Attached files
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EX-32.2 - EXHIBIT 32.2 - MOHEGAN TRIBAL GAMING AUTHORITY | a20191231ex322.htm |
EX-32.1 - EXHIBIT 32.1 - MOHEGAN TRIBAL GAMING AUTHORITY | a20191231ex321.htm |
EX-31.2 - EXHIBIT 31.2 - MOHEGAN TRIBAL GAMING AUTHORITY | a20191231ex312.htm |
EX-31.1 - EXHIBIT 31.1 - MOHEGAN TRIBAL GAMING AUTHORITY | a20191231ex311.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
_________________________________
FORM 10-Q
_____________________________________
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2019
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 033-80655
__________________________________________
MOHEGAN TRIBAL GAMING AUTHORITY
(Exact name of registrant as specified in its charter)
__________________________________________
Not Applicable | 06-1436334 | |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | |
One Mohegan Sun Boulevard, Uncasville, CT | 06382 | |
(Address of principal executive offices) | (Zip Code) |
(860) 862-8000
(Registrant’s telephone number, including area code)
___________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
None | None | None |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ No x*
* | The registrant is a voluntary filer of reports required to be filed by certain companies under Sections 13 or 15(d) of the Securities Exchange Act of 1934 and has filed all reports that would have been required during the preceding 12 months had it been subject to such filing requirements. |
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o |
Non-accelerated filer x | Smaller reporting company o |
Emerging growth company o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
MOHEGAN TRIBAL GAMING AUTHORITY
INDEX TO FORM 10-Q
Page Number | ||
PART I. | ||
Item 1. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
PART II. | ||
Item 1. | ||
Item 1A. | ||
Item 6. | ||
Signatures. |
PART I. FINANCIAL INFORMATION
Item 1. | Financial Statements |
MOHEGAN TRIBAL GAMING AUTHORITY
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands) (unaudited)
December 31, 2019 | September 30, 2019 | ||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 139,164 | $ | 130,138 | |||
Restricted cash and cash equivalents | 6,706 | 4,960 | |||||
Accounts receivable, net of allowance for doubtful accounts of $12,007 and $11,715, respectively | 55,388 | 52,764 | |||||
Inventories | 17,794 | 18,248 | |||||
Due from Ontario Lottery and Gaming Corporation | 11,905 | 10,946 | |||||
Casino Operating and Services Agreement customer contract asset | 471 | 3,004 | |||||
Other current assets | 57,319 | 47,276 | |||||
Total current assets | 288,747 | 267,336 | |||||
Restricted cash and cash equivalents | 136,014 | 145,631 | |||||
Property and equipment, net | 1,444,019 | 1,520,687 | |||||
Right-of-use operating lease assets | 361,036 | — | |||||
Other intangible assets, net | 456,672 | 455,265 | |||||
Casino Operating and Services Agreement customer contract asset, net of current portion | 95,208 | 50,192 | |||||
Notes receivable | 2,514 | 2,514 | |||||
Other assets, net | 71,314 | 69,971 | |||||
Total assets | $ | 2,855,524 | $ | 2,511,596 | |||
LIABILITIES AND CAPITAL | |||||||
Current liabilities: | |||||||
Current portion of long-term debt | $ | 74,266 | $ | 76,909 | |||
Current portion of finance lease obligations | 1,794 | 1,133 | |||||
Current portion of right-of-use operating lease obligations | 9,894 | — | |||||
Trade payables | 20,811 | 16,672 | |||||
Accrued payroll | 48,853 | 53,225 | |||||
Construction payables | 24,040 | 11,888 | |||||
Accrued interest payable | 10,070 | 19,804 | |||||
Due to Ontario Lottery and Gaming Corporation | 38,413 | 30,662 | |||||
Other current liabilities | 171,585 | 174,231 | |||||
Total current liabilities | 399,726 | 384,524 | |||||
Long-term debt, net of current portion | 1,885,752 | 1,832,248 | |||||
Finance lease obligations, net of current portion | 30,043 | 28,561 | |||||
Right-of-use operating lease obligations, net of current portion | 359,848 | — | |||||
Build-to-suit liability | — | 90,292 | |||||
Other long-term liabilities | 34,194 | 38,538 | |||||
Total liabilities | 2,709,563 | 2,374,163 | |||||
Commitments and Contingencies | |||||||
Capital: | |||||||
Retained earnings | 134,205 | 137,124 | |||||
Accumulated other comprehensive income (loss) | 4,253 | (6,633 | ) | ||||
Total capital attributable to Mohegan Tribal Gaming Authority | 138,458 | 130,491 | |||||
Non-controlling interests | 7,503 | 6,942 | |||||
Total capital | 145,961 | 137,433 | |||||
Total liabilities and capital | $ | 2,855,524 | $ | 2,511,596 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
MOHEGAN TRIBAL GAMING AUTHORITY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(in thousands) (unaudited)
For the | For the | ||||||
Three Months Ended | Three Months Ended | ||||||
December 31, 2019 | December 31, 2018 | ||||||
Revenues: | |||||||
Gaming | $ | 264,269 | $ | 221,935 | |||
Food and beverage | 50,532 | 34,806 | |||||
Hotel | 27,589 | 22,977 | |||||
Retail, entertainment and other | 56,662 | 39,782 | |||||
Net revenues | 399,052 | 319,500 | |||||
Operating costs and expenses: | |||||||
Gaming, including related party transactions of $755 and $702, respectively | 157,188 | 128,664 | |||||
Food and beverage | 41,693 | 26,447 | |||||
Hotel, including related party transactions of $2,161 and $2,161, respectively | 11,842 | 9,803 | |||||
Retail, entertainment and other | 24,986 | 20,762 | |||||
Advertising, general and administrative, including related party transactions of $9,566 and $11,332, respectively | 74,214 | 49,018 | |||||
Corporate, including related party transactions of $2,253 and $1,397, respectively | 14,090 | 12,425 | |||||
Depreciation and amortization | 28,544 | 27,090 | |||||
Other, net | 3,070 | 1,921 | |||||
Total operating costs and expenses | 355,627 | 276,130 | |||||
Income from operations | 43,425 | 43,370 | |||||
Other income (expense): | |||||||
Interest income | 751 | 3,439 | |||||
Interest expense | (35,356 | ) | (36,010 | ) | |||
Other, net | (592 | ) | (30 | ) | |||
Total other expense | (35,197 | ) | (32,601 | ) | |||
Income before income tax | 8,228 | 10,769 | |||||
Income tax benefit (provision) | 1,196 | (61 | ) | ||||
Net income | 9,424 | 10,708 | |||||
Income attributable to non-controlling interests | (30 | ) | (86 | ) | |||
Net income attributable to Mohegan Tribal Gaming Authority | 9,394 | 10,622 | |||||
Comprehensive income: | |||||||
Foreign currency translation adjustment | 11,417 | 1,899 | |||||
Other comprehensive income | 11,417 | 1,899 | |||||
Other comprehensive income attributable to non-controlling interests | (531 | ) | (95 | ) | |||
Other comprehensive income attributable to Mohegan Tribal Gaming Authority | 10,886 | 1,804 | |||||
Comprehensive income attributable to Mohegan Tribal Gaming Authority | $ | 20,280 | $ | 12,426 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
MOHEGAN TRIBAL GAMING AUTHORITY
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN CAPITAL
(in thousands) (unaudited)
Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Capital Attributable to Mohegan Tribal Gaming Authority | Non-controlling Interests | Total Capital | |||||||||||||||
