UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 2011
OR
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| 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: 001-32384
MACQUARIE INFRASTRUCTURE COMPANY LLC
(Exact Name of Registrant as Specified in Its Charter)
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| Delaware | 43-2052503 | |
| (State or Other Jurisdiction of Incorporation or Organization) |
(IRS Employer Identification No.) |
125 West 55th Street
New York, New York 10019
(Address of Principal Executive Offices) (Zip Code)
(212) 231-1000
(Registrant’s Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year if Changed Since Last Report): N/A
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 x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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| Large Accelerated Filer x | Accelerated Filer o | Non-accelerated Filer o | Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
There were 46,207,881 limited liability company interests without par value outstanding at November 1, 2011.
MACQUARIE INFRASTRUCTURE COMPANY LLC
TABLE OF CONTENTS
Macquarie Infrastructure Company LLC is not an authorized deposit-taking institution for the purposes of the Banking Act 1959 (Commonwealth of Australia) and its obligations do not represent deposits or other liabilities of Macquarie Bank Limited ABN 46 008 583 542 (MBL). MBL does not guarantee or otherwise provide assurance in respect of the obligations of Macquarie Infrastructure Company LLC.
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PART I
FINANCIAL INFORMATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of the financial condition and results of operations of Macquarie Infrastructure Company LLC should be read in conjunction with the consolidated condensed financial statements and the notes to those statements included elsewhere herein. This discussion contains forward-looking statements that involve risks and uncertainties and are made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” and similar expressions identify such forward-looking statements. Our actual results and timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth under “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2010. Unless required by law, we can undertake no obligation to update forward-looking statements. Readers should also carefully review the risk factors set forth in other reports and documents filed from time to time with the SEC.
Except as otherwise specified, “Macquarie Infrastructure Company,” “MIC,” “we,” “us,” and “our” refer to the Company and its subsidiaries together from June 25, 2007 and, prior to that date, to the Trust, the Company and its subsidiaries. Macquarie Infrastructure Management (USA) Inc., which we refer to as our Manager, is part of the Macquarie Group, comprised of Macquarie Group Limited and its subsidiaries and affiliates worldwide.
We own, operate and invest in a diversified group of infrastructure businesses that provide basic services, such as chilled water for building cooling and gas utility services to businesses and individuals primarily in the U.S. The businesses we own and operate are energy-related businesses consisting of: a 50% interest in International Matex Tank Terminals, or IMTT, The Gas Company and our controlling interest in District Energy; and an aviation-related business, Atlantic Aviation.
Our infrastructure businesses generally operate in sectors with limited competition and significant barriers to entry, including high initial development and construction costs, the existence of long-term contracts or the requirement to obtain government approvals and a lack of immediate cost-efficient alternatives to the services provided. Overall they tend to generate sustainable long-term cash flows.
Dividends
Since January 1, 2011, MIC have made or declared the following dividends:
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| Declared | Period Covered | $ per LLC Interests |
Record Date | Payable Date | ||||||||||||
| October 31, 2011 | Third quarter 2011 | $ | 0.20 | November 14, 2011 | November 17, 2011 | |||||||||||
| August 1, 2011 | Second quarter 2011 | $ | 0.20 | August 15, 2011 | August 18, 2011 | |||||||||||
| May 2, 2011 | First quarter 2011 | $ | 0.20 | May 11, 2011 | May 18, 2011 | |||||||||||
The precise timing and amount of any future dividend will be based on the continued stable performance of the Company’s businesses and the economic conditions prevailing at the time of any authorization.
Tax Treatment of Dividends
We believe that dividends paid in 2011 are likely to be characterized in part as a dividend and in part as a return of capital for tax purposes. Shareholders would include in their taxable income that portion which is characterized as a dividend. We anticipate that any portion that is characterized as a dividend for U.S. federal income tax purposes will be eligible for treatment as qualified dividend income, subject to the shareholder having met the holding period requirements as defined by the Internal Revenue Code. Any portion that is characterized as a return of capital for tax purposes would generally not be includable in the shareholder’s taxable income but would reduce the shareholder’s basis in the shares on which the dividend was paid. Holders of MIC LLC interests are encouraged to seek their own tax advice with regards to their investment in MIC.
