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Energy Costs Hitting Nevada Casinos

LAS VEGAS, Nevada – As energy costs continue to escalate in Southern Nevada, casino companies are warning investors there could be an impact to their bottom lines in 2001.

Not surprisingly, the Strip's brightly lit casinos are among the state's largest electricity customers. In 2000, the 37 casinos on the Strip paid $130.8 million in energy costs, according to the state Gaming Control Board. However, they made a total of $10.2 billion in revenues.

With Nevada Power Co.'s electric rate increases, the owners of these casinos are warning their energy costs could escalate at least 25 percent this year.

"The outlook is not positive on power costs," Mandalay Resort Group President Glenn Schaeffer said on a conference call with investors Feb. 28. "We're in the bright lights business, and (customers) want the lights turned on."

Schaeffer said Mandalay is expecting power costs to rise 25 to 30 percent over a year ago. Competitor MGM MIRAGE has warned investors of a similar increase.

"I think it's fair to presume we'll have some substantial increase in utility costs this year, and this should be taken into consideration in earnings estimates," Schaeffer said.

Jason Ader, gaming analyst for Bear Stearns, estimates these increases will boost casino company expenses in 2001 by 3 to 5 percent.

"Therefore, we expect a comparable reduction in earnings," Ader said. "Given the magnitude of the price increase, it's something every investor should be focused on."

On an earnings per share basis, the impact will be between 3 to 10 cents per share for 2001, Ader said, with the larger companies reporting a lower impact because of their additional shares outstanding.

Put into context, Mandalay reported $1.50 in earnings per share for the year 2000, while MGM MIRAGE reported $1.09 per share.

While calling the increased power costs "an immaterial amount by itself," gaming analyst Andrew Zarnett of Deutsche Banc Alex. Brown believes local operators such as Station Casinos Inc. and Coast Resorts Inc. could feel the pinch indirectly.

"A lot of seniors have fixed disposable income," Zarnett said. "If you pull out an extra $50 a month (for increased power costs), that's money they would have spent in a local casino or a casino restaurant. That's the larger impact."

A similar impact could be seen by Strip casinos from power increases across the Nevada-California border, said William Schmitt, gaming analyst with CIBC World Markets.

"The more significant increases would be in California, because that will impact their customers," Schmitt said.

Despite the substantial increases in Nevada, analysts believe gaming companies can take steps to make sure that earnings aren't hit very hard by the increases. Ader is urging casinos to start taking on an "energy surcharge" on rooms to offset the higher rates.

"A few extra dollars on their bills won't affect customer demand in any way," Ader said.

A second method is controlling energy consumption through conservation methods. That's the focus of Las Vegas-based Nevada Energy Buyers Network.

NEBN is currently consulting two casino companies, Station and the Sahara, on methods of controlling their energy costs. NEBN President Steven Boss said the company is in talks with an additional six gaming operators.

Between soaring electricity and natural gas rates, "the casinos are starting to become aware that their rates will be 40 to 50 percent higher this summer (over last year)," Boss said. "If they don't want to completely blow their budget, they need to take some steps to reduce consumption, without sacrificing the comfort of their guests. We try to make them as educated as possible on energy matters."

One method is installing more efficient lighting, while another is controlling the use of light in places like rooms and parking lots, Boss said. Casinos can also install air filtration systems that will only exchange air from the casino for clean air from the outside only when necessary, rather than automatically.

Ultimately, Boss said NEBN will become an "aggregator," grouping together mid-sized casino companies with hospitals, warehouses and office buildings, then shopping for electricity as a group to find more favorable rates. But that isn't an option now, as Nevada still does not permit retail customers to shop for electricity.

But Boss is assisting them with finding more favorable rates on natural gas, a energy source that's had open competition for about a decade. Finding long-term natural gas contracts at more favorable rates is a necessity right now, as market prices for natural gas are up four to five times over last summer, Boss said.

"For a typical medium-sized casino, they're paying over $1 million a year (for natural gas now)," Boss said. "It's getting their attention."

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