Balance, September 30, 2019 | $ | 137,124 | $ | (6,633 | ) | $ | 130,491 | $ | 6,942 | $ | 137,433 | ||||||||
Net income | 9,394 | — | 9,394 | 30 | 9,424 | ||||||||||||||
Foreign currency translation adjustment | — | 10,886 | 10,886 | 531 | 11,417 | ||||||||||||||
Distributions to Mohegan Tribe | (12,000 | ) | — | (12,000 | ) | — | (12,000 | ) | |||||||||||
Distributions to Salishan Company, LLC related to the Cowlitz Project | (313 | ) | — | (313 | ) | — | (313 | ) | |||||||||||
Balance, December 31, 2019 | $ | 134,205 | $ | 4,253 | $ | 138,458 | $ | 7,503 | $ | 145,961 | |||||||||
Balance, September 30, 2018 | $ | 250,707 | $ | 11,062 | $ | 261,769 | $ | 9,025 | $ | 270,794 | |||||||||
Cumulative-effect adjustment for the adoption of ASC 606 "Revenue from Contracts with Customers" | (41,575 | ) | — | (41,575 | ) | — | (41,575 | ) | |||||||||||
Net income | 10,622 | — | 10,622 | 86 | 10,708 | ||||||||||||||
Foreign currency translation adjustment | — | 1,804 | 1,804 | 95 | 1,899 | ||||||||||||||
Distributions to Mohegan Tribe | (12,000 | ) | — | (12,000 | ) | — | (12,000 | ) | |||||||||||
Redemption of membership interest related to the New England Black Wolves franchise | (4,499 | ) | — | (4,499 | ) | 4,574 | 75 | ||||||||||||
Balance, December 31, 2018 | $ | 203,255 | $ | 12,866 | $ | 216,121 | $ | 13,780 | $ | 229,901 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
MOHEGAN TRIBAL GAMING AUTHORITY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) (unaudited)
For the | For the | ||||||
Three Months Ended | Three Months Ended | ||||||
December 31, 2019 | December 31, 2018 | ||||||
Cash flows provided by (used in) operating activities: | |||||||
Net income | $ | 9,424 | $ | 10,708 | |||
Adjustments to reconcile net income to net cash flows provided by (used in) operating activities: | |||||||
Depreciation and amortization | 28,544 | 27,090 | |||||
Non-cash operating lease expense | 3,273 | — | |||||
Accretion of discounts | 317 | 194 | |||||
Amortization of discounts and debt issuance costs | 4,550 | 4,845 | |||||
Provision for losses on receivables | 321 | 369 | |||||
Deferred income tax provision | (1,316 | ) | — | ||||
Other, net | 244 | (247 | ) | ||||
Changes in operating assets and liabilities, net of effect of the MGE Niagara Resorts acquisition: | |||||||
Accounts receivable | (2,657 | ) | (5,594 | ) | |||
Accrued interest on notes receivable related to the Cowlitz Project | — | 72,166 | |||||
Inventories | 510 | 476 | |||||
Due from Ontario Lottery and Gaming Corporation | (761 | ) | — | ||||
Casino Operating and Services Agreement customer contract asset | (40,976 | ) | — | ||||
Other assets | (9,033 | ) | (2,189 | ) | |||
Trade payables | 4,058 | (655 | ) | ||||
Accrued interest | (9,743 | ) | (10,025 | ) | |||
Due to Ontario Lottery and Gaming Corporation | 8,591 | — | |||||
Operating lease liabilities | (2,057 | ) | — | ||||
Other liabilities | (4,247 | ) | (16,087 | ) | |||
Net cash flows provided by (used in) operating activities | (10,958 | ) | 81,051 | ||||
Cash flows provided by (used in) investing activities: | |||||||
Purchases of property and equipment | (22,218 | ) | (14,064 | ) | |||
Acquisition of the MGE Niagara Resorts, net of cash acquired | (1,666 | ) | — | ||||
Proceeds from notes receivable related to the Cowlitz Project | — | 32,026 | |||||
Other, net | (1,390 | ) | (1,364 | ) | |||
Net cash flows provided by (used in) investing activities | (25,274 | ) | 16,598 | ||||
Cash flows provided by (used in) financing activities: | |||||||
Senior secured credit facility borrowings - revolving and line of credit | 326,222 | 360,712 | |||||
Senior secured credit facility repayments - revolving and line of credit | (291,147 | ) | (350,712 | ) | |||
Senior secured credit facility repayments - term loans A and B | (13,295 | ) | (18,858 | ) | |||
MGE Niagara Resorts credit facility borrowings - revolving and line of credit | 41,864 | — | |||||
MGE Niagara Resorts credit facility repayments - line of credit | (11,596 | ) | — | ||||
MGE Niagara Resorts credit facility repayments - term loan | (960 | ) | — | ||||
Other borrowings | — | 11,335 | |||||
Other repayments | (6,458 | ) | (1,450 | ) | |||
Payments on finance lease obligations | (404 | ) | — | ||||
Distributions to Mohegan Tribe | (12,000 | ) | (12,000 | ) | |||
Distributions to Salishan Company, LLC related to the Cowlitz Project | (313 | ) | — | ||||
Other, net | (1,527 | ) | (6,776 | ) | |||
Net cash flows provided by (used in) financing activities | 30,386 | (17,749 | ) | ||||
Net increase (decrease) in cash, cash equivalents, restricted cash and restricted cash equivalents | (5,846 | ) | 79,900 | ||||
Effect of exchange rate on cash, cash equivalents, restricted cash and restricted cash equivalents | 7,001 | 641 | |||||
Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period | 280,729 | 234,626 | |||||
Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period | $ | 281,884 | $ | 315,167 | |||
Reconciliation of cash, cash equivalents, restricted cash and restricted cash equivalents to the condensed consolidated balance sheets: | |||||||
Cash and cash equivalents | $ | 139,164 | $ | 101,584 | |||
Restricted cash and cash equivalents, current | 6,706 | 414 | |||||
Restricted cash and cash equivalents, non-current | 136,014 | 213,169 | |||||
Cash, cash equivalents, restricted cash and restricted cash equivalents | $ | 281,884 | $ | 315,167 | |||
Supplemental disclosures: | |||||||
Cash paid for interest | $ | 40,388 | $ | 41,190 | |||
Non-cash transactions: | |||||||
Right-of-use operating lease assets | $ | 359,909 | $ | — | |||
Right-of-use operating lease obligations | $ | 360,054 | $ | — | |||
Construction payables | $ | 24,040 | $ | 9,732 | |||
Senior secured credit facility reductions | $ | 13,295 | $ | 28,858 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1—ORGANIZATION AND BASIS OF PRESENTATION:
Organization
The Mohegan Tribe of Indians of Connecticut (the “Mohegan Tribe”) established the Mohegan Tribal Gaming Authority in July 1995 with the exclusive authority to conduct and regulate gaming activities for the Mohegan Tribe on tribal lands and the non-exclusive authority to conduct such activities elsewhere. The Mohegan Tribe is a sovereign Indian nation with independent legal jurisdiction over its people and land. Like other sovereign governments, the Mohegan Tribe and its entities, including the Mohegan Tribal Gaming Authority, are generally not subject to federal, state or local income taxes. However, MGE Niagara Entertainment Inc. (“MGE Niagara”), a wholly-owned subsidiary, is subject to tax in Ontario, Canada, and certain non-tribal entities are subject to state or local income taxes in the United States. The Mohegan Tribal Gaming Authority d/b/a Mohegan Gaming & Entertainment (the “Company”) is primarily engaged in the ownership, operation and development of integrated entertainment facilities both domestically and internationally, including Mohegan Sun, a gaming and entertainment complex located on an approximately 196-acre site in Uncasville, Connecticut, and Mohegan Sun Pocono, a gaming and entertainment facility located on an approximately 400-acre site in Plains Township, Pennsylvania.