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Arbitration Proceeding Between MIC and Co-investor in IMTT
MIC has been unable to resolve the previously-disclosed dispute with the co-owner of IMTT regarding distributions, despite efforts to do so in accordance with the Shareholders’ Agreement. Accordingly, on April 18, 2011, MIC initiated formal arbitration proceedings with the Voting Trust of IMTT Holdings Inc. (“Voting Trust”) and IMTT Holdings Inc. under the auspices of the American Arbitration Association, as provided under the Shareholders’ Agreement. MIC believes the Voting Trust’s defenses and claims in the arbitration are without merit. We expect this process to be completed in the first quarter of 2012.
IMTT is named as a respondent because under the Shareholders’ Agreement it is responsible for any monetary damages resulting from a breach of the Shareholders’ Agreement by the Voting Trust. MIC is seeking payment of distributions due for the quarters ended December 31, 2010, March 31, 2011, June 30, 2011, an order covering future periods and other non-monetary relief that is designed to minimize the risk of future disputes. MIC remains concerned that, until the issues in the arbitration have been finally resolved, IMTT’s senior management (which includes members and beneficiaries of the Voting Trust) may make operational decisions that are influenced by the context of the arbitration. We expect that this will be resolved through the arbitration.
Contingent upon the favorable outcome of the arbitration, and the continued stable performance of our businesses, and subject to prevailing economic conditions, our board of directors expect to increase our quarterly dividend by approximately $0.70 per share per year.
Continuing Operations
Our energy-related businesses were largely resistant to the recent economic downturn, due primarily to the contracted or utility-like nature of their revenues combined with the essential services they provide and the contractual or regulatory ability to pass through most cost increases to customers. We believe these businesses are generally able to generate consistent cash flows throughout the business cycle.
Improvement in general aviation activity levels have resulted in improvement in the operating performance of Atlantic Aviation. We will continue to apply excess cash flow generated by Atlantic Aviation to the reduction of that business’ term loan principal in accordance with the terms of its debt facility. Those repayments are expected to enhance the terms on which we may be able to refinance this debt when it matures in 2014.
FBO Transactions at Atlantic Aviation
During the quarter ended June 30, 2011, Atlantic Aviation concluded that several of its sites did not have sufficient scale or serve a market with sufficiently strong growth prospects to warrant continued operations at these sites. Atlantic Aviation has sold certain FBOs and has reinvested the proceeds to acquire two FBOs in Oregon during the third quarter of 2011. Accordingly, Atlantic Aviation recorded a $949,000 non-cash loss on disposal of assets during the nine months ended September 30, 2011.
Proceeds from the above mentioned sales were redeployed into the acquisition of two FBOs. On August 31, 2011, Atlantic Aviation concluded a purchase of the assets of Portland International and Eugene airports in Oregon for $23.1 million. This acquisition will expand the business’ network into the Pacific Northwest. See Note 4, “Acquisitions”, in our consolidated condensed financial statements in Part I of this Form 10-Q for financial information and further discussions.
Income Taxes
We file a consolidated federal income tax return that includes the taxable income of The Gas Company and Atlantic Aviation. IMTT and District Energy file separate federal income tax returns. To the extent we receive distributions from IMTT and District Energy, such distributions may be characterized as non-taxable returns of capital and reduce our tax basis in these companies, or as a taxable dividend. We will include in our taxable income the taxable portion of any distributions from IMTT and District Energy characterized as a dividend. Those dividends are eligible for the 80% dividends received deduction.
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As a result of having federal net operating loss, or NOL, carryforwards, we do not expect to have a consolidated regular federal income tax liability or make regular federal tax payments at least through the 2013 tax year. However, we expect to pay an Alternative Minimum Tax of less than $500,000 for 2011. The cash state and local taxes paid by our individual businesses are discussed in the sections entitled “Income Taxes” for each of our individual businesses.
The individual businesses included in our consolidated federal income tax return pay federal income taxes to MIC in an amount approximately equivalent to the federal income taxes each would have paid on a standalone basis if they were not part of the MIC consolidated federal income tax return.
Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010
In December 2010, the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (the “Act”) was signed. The Act provides for 100% tax depreciation for certain fixed assets placed in service after September 8, 2010 and before January 1, 2012, and 50% tax depreciation for certain fixed assets placed in service during 2012 for federal income tax purposes. Generally, states only allow this tax depreciation deduction in determining state taxable income. Importantly, Illinois and Louisiana, two states in which we have significant operations, do permit the use of federal tax depreciation deductions in calculating state taxable income. The Company will take into consideration the benefits of these accelerated depreciation provisions of the Act when evaluating our capital expenditure plans for the remainder of 2011 and 2012.
Taxpayer Accountability and Budget Stabilization Act
In January 2011, Illinois enacted the Taxpayer Accountability and Budget Stabilization Act. The legislation increases the corporate income tax rate to 7.0% from 4.8% for taxable years beginning on or after January 1, 2011 and prior to January 1, 2015; 5.25% for taxable years beginning on or after January 1, 2015 and prior to January 1, 2025; and 4.8% for taxable years beginning on or after January 1, 2025. The legislation also provides that no NOL carryforwards deduction will be allowed for any taxable year ending after December 31, 2010 and prior to December 31, 2014. For purposes of determining the taxable years to which a net loss may be carried, no taxable year for which a deduction is disallowed under this provision will be counted. As discussed below in District Energy’s Results of Operations, the income tax expense for the nine months ended September 30, 2011 reflects a change in the deferred tax liability of this business consistent with the change in Illinois law.
Discontinued Operations
On June 2, 2010, we concluded the sale in bankruptcy of an airport parking business (“Parking Company of America Airports” or “PCAA”), resulting in a pre-tax gain of $130.3 million, of which $76.5 million related to the forgiveness of debt and the elimination of $201.0 million of current debt from liabilities from our consolidated condensed balance sheet. The results of operations from this business and the gain from the bankruptcy sale are separately reported as discontinued operations in the Company’s consolidated condensed financial statements. This business is no longer a reportable segment. As a part of the bankruptcy sale process, substantially all of the cash proceeds were used to pay the creditors of this business and were not paid to us. See Note 5, “Discontinued Operations”, in our consolidated condensed financial statements in Part I of this Form 10-Q for financial information and further discussions.
Results of Operations
Consolidated
Key Factors Affecting Operating Results:
| • | consistent performance of our energy-related businesses reflecting: |
| • | an increase in average storage rates at IMTT; and |
| • | an increase in contribution margin at The Gas Company; partially offset by |
| • | a decrease in revenue and gross profit from IMTT related to spill response activity in 2010; and |
| • | higher terminalling costs at IMTT. |
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Results of Operations: Consolidated – (continued)
| • | improved contribution from Atlantic Aviation reflecting: |
| • | higher general aviation volume of fuel sold; and |
| • | lower cash interest expense. |
Our consolidated results of operations are as follows:
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| Quarter Ended September 30, | Change Favorable/(Unfavorable) | Nine Months Ended September 30, | Change Favorable/(Unfavorable) | |||||||||||||||||||||||||||||
| 2011 | 2010 | $ | % | 2011 | 2010 | $ | % | |||||||||||||||||||||||||
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| Revenue |
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| Revenue from product sales | $ | 159,834 | $ | 129,217 | 30,617 | 23.7 | $ | 474,480 | $ | 374,412 | 100,068 | 26.7 | ||||||||||||||||||||
| Revenue from product sales – utility | 35,088 | 28,232 | 6,856 | 24.3 | 105,782 | 83,517 | 22,265 | 26.7 | ||||||||||||||||||||||||
| Service revenue | 55,420 | 54,598 | 822 | 1.5 | 154,590 | 157,598 | (3,008 | ) | (1.9 | ) | ||||||||||||||||||||||
