Monday, September 18, 2006
By Gary Rotstein, Pittsburgh Post-Gazette
(emphasis added)
Five Pennsylvania racetracks preparing to open slot machine parlors went before the Pennsylvania Gaming Control Board last week, and the new operators of The Meadows were the only ones confronted by serious concerns.
Gaming board members took such issue with slots revenue numbers provided for the harness track in Washington County that they said it could jeopardize the license sought by Las Vegas-based Millennium Gaming Inc. They issued no such warnings to other applicants, who had lesser differences with the estimates made by the board's staff and consultant.
The board plans to award slots licenses to all or some of the tracks Sept. 27, which would enable those with the quickest construction plans to offer the newest form of Pennsylvania gambling within a few months.
Bill Paulos, a partner in Millennium, would like to have a temporary casino with 1,800 slot machines ready by April.
Millennium was the lead company involved in purchase of The Meadows for $200 million in July. Mr. Paulos said the purchase agreement included the ability to return the track to Magna Entertainment Corp. if a slots license is not awarded, but he doesn't expect to use that.
"I still feel confident" the financial differences will be worked out by Sept. 27, he said. "I'm the operator of a company with some partners that are very bullish on The Meadows facility and site. The interesting thing is, what's the absolute worst that can happen?"
He pointed out that if the track falls short of projections and loses money for investors, at the state's projection of $123 million or less in annual revenues, the state will still retain a $50 million licensing fee and a greater amount than that from its share of the 54 percent overall tax rate on the new casinos.
Mr. Paulos said the racetrack casino is expected to bring in at least $215 million annually in slots revenue -- the amount remaining after slots winners are paid that covers operating costs, taxes and any profit for the owners. It has financial backing from Merrill Lynch and Bank of America, he noted, for an overall investment of nearly a half-billion dollars for the track purchase, slots license, temporary and permanent casino construction, and other costs.
If the slots generate about $100 million less a year than projected, he agreed with gaming board members that The Meadows project would not be viable.
He suggested the casino's location in a high-development area along Interstate 79, where large new shopping projects are also planned, will bring it many slots players who now travel to West Virginia or who would rather gamble at The Meadows than travel to Downtown Pittsburgh.
A state gaming board spokesman said he couldn't address Mr. Paulos' position that the board has nothing to lose by awarding a license. Generally, however, board members have said they have a responsibility to assure operators are financially sound and generate the revenue to meet the state's goals.
The Pennsylvania racing industry has lobbied for years for new gambling to revive the tracks, which have had sagging racing revenue while counterparts in West Virginia and Delaware have seen healthy profits since adding slots.
The law passed in 2004, with strong backing from Gov. Ed Rendell to broaden its scope to add five stand-alone and two resort casinos with new state funds of $1 billion a year for property tax reduction as the primary goal.
To reach that figure, the 14 licensees would eventually have to reach $3 billion in revenues. Although the law allows 61,000 machines statewide, fewer than 40,000 are expected, because smaller markets won't attract enough players to support the 5,000 maximum per site.
The Meadows has been viewed from the outset as among the smaller operations, compared to the stand-alone parlors or certain tracks in population centers. Revenue projections have not been released for all of the sites, but The Meadows might rake in more than two other tracks, near Erie and Wilkes-Barre, but less than three in the Philadelphia and Harrisburg areas.
The Innovation Group's study done for state Senate Democrats in 2004 estimated The Meadows might support 2,000 machines and $290 million in annual revenue before other Pennsylvania slots parlors open.
Once Downtown Pittsburgh has a location competing for customers, it said the revenues might drop to $151 million. If another racetrack casino opens in the Beaver Valley, revenues might level off at $134 million, the report predicted.
The board has declined to release details supporting the financial projections from its consultant, PricewaterhouseCoopers, as it has deemed those to be confidential under the state's slots law. Such analysis focuses, among other things, on the number of potential slots players within convenient driving distance and what they might spend per trip.
Mr. Paulos said The Innovation Group did a more recent study for Millennium, and both it and Christiansen Capital Advisors, which was previously hired by Magna, estimated Meadows slots revenues would stabilize above $215 million annually. He was unable to explain why The Innovation Group's long-term figures surpassed those it offered in the state Senate report.
One gaming industry analyst who has followed Pennsylvania's developments closely, Joe Weinert of Spectrum Gaming Group, was surprised by the board's estimates. He noted that the two West Virginia racetrack casinos close to Pennsylvania, Mountaineer and Wheeling Island, and two of the three Delaware racetrack casinos all generate nearly $200 million or more.
The West Virginia tracks' revenues will decline somewhat as The Meadows enters the slots business, but Mr. Weinert doubts the revenue will be only a little above $100 million.
"I cannot believe Millennium would go ahead with the type of commitment they're prepared to make if they thought that property would gross only that amount," said Mr. Weinert, who has done work for some other license applicants. "The Meadows should do well. ... It's well situated compared to some, being in the greater Pittsburgh market, but it's also being thrown into a more competitive market."
"Candidly, I think forecasting revenues in a jurisdiction that has no gaming, that has no operations yet, that has no sites yet, is clearly an art and not a science," said Bill Clifford, chief financial officer for Penn National Gaming Inc., the other applicant with a sizable disparity in revenue forecasts.
The gaming board estimated Penn National's track in Grantville, near Harrisburg, will bring in about $190 million a year, while the company believes the amount is at least $60 million higher. Even at the lower amount, however, the operator and board agree the track will be viable.
"The problem, really, is nobody knows what these will bring in," Mr. Clifford said. "That's kind of the whole concept of capitalism. You do an educated guess, invest your money, and you're either a success or not."
(Gary Rotstein can be reached at grotstein@post-gazette.com or 412-263-1255. )