In September 2018, MGE Niagara was selected by the Ontario Lottery and Gaming Corporation (the “OLG”) to be the service provider for the Niagara Fallsview Casino Resort, Casino Niagara and the future 5,000-seat Niagara Falls Entertainment Centre, all in Niagara Falls, Canada (collectively, the “MGE Niagara Resorts”). On June 11, 2019 (the “Closing Date”), MGE Niagara completed the acquisition of the MGE Niagara Resorts (the “Acquisition”) and assumed the day-to-day operations of the properties under the terms of a 21-year Casino Operating and Services Agreement (the “COSA”) with the OLG.
The Company also (i) owns 100% of Salishan-Mohegan, LLC (“Salishan-Mohegan”), which developed and currently manages ilani Casino Resort in Clark County, Washington, a gaming and entertainment facility owned by the federally-recognized Cowlitz Indian Tribe and the Cowlitz Tribal Gaming Authority, (ii) holds the development rights to any future development at ilani Casino Resort through Salishan-Mohegan Development Company, LLC, a majority-owned subsidiary of Salishan-Mohegan, (iii) manages Resorts Casino Hotel in Atlantic City, New Jersey, and owns 10% of the casino’s holding company and its subsidiaries, including those conducting or licensing online gaming and retail sports wagering in New Jersey, (iv) manages Paragon Casino Resort in Marksville, Louisiana and (v) owns 100% of Inspire Integrated Resort Co., Ltd. and MGA Korea, LLC, which were formed to develop and construct an integrated resort and casino project to be located adjacent to the Incheon International Airport in South Korea.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information and with instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In accordance with Rule 10-01, the accompanying unaudited condensed consolidated financial statements do not include all of the information and footnotes required by US GAAP for complete consolidated financial statements. The accompanying year-end condensed consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by US GAAP. All adjustments, including normal recurring accruals and adjustments, necessary for a fair statement of the Company's operating results for the interim period, have been included.
The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2019. The preparation of financial statements in conformity with US GAAP requires the Company to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosures of contingent assets and liabilities.
Revenue Disaggregation
The Company is primarily engaged in the ownership, operation and development of integrated entertainment facilities both domestically and internationally. The Company’s current wholly-owned operations are focused within Connecticut and Pennsylvania. The Company also currently manages other gaming facilities elsewhere within the United States and Canada. The Company generates revenues by providing the following types of goods and services: gaming, food and beverage, hotel, retail, entertainment and other and management and development.
7
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)
Revenue disaggregation by geographic location and revenue type for the three months ended December 31, 2019 was as follows (in thousands):
Connecticut | Pennsylvania | Canada | |||||||||||||
(Mohegan Sun) | (Mohegan Sun Pocono) | (MGE Niagara Resorts) | Other | ||||||||||||
Gaming | $ | 160,259 | $ | 51,978 | $ | 52,032 | $ | — | |||||||
Food and beverage | 28,533 | 6,082 | 15,953 | (36 | ) | ||||||||||
Hotel | 22,048 | 1,980 | 3,563 | (2 | ) | ||||||||||
Retail, entertainment and other | 32,495 | 1,914 | 13,426 | 146 | |||||||||||
Management and development | — | — | — | 9,012 | |||||||||||
Net revenues | $ | 243,335 | $ | 61,954 | $ | 84,974 | $ | 9,120 |
Revenue disaggregation by geographic location and revenue type for the three months ended December 31, 2018 was as follows (in thousands):
Connecticut | Pennsylvania | Canada | |||||||||||||
(Mohegan Sun) | (Mohegan Sun Pocono) | (MGE Niagara Resorts) | Other | ||||||||||||
Gaming | $ | 170,482 | $ | 51,453 | $ | — | $ | — | |||||||
Food and beverage | 29,135 | 5,713 | — | (42 | ) | ||||||||||
Hotel | 21,220 | 1,758 | — | (1 | ) | ||||||||||
Retail, entertainment and other | 31,842 | 1,867 | — | 421 | |||||||||||
Management and development | — | — | — | 5,712 | |||||||||||
Net revenues | $ | 252,679 | $ | 60,791 | $ | — | $ | 6,090 |
Contract and Contract-related Assets
As of December 31, 2019 and September 30, 2019, contract assets related to the COSA totaled $95.7 million and $53.2 million, respectively.
Contract and Contract-related Liabilities
A difference may exist between the timing of cash receipts from patrons and the recognition of revenues, resulting in a contract or contract-related liability. In general, the Company has three types of such liabilities: (1) outstanding gaming chips and slot tickets liability, which represents amounts owed in exchange for outstanding gaming chips and slot tickets held by patrons; (2) loyalty points deferred revenue liability and (3) patron advances and other liability, which primarily represents funds deposited in advance by patrons for gaming and advance payments by patrons for goods and services such as advance ticket sales, deposits on rooms and convention space and gift card purchases. These liabilities are generally expected to be recognized as revenues within one year and are recorded within other current liabilities.
The following table summarizes these liabilities (in thousands):
December 31, 2019 | September 30, 2019 | ||||||
Outstanding gaming chips and slot tickets liability | $ | 11,350 | $ | 7,968 | |||
Loyalty points deferred revenue liability | 39,374 | 40,968 | |||||
Patron advances and other liability | 20,698 | 22,312 | |||||
Total | $ | 71,422 | $ | 71,248 |
As of December 31, 2019 and September 30, 2019, customer contract liabilities related to Mohegan Sun Pocono's revenue sharing agreement with Unibet Interactive Inc. totaled $17.7 million and $18.0 million, respectively, and are primarily recorded within other long-term liabilities.
8
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)
Fair Value of Financial Instruments
The Company applies the following fair value hierarchy, which prioritizes the inputs utilized to measure fair value into three levels:
• | Level 1 - Quoted prices for identical assets or liabilities in active markets; |
• | Level 2 - Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets or valuations based on models where the significant inputs are observable or can be corroborated by observable market data; and |
• | Level 3 - Valuations based on models where the significant inputs are unobservable. The unobservable inputs reflect the Company's estimates or assumptions that market participants would utilize in pricing such assets or liabilities. |
The Company's assessment of the significance of a particular input requires judgment and may affect the valuation of financial assets and liabilities and their placement within the fair value hierarchy.
The carrying amount of cash and cash equivalents, restricted cash and cash equivalents, receivables and trade payables approximates fair value. The estimated fair values of the Company's long-term debt were as follows (in thousands):
December 31, 2019 | |||||||
Carrying Value | Fair Value | ||||||
Senior secured credit facility - revolving (1) | $ | 137,000 | $ | 134,089 | |||
Senior secured credit facility - term loan A (1) | 253,272 | 252,122 | |||||
Senior secured credit facility - term loan B (1) | 804,174 | 789,393 | |||||
2016 7 7/8% senior unsecured notes (1) | 490,821 | 512,500 | |||||
Line of credit (1) | 75 | 74 | |||||
MGE Niagara Resorts credit facility - revolving (1) | 30,728 | 30,728 | |||||
MGE Niagara Resorts credit facility - term loan (1) | 73,936 | 74,900 | |||||
MGE Niagara Resorts convertible debenture (2) | 30,728 | 30,728 | |||||
Mohegan Expo credit facility (3) | 28,831 | 29,657 | |||||
Guaranteed credit facility (3) | 31,264 | 32,375 | |||||
Redemption note payable (3) | 78,035 | 78,035 | |||||
Other (3) | 1,154 | 1,154 | |||||
Long-term debt | $ | 1,960,018 | $ | 1,965,755 |
________
(1) | Estimated fair values were based on Level 2 inputs (quoted market prices or prices of similar instruments) as of December 31, 2019. |
(2) | Estimated fair value was based on Level 3 inputs (changes in market conditions) from date of issuance (June 11, 2019) to December 31, 2019. |
(3) | Estimated fair values were based on Level 3 inputs (present value of future payments discounted to carrying value) as of December 31, 2019. |
NOTE 2—NEW ACCOUNTING STANDARDS:
The following accounting standard was adopted during the three months ended December 31, 2019:
ASU 2016-02
In February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), which requires, among other things, lessees to recognize a right-of-use (“ROU”) asset and a lease liability for leases with terms in excess of 12 months and the disclosure of information about leasing arrangements. In July 2018, the FASB issued ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements” and ASU No. 2018-10, “Codification Improvements to Topic 842, Leases”, which clarify various aspects of ASU 2016-02.
