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Mohegan books show $3 billion impact from reversed recognitions

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UNCASVILLE, Conn. - When Interior Department Associate Deputy Secretary
James Cason faxed the withdrawal of federal recognition to two Connecticut
tribes on Oct. 11, he also delivered an estimated $6 billion in additional
gross revenue to the state's two existing tribal casinos.

This 10-year projection, and rare inside glimpse of gaming economics,
derives from a figure embedded in the recently issued annual financial
report for the Mohegan Tribal Gaming Authority, which runs the Mohegan Sun
casino resort and the Mohegan Tribe's other gaming investments. The report
states that the reversal of recognition for the Eastern Pequot Tribal
Nation and the Schaghticoke Tribal Nation increased revenue projections
through 2014 for Mohegan Sun by $3.2 billion. The estimate assumed that the
two newly recognized tribes would have launched casinos drawing that amount
of business away from the Mohegan Sun.

The Mashantucket Pequot Tribal Nation does roughly the same amount of
business as the Mohegans at its nearby Foxwoods Resort Casino. Even though
the Mashantuckets have not published long-term revenue projections, it's
reasonable to assume the impact would be about equal.

So the recognition decisions, the subject of intense opposition from the
state's politicians, also amounted to a revenue transfer of $6 billion from
two tribes of moderate income to two of the richest indigenous nations on
the planet.

The Mohegans keep constantly updated revenue projections through 2014
because of a unique bookkeeping demand called the "relinquishment
liability." Mohegan Sun Chief Financial Officer Leo Chupaska explained to
Indian Country Today that this debit resulted from the tribe's decision in
1998 to buy out the long-term management contract of its original partner,
Trading Cove Associates. A leading figure in this entity was South African
businessman Sol Kerzner, developer of the famed Sun City resort in one of
that region's bantustans. It bankrolled the Mohegan Tribe's federal
recognition in 1994 and launched the Mohegan Sun in 1996.

In the buyout agreement, the Mohegan Tribe agreed to pay Trading Cove 5
percent of the Sun's gross revenues through 2014. The annual payments of
around $60 million are in the same ballpark as the casino's annual
distribution to the tribe itself.

When the Mohegans and Trading Cove signed this agreement in 1998, said
Chupaska, the "accounting gods" required the Sun to book the entire
projected cost of the 15 years of payments as an expense against that
year's profits. "We took a big hit that year," said Chupaska - $549
million, to be exact. (This was a non-cash charge, however. The payments go
out year by year as due, but because they've already been accounted for,
they don't show up in the profit and loss statements for the subsequent
years.)

If the gross revenue projections changed, however, the Mohegan Sun would
have to adjust its financial report to show either the increase or decrease
in the future payments. The withdrawal of recognition for the two potential
competitors ranked as one of the biggest changes so far. According to the
Sun's "crystal-balling," said Chupaska, the additional $3.2 billion in
revenues meant it would have to increase its payments to Trading Cove by a
total of $123.6 million. Although these payments would go on until the end
of December 2014, the accounting gods still decreed it had to be booked in
the current year.

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(The calculations also included increased competition from Foxwoods. The
same day that Sun executives released their financials in a conference
call, Mashantucket Pequot leaders celebrated the ground-breaking on a new
$700 million hotel and conference complex next to Foxwoods. Chupaska said
that Sun revenues would be impacted by the Foxwoods bid for entertainment
and convention dollars, "but not a great deal.")

So the fiscal 2005 report, issued Nov. 15, shows a special "non-cash
relinquishment liability reassessment charge" of $123.6 million. Even
though casino revenues were up across the board, to record levels, the
charge left the quarterly results showing a hefty loss of $77.4 million.
The fiscal year still showed a profit, of $23.7 million, but this was a 77
percent decrease from the prior year.

These figures are artificial, however. By any other measure, business at
Mohegan Sun is booming. Annual gaming revenues hit a record of $1.2
billion, a 6.8 percent increase over the prior year. Non-gaming revenues
increased 4.8 percent, to $254.6 million. Hotel occupancy rose to 98
percent.

The annual report also showed the first returns from the Mohegans' massive
expansion into the Pennsylvania market, the new frontier for Eastern
gaming. The Mohegan Sun at Pocono Downs, a harness racing track and future
racino in northcentral Pennsylvania, showed net revenues of $9.4 million
(including racing revenues of $8.2 million.) Because of preopening costs of
$1.3 million, such as architect and lawyers fees, operations showed a loss
of $458,000.

The Mohegan Tribal Gaming Authority is in the middle of refurbishing the
existing track facilities. Once it receives its conditional slot machine
license from the new Pennsylvania Gaming Control Board, it will begin
construction of a new gaming complex offering 2,000 slot machines and all
the amenities.

The Pocono Downs project is a conventional corporate investment, not
covered by tribal sovereignty. It not only furthers the Mohegan strategy of
diversifying geographically, it is not subject to the buyout agreement with
Trading Cove. Its revenues do not have to shared, another incentive for the
expansion.

The new Mohegan leadership issued a strong endorsement of this strategy,
along with praise for the financial report. Bruce "Two Dogs" Bozsum, the
recently elected tribal council chairman, said, "The entire management
board is extremely pleased with our fourth-quarter performance and remains
focused on our long-term growth strategy, specifically Mohegan Sun and the
opening of Pocono Downs." As tribal chairman, Bozsum also chairs the Tribal
Gaming Authority's management board.

While campaigning in tribal elections, Bozsum voiced doubts about the
expansion plans but has since come to support them. "Our commitment in
Pennsylvania is a great opportunity for our team to learn and grow in order
to provide for the future generations of the Mohegan Tribe," he said in a
release.

In a conference call with investors, Bozsum offered further assurances,
emphasizing that in spite of the unprecedented turnover on the council, the
new members had substantial experience with casino operations.