South Central Gaming Zone of Kansas Projections of Casino Visits and Gaming Revenues Prepared For: Kansas Lottery Gaming Facility Review Board November 2010 Prepared by: Wells Gaming Research 6900 South McCarran Blvd. Suite 3030 - Reno, NV 89509 775-826-3232 - http://www.wellsgaming.com South Central Gaming Zone of Kansas 2010 Projections of Gaming Revenues and Casino Visits Table of Contents Section 1 Page Introduction Background 1-1 Project Objectives, Scope of Work 1-3, 1-4 Gravity Model 1-5 Research Methodology 1-7 Limiting Conditions 1-10 Section 2 Executive Summary 2-1 Highlights of WGR's Research & Analyses 2-1 Trade Area Description 2-1 Trade Area Map (MAP 1) 2-2 Demographic Highlights 2-3 Summary of Current Gaming Capacity 2-5 Summary Comparison of the Applicants' Proposals 2-7 Highlights of the Gaming Revenue Projections 2-9 Section 3 Demographics for 2000 through 2017 Total Population 3-1 Adult Population 3-3 Median Household Income 3-4 Existing Gaming Capacity for the South Central Gaming Zone's Trade Area 3-6 Section 4 The WinSpirit - a Global Gaming KS, LLC Proposal Highlights of Global's WinSpirit 4-1 Development Site (MAP 2) 4-2 Gaming Capacity & Amenities 4-3 Existing & Proposed Competition 4-5 Scenarios - Brief Description of Each of the 7 Scenarios 4-6 Gaming Revenue Projections 4-8 Casino Visit Projections 4-10 Section 5 The Kansas Star - a Peninsula Gaming Partners, LLC Proposal Highlights of Peninsula's Kansas Star 5-1 Development Site (MAP 3) 5-2 Gaming Capacity & Amenities 5-3 Existing & Proposed Competition 5-6 Scenarios - Brief Description of Each of the 6 Scenarios 5-7 Gaming Revenue Projections 5-9 Casino Visit Projections 5-11 Section 6 Information on Wells Gaming Research & Richard H. Wells 6-1 Wells Gaming Research November 2010 6-1 Section 1 Introduction South Central Gaming Zone of Kansas 2010 Projections of Gaming Revenues and Casino Visits Introduction Background The State of Kansas legalized casino gaming in April 2007 when it passed and signed into law Senate Bill 66, the Kansas Expanded Lottery Act. Key gaming provisions of Senate Bill 66 are as follows: • Established four gaming zones • Stipulated that one state owned lottery gaming facility would be allowed in each of the four gaming zones. • Permitted an aggregate of 2,800 slot machines to be installed at 3 existing racetracks. • Created the Lottery Gaming Facility Review Board to evaluate applicants for gaming facility managers. • Required applicants to pay minimum capital investment and privilege fees. • Outlined tax structure for the contract managers of Kansas’ Lottery gaming facilities. In 2008, Round 1 of the bidding process, Kansas Lottery received four bids in the $300 to $500 million range to build and manage a gaming facility in the South Central gaming zone. Harrah’s Entertainment was ultimately selected, but then withdrew in November 2008 citing the economic downturn. In 2009, Round 2, Kansas Lottery received three considerably lower bids. The bidding pool was reduced to one after gaming companies either dropped out or combined forces. In April 2010, Chisholm Creek, the last remaining bidder, dropped out due to potential competition from a tribal casino in Park City, Kansas and uncertainty regarding potential changes in state legislation that might give Wichita Greyhound Park another chance to install slot machines. Round 3: Current Status Application Process: Shortly after Chisholm Creek withdrew its plans for a casino located at the Mulvane exit in Sumner County, the Kansas Lottery opened up the application process for a third time. Three proposals were presented to the Sumner County Board of County Commissioners on August 10, 2010. On September 8, 2010, the day that the Kansas Lottery Commission met to hear presentations from the applicants, Harrah’s Sumner Investment Company pulled its plans for a casino project. The Kansas Lottery Commission voted to approve contracts with Global Gaming Partners of Ada, Oklahoma and Peninsula Gaming Partners of Dubuque, Iowa for proposed casino projects to be located in Sumner County. Contracts were forwarded to the seven-member Lottery Review Board for their consideration and to select a winner. The review board has 60 days to review submitted casino plans, hear presentations from the applicants, consider public comments, and seek November 2010 Wells Gaming Research Page 1-1 South Central Gaming Zone of Kansas 2010 Projections of Gaming Revenues and Casino Visits guidance from their selected consulting group. After this process is complete, the review board is expected to select a winner. Gaming in Kansas: There have been several significant events that have occurred since Round 2 of the application process: • The Kansas Lottery opened their first casino in Dodge City on Tuesday, December 15, 2009. • The Kansas Lottery broke ground on its second casino in Kansas City on April 30, 2010. • To