Effective October 1, 2019, the Company adopted ASU 2016-02 under a modified retrospective transition approach. Accordingly, comparative information as of September 30, 2019 and for the three months ended December 31, 2018 has not been restated and continues to be reported under accounting standards in effect for those periods. The Company elected the package of practical expedients included in ASU 2016-02, which allowed it to: (i) not reassess whether any expired or existing contracts contain leases, (ii) not reassess the lease classification for any expired or existing leases and (iii) not reassess the initial direct costs for existing leases. The Company also made an accounting policy election to not recognize leases with an initial term of 12 months or less on its balance sheet. In addition, the Company elected to not separate lease and non-lease components for all significant classes of underlying assets for which the Company is the lessee. For instances in which the Company is the lessor, and the class of underlying asset represents retail space, the Company accounts for both the lease and non-lease components as a single lease
9
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)
component. In all other instances, non-lease components are accounted for separately in accordance with applicable guidance, most commonly ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”.
As of October 1, 2019, the adoption of ASU 2016-02 resulted in the recognition of ROU operating lease assets of $359.2 million and related ROU operating lease liabilities of $366.8 million, as well as the derecognition of a previously recognized build-to-suit asset and related liability of $90.3 million. The difference between the ROU operating lease assets and liabilities reflects the reclassification of historical prepaid and deferred rent balances. The adoption of ASU 2016-02 did not impact the Company's retained earnings or the Company’s compliance with its financial covenants under its current debt agreements.
The following accounting standards will be adopted in a future reporting period:
ASU 2018-13
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”), which adds, amends and removes certain disclosure requirements related to fair value measurements. ASU 2018-13 requires enhanced disclosures on valuation techniques and inputs that a reporting entity uses to determine its measures of fair value, including judgments and assumptions that the entity makes and the uncertainties in the fair value measurements as of the reporting date. ASU 2018-13 is effective for annual reporting periods beginning after December 15, 2019. Certain amended or eliminated disclosure requirements may be adopted earlier, while certain additional disclosure requirements can be adopted on its effective date. In addition, certain changes required by this new standard require retrospective adoption, while other changes must be adopted prospectively. The Company is currently evaluating the impact ASU 2018-13 will have on its financial statement disclosures.
ASU 2019-12
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”), which simplifies various aspects related to the accounting for income taxes. This new standard removes certain exceptions to the general principles in ASU 2019-12 and clarifies and amends existing guidance to improve consistent application. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020. The Company is currently evaluating the impact ASU 2019-12 will have on its financial statements, but does not expect its adoption to have a material impact.
NOTE 3—LEASES:
The Company determines if a contract is, or contains, a lease at its inception or at the time of any modification. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Control over the use of the identified asset requires that the lessee has both: (i) the right to obtain substantially all of the economic benefits from the use of the asset and (ii) the right to direct the use of the asset.
ROU operating and finance lease assets and liabilities are recognized on the respective lease commencement date based on the present value of future lease payments over the expected lease term. An expected lease term includes any option to extend or terminate the lease if it is reasonably certain that the Company will exercise such option. The Company utilizes the incremental borrowing rate (“IBR”) applicable to the lease as determined at the lease commencement date to calculate the present value of future lease payments. The applicable IBR is determined based on the treasury group to which the leasing entity belongs and that group’s estimated interest rate for collateralized borrowings over a similar term as the future lease payments. Upon adoption of ASU 2016-02, the Company utilized IBRs as of October 1, 2019 to determine the present value of the remaining lease payments for operating leases that commenced prior to that date. Operating lease expense for fixed lease payments is recognized on a straight-line basis over the expected lease term. ROU finance lease assets are recorded within property and equipment, net and are amortized on a straight-line basis over the related lease term. As of December 31, 2019, ROU finance lease assets totaled $31.4 million.
Lessee
The Company leases real estate and equipment under various operating and finance lease agreements. Lease terms range from approximately one month to 50 years and do not contain any material residual value guarantees or restrictive covenants. Rental payments under these lease agreements are fixed and/or variable based on periodic adjustments for inflation, performance, usage or appraised land values. Variable components of lease payments are not included in the calculation of ROU assets and liabilities.
The Company’s lease arrangements contain both lease and non-lease components. For instances in which the Company is a lessee, the Company accounts for both lease and non-lease components as a single lease component for substantially all classes of underlying assets (primarily real estate and equipment). Leases with an expected or initial term of 12 months or less are not
10
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)
recorded on the Company’s balance sheet and the related lease expenses are recognized on a straight-line basis over the expected lease term.
Information related to weighted average lease terms and discount rates is as follows:
December 31, 2019 | ||
Weighted average remaining lease terms (years): | ||
Operating leases | 23 | |
Finance leases | 18 | |
Weighted average discount rates: | ||
Operating leases (1) | 7.98 | % |
Finance leases | 5.01 | % |
_________
(1) | The weighted average discount rates for existing operating leases were established upon the adoption of ASU 2016-02 on October 1, 2019. |
The components of lease expense are as follows (in thousands):
For the | |||
Three Months Ended | |||
December 31, 2019 | |||
Operating lease expense | $ | 9,601 | |
Short-term lease expense | 9,956 | ||
Variable lease expense | 3,609 | ||
Finance lease expense: | |||
Amortization of ROU assets | 607 | ||
Interest on lease liabilities | 397 | ||
Less: sublease income (1) | (9,604 | ) | |
Total | $ | 14,566 |
_________
(1) | Represents income earned by the Company from the rental of hotel, convention or retail space at the MGE Niagara Resorts and the Earth Hotel Tower at Mohegan Sun, both of which are leased properties. |
Supplemental cash flow information related to lease liabilities is as follows (in thousands):
For the | |||
Three Months Ended | |||
December 31, 2019 | |||
Cash paid for amounts included in the measurement of lease liabilities: | |||
Payments on operating lease obligations | $ | 8,385 | |
Payments for interest on finance lease obligations | 397 | ||
Payments on finance lease obligations | 404 | ||
Total | $ | 9,186 |
11
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)
Maturities of ROU operating lease obligations are as follows (in thousands):
Operating Leases | Finance Leases | ||||||
Fiscal years: | |||||||
2020 (1) | $ | 24,415 | $ | 2,502 | |||
2021 | 30,922 | 3,131 | |||||
2022 | 31,282 | 3,130 | |||||
2023 | 31,047 | 2,934 | |||||
2024 | 31,115 | 2,568 | |||||
Thereafter | 734,067 | 33,442 | |||||
Total future lease payments | 882,848 | 47,707 | |||||
Less: amounts representing interest | (513,106 | ) | (16,197 | ) | |||
Plus: residual values | — | 327 | |||||
Present value of future lease payments | 369,742 | 31,837 | |||||
Less: current portion of lease obligations | (9,894 | ) | (1,794 | ) | |||
Lease obligations, net of current portion | $ | 359,848 | $ | 30,043 |
_________
(1) | Represents payment obligations from January 1, 2020 to September 30, 2020. |
In connection with the acquisition of the MGE Niagara Resorts, the Company committed to enter into a lease agreement with a third-party to lease the Niagara Falls Entertainment Centre following the completion of its construction. Prior to the adoption of ASU 2016-02, the Company was deemed, for accounting purposes only, to be the owner of this construction project, despite not being the legal owner. Accordingly, the Company capitalized $90.3 million as of September 30, 2019 for amounts paid as a build-to-suit asset within property and equipment, net and recorded a corresponding build-to-suit liability. In connection with the adoption of ASU 2016-02, the Company derecognized the build-to-suit asset and liability in their entirety.