| Financing and equipment lease income | 1,236 | 1,251 | (15 | ) | (1.2 | ) | 3,784 | 3,767 | 17 | 0.5 | ||||||||||||||||||||||
| Total revenue | 251,578 | 213,298 | 38,280 | 17.9 | 738,636 | 619,294 | 119,342 | 19.3 | ||||||||||||||||||||||||
| Costs and expenses |
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| Cost of product sales | 107,475 | 78,843 | (28,632 | ) | (36.3 | ) | 326,026 | 235,784 | (90,242 | ) | (38.3 | ) | ||||||||||||||||||||
| Cost of product sales – utility | 29,205 | 22,467 | (6,738 | ) | (30.0 | ) | 86,842 | 66,931 | (19,911 | ) | (29.7 | ) | ||||||||||||||||||||
| Cost of services | 15,860 | 16,625 | 765 | 4.6 | 40,704 | 41,088 | 384 | 0.9 | ||||||||||||||||||||||||
| Gross profit | 99,038 | 95,363 | 3,675 | 3.9 | 285,064 | 275,491 | 9,573 | 3.5 | ||||||||||||||||||||||||
| Selling, general and administrative | 50,706 | 50,486 | (220 | ) | (0.4 | ) | 150,685 | 150,742 | 57 | — | ||||||||||||||||||||||
| Fees to manager – related party | 3,465 | 2,380 | (1,085 | ) | (45.6 | ) | 11,253 | 6,837 | (4,416 | ) | (64.6 | ) | ||||||||||||||||||||
| Depreciation | 10,072 | 6,973 | (3,099 | ) | (44.4 | ) | 25,905 | 21,897 | (4,008 | ) | (18.3 | ) | ||||||||||||||||||||
| Amortization of intangibles | 8,637 | 8,743 | 106 | 1.2 | 33,400 | 26,154 | (7,246 | ) | (27.7 | ) | ||||||||||||||||||||||
| Loss on disposal of assets | 518 | — | (518 | ) | NM | 1,743 | — | (1,743 | ) | NM | ||||||||||||||||||||||
| Total operating expenses | 73,398 | 68,582 | (4,816 | ) | (7.0 | ) | 222,986 | 205,630 | (17,356 | ) | (8.4 | ) | ||||||||||||||||||||
| Operating income | 25,640 | 26,781 | (1,141 | ) | (4.3 | ) | 62,078 | 69,861 | (7,783 | ) | (11.1 | ) | ||||||||||||||||||||
| Other income (expense) |
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| Interest income | 3 | 2 | 1 | 50.0 | 104 | 22 | 82 | NM | ||||||||||||||||||||||||
| Interest expense(1) | (14,638 | ) | (24,844 | ) | 10,206 | 41.1 | (48,973 | ) | (98,505 | ) | 49,532 | 50.3 | ||||||||||||||||||||
| Equity in earnings and amortization charges of investees | 2,436 | 7,804 | (5,368 | ) | (68.8 | ) | 14,068 | 19,171 | (5,103 | ) | (26.6 | ) | ||||||||||||||||||||
| Other income, net | 1,200 | 1,269 | (69 | ) | (5.4 | ) | 805 | 821 | (16 | ) | (1.9 | ) | ||||||||||||||||||||
| Net income (loss) from continuing operations before income taxes | 14,641 | 11,012 | 3,629 | 33.0 | 28,082 | (8,630 | ) | 36,712 | NM | |||||||||||||||||||||||
| (Provision) benefit for income taxes | (5,137 | ) | (2,036 | ) | (3,101 | ) | (152.3 | ) | (11,635 | ) | 12,541 | (24,176 | ) | (192.8 | ) | |||||||||||||||||
| Net income from continuing operations | $ | 9,504 | $ | 8,976 | 528 | 5.9 | $ | 16,447 | $ | 3,911 | 12,536 | NM | ||||||||||||||||||||
| Net income from discontinued operations, net of taxes | — | — | — | — | — | 81,199 | (81,199 | ) | (100.0 | ) | ||||||||||||||||||||||
| Net income | $ | 9,504 | $ | 8,976 | 528 | 5.9 | $ | 16,447 | $ | 85,110 | (68,663 | ) | (80.7 | ) | ||||||||||||||||||
| Less: net income (loss) attributable to noncontrolling interests | 3,128 | 34 | (3,094 | ) | NM | 1,396 | (1,317 | ) | (2,713 | ) | NM | |||||||||||||||||||||
| Net income attributable to MIC LLC | $ | 6,376 | $ | 8,942 | (2,566 | ) | (28.7 | ) | $ | 15,051 | $ | 86,427 | (71,376 | ) | (82.6 | ) | ||||||||||||||||
NM — Not meaningful
| (1) | Interest expense includes non-cash gains on derivative instruments of $4.6 million and $9.6 million for the quarter and nine months ended September 30, 2011, respectively. For the quarter and nine months ended September 30, 2010, interest expense includes non-cash losses on derivative instruments of $3.8 million and $35.5 million, respectively. |
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Results of Operations: Consolidated – (continued)
Gross Profit
Consolidated gross profit increased reflecting improved results for Atlantic Aviation for the quarter ended September 30, 2011, and The Gas Company for the quarter and nine months ended September 30, 2011, partially offset by a decrease in non-fuel gross profit at Atlantic Aviation for the nine months ended September 30, 2011.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased at The Gas Company, predominantly during the third quarter of 2011. This increase was partially offset by a decrease in costs at Corporate.
