Harrah’s in energy pacts in Nevada, two other states

Brad Foss

Thursday, Sept. 6, 2001 | 11:15 a.m.

ATLANTIC CITY -- Harrah's Entertainment Inc. is willing to bet on many things. The cost of energy isn't one of them.

Stung by high electricity and natural gas prices last year, Harrah's is not taking any more chances when it comes to buying the power to keep its casino on the New Jersey shore as bright and noisy as the nearby boardwalk and as cool as an Atlantic breeze.

The company has since locked in long-term supply contracts at fixed prices with Houston-based Enron Corp., joining the growing legion of hotels, manufacturers, retailers and technology firms behaving more like utilities in terms of hedging their exposure to volatile energy prices.

The long-term electricity and natural gas contracts cover Harrah's casinos in Nevada, New Jersey and Illinois, which account for about three-quarters of Harrah's estimated $40 million annual energy bill.

"(Enron) forecast that those are the markets where the greatest potential volatility and exposure (to price swings) will be," said Harrah's spokesman Gary Thompson. "There's much greater price stability in other markets where we operate."

The five-year Nevada contract begins in June 2003 -- a delay prompted by an expectation that energy prices would decline in the short-term, Thompson said.

In January, Harrah's Atlantic City -- 86,000 square feet of casino space and more than 1,100 hotel rooms -- rang up a natural gas bill that topped $220,000, nearly quadruple what it normally pays during a winter month.

Under the 7-year deal with Enron, Harrah's agreed to pay roughly $5 per 1,000 cubic feet for a certain amount of natural gas.

"We wanted to put ourselves in a position where we could even the playing field and not worry about those price spikes," said Stuart Thomas, who oversees energy procurement at Harrah's.

Last winter, the retail price soared above $10 per 1,000 cubic feet in many parts of the country, and as high as $19 per 1,000 cubic feet in New Jersey.

At $5 per 1,000 cubic feet, Harrah's natural gas bill last January would have been closer to $60,000.

While Harrah's will be buffered from the worst-case scenario next January, the company could miss out on some savings if natural gas prices dip below what they've agreed to pay Enron. Harrah's executives said that is a tradeoff they will accept.

"We didn't do it to save money," said Thomas, emphasizing that Harrah's $40 million-a-year energy bill is a tiny fraction of its overall costs. "We did it to manage risk."

Still, Harrah's does expect savings from the effort. If energy prices remain flat over the period of the contracts, the savings should be about 5 percent a year, Thompson said.

"If prices shoot up again, the savings could be substantially higher," Thompson said.

Harrah's is not alone. Eli Lilly & Co., IBM Corp., Kraft Foods Inc., Saks Inc. and Solvay Polymers Inc. are just some of the companies that have energy management deals with Enron, Duke Energy Corp. and Reliant Resources Inc.

Enron's energy services unit is head and shoulders above its closest rival in this emerging field, signing $40 billion in contracts since it was created in 1997. After $200 million in losses since 1998, it recorded its first profits of $100 million in profit in the first half of 2001.

Jeremy Blachman, the division's chief operating officer, attributes the success to the breadth of its portfolio, which includes deals with food and beverage giant Quaker Oats Co. and the Archdiocese of Chicago, which signed a seven-year agreement worth nearly $250 million.

"Over the last couple of years, and particularly the last 6 to 9 months, we have seen our business go across markets," Blachman said.

A.G. Edwards & Sons analyst Mike Heim said Enron's energy services unit, which is essentially a seller of electricity and natural gas at retail prices, remains but "a blip" within Enron, which gets 80 percent of its profit from wholesale marketing and trading.

But if power and natural gas prices remain volatile, "it has the potential to become 10 to 20 percent of their business down the line," Heim said.

Makers of chemicals, fertilizer, glass and steel -- some of the most energy-intensive industries in the United States -- were hit the hardest in the past 18 months as natural gas and electricity soared to prices never seen before.

Companies that were not protected with long-term contracts took it in the neck, said P.J. Juvekar, a senior chemicals analyst at Salomon Smith Barney.

After Dow Chemical Co., which was protected, completed its purchase of Union Carbide Corp., which wasn't, Dow was hit with a first-quarter loss of $685 million, compared with a profit of $512 million a year earlier.

"Most of the disappointment came from the Carbide side, where they were fully exposed to $10 (per 1,000 cubic feet) natural gas prices without any hedges," Juvekar said.

Companies that were protected from last year's energy spikes recognized earlier on that "we didn't feel as comfortable as the market deregulated," said Michael Thaman, chief financial officer of fiberglass giant Owens Corning, which needs massive quantities of natural gas and electricity to melt billions of pounds of glass each year.

"We certainly don't have any illusions about our ability to beat the market," said Thaman, whose company signed a 10-year contract with Enron worth $1 billion.

In the case of Harrah's, the most important thing was to rein in energy costs without skimping on amenities at the casino or hotel, said Bill Simpson, facilities manager at the Atlantic City property.

Shutting down unused slot machines (3,500 are on at all times) or adjusting the casino floor thermostat -- set at a constant 70 degrees -- were never considered last winter even as natural gas and electricity prices soared to record levels. Neither was passing along the costs to hotel guests by adding an energy surcharge on their bills, a strategy pursued by many hotel companies.

The Sun's David Strow contributed to this story.

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