Lessor
The Company leases space at its facilities to third parties. Lease terms for these non-cancelable operating leases range from approximately one month to 17 years. Rental income under these lease agreements are fixed and/or variable based on percentage of tenant sales or periodic adjustments for inflation. Rental income is recorded within hotel and retail, entertainment and other revenues. For instances in which the Company is the lessor, and the class of underlying asset represents retail space, the Company accounts for both the lease and non-lease components, such as common area maintenance and tenant services, as a single lease component. In all other instances, non-lease components are accounted for separately in accordance with applicable guidance, most commonly ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”.
Lease income consists of the following (in thousands):
For the Three Months Ended December 31, 2019 | |||||||
Hotel | Retail, Entertainment and Other | ||||||
Fixed rent | $ | 15,743 | $ | 3,075 | |||
Variable rent | — | 1,388 | |||||
Total | $ | 15,743 | $ | 4,463 |
12
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)
Future fixed rental income that the Company expects to earn under non-cancelable operating leases, exclusive of amounts under contingent escalated rent clauses, are as follows (in thousands):
Fiscal years: | |||
2020 (1) | $ | 7,120 | |
2021 | 8,211 | ||
2022 | 5,375 | ||
2023 | 4,748 | ||
2024 | 4,180 | ||
Thereafter | 9,440 | ||
Total | $ | 39,074 |
_________
(1) | Represents future fixed rental income from January 1, 2020 to September 30, 2020. |
The portions of Mohegan Sun, including the Sky Hotel Tower and the Earth Expo & Convention Center, and Mohegan Sun Pocono that are leased to third parties under operating leases are recorded within property and equipment, net as follows (in thousands):
December 31, 2019 | |||
Property and equipment, at cost | $ | 492,612 | |
Less: accumulated depreciation | (197,212 | ) | |
Property and equipment, net | $ | 295,400 |
As of September 30, 2019, information pertaining to the Company’s leases, as accounted for under prior accounting standards, was as follows:
Capital Leases
Minimum future capital lease payments were as follows (in thousands):
Fiscal years: | |||
2020 | $ | 2,571 | |
2021 | 2,598 | ||
2022 | 2,598 | ||
2023 | 2,548 | ||
2024 | 2,251 | ||
Thereafter | 32,832 | ||
Total minimum future capital lease payments | 45,398 | ||
Less: amounts representing interest | (16,031 | ) | |
Plus: residual values | 327 | ||
Present value of capital lease obligations | 29,694 | ||
Less: current portion of capital lease obligations | (1,133 | ) | |
Capital lease obligations, net of current portion | $ | 28,561 |
13
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)
Operating Leases
Minimum future rental income that the Company expected to earn under non-cancelable leases was as follows (in thousands):
Fiscal years: | |||
2020 | $ | 4,808 | |
2021 | 4,038 | ||
2022 | 2,485 | ||
2023 | 2,092 | ||
2024 | 2,011 | ||
Thereafter | 5,734 | ||
Total | $ | 21,168 |
Minimum future rental payments that the Company expected to incur under non-cancelable leases and subleases was as follows (in thousands):
Fiscal years: | Minimum Future Rental Payments | Minimum Future Sublease Income | Total | ||||||||
2020 | $ | 32,504 | $ | (1,709 | ) | $ | 30,795 | ||||
2021 | 30,376 | (1,428 | ) | 28,948 | |||||||
2022 | 30,651 | (1,114 | ) | 29,537 | |||||||
2023 | 30,473 | (987 | ) | 29,486 | |||||||
2024 | 30,602 | (1,025 | ) | 29,577 | |||||||
Thereafter | 715,910 | (843 | ) | 715,067 | |||||||
Total | $ | 870,516 | $ | (7,106 | ) | $ | 863,410 |
NOTE 4—MGE NIAGARA RESORTS:
In September 2018, MGE Niagara was selected by the OLG to be the service provider for the MGE Niagara Resorts. Following its selection, MGE Niagara entered into a Transition and Asset Purchase Agreement with the OLG and the Ontario Gaming Assets Corporation. Pursuant to the terms of this agreement, MGE Niagara agreed to acquire certain assets associated with the MGE Niagara Resorts and to perform certain transition activities in order to facilitate the transition of the operational responsibilities from the previous operator to MGE Niagara.
On the Closing Date, MGE Niagara completed the Acquisition, assumed the day-to-day operations of the properties under the terms of the COSA and engaged in a series of transactions related thereto, including: (i) a lease agreement with the OLG to lease the Fallsview Casino Resort and related administrative office space, (ii) a lease agreement with a third-party investor to lease Casino Niagara and related license agreements to operate an adjacent parking lot and the right for patrons to use an adjacent parking garage and (iii) committed to enter into a lease agreement with a third-party to lease the Niagara Falls Entertainment Centre following the completion of its construction, both of which are expected to occur in 2020.
As of the Closing Date, the purchase price of the Acquisition was approximately 96 million Canadian dollars (approximately $72 million), net of cash acquired of approximately 57 million Canadian dollars (approximately $43 million). During the three months ended December 31, 2019, the Company recorded adjustments to the purchase price of the Acquisition totaling 2.2 million Canadian dollars ($1.7 million), net of cash acquired of approximately 518,000 Canadian dollars (approximately $390,000). While no additional material adjustments are expected, the purchase price allocation is not final.
14
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)
The below unaudited pro forma financial information was prepared as if the Acquisition, the financing to fund the Acquisition and the lease transactions had occurred on October 1, 2018. Unaudited pro forma financial information does not necessarily represent results that may occur in the future. The following unaudited pro forma financial information includes historical financial results of the MGE Niagara Resorts prior to the Acquisition, adjusted to include the Company's share of revenues earned under the COSA which are recorded on a net basis, along with other adjustments directly attributable to the Acquisition, including interest expense and depreciation (in thousands, unaudited):
For the | |||
Three Months Ended | |||
December 31, 2018 | |||
Net revenues | $ | 405,802 | |
Net income attributable to Mohegan Tribal Gaming Authority | $ | 8,554 |
NOTE 5—LONG-TERM DEBT:
Long-term debt consisted of the following (in thousands):
December 31, 2019 | September 30, 2019 | ||||||
Senior Secured Credit Facility - Revolving | $ | 137,000 | $ | 102,000 | |||
Senior Secured Credit Facility - Term Loan A, net of discount and debt issuance costs of $3,668 and $4,236, respectively | 253,272 | 263,829 | |||||
Senior Secured Credit Facility - Term Loan B, net of discount and debt issuance costs of $15,975 and $16,925, respectively | 804,174 | 805,394 | |||||
2016 7 7/8% Senior Unsecured Notes, net of discount and debt issuance costs of $9,179 and $9,565, respectively | 490,821 | 490,435 | |||||
Line of Credit | 75 | — | |||||
MGE Niagara Resorts Credit Facility - Revolving | 30,728 | — | |||||
MGE Niagara Resorts Credit Facility - Term Loan, net of debt issuance costs of $963 and $1,002, respectively | 73,936 | 73,564 | |||||
MGE Niagara Resorts Convertible Debenture | 30,728 | 30,204 | |||||
Mohegan Expo Credit Facility, net of debt issuance costs of $827 and $925, respectively | 28,831 | 29,357 | |||||
Guaranteed Credit Facility, net of debt issuance costs of $1,111 and $1,191, respectively | 31,264 | 31,840 | |||||
Redemption Note Payable, net of discount of $22,072 and $23,905, respectively | 78,035 | 81,329 | |||||
Other | 1,154 | 1,205 | |||||
Long-term debt | 1,960,018 | 1,909,157 | |||||
Less: current portion of long-term debt | (74,266 | ) | (76,909 | ) | |||
Long-term debt, net of current portion | $ | 1,885,752 | $ | 1,832,248 |
Senior Secured Credit Facilities - Non-cash Transactions
On December 31, 2019 and 2018, the bank that administers the Company's debt service payments for its Senior Secured Credit Facilities made required principal payments on behalf of the Company totaling $13.3 million and $28.9 million, respectively, but did not accordingly debit the Company's bank account for these payments. As of December 31, 2019 and 2018, the Company reflected these non-cash transactions as reductions to current portion of long-term debt and corresponding increases to other current liabilities. On the respective following banking days, the bank withdrew the payments from the Company's bank account, resulting in reductions to the Company's cash and cash equivalents and other current liabilities.