Fees to Manager
Base management fees to our Manager increased in line with our increased market capitalization. Our Manager elected to reinvest its base management fees for the first nine months ended September 30, 2011 and for the quarter ended March 31, 2010 in additional LLC interests as follows:
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| Period | Base Management Fees Amount ($ in Thousands) |
LLC Interests Issued |
Issue Date | |||||||||
| 2011 Activities: |
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| Third quarter 2011 | $ | 3,465 | (1) | (1) | ||||||||
| Second quarter 2011 | 4,156 | 179,623 | August 31, 2011 | |||||||||
| First quarter 2011 | 3,632 | 144,742 | June 6, 2011 | |||||||||
| 2010 Activities: |
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| First quarter 2010 | $ | 2,189 | 155,375 | June 11, 2010 | ||||||||
| (1) | LLC interests for the third quarter 2011 base management fees will be issued to our Manager during the fourth quarter of 2011. |
The base management fees in the amount of $2.3 million and $2.4 million for the second and third quarters of 2010, respectively, were paid in cash to our Manager during the third and fourth quarter of 2010, respectively.
Depreciation
The increase in depreciation primarily reflects the non-cash asset impairment charges of $1.4 million recorded at Atlantic Aviation during the quarter ended June 30, 2011. The impairment charges resulted from adverse trading conditions specific to three small locations.
During the quarter ended September 30, 2011, Atlantic Aviation consolidated two FBOs it operated at one airport. Atlantic Aviation has vacated a portion of its leased premises and recorded non-cash write-offs of $2.9 million primarily associated with leasehold improvements.
Amortization of Intangibles
The increase in amortization of intangible expense reflects the non-cash impairment charges of $7.3 million recorded at Atlantic Aviation during the quarter ended June 30, 2011. The impairment charges resulted from adverse trading conditions specific to three small locations.
Loss on disposal of assets
During the quarter ended June 30, 2011, Atlantic Aviation concluded that several of its sites did not have sufficient scale or serve a market with sufficiently strong growth prospects to warrant continued operations at these sites. Atlantic Aviation has sold certain FBOs and has reinvested the proceeds to acquire two FBOs in Oregon during the third quarter of 2011. Accordingly, Atlantic Aviation recorded a $949,000 non-cash loss on disposal of assets during the nine months ended September 30, 2011.
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Results of Operations: Consolidated – (continued)
Interest Expense and Gains (Losses) on Derivative Instruments
Interest expense includes non-cash gains on derivative instruments of $4.6 million and $9.6 million for the quarter and nine months ended September 30, 2011, respectively, and non-cash losses on derivative instruments of $3.8 million and $35.5 million for the quarter and nine months ended September 30, 2010, respectively. The change in the non-cash gains (losses) on derivatives recorded in interest expense is attributable to the change in fair value of interest rate swaps and includes the reclassification of amounts from accumulated other comprehensive loss into earnings. Excluding the portion related to non-cash gains (losses) on derivatives, interest expense decreased due primarily to lower principal balance at Atlantic Aviation, partially offset by the expiration of an interest rate basis swap agreements in March 2010 at each of the consolidated operating businesses.
Equity in Earnings and Amortization Charges of Investees
The decrease in equity in the earnings of IMTT primarily reflects our share of the decrease in operating results of the business due to lower level of spill response activity and related gross profit, as a result of the BP oil spill in 2010, and our share of the net non-cash derivative losses for the quarter and nine months ended September 30, 2011.
