Pricewaterhousecoopers Report
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pwc Smoking Ban Economic Effect Analysis November 17, 2005 Smoking Ban Economic Effect Analysis Table of Contents Scope. 3 Methods and Conclusions . 5 GASP Report Response. 15 Appendix. 19 pwc 1 pwc Scope Smoking Ban Economic Effect Analysis Scope In light of the proposed smoking ban, PricewaterhouseCoopers LLP (“PricewaterhouseCoopers” or “PwC”) has been engaged to provide the following services: ¾ perform a preliminary analysis of the effect of the smoking ban on Delaware's three gaming facilities and isolate the effects of the smoking ban from other potential mitigating factors. This analysis will not include any tests that measure statistical significance; ¾ prepare an abbreviated response to the report from the New Jersey Group Against Smoking Pollution entitled Trends in Smokefree Gaming, dated September 13, 2005; ¾ estimate the effect of a smoking ban on the Atlantic City casino market's gaming revenues; ¾ estimate the associated job loss; ¾ prepare an executive summary; and ¾ participate in a presentation of our findings. pwc 3 pwc Methods and Conclusions Smoking Ban Economic Effect Analysis Methods and Conclusions A summary of the method that was used in the analysis is presented below. Estimated Effect of Smoking Ban on Delaware ¾ PwC performed an extensive literature search which included: • regulatory filings; • industry surveys such as Harrah’s Profile of the American Casino Gambler; • economic impact studies from various states and countries with current and proposed smoking ban regulations; and • reports from several pro- and anti-environmental tobacco smoke groups. ¾ We interviewed the management teams from all three of the Delaware racinos: • Dover Downs; • Harrington Raceway; and • Delaware Park Racetrack and Slots. ¾ PwC also interviewed an official from the Delaware Video Lottery regulatory agency. pwc 5 Smoking Ban Economic Effect Analysis Methods and Conclusions Estimated Effect of Smoking Ban on Delaware (continued) ¾ To present a more detailed view of the smoking ban’s effect on revenues, measures taken to mitigate the smoking ban in Delaware (“Mitigating Measures”) were identified, quantified and isolated from gaming revenues. The Mitigating Measures included legislation authorizing operators to: • add up to 500 more video lottery terminals (“VLTs”) at each racino; • extend their operating hours from 2:00AM to 4:00AM, seven days per week; • introduce credit play; • eliminate the $100 betting limit; and • provide larger, more progressive jackpots and franchise games. ¾ Based upon our interviews, literature search and existing gaming industry knowledge, we adjusted the reported gaming revenues for the Mitigating Measures by: • calculating the win/machine/day for the additional VLTs and deducting the associated estimated gaming revenues; • estimating the revenue generated by each racino during the 2:00AM to 4:00AM time period and deducting the estimated incremental gaming revenues; and • identifying the estimated effect of the remaining Mitigating Measures, and deducting the corresponding gaming revenues. pwc 6 Smoking Ban Economic Effect Analysis Methods and Conclusions Estimated Effect of Smoking Ban on Delaware (continued) ¾ A summary of the estimated adjusted gaming revenues is presented below (refer to the Appendix for the detailed analysis). Delaware 1999 2000 2001 2002 2003 2004 2-Year Cumulative Effect Total adjusted estimated revenues $412,493,300 $485,095,300 $526,639,900 $565,909,900 $499,066,553 $457,680,412 Year over year percentage change 17.60% 8.56% 7.46% -11.81% -8.29% -19.12% pwc 7 Smoking Ban Economic Effect Analysis Methods and Conclusions Estimated Effect of Smoking Ban on Dover Downs ¾ Further study was conducted to estimate the effect of the smoking ban on Dover Downs. Reasons for analyzing Dover Downs are as follows: • Dover Downs is the only public company amongst the three racinos in Delaware; and • Dover Downs is the only racino in Delaware that includes hotel and conference center components, thus selected as the most qualified comparable to the Atlantic City casino resorts. ¾ The Mitigating Measures were also addressed in the Dover Downs analysis. After isolating and deducting the estimated effect of the Mitigating Measures from Dover Downs’ gaming revenue, the estimated adjusted gaming revenue was used to identify and estimate changes in player behavior in response to the smoking ban, including: • the number of total trips taken by smokers and non-smokers; • the average gaming spend per trip for smokers and non-smokers; and • the average number of visits for smokers and non-smokers. pwc 8 Smoking Ban Economic Effect Analysis Methods and Conclusions Estimated Effect of Smoking Ban on Dover Downs (continued) ¾ Several assumptions were used to estimate the effect of the