Task 4 – Project Specific Gaming Revenue Projections Southeast Gaming Zone – Cherokee County, Kansas Final Report Prepared For: Kansas Lottery Gaming Facility Review Board July 15, 2008 Prepared By: Wells Gaming Research 495 Apple Street, Suite 205 Reno, NV 89502 775-826-3232 http:/www.wellsgaming.com Task-4 Project Specific Gaming Revenue Projections Southeast Gaming Zone of Kansas Table of Contents Section 1 Page # Introduction 1-1 Research Methodology & Scope of Work 1-3 Map - Southeast Zone, Penn National Cherokee 1-4 Gravity Model Analyses 1-6 Limiting Conditions 1-8 Section 2 Trade Area Summary 2-1 Map - Southeast Zone, Penn National Cherokee 2-2 Current Casino Capacity 2-3 Gravity Model Projections 2-5 Penn National's Cherokee Casino Project 2-7 Capacity Recap w/ the Cherokee Casino (Phase 1) Added 2-8 Cherokee Project w/ Full Build-Out 2-9 Gravity Model Forecasts Compared with Penn's Pro Forma Projections 2-11 Gaming Revenue Comparisons 2-13 Financial Statement Analyses 2-15 Income Statement 2-19 Section 3 Wells Gaming Research Company Information 3-1 Wells Gaming Research July 2008 Task-4 Project Specific Gaming Revenue Projections Southeast Gaming Zone of Kansas Introduction The State of Kansas has lost gaming revenues for many years to a number of surrounding states, particularly to Missouri and Oklahoma. The recent development of numerous tribal casinos in Oklahoma exacerbated the problem. In an effort to stem the flow of gaming revenues and related taxes, Kansas’ legislators passed Senate Bill 66 (the Kansas Expanded Lottery Act), which legalized casino gaming. SB 66 was signed by the governor in 2007. Key Provisions of Senate Bill 66 Some key provisions of SB 66 that pertain to this study include: 1. Establishment of four casino gaming zones: • Northeast (located in Wyandotte County) • Southeast (located in Crawford and Cherokee Counties) • South Central (located in Sumner and Sedgwick Counties) • Southwest (located in Ford County) 2. Building one state owned casino in each of the four Kansas gaming zones listed above. 3. Permitting an aggregate of 2,800 slot machines to be installed at the three existing racetracks. Senate Bill 66 required the counties located within the four subject gaming zones to hold referendum elections for the purpose of either approving or disapproving casino gaming, or slot machines to be located at their respective racetracks. Three gaming zones have racetracks (northeast, southeast, and south central). However, Sedgwick County, located in the south central gaming zone, rejected gaming in their referendum election. As a result, slot machines will be limited to two Kansas racetracks: Woodlands Race Track located in the Kansas City, Kansas (northeast gaming zone), and Camptown Greyhound Park (closed since November 2000) located near Frontenac, Kansas (southeast gaming zone). The Kansas Lottery Commission has appointed an independent Lottery Gaming Facility Review Board to review all of the gaming applications and select the best ones. The Board has engaged a number of outside consulting firms to help with the reviewing process. To date, five gaming applications have been approved for the northeast zone, one for the southeast zone, three for the south central zone, and two for the southwest zone. The applicants that are selected will be contract managers of the gaming facilities acting on behalf of the Kansas Lottery Commission. As planned, the state will own and/or control the gaming portion of the facilities. However, the lottery will select a contract manager who will manage the gaming. The contract managers that are selected will fund, build, and operate all of the facilities under contract with the state lottery. The contract managers will also be required to pay the following taxes that are all based on a percentage of casino gaming revenues: July 2008 Wells Gaming Research Page 1-1 Task-4 Project Specific Gaming Revenue Projections Southeast Gaming Zone of Kansas • The lottery facility would pay a minimum of 22% of gaming revenues to the state plus an additional 2% to fund programs for problem gamblers and gaming addictions issues. • If a lottery gaming facility were located in either the northeast or southwest gaming zones, but not in a city, the gaming facility would be required to pay an additional 3% of gaming revenues to the county where the gaming facility was located. • If, on the other hand, the gaming facility were located in a city, the facility would