Income Taxes
For 2011, we expect that any consolidated taxable income will be fully offset by our NOL carryforwards. For 2011, we expect to pay a federal Alternative Minimum Tax of less than $500,000.
As we own less than 80% of IMTT and District Energy, these businesses are not included in our consolidated federal tax return. These businesses file separate consolidated income tax returns. We expect that any dividends from IMTT and District Energy in 2011 will be treated as taxable dividends and qualify for the 80% Dividends Received Deduction (DRD).
As of September 30, 2011, our full year projected combined federal and state income taxes for 2011 will be approximately 41.43% of net income before taxes. Accordingly, our provision for income taxes for the nine months ended September 30, 2011 is approximately $11.6 million, of which $2.3 million is for state and local income taxes. The difference between our effective tax rate and the U.S. federal statutory rate of 35% is attributable to state and local income taxes, adjustments for our less than 80% owned businesses and a non-deductible write-off of goodwill from the sale of FBOs in the quarter ended June 30, 2011. See Note 7, “Intangible Assets”, in our consolidated condensed financial statements in Part I of this Form 10-Q for further discussions.
Valuation allowance:
As discussed in Note 17, “Income Taxes” in our consolidated financial statements, in Part II, Item 8 of our Form 10-K for 2010, from the date of sale of the noncontrolling interest in District Energy and onwards, we evaluate the need for a valuation allowance against our deferred tax assets without taking into consideration the deferred tax liabilities of District Energy. As of December 31, 2010, our valuation allowance was approximately $9.2 million. In calculating our consolidated income tax provision for the nine months ended September 30, 2011, we did not provide for an increase in the valuation allowance.
During the nine months ended September 30, 2010, we reduced the valuation allowance by approximately $2.6 million. This decrease was recorded as part of the benefit for income taxes included in continuing operations on the consolidated condensed statements of operations.
Discontinued Operations
On June 2, 2010, we concluded the sale in bankruptcy of PCAA, resulting in a pre-tax gain of $130.3 million, of which $76.5 million related to the forgiveness of debt. The results of operations from this business and the gain from the bankruptcy sale are separately reported as discontinued operations in our consolidated condensed financial statements. See Note 5, “Discontinued Operations”, in our consolidated condensed financial statements in Part I of this Form 10-Q for financial information and further discussions.
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Results of Operations: Consolidated – (continued)
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) excluding non-cash items and Free Cash Flow
In accordance with GAAP, we have disclosed EBITDA excluding non-cash items for our Company and each of our operating segments in Note 12, “Reportable Segments” in our consolidated condensed financial statements, as a key performance metric relied on by management in evaluating our performance. EBITDA excluding non-cash items is defined as earnings before interest, taxes, depreciation and amortization and noncash items, which includes impairments, derivative gains and losses and adjustments for other non-cash items reflected in the statements of operations. We believe EBITDA excluding non-cash items provides additional insight into the performance of our operating businesses relative to each other and similar businesses without regard to their capital structure, and their ability to service or reduce debt, fund capital expenditures and/or support distributions to the holding company.
We also disclose Free Cash Flow, as defined by us, as a means of assessing the amount of cash generated by our businesses and supplementing other information provided in accordance with GAAP. We define Free Cash Flow as cash from operating activities, less maintenance capital expenditures and changes in working capital. Working capital movements are excluded on the basis that these are largely timing differences in payables and receivables, and are therefore not reflective of our ability to generate cash.
We believe that reporting Free Cash Flow will provide our investors with additional insight into our future ability to deploy cash, as GAAP metrics such as net income and cash from operating activities do not reflect all of the items that our management considers in estimating the amount of cash generated by our operating entities. In this Quarterly Report on Form 10-Q, we have disclosed Free Cash Flow for our consolidated results and for each of our operating segments.
We note that Free Cash Flow does not fully reflect our ability to freely deploy generated cash, as it does not reflect required payments to be made on our indebtedness, pay dividends and other fixed obligations or the other cash items excluded when calculating Free Cash Flow. We also note that Free Cash Flow may be calculated in a different manner by other companies, which limits its usefulness as a comparative measure. Therefore, our Free Cash Flow should be used as a supplemental measure and not in lieu of our financial results reported under GAAP.
