Tuesday, November 24, 2009

Mohegan Gaming Authority Earnings On The Back Of A Napkin

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By Ken Davison


Last week the Mohegan Tribal Gaming Authority issued its earnings report for the three months of July through September and for the twelve month fiscal year which ended on September 30th.

I have always said that to understand MTGA's financial statements a reader must understand how MTGA accounts for its contract with its investors, Trading Cove Associates.

As the reader may know, MTGA agreed to pay Trading Cove five percent of its revenues (before expenses) to Trading Cove Associates for 15 years, beginning on January 1, 2000 and ending on December 31, 2014.

MTGA has paid Trading Cove Associates about $75 million per year in recent years but since Trading Cove was not entitled to five percent of the revenues on the Casino of The Wind expansion that $75 million (approximate figure) has declined to somewhere in the $60 plus million dollar range.

So when MTGA reports on the details of the fiscal year that ended September 30th, will the profits be reduced by the $60 plus million dollars that MTGA will have paid Trading Cove Associates last fiscal year? The answer is no, MTGA not only will not show an expense of $60 plus million related to what it paid Trading Cove Associates but it will show a profit of $15 to $20 million on that contract because of the accounting method used.

At the end of every fiscal year, MTGA estimates what it will pay Trading Cove during the entire 15-year contract period which means it must estimate the payments through December 2014. This past fiscal year, MTGA estimated it would pay Trading Cove less than previous estimates so MTGA recorded a $45 million gain in the last fiscal year that ended in September.

As far as the payments to Trading Cove throughout the year, MTGA records only about half of those payments as an expense in the year they are incurred because MTGA booked a huge expense in the two fiscal years before the contract took effect. MTGA probably recorded between $25 million and $30 million as an expense in the last fiscal year (out of the $60 plus million it paid Trading Cove).

So if you take that $25 - $30 million expense and then take into account the $45 million gain explained earlier, then the Trading Cove contract shows up as a gain of $15 million to $20 million in the income statement last fiscal year.

That's how a $60 plus million expense can be shown as a profit of $20 million on the financial statements. One can look at it as the profits being overstated on paper by about $80 million based on the accounting treatment of that Trading Cove contract.

MTGA has not yet issued its full financial statements for last fiscal year, only a press release so that is why we're dealing with estimates here and why we're calling these calculations "back of the napkin" computations. But when the details are issued in December, it will be mighty close.

MTGA reported a profit of $119 million for the twelve months that ended on September 30, 2009. Take away $80 million and that figure becomes $39 million. Take away the $71.5 million that MTGA distributed to the tribal government last fiscal year (which is not deducted from profits but from retained earnings and the situation looks pretty dicey.

The accounting for the Trading Cove contract is all on the up-and-up, I'm not saying it isn't. What I am saying is that a clear understanding of the Trading Cove contract is the key to understanding MTGA's financial statements.