Debt Covenant Compliance
As of December 31, 2019, the Company and MGE Niagara were in compliance with all financial covenants.
15
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)
NOTE 6—SEGMENT REPORTING:
The Company, either directly or through subsidiaries, operates Mohegan Sun, along with its other Connecticut operations (the “Connecticut Facilities”), Mohegan Sun Pocono, along with its other Pennsylvania operations (the “Pennsylvania Facilities”) and the MGE Niagara Resorts. The Company assumed the day-to-day operations of the MGE Niagara Resorts on June 11, 2019. Certain other properties that are managed or under development by the Company, which were previously included within the Company's corporate functions, are now identified as the management, development and other reportable segment.
The Company's chief operating decision maker currently reviews and assesses the performance and operating results and determines the proper allocation of resources to the Connecticut Facilities, the Pennsylvania Facilities, the MGE Niagara Resorts and the properties managed or under development on a separate basis. Accordingly, the Company now has four separate reportable segments: (i) Mohegan Sun, which includes the operations of the Connecticut Facilities, (ii) Mohegan Sun Pocono, which includes the operations of the Pennsylvania Facilities, (iii) the MGE Niagara Resorts and (iv) management, development and other. The Company's corporate functions, along with any inter-segment activities are disclosed separately in the following segment disclosures to reconcile to consolidated results. The following management, development and other and corporate segment disclosures for the three months ended December 31, 2018 have been restated to conform to fiscal 2020 presentation.
For the Three Months Ended | |||||||
(in thousands) | December 31, 2019 | December 31, 2018 | |||||
Net revenues: | |||||||
Mohegan Sun | $ | 243,335 | $ | 252,679 | |||
Mohegan Sun Pocono | 61,954 | 60,791 | |||||
MGE Niagara Resorts | 84,974 | — | |||||
Management, development and other | 9,012 | 5,712 | |||||
Corporate | 108 | 378 | |||||
Inter-segment | (331 | ) | (60 | ) | |||
Total | $ | 399,052 | $ | 319,500 | |||
Income (loss) from operations: | |||||||
Mohegan Sun | $ | 45,065 | $ | 44,063 | |||
Mohegan Sun Pocono | 7,794 | 7,192 | |||||
MGE Niagara Resorts | (1,333 | ) | — | ||||
Management, development and other | (918 | ) | (413 | ) | |||
Corporate | (7,164 | ) | (7,472 | ) | |||
Inter-segment | (19 | ) | — | ||||
Total | $ | 43,425 | $ | 43,370 | |||
For the Three Months Ended | |||||||
(in thousands) | December 31, 2019 | December 31, 2018 | |||||
Capital expenditures incurred: | |||||||
Mohegan Sun | $ | 4,631 | $ | 5,123 | |||
Mohegan Sun Pocono | 999 | 377 | |||||
MGE Niagara Resorts | 7,851 | — | |||||
Management, development and other | 22,868 | 7,542 | |||||
Corporate | 8 | 7 | |||||
Total | $ | 36,357 | $ | 13,049 | |||
(in thousands) | December 31, 2019 | September 30, 2019 | |||||
Total assets: | |||||||
Mohegan Sun | $ | 1,355,934 | $ | 1,282,384 | |||
Mohegan Sun Pocono | 545,220 | 548,424 | |||||
MGE Niagara Resorts | 575,771 | 342,821 | |||||
Management, development and other | 358,366 | 313,458 | |||||
Corporate | 915,650 | 912,712 | |||||
Inter-segment | (895,417 | ) | (888,203 | ) | |||
Total | $ | 2,855,524 | $ | 2,511,596 |
16
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)
NOTE 7—COMMITMENTS AND CONTINGENCIES:
The Company is a defendant in various claims and legal actions resulting from its normal course of business, primarily relating to personal injuries to patrons and damages to patrons' personal assets. The Company estimates litigation claims expense and accrues for such liabilities based upon historical experience. In management's opinion, the aggregate liability, if any, arising from such legal actions will not have a material impact on the Company's financial position, results of operations or cash flows.
NOTE 8—SUBSEQUENT EVENT:
On January 21, 2020, the Company, through a wholly-owned subsidiary, purchased a 45% interest in Mohegan Hotel Holdings, LLC, the indirect owner of the Earth Hotel Tower, in exchange for $15.8 million, which the Company believes represented the fair market value of the investment.
17
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Some information included in this Quarterly Report on Form 10-Q and other materials filed by us with the Securities and Exchange Commission, or the SEC, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements include information relating to business development activities, as well as capital spending, financing sources, the effects of regulation, including gaming and tax regulation and increased competition. These statements can sometimes be identified by our use of forward-looking words such as “may,” “will,” “anticipate,” “estimate,” “expect” or “intend” and similar expressions. Such forward-looking information involves important risks and uncertainties that could significantly affect anticipated future results, and accordingly, such results may differ materially from those expressed in any forward-looking statements made by us or on our behalf. These risks and uncertainties include, but are not limited to, those relating to the following:
• | the financial performance of our various operations; |
• | the local, regional, national or global economic climate; |
• | increased competition, including the expansion of gaming in jurisdictions in which we own or operate gaming facilities; |
• | our leverage and ability to meet our debt service obligations and maintain compliance with financial debt covenants; |
• | the continued availability of financing; |
• | our dependence on existing management; |
• | our ability to integrate new amenities from expansions to our facilities into our current operations and manage the expanded facilities; |
• | changes in federal or state tax laws or the administration of such laws; |
• | changes in gaming laws or regulations, including the limitation, denial or suspension of licenses required under gaming laws and regulations; |
• | cyber security risks relating to our information technology and other systems, including misappropriation of patron information or other breaches of information security; |
• | changes in applicable laws pertaining to the service of alcohol, smoking or other amenities offered at our facilities; |
• | our ability to successfully implement our diversification strategy; |
• | an act of terrorism; |
• | our customers' access to inexpensive transportation to our facilities and changes in oil, fuel or other transportation-related expenses; |
• | unfavorable weather conditions; |
• | risks associated with operations in foreign jurisdictions; |
• | failure by our employees, agents, affiliates, vendors or businesses to comply with applicable laws, rules and regulations, including state gaming laws and regulations and anti-bribery laws such as the United States Foreign Corrupt Practices Act, and similar anti-bribery laws in other jurisdictions; and |
• | fluctuations in foreign currency exchange rates. |
Additional information concerning potential factors that could affect our financial results is included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019, as well as our other reports and filings with the SEC. The forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date of this report. We do not undertake any obligation to update or supplement any forward-looking statements to reflect subsequent events or circumstances, except as required by law. We cannot assure you that projected results or events will be achieved or will occur.