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Results of Operations: Consolidated – (continued)
A reconciliation of net income attributable to MIC LLC from continuing operations to EBITDA excluding non-cash items and EBITDA excluding non-cash items to Free Cash Flow from continuing operations, on a consolidated basis, is provided below:
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| Quarter Ended September 30, | Change Favorable/(Unfavorable) | Nine Months Ended September 30, | Change Favorable/(Unfavorable) | |||||||||||||||||||||||||||||
| 2011 | 2010 | $ | % | 2011 | 2010 | $ | % | |||||||||||||||||||||||||
| ($ In Thousands) (Unaudited) | ||||||||||||||||||||||||||||||||
| Net income attributable to MIC LLC from continuing operations(1) | $ | 6,376 | $ | 8,942 | $ | 15,051 | $ | 5,364 | ||||||||||||||||||||||||
| Interest expense, net(2) | 14,635 | 24,842 | 48,869 | 98,483 | ||||||||||||||||||||||||||||
| Provision (benefit) for income taxes | 5,137 | 2,036 | 11,635 | (12,541 | ) | |||||||||||||||||||||||||||
| Depreciation(3) | 10,072 | 6,973 | 25,905 | 21,897 | ||||||||||||||||||||||||||||
| Depreciation – cost of services(3) | 1,664 | 1,639 | 4,969 | 4,910 | ||||||||||||||||||||||||||||
| Amortization of intangibles(4) | 8,637 | 8,743 | 33,400 | 26,154 | ||||||||||||||||||||||||||||
| (Gain) loss on disposal of assets | (204 | ) | — | 949 | — | |||||||||||||||||||||||||||
| Equity in (earnings) losses and amortization charges of investees(5) | (2,436 | ) | 2,196 | (14,068 | ) | (4,171 | ) | |||||||||||||||||||||||||
| Base management fees settled/to be settled in LLC interests | 3,465 | — | 11,253 | 2,189 | ||||||||||||||||||||||||||||
| Other non-cash expense, net | 4,286 | 902 | 3,973 | 1,672 | ||||||||||||||||||||||||||||
| EBITDA excluding non-cash items from continuing operations | $ | 51,632 | $ | 56,273 | (4,641 | ) | (8.2 | ) | $ | 141,936 | $ | 143,957 | (2,021 | ) | (1.4 | ) | ||||||||||||||||
| EBITDA excluding non-cash items from continuing operations | $ | 51,632 | $ | 56,273 | $ | 141,936 | $ | 143,957 | ||||||||||||||||||||||||
| Interest expense, net(2) | (14,635 | ) | (24,842 | ) | (48,869 | ) | (98,483 | ) | ||||||||||||||||||||||||
| Interest rate swap breakage fees(2) | (515 | ) | (1,484 | ) | (2,247 | ) | (4,689 | ) | ||||||||||||||||||||||||
| Non-cash derivative (gains) losses recorded in interest expense(2) | (4,093 | ) | 5,307 | (7,326 | ) | 40,186 | ||||||||||||||||||||||||||
| Amortization of debt financing costs(2) | 1,014 | 1,043 | 3,074 | 3,299 | ||||||||||||||||||||||||||||
| Equipment lease receivables, net | 778 | 751 | 2,271 | 2,202 | ||||||||||||||||||||||||||||
| Provision/benefit for income taxes, net of changes in deferred taxes | (1,827 | ) | 325 | (2,955 | ) | (1,144 | ) | |||||||||||||||||||||||||
| Changes in working capital | (6,476 | ) | 963 | (18,719 | ) | (5,346 | ) | |||||||||||||||||||||||||
| Cash provided by operating activities | 25,878 | 38,336 | 67,165 | 79,982 | ||||||||||||||||||||||||||||
| Changes in working capital | 6,476 | (963 | ) | 18,719 | 5,346 | |||||||||||||||||||||||||||
| Maintenance capital expenditures | (5,197 | ) | (3,053 | ) | (12,271 | ) | (6,802 | ) | ||||||||||||||||||||||||
| Free cash flow from continuing operations | $ | 27,157 | $ | 34,320 | (7,163 | ) | (20.9 | ) | $ | 73,613 | $ | 78,526 | (4,913 | ) | (6.3 | ) | ||||||||||||||||
| (1) | Net income attributable to MIC LLC from continuing operations excludes net income attributable to noncontrolling interests of $3.1 million and $1.4 million for the quarter and nine months ended September 30, 2011, respectively, and net income attributable to noncontrolling interests of $34,000 and net loss attributable to noncontrolling interests of $1.453 million for the quarter and nine months ended September 30, 2010, respectively. |