smoking ban on Dover Downs’ gaming revenue. These assumptions were derived from the information gathered from research and interviews, including: • approximately 50 percent of the Delaware gaming market’s customers are smokers; and • the relative gaming spend of smokers is approximately 10 percent higher than non-smokers. ¾ A summary of the estimated adjusted gaming revenues for Dover Downs is presented below (refer to the Appendix for the detailed analysis). Dover Downs 1999 2000 2001 2002 2003 2004 2-Year Cumulative Effect Total adjusted estimated revenues 141,300,000 $156,999,600 $168,373,700 $186,893,500 $167,083,351 $148,775,942 Year over year percentage change 11.11% 7.24% 11.00% -10.60% -10.96% -20.40% pwc 9 Smoking Ban Economic Effect Analysis Methods and Conclusions Preliminary Atlantic City Estimated Effect ¾ The Casino Association of New Jersey previously provided PwC with actual player data for the last twelve months ended November 2004. PwC used this actual player data to estimate 2005 player behavior. ¾ Using the information gathered from the analysis of the Delaware racino market and the study of Dover Downs, an analysis was conducted on the possible effects of a smoking ban on the Atlantic City casino market. ¾ Based on player behavior in the Delaware market, several assumptions were made regarding Atlantic City players’ response to a smoking ban such as: • the change in the number of players; • the change in the number of trips made to a casino per year; and • the change in the average players’ gaming spend. ¾ The Delaware player percentage of smokers was applied to remain conservative although an Atlantic City player database poll conducted by Aztar Corporation indicated that approximately 60 percent of their players were smokers. ¾ Assumptions regarding new gaming venues in Pennsylvania, which allow smoking, were not made in the analysis, but proximate alternate venues may increase the amount of Atlantic City gaming revenue losses. ¾ It should be noted that the effect on Atlantic City’s gaming revenues may also be more severe than Delaware’s because the Atlantic City casinos cannot implement many of the Mitigating Measures such as extended hours and credit play. pwc 10 Smoking Ban Economic Effect Analysis Methods and Conclusions Preliminary Atlantic City Estimated Effect (continued) ¾ The estimated effect of a smoking ban in Atlantic City is presented below: Smoking Ban Adjustment Percentage Percentage Estimated LTM ending Smoking Ban Change Smoking Ban Change Cumulative November 2004 (1) Base Year (2) Year One (3) Year One Year Two (3) Year Two Percentage Change Number of players Smokers 4,314,340 4,278,461 -0.83% 4,251,923 -0.62% Nonsmokers 4,314,340 4,480,276 3.85% 4,480,276 0.00% Total number of players 8,628,679 8,628,679 8,758,736 1.51% 8,732,199 -0.30% Number of trips Smokers 15,608,144 13,583,036 -12.97% 11,405,951 -16.03% Nonsmokers 15,608,144 16,208,457 3.85% 16,208,457 0.00% Total trips 31,216,288 31,216,288 29,791,493 -4.56% 27,614,409 -7.31% Average gaming spend per trip Smokers $165.89 $145.50 -12.29% $130.92 -10.02% Nonsmokers $150.09 $150.09 0.00% $150.09 0.00% Weighted average total gaming spend $151.98 $157.99 $147.85 -6.42% $140.75 -4.80% Average number of visits Smokers 3.62 3.17 -12.24% 2.68 -15.50% Nonsmokers 3.62 3.62 0.00% 3.62 0.00% Weighted average of total visits 3.62 3.62 3.40 -5.88% 3.19 -6.18% Gaming revenues (in millions) Smokers $2,589 $1,976 -23.67% $1,493 -24.44% Nonsmokers $2,343 $2,433 3.85% $2,433 0.00% Total gaming revenues $4,744 $4,932 $4,409 -10.60% $3,926 -10.96% -20.40% (1) Based upon actual data from the New Jersey Casino Association. (2) PwC used the actual player data for the last twelve months ("LTM") ended November 2004 to estimate 2005 player behavior and applied the approximate growth rate experienced during the LTM period ended September 2005. (3) Adjustments based on PwC's estimated effect of the smoking ban on Dover Downs. pwc 11 Smoking Ban Economic Effect Analysis Methods and Conclusions Preliminary Atlantic City Estimated Effect (continued) ¾ The following assumptions, based on the Dover Downs analysis, were incorporated into the Atlantic City estimates: Assumptions: Smoking Ban Base Year Year 1 Year 2 Estimated percentage of players that are smokers (1) 50% 49% 49% Estimated percentage of players that are nonsmokers (1) 50% 51% 51% Adjusted gaming spend for smokers (2) 10% -3% -13% Estimated change in the number of players Smokers NA -0.83% -0.62% Nonsmokers 3.85% 0.00% Estimated change in the number of trips Smokers NA -12.97% -16.03% Nonsmokers 3.85% 0.00% Estimated change in the average number of visits Smokers NA -12.24% -15.50% Nonsmokers 0.00% 0.00% Estimated change in average gaming spend Smokers NA -12.29% -10.02% Nonsmokers 0.00% 0.00% (1) Base Year percentage of smokers at 50% is based on Delaware player behavior.