The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and the related notes beginning on page 3 of this Quarterly Report on Form 10-Q.
18
Overview
Our Company
We were established in July 1995 by the Mohegan Tribe, a federally-recognized Indian tribe with an approximately 595-acre reservation situated in southeastern Connecticut, adjacent to Uncasville, Connecticut. Under the Indian Gaming Regulatory Act of 1988, federally-recognized Indian tribes are permitted to conduct full-scale casino gaming operations on tribal lands, subject to, among other things, the negotiation of a compact with the affected state. The Mohegan Tribe and the State of Connecticut entered into such a compact, the Mohegan Compact, which was approved by the United States Secretary of the Interior. We were established as an instrumentality of the Mohegan Tribe, with the exclusive authority to conduct and regulate gaming activities for the Mohegan Tribe on tribal lands and the non-exclusive authority to conduct such activities elsewhere. We are governed and overseen by a nine-member Management Board, whose members also comprise the Mohegan Tribal Council, the governing body of the Mohegan Tribe. Any change in the composition of the Mohegan Tribal Council results in a corresponding change in our Management Board.
We are primarily engaged in the ownership, operation and development of integrated entertainment facilities, both domestically and internationally, including: (i) Mohegan Sun in Uncasville, Connecticut, (ii) Mohegan Sun Pocono in Plains Township, Pennsylvania, (iii) Niagara Fallsview Casino Resort, Casino Niagara and the future 5,000-seat Niagara Falls Entertainment Centre, all in Niagara Falls, Canada (collectively, the “MGE Niagara Resorts”), (iv) Resorts Casino Hotel in Atlantic City, New Jersey, (v) ilani Casino Resort in Clark County, Washington, (vi) Paragon Casino Resort in Marksville, Louisiana and (vii) Project Inspire, a first-of-its-kind, multi-billion dollar integrated resort and casino under construction at Incheon International Airport in South Korea.
19
Results of Operations
We, either directly or through subsidiaries, operate Mohegan Sun, along with our other Connecticut operations (the “Connecticut Facilities”), Mohegan Sun Pocono, along with our other Pennsylvania operations (the “Pennsylvania Facilities”) and the MGE Niagara Resorts. We assumed the day-to-day operations of the MGE Niagara Resorts on June 11, 2019. In addition, certain other properties that are managed or under development, which were previously included within our corporate functions, are now identified as the management, development and other reportable segment.
Our chief operating decision maker currently reviews and assesses the performance and operating results and determines the proper allocation of resources to the Connecticut Facilities, the Pennsylvania Facilities, the MGE Niagara Resorts and the properties managed or under development on a separate basis. Accordingly, we now have four separate reportable segments: (i) Mohegan Sun, which includes the operations of the Connecticut Facilities, (ii) Mohegan Sun Pocono, which includes the operations of the Pennsylvania Facilities, (iii) the MGE Niagara Resorts and (iv) management, development and other. Our corporate functions, along with any inter-segment activities are disclosed separately in the following segment disclosures to reconcile to consolidated results. The following management, development and other and corporate segment disclosures for the three months ended December 31, 2018 have been restated to conform to fiscal 2020 presentation.
For the Three Months Ended December 31, | ||||||||||||||
(in thousands) | 2019 | 2018 | Variance | Percentage Variance | ||||||||||
Net revenues: | ||||||||||||||
Mohegan Sun | $ | 243,335 | $ | 252,679 | $ | (9,344 | ) | (3.7 | )% | |||||
Mohegan Sun Pocono | 61,954 | 60,791 | 1,163 | 1.9 | % | |||||||||
MGE Niagara Resorts (1) | 84,974 | — | 84,974 | 100.0 | % | |||||||||
Management, development and other | 9,012 | 5,712 | 3,300 | 57.8 | % | |||||||||
Corporate | 108 | 378 | (270 | ) | (71.4 | )% | ||||||||
Inter-segment | (331 | ) | (60 | ) | (271 | ) | (451.7 | ) | ||||||
Total | $ | 399,052 | $ | 319,500 | $ | 79,552 | 24.9 | % | ||||||
Income (loss) from operations: | ||||||||||||||
Mohegan Sun | $ | 45,065 | $ | 44,063 | $ | 1,002 | 2.3 | % | ||||||
Mohegan Sun Pocono | 7,794 | 7,192 | 602 | 8.4 | % | |||||||||
MGE Niagara Resorts (1) | (1,333 | ) | — | (1,333 | ) | (100.0 | )% | |||||||
Management, development and other | (918 | ) | (413 | ) | (505 | ) | (122.3 | )% | ||||||
Corporate | (7,164 | ) | (7,472 | ) | 308 | 4.1 | % | |||||||
Inter-segment | (19 | ) | — | (19 | ) | (100.0 | )% | |||||||
Total | $ | 43,425 | $ | 43,370 | $ | 55 | 0.1 | % | ||||||
Net income attributable to Mohegan Tribal Gaming Authority | $ | 9,394 | $ | 10,622 | $ | (1,228 | ) | (11.6 | )% |
_________
(1) | We assumed the day-to-day operations of the MGE Niagara Resorts on June 11, 2019. |
The most significant factors and trends that impacted our operating and financial performance were as follows:
• | increasingly competitive gaming markets; |
• | lower gaming volumes and table game hold percentage at Mohegan Sun; |
• | improved overall business volumes and additional revenues generated by our new sports wagering and interactive gaming operations at Mohegan Sun Pocono; |
• | higher management fees earned; |
• | the acquisition of the MGE Niagara Resorts, which contributed $85.0 million to net revenues and increased operating costs and expenses by $86.3 million; and |
• | lower than anticipated table game hold percentage at the MGE Niagara Resorts. |
Mohegan Sun
Revenues
Net revenues declined by $9.4 million, or 3.7%, to $243.3 million for the three months ended December 31, 2019 compared to $252.7 million in the same period in the prior year. These results were driven by lower gaming revenues, partially offset by higher non-gaming revenues. The decline in gaming revenues reflected lower slot and table game revenues primarily driven by
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lower overall gaming volumes. In addition, table game revenues were modestly impacted by lower year-over-year hold percentage. The increase in non-gaming revenues was primarily driven by higher hotel and entertainment revenues, both of which benefited from a strong entertainment calendar.
Operating Costs and Expenses
Operating costs and expenses decreased by $10.3 million, or 4.9%, to $198.3 million for the three months ended December 31, 2019 compared to $208.6 million in the same period in the prior year. The decrease in operating costs and expenses was primarily driven by lower payroll, governmental services and utility costs, along with reduced slot machine tax expenses commensurate with the decline in slot revenues. The decrease in operating costs and expenses also reflected lower depreciation expense due to the impact of an out-of-period correction which increased depreciation expense by $6.3 million in the same period in the prior year.
Mohegan Sun Pocono
Revenues
Net revenues increased by $1.2 million, or 2.0%, to $62.0 million for the three months ended December 31, 2019 compared to $60.8 million in the same period in the prior year. The growth in net revenues reflected increases in both gaming and non-gaming revenues driven, in part, by strong overall business volumes. The increase in gaming revenues reflected higher table game revenues and additional revenues generated by our new sports wagering and interactive gaming operations, while the increase in non-gaming revenues reflected higher food and beverage and hotel revenues. These results were partially offset by lower slot revenues.
Operating Costs and Expenses
Operating costs and expenses were $54.2 million for the three months ended December 31, 2019 compared to $53.6 million in the same period in the prior year, relatively flat.
