, great. And then reading through the press release, by the way, just to complement you gentlemen, that was just phenomenal, and great job. There was about 2000 that were affected by the hurricanes. Is that correct?

Yes. At Bay St. Louis and Biloxi, we had about 2000 folks impacted.

Okay, great. And Larry answered the last one. So great guys, I will talk to you later. Good job.

Thank you. There are no further questions at this time. Mr. Carlino, I will turn the conference back to you to continue with your presentation.

I think we have finished. Obviously, things are busy but going well here at Penn National, and hopefully we have left you with that picture and look forward to seeing you next quarter. Thanks very much.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.