Tuesday, September 2, 2008

Feather News Disputes Tribe's Claim That Pocono Downs Expansion Was Completed Under Budget

Feather News
Updated with footnote

The Mohegan Tribal Gaming Authority issued a press release recently that said the Pocono Downs expansion was completed under budget.

A high casino official noted that their final number (so far) for the expansion cost is $203 million. That would seem to suggest that the construction was completed under its last budget estimate of $208 million.

First, its important to note that in November 2006, the expansion budget announced was to be between $140 to $150 million. Since then, the budget estimate was increased 43% to $208 million and MTGA's bankers approved in February 2008 costs up to $215 million.

Lets forget for the moment that the revised budget itself was overbudget by 43% and focus on the revised budget number of $208 million. If the final number for the cost was $203 million then it might appear that the project was $5 million underbudget.

What the Tribe has not told tribal members is that remediation costs of $30 million was never carried out. Instead, the "dirty" dirt was simply covered over. If we back out the $30 million of projected remediation costs from the $208 million budget, then that puts the budget without remediation expenses at $178 million.

If the final cost for the expansion ends up at the $203 million, then that is $25 million over the budget amount of $178 million (which excludes the remediation cost).

Note: MTGA ended up making a profit on the remediation, according to federal reports. Penn National promised in August 2006 to pay MTGA about $30 million (over five years) to keep MTGA from backing out of the racetrack purchase contract. According to a report filed by MTGA with the Securities and Exchange Commission, "On August 7, 2006, we entered into an amendment of the Pocono Downs purchase agreement with the seller, a subsidiary of Penn National Gaming, Inc. Pursuant to the amendment, in exchange for our agreement to modify certain provisions of the purchase agreement, including the elimination of our post-closing termination rights, we will receive an aggregate refund of $30.0 million of the original purchase price for the Pocono Downs entities, payable in five annual installments of $7.0 million, $7.0 million, $6.5 million, $6.0 million and $3.5 million in November 2007, 2008, 2009, 2010 and 2011, respectively. The first installment of $7.0 million was received in November 2007."

In accepting the money, MTGA let Penn National off the hook for paying for the bulk of the remediation of the Pocono Downs property that they sold to MTGA for $280 million. Last fiscal year, MTGA booked the present value of the $30 million in payments as revenue even though the payments were described as a reduction to the property cost. The present value of the amount booked as revenue was $25.2 million.

According to MTGA's SEC filing, "the $25.2 million present value of the payments for the $30.0 million refund, calculated utilizing the Authority’s risk-free rate of investment, was recorded as a non-current receivable in other assets in the consolidated balance sheet as of September 30, 2007 and as a non-operating gain in other income in the consolidated statement of income for the fiscal year."