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Churchill Downs Inc. Reports Operating Results (10-Q)

July 29, 2009 | About:

Churchill Downs Inc. (CHDN) filed Quarterly Report for the period ended 2009-06-30.

Churchill Downs Inc. is a racing company that primarily conducts pari-mutuel wagering on live Thoroughbred Standardbred and Quarter Horse horse racing and simulcast signals of races. Additionally the company offers racing services through our other business interests. Churchill Downs Inc. has a market cap of $480.7 million; its shares were traded at around $35.11 with a P/E ratio of 26.6 and P/S ratio of 1.2. The dividend yield of Churchill Downs Inc. stocks is 1.5%.

Highlight of Business Operations:

On June 3, 2009, construction began on a 108,000 square-foot facility adjacent to Calder, which will feature over 1,200 slot machines and is scheduled to open in early 2010. On July 10, 2009, Calder received licensing approval from the state of Florida to operate 1,225 slot machines. In accordance with the relevant legislation, during the third quarter of 2009, we submitted payments of $3.0 million for the annual license fee for 2009 and $0.3 million for the annual Problem Gaming Fund fee for 2009. The fees will be amortized as expense on a straight line basis over their legal life, which is twelve months.

On January 29, 2008, Miami-Dade County voters approved a referendum permitting pari-mutuel facilities, including Calder, to operate up to 2,000 slot machines at each location. Under current state law, slot machine revenues are to be subject to a fifty percent tax rate. In 2008, Florida Governor Charlie Crist approved a compact with the Seminole tribe which would permit the tribe to operate certain table games and Class III slot machines in return for specified revenue to the State of Florida. The compact was voided by the Florida Supreme Court. The Florida legislature subsequently enacted legislation permitting Governor Crist to enter into a compact with the tribe. The governor has until August 31, 2009 to negotiate the compact, which must then be ratified by the Florida legislature. Pending legislation provides for a reduction in the tax rate for racetracks operating slot facilities in Miami-Dade and Broward Counties from fifty percent to thirty-five percent as well as a reduction in the annual license fee from $3 million to $2 million upon final ratification of the tribal compact. The legislation also permits the operation of slot machines at facilities that operate quarter horse meets, including those licensed but not yet operating. This provision would permit Hialeah Racecourse, which is approximately twelve miles from Calder, to open as a quarter horse facility and operate slot machines after two consecutive years of racing. It is unclear whether it would apply to other quarter horse facilities not yet licensed. At this time, it is too early to determine whether the compact will be finalized and the resulting tax reduction achieved.

The 2009 session of the Kentucky legislature concluded on March 27, 2009. The Speaker of the House filed House Bill 158 (HB 158), which would have permitted the operation of video lottery terminals (VLTs) at Kentucky racetracks. HB 158, as amended, passed the Licensing and Occupations Committee of the House. HB 158 stipulated a $100 million license fee for Churchill Downs payable over the first five years of operation. HB 158 also stipulated a 28% tax rate on gross gaming revenues during the first five years of operation and a 38% tax rate for ensuing years if the facility exceeds $100 million in gross gaming revenues per year. HB 158 was heard by the Appropriations and Revenue Committee of the House but was not voted on by the committee. The Speaker of the House subsequently stated that the issue of expanded gaming should be considered in a special session in the summer of 2009 as part of the states efforts to balance the 2010 budget.

As of June 30, 2009, approximately $76.5 million has been paid by the riverboat casinos into the HRE Trust Fund pursuant to Public Law 94-804. The State of Illinois has adopted the position that the organizational licensees are not entitled to payment of interest. On July 14, 2009, the Illinois Racing Board (IRB) voted to determine eligibility to receive a distribution under Public Act 94-804 and to approve a percentage allocation among eligible organizational licensees of the $30.6 million, excluding interest, that has been paid into the special protest fund account during the two-year statutory period. The IRB allocated 33.8% ($10.3 million) to Arlington Park. The IRB determination is subject to challenge by current and former organizational licensees. To date, no amounts have been paid out of the HRE Trust Fund or the special protest funds. However, if the riverboat casinos legal challenges are ultimately unsuccessful, all of these funds likely will be required to be disbursed in accordance with the statutes and the IRB determination. We have not recorded any of the amounts which we may be entitled to receive under Public Acts 94-804 and 95-1008 as revenue, nor do we have an asset reflected on our balance sheet in respect of any such amounts. In light of the pending litigation and significant uncertainty surrounding it, there can be no assurance that we will receive any of these funds or, if it does, the timing of such receipt.

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