Sunday, December 7, 2008

Mohegan Gaming Authority 4th Quarter Analysis: Part II

Feather News


The fourth quarter earnings press release also gave tribal members its first glimpse of the Pocono Downs operation in Pennsylvania since the expansion opened there on July 17, 2008. That expansion basically doubled the number of slot machines to a total of about 2,500 machines in addition to offering more restaurant and retail amenities.

Readers of the Feather News have learned for some time that the Pocono Downs has been losing money when one takes into account the interest expense on the investment. The Tribe has never reported this to its members. As recently as the last quarterly meeting, tribal members were told that the Pocono Downs is profitable. However, the financial reports provide us with clear evidence that this is simply not true.

First, lets take a look at what MTGA's press release says about the last 12 months at Pocono Downs:

"Adjusted EBITDA for the fiscal year ended September 30, 2008 decreased by $591,000, or 2.0%, to $29.6 million from $30.2 million in the prior fiscal year."

The term 'EBITDA' is 'earnings before interest, taxes, depreciation and amortization. The largest of those expenses is interest expense so we are not even going to discuss the other expenses. So if Pocono Down's profit before taking into account interest expense is $29.6 million then what is the profit AFTER interest expense? Let's take a look.

To calculate the interest expense we have to add up the total investment in Pocono Downs. The major components are:
1. Purchase of the racetrack property $280 million
2. Cost to build Phase I $92 million
3. Cost to build Phase II $203 million
4. Cost for gaming license $50 million

The above amounts total $625 million. The weighted average interest rate was 7.2% for the fiscal year ended September 30, 2008. But if we do a rough calculation of the interest expense at 7 percent on that $625 million investment, then we arrive at an annual interest expense of $43.8 million.

So if MTGA reported that Pocono Downs had a $29.6 million profit BEFORE interest and other expenses, then if we subtract $43.8 million of interest expense we end up with a LOSS of $14.2 million for the year.

Remember, these numbers are based on reports filed by the Mohegan Tribal Gaming Authority and are rough calculations.

Don't count on Wuskuso reporting this news to tribal members!


Note: The above calculation of $625 million in total investment in Pocono Downs doesn't include the accumulated losses at the property since it was bought or any of the corporate diversification expenses. If these costs are added, the total cost would be estimated at $750 million. Also, the final cost of Project Sunrise may be decreased from $203 million to $199 million, according to the press release. We used a 7% interest rate in our above calculations. The actual weighted average interest rate was 7.2% for the fiscal year 2008, according to MTGA.

The above article discusses profits at Pocono Downs. Net revenues at Pocono Downs, mostly comprised of slot machine revenues, for the fiscal year ended September 30, 2008 was $209.2 million. These revenues are before any expenses are deducted. The increase over last year's $189.5 million in net revenues is primarily due to doubling the slot machines in the expansion that opened last summer.