pay 1.5% of gaming revenues to the city and 1.5% to the county. • If the lottery gaming facility were located in either the southeast or the south central gaming zone, but not in a city, the gaming facility would pay 2% of gaming revenues to the county in which the facility were located, and an additional 1% to the other county in the gaming zone (each gaming zone has two counties). • If a gaming facility were located in a city, a combined tax equal to 3% of gaming revenues would be paid to the city (1%), to the county in which the facility were located (1%), and to the second county in the gaming zone (1%). These state owned casinos are unique and will be the first state owned casinos in the US. Assessment of the Kansas Gaming Revenue Potential Before enactment of Senate Bill 66 (the Kansas Expanded Lottery Act), the Kansas Lottery Commission engaged Christensen Capital to update their study addressing the gaming revenue potential for the four Kansas gaming zones. The updated study was released in March of 2008. Task One The Kansas Lottery Gaming Facility Review Board engaged a team of casino gaming consultants including Wells Gaming Research (WGR) and Cummings & Associates to assess the gaming revenue potential of the four authorized gaming zones in Kansas. In essence, Task-1 required a market analysis of each of the gaming zones. This involved estimating the gross gaming revenue potential for a generic casino (not associated with any of the proposals) to be located in each of the gaming zones, and projecting the potential revenue generation for the State of Kansas. The results of studies conducted by WGR and Cummings were compared with the Christensen Study that had been previously commissioned by the Lottery. In compliance with the Kansas Lottery Gaming Facility Review Board’s directive, WGR’s Task-1 work was carried out independently and was not influenced by the work performed by either Cummings or Christensen. Moreover, the work that follows on Task-4 was also carried out independently. July 2008 Wells Gaming Research Page 1-2 Task-4 Project Specific Gaming Revenue Projections Southeast Gaming Zone of Kansas Research Methodology & Scope of Work Kansas Penn Gaming, LLC. (Penn National Gaming, Inc.) submitted an application to the Kansas Lottery Gaming Facility Review Board requesting approval to build a casino entertainment property in Cherokee County, Kansas (southeastern gaming zone). Trade Area for the Southeast Gaming Zone The southeast trade area is shown on the map on page 1- 4. The trade area encompasses the 100-to-125-mile radius of the intersection of Kansas, Missouri, and Oklahoma (for quick reference, a circle has been drawn around the subject area). Included are 65 counties located in southeast Kansas, southwest Missouri, northeast Oklahoma, and northwest Arkansas. The boundaries extend from Miami County, Kansas on the north; to Sequoyah County, Oklahoma on the south; to Osage County, Oklahoma on the west; and to Douglas County, Missouri on the east. The southeast gaming zone includes the Cherokee and Crawford Counties where Kansas Senate Bill 66 has authorized casinos. Competitive Set Even though the southeast trade area includes a 100-to-125 mile radius of the Cherokee casino site, the competitive set extends to include all existing and proposed casinos located within a 150-mile region surrounding the development site. Competitor casinos located up to 150 miles from the development site will have overlapping trade areas with the subject casino. Key Research Components The major focus of WGR’s research and analyses included, but were not limited to, the following: • Site-Visits Richard Wells, president of WGR, conducted site visits to a majority of the competing casinos located in the southeast gaming zone’s trade area. Two changes were made in the assumptions used in WGR’s Task-1 report because of additional information gleaned from these on-site visits. 1. Five proposed new casinos that had been included in Task-1 are facing significant opposition and are not likely to be built in the foreseeable future. They were eliminated from the Task-4 analyses. 2. The attraction factors were reduced at seven existing southeast casinos in the Task-4 analyses. • Population Analyses Detailed population data was obtained from the Bureau of Business & Economic Research, University of Nevada, Reno at the census tract level for 2000 through 2012. 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