Energy problems, Indian threats to Las Vegas casinos downplayed

David Strow

Wednesday, May 16, 2001 | 10:57 a.m.

Gas prices up

Gasoline prices across Nevada are beginning to inch up with the onset of th' e summer driving season.

The latest monthly survey by the American Automobile Association shows the price for a gallon of self-serve unleaded gasoline averaged about a $1.79in Nevada, up about a penny from April.

Nationally, the average price jumped 13 cents to a new high of $1.72.

In Nevada, average prices were highest in Reno and Las Vegas at $1.82. That's unchanged in Reno from last month but represents a 9-cent jump in Las Vegas.

Prices in Elko also rose 9 cents to $1.68. They held steady in Carson City at $1.80 and in Sparks at $1.79, AAA reported.

Two issues -- soaring energy costs and the proliferation of Indian gaming in California -- have helped create nervousness among investors about the outlook for the Las Vegas Strip.

But in separate reports to investors, two prominent gaming analysts are downplaying the possible impact these issues will have on Nevada casino companies this year.

Energy costs have been a hot-button issue in recent weeks, particularly after several Las Vegas hotel-casinos began charging guests nightly energy surcharges. But Jason Ader, gaming analyst at Bear Stearns, suggested investors shouldn't stay up nights worrying about it, as higher energy costs are already factored into estimates.

"For the larger Las Vegas operators, and particularly for those properties that are considered 'must-see,' we ultimately believe that the impact of higher energy prices will be modest ... In general, we do not expect stock prices to decline purely as a result of higher energy costs," Ader wrote.

Ader's analysis indicated that the "average" Strip casino should see increased costs of $3.2 million this year from their increased electricity and natural gas bills.

"While this is nothing to sneeze at, for most operators it is expected to reduce (cash flow) by no more than 1 percent to 3 percent," Ader said.

Older properties and single-casino operators could be most vulnerable, since the costs would take a relatively bigger bite of cash flow. Ader cited Riviera Holding Corp. and Hard Rock Hotel Inc. as companies that are more vulnerable.

Among large operators, Ader said Mandalay Resort Group, MGM MIRAGE and Station Casinos Inc. will see the most notable impact, given their exposure in Nevada. MGM MIRAGE could see cash flow reduced by $34 million to $36 million in 2001; Mandalay, $17 million to $19 million; Station, $8 million to $10 million; Park Place Entertainment Corp., $16 million to $18 million; and Harrah's Entertainment Inc., $8 million to $10 million.

Energy costs could have an indirect impact as well, Ader said. Higher electricity and gasoline prices could cut down on Las Vegas visits by Californians, and higher energy costs at home could cut into the visits of Las Vegas locals to casinos operated by companies like Station and Coast Resorts, he said.

"As the summer driving season approaches, we will become increasingly concerned if the price of gasoline continues its recent upward trend," Ader said. "With the recent increase of competitive gaming product being offered in Southern California on Native American lands, further gasoline price increases could steer the average gamer to a detour in order to bypass an incremental trip to Las Vegas."

But David Anders, gaming analyst with Merrill Lynch, wrote in a recent report he's no longer convinced California Indian casinos are the threat to Las Vegas he thought they could be, following a tour of 10 casinos in San Diego and Palm Springs.

"We believe that the Native American casinos in Southern California offer very attractive local entertainment but should do little to cut into Las Vegas' business longer term," Anders wrote. "In fact, we now attribute most of the current weakness in demand for Las Vegas from Southern California to cyclical (economic issues) rather than (long-term) issues."

A key reason for this view, Anders said, was the "challenging geographic locations" of many tribal casinos. Many are located on one-lane back roads, he noted.

"Although several of the casinos in San Diego and Palm Springs are in the midst of building nicer permanent facilities (with hotel rooms), we still believe that their geographic locations should ultimately preclude them from significantly taking share from Las Vegas, especially in the all-important Los Angeles market," Anders wrote.

However, Anders said he remains cautious about the impact California gaming could have on Reno and Laughlin, "given that they are essentially pure gambling markets, compared to Las Vegas, which is a major resort destination."