MGE Niagara Resorts
Revenues
Net revenues totaled $85.0 million for the three months ended December 31, 2019. We assumed the day-to-day operations of the MGE Niagara Resorts on June 11, 2019. Net revenues for the three months ended December 31, 2019 reflect lower than anticipated table game hold percentage and unfavorable weather conditions.
Operating Costs and Expenses
Operating costs and expenses totaled $86.3 million for the three months ended December 31, 2019. We assumed the day-to-day operations of the MGE Niagara Resorts on June 11, 2019.
Management, Development and Other
Revenues
Net revenues increased by $3.3 million, or 57.9%, to $9.0 million for the three months ended December 31, 2019 compared to $5.7 million in the same period in the prior year. These results primarily reflected higher management fees from ilani Casino Resort driven principally by continued improvement in performance at the property.
Operating Costs and Expenses
Operating costs and expenses increased by $3.8 million, or 62.3%, to $9.9 million for the three months ended December 31, 2019 compared to $6.1 million in the same period in the prior year. The increase in operating costs and expenses was driven by higher pre-opening costs and expenses associated with Project Inspire and higher development costs and expenses associated with our other domestic and international diversification initiatives.
Corporate
Revenues
Net revenues declined by $270,000, or 71.4%, to $108,000 for the three months ended December 31, 2019 compared to $378,000 in the same period in the prior year. These results were primarily driven by lower revenues generated by our “Play 4 Fun” on-line gaming platform.
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Operating Costs and Expenses
Operating costs and expenses declined by $600,000, or 7.6%, to $7.3 million for the three months ended December 31, 2019 compared to $7.9 million in the same period in the prior year. The decrease in operating costs and expenses was primarily due to a reduction in payroll costs, partially offset by higher costs related to certain governmental services.
Other Expenses
Other expenses increased by $2.6 million, or 8.0%, to $35.2 million for the three months ended December 31, 2019 compared to $32.6 million in the same period in the prior year, primarily due to the impact of lower interest income. Interest expense was $35.4 million for the three months ended December 31, 2019 compared to $36.0 million in the same period in the prior year. Weighted average outstanding debt was $2.03 billion for the three months ended December 31, 2019 compared to $1.96 billion in the same period in the prior year. Weighted average cost of borrowing was 7.0% for the three months ended December 31, 2019 compared to 7.4% in the same period in the prior year.
Seasonality
The gaming markets in the Northeastern United States and Niagara Falls, Canada, are seasonal in nature, with peak gaming activities often occurring during the months of May through August. Accordingly, our operating results for the three months ended December 31, 2019 are not necessarily indicative of operating results for other interim periods or an entire fiscal year.
Liquidity and Capital Resources
As of December 31, 2019 and September 30, 2019, we held cash and cash equivalents of $139.2 million and $130.1 million, respectively. Inclusive of letters of credit, which reduce borrowing availability, we had $110.7 million of borrowing capacity under our senior secured revolving facility and line of credit as of December 31, 2019. In addition, inclusive of letters of credit, which reduce borrowing availability, MGE Niagara Entertainment Inc. had $96.0 million of borrowing capacity under the MGE Niagara Resorts revolving facility and line of credit as of December 31, 2019. Borrowing capacities under these facilities may be further impacted by restrictive financial covenant requirements. As a result of the cash based nature of our business, operating cash flow levels tend to follow trends in our operating income, excluding the effects of non-cash charges, such as depreciation and amortization.
Cash used in operating activities totaled $11.0 million for the three months ended December 31, 2019 compared to cash provided by operating activities of $81.1 million in the same period in the prior year. These results primarily reflected the impact of a $72.2 million payment received in the same period in the prior year from the Cowlitz Tribal Gaming Authority related to accrued interest on funds previously advanced for the Cowlitz Project, combined with additional working capital requirements associated with the MGE Niagara Resorts.
Cash used in investing activities totaled $25.3 million for the three months ended December 31, 2019 compared to cash provided by investing activities of $16.6 million in the same period in the prior year. The increase in cash used in investing activities for the three months ended December 31, 2019 primarily reflected the impact of a $32.0 million payment received in the same period in the prior year from the Cowlitz Tribal Gaming Authority related to funds previously advanced for the Cowlitz Project. The increase in cash used in investing activities for the three months ended December 31, 2019 also reflected higher capital expenditures. Capital expenditures totaled $34.3 million for the three months ended December 31, 2019, of which $22.9 million related to Project Inspire.
Cash provided by financing activities totaled $30.4 million for the three months ended December 31, 2019 compared to cash used in financing activities of $17.7 million in the same period in the prior year. The increase in cash provided by financing activities for the three months ended December 31, 2019 was primarily driven by a $43.6 million increase in borrowings for general corporate purposes, including working capital requirements associated with the MGE Niagara Resorts.
Sufficiency of Resources
We believe that existing cash balances, financing arrangements and operating cash flows will provide us with sufficient resources to meet our existing debt obligations, distributions to the Mohegan Tribe, capital expenditures and working capital requirements, including threshold payments relating to the MGE Niagara Resorts, for at least the next twelve months; however, we can provide no assurance in this regard.
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Critical Accounting Policies and Estimates
There has been no material change from the critical accounting policies and estimates previously disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and commodity prices. As of December 31, 2019, our primary exposure to market risk was interest rate risk associated with our credit facilities which accrued interest on the basis of base rate, Eurodollar rate and Bankers’ Acceptance rate formulas, plus applicable rates, as defined under the credit facilities. Based on our variable rate outstanding debt as of December 31, 2019, a 100 basis point change in average interest rate would impact annual interest expense by approximately $13.8 million.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2019. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company's management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosures. Management recognizes that controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Based on an evaluation of our disclosure controls and procedures as of September 30, 2019, and due to a material weakness in our internal control over financial reporting relating to our goodwill and other intangible assets impairment analysis review control, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were not effective.
Notwithstanding this material weakness, our management, including our Chief Executive Officer and Chief Financial Officer, has concluded that our financial statements included in this Quarterly Report on Form 10-Q present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in accordance with accounting principles generally accepted in the United States of America.
Changes in Internal Control Over Financial Reporting
There have been no other changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, that occurred during the quarter ended December 31, 2019, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting, other than the material weakness discussed above. In making our assessment of changes in internal control over financial reporting, we have excluded the MGE Niagara Resorts, which was acquired on June 11, 2019.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There has been no material change from the legal proceedings previously disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019.
Item 1A. Risk Factors
There has been no material change from the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019.
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Item 6. Exhibits
Exhibit No. | Description | |
31.1 | ||
31.2 | ||
32.1 | ||
32.2 | ||
101.INS | XBRL Instance Document (filed herewith). | |
101.SCH | XBRL Taxonomy Extension Schema (filed herewith). | |
101.CAL | XBRL Taxonomy Calculation Linkbase (filed herewith). | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase (filed herewith). | |
101.LAB | XBRL Taxonomy Extension Label Linkbase (filed herewith). | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase (filed herewith). |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Mohegan Tribal Gaming Authority has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.
MOHEGAN TRIBAL GAMING AUTHORITY | |||
Date: | February 12, 2020 | By: | /S/ RALPH JAMES GESSNER JR. |
Ralph James Gessner Jr. Chairman and Member, Management Board | |||
Date: | February 12, 2020 | By: | /S/ MARIO C. KONTOMERKOS |
Mario C. Kontomerkos Chief Executive Officer, Mohegan Tribal Gaming Authority (Principal Executive Officer) | |||
Date: | February 12, 2020 | By: | /S/ DREW M. KELLEY |
Drew M. Kelley Chief Financial Officer, Mohegan Tribal Gaming Authority (Principal Financial and Accounting Officer) |
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