date, there have been no viable applicants in the southeast gaming zone of Kansas. • In May 2010, the Senate rejected a bill that would have reduced the mandatory investment from $250 million to $100 million and the required privilege fee from $25 million to $11 million for the southeast zone. • Slot machines in three racetracks have not materialized due to the high tax rate and a negative referendum vote in one county. • In May 2010, the Senate rejected a bill that would have allowed for racetracks to keep up to 58% (currently 25%) with expenses included, and the state could collect a minimum of 22%, plus 3% would go to the local government and 2% to gambling treatment programs. • In September 2010, the Wyandotte Nation purchased a commercial lot adjoining Wild West World along I-35 in Park City, Kansas. This is the first portion of 6 acres that the tribe has earmarked to purchase for its casino project. The Wyandotte Nation had already purchased 10.5 acres near the theme park in 1992. Their hope is to break ground on a Class II casino by the end of 2010, provided approval is received from the Department of the Interior on their application to use the land for casino gaming. Differences in Economic and Competitive Climate Round 3 vs. Round 2 Although the recession is technically over, the economy continues to be beset with unknown risk. Slow, anemic growth is expected to continue and some economists are predicting a possible double-dip recession. The consumer segment is under great pressure. Excessive borrowing and debt, exacerbated by high unemployment, continue to be a heavy constraint on consumer spending. Borrowing money continues to be very difficult for most consumers and businesses. Availability of capital continues to be restricted for casino projects. The ground rules have completely changed: developers are required to have a much higher percentage of equity capital and they cannot finance nearly as much as they could prior to the current recession. Green-field financing is all but non-existent. Expansions and new casino projects in Oklahoma have successfully continued throughout the current recession. Due to the nature of the market, lower capital November 2010 Wells Gaming Research Page 1-2 South Central Gaming Zone of Kansas 2010 Projections of Gaming Revenues and Casino Visits costs are required for gaming facility projects in Oklahoma, which has contributed to the ability of tribes to complete expansion and new casino projects. Following are significant casino projects that have been completed/or are in process in Oklahoma: • The Cherokee Nation opened the Hard Rock Hotel and Casino in August 2009. This was a major, $155 million expansion in Tulsa, Oklahoma. • The Creek Nation opened the River Spirit Casino in May 2009, a state-of- the-art, $195 million expansion in Tulsa, Oklahoma. They added an events center and parking garage in 2010. • The Cherokee Casino in West Siloam Springs underwent a $108 million expansion in 2009 and also added a hotel in June 2010. • The Cherokee Nation opened Cherokee Casino Ramona in July 2010. • The Choctaw Nation opened the Choctaw Casino Resort in February 2010 in Durant, Oklahoma for $300 million. • The Chickasaw Nation opened the WinStar World Casino on New Years’ Eve 2008. At the time it opened, it was in the top five largest casinos in the world and the largest casino in Oklahoma. The WinStar added a hotel in August 2009 and a restaurant in February 2010. • The Riverwind Casino opened a 100-room hotel in February 2009. • Lucky Star Concho has added 600 slots. • The Chickasaw Nation/Global Gaming Solutions (GGS) bought Remington Park (racetrack and casino) in Oklahoma City, Oklahoma from bankrupt Magna Entertainment Corporation for $80.25 million on December 31, 2009. In 2010, GGS spent an additional $7 million on updated slot machines and other improvements to refurbish Remington Park. In summary, gaming expansion has decelerated, but not ceased in Oklahoma during the current economic downturn. Oklahoma is second only to Nevada in the number of casinos statewide. Currently, there are approximately 61,875 slot machines at 108 casinos in Oklahoma; however, there are signs that the Oklahoma market is becoming saturated. Despite all of this, there are still planned gaming projects in Oklahoma at the present time. Project Objectives The Kansas Lottery Gaming Facility Review Board (Board) engaged WGR to conduct an independent study of each applicant in the South Central Gaming Zone of Kansas. WGR’s first objective is to provide the Board with gross gaming revenue and casino visit projections for each applicant so that they can assess which applicant would have the greatest ability to generate revenue for the State of Kansas. The second objective is to compare the revenue and casino visit projections submitted from the applicants for their projects to WGR’s independent projections.