Sunday, December 7, 2008

Mohegan Gaming Authority 4th Quarter Analysis: Part I

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Updated with footnote on TCA

The Mohegan Tribal Gaming Authority issued its fourth quarter earnings report last Thursday. The period covers the three months of July 1st through September 30th and also covers the entire fiscal year from October 1, 2007 through September 30, 2008.

The subject of the earnings report is, well, MTGA's earnings (also known as profits) and and discusses details of the income statement. The two other key financial reports - the balance sheet and the statement of cash flows - are expected to be released in about two weeks when MTGA issues its audited financial statements for the year.

A more complete analysis will be made once the entire financial statements are released in two weeks.

In the meantime, we can take a look at what the earnings report reveals. The earnings, also known as profits or 'the bottom line', is the key figure that was reported last Thursday. For that reason and because it is probably the most important number in the financial statements for tribal members to know, we will discuss briefly those profits that were reported. Two other articles, one on Pocono Downs and another on miscellaneous items, will follow this one on the earnings report.

Profits for the three months:

MTGA'S earnings for the three month period were $90.6 million or a 94% increase over the fourth quarter in 2007. The reason for the dramatic increase has nothing to do with MTGA's performance but is largely due to an accounting adjustment that increased profits in the quarter by $68.9 million. The adjustment is due to a re-assessment of the amount of money MTGA will pay Trading Cove Associates, its former management company, over the remaining years of its 15-year contract that ends on December 31, 2014. Had that re-assessment adjustment not been made, then earnings for the fourth quarter would have been $21.7 million, a 54% decrease from the fourth quarter in 2007 when earnings were reported at $46.7 million.

Many of you know that the MTGA pays Trading Cove Associates 5 percent of every dollar taken in as revenues at Mohegan Sun (excluding revenues of the Casino of the Wind expansion). The amount that MTGA will pay TCA through 2014 was revised downward because revenues through 2014 are estimated to be lower than previously thought.

The 54% decrease in profits - when not taking into account the $68.9 million accounting adjustment - is not as steep as the third quarter (April through July), when profits declined 89 percent from the year before to about $5 million from $45.6 million in the third quarter of 2007. That dramatic decline in profits resulted in the Tribal Council taking over the reporting of profits in the Wuskuso newsletter. In that article, the Tribal Council neglected to report the actual earnings and never reported to tribal members that the profits fell 89 percent.

Profits for the fiscal year:

MTGA reported profits for fiscal year 2008 of $152.8 million, a decrease of 11.5% from its fiscal year 2007 profits of $172.6 million. Likewise, the fiscal year 2008 profits includes the same $68.9 million accounting adjustment discussed above, which is due to a re-assessment of the amount of money MTGA will pay Trading Cove Associates, its former management company, over the remaining years of its 15-year contract. Had that re-assessment adjustment not been made, then earnings for the fiscal year would have been $83.9 million, or a 52% decrease from the 2007 fiscal year earnings of $172.6 million.


Note:
Trading Cove Associates, or TCA, is the former management company that managed the Mohegan Sun since it opened in 1996 and until the contract was bought out in a deal that promised TCA 5% of the Mohegan Sun revenues for 15 years, beginning in January 2000 and lasting through December 2014. The Mohegan Tribe, through MTGA, paid TCA $77.5 million in FY 2007 (Dec. 2007 SEC 10-K filing, pg. F-32) and is expected to pay TCA about $1 billion by the time TCA's 15-year contract ends in 2014.

In the fourth quarter of 2007, a $3.0 million non-cash relinquishment liability reassessment charge was recorded. We have not taken this into account in the above calculations (it is not that significant). MTGA said in its press release that the decrease in its fiscal year 2008 profits was attributable "primarily due to an $18.4 million increase in Corporate-related expenses and reductions in income from operations at Pocono Downs and Mohegan Sun of $4.0 million and $3.3 million, respectively."