| (2) | Interest expense, net, includes non-cash gains (losses) on derivative instruments, non-cash amortization of deferred financing fees and interest rate swap breakage fees. |
| (3) | Depreciation – cost of services includes depreciation expense for District Energy, which is reported in cost of services in our consolidated condensed statements of operations. Depreciation and Depreciation – cost of services does not include acquisition-related step-up depreciation expense of $2.0 million and $5.5 million for the quarter and nine months ended September 30, 2011, respectively, and $1.7 million and $5.2 million for the quarter and nine months ended September 30, 2010, respectively, in connection with our investment in IMTT, which is reported in equity in earnings and amortization charges of investees in our consolidated condensed statements of operations. |
8
Results of Operations: Consolidated – (continued)
| (4) | Amortization of intangibles does not include acquisition-related step-up amortization expense of $85,000 and $520,000 for the quarter and nine months ended September 30, 2011, respectively, and $283,000 and $850,000 for the quarter and nine months ended September 30, 2010, respectively, in connection with our investment in IMTT, which is reported in equity in earnings and amortization charges of investees in our consolidated condensed statements of operations. |
| (5) | Equity in earnings and amortization charges of investees in the above table includes our 50% share of IMTT’s earnings, offset by distributions we received only up to our share of the earnings recorded. |
Energy-Related Businesses
IMTT
We account for our 50% interest in IMTT under the equity method. To enable meaningful analysis of IMTT’s performance across periods, IMTT’s overall performance is discussed below, rather than IMTT’s contribution to our consolidated results.
Key Factors Affecting Operating Results:
| • | terminal revenue and terminal gross profit increased principally due to an increase in average tank rental rates; partially offset by |
| • | increased terminal repairs and maintenance costs; |
| • | increased terminal labor costs, predominantly in the second quarter of 2011; and |
| • | a decrease in environmental response service revenue and gross profit, principally due to a lower level of spill response activity. |
9
Energy-Related Business: IMTT – (continued)
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| Quarter Ended September 30, | Change Favorable/(Unfavorable) | Nine Months Ended September 30, | Change Favorable/(Unfavorable) | |||||||||||||||||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||||||||||
| $ | $ | $ | % | $ | $ | $ | % | |||||||||||||||||||||||||
| ($ In Thousands) (Unaudited) | ||||||||||||||||||||||||||||||||
| Revenue |
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| Terminal revenue | 102,794 | 91,825 | 10,969 | 11.9 | 310,245 | 278,122 | 32,123 | 11.5 | ||||||||||||||||||||||||
| Environmental response revenue | 11,775 | 90,377 | (78,602 | ) | (87.0 | ) | 22,105 | 169,353 | (147,248 | ) | (86.9 | ) | ||||||||||||||||||||
| Total revenue | 114,569 | 182,202 | (67,633 | ) | (37.1 | ) | 332,350 | 447,475 | (115,125 | ) | (25.7 | ) | ||||||||||||||||||||
| Costs and expenses |
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| Terminal operating costs | 46,289 | 42,300 | (3,989 | ) | (9.4 | ) | 140,459 | 124,846 | (15,613 | ) | (12.5 | ) | ||||||||||||||||||||
| Environmental response operating costs | 7,288 | 58,728 | 51,440 | 87.6 | 16,031 | 108,199 | 92,168 | 85.2 | ||||||||||||||||||||||||
| Total operating costs | 53,577 | 101,028 | 47,451 | 47.0 | 156,490 | 233,045 | 76,555 | 32.8 | ||||||||||||||||||||||||
| Terminal gross profit | 56,505 | 49,525 | 6,980 | 14.1 | 169,786 | 153,276 | 16,510 | 10.8 | ||||||||||||||||||||||||
| Environmental response gross profit | 4,487 | 31,649 | (27,162 | ) | (85.8 | ) | 6,074 | 61,154 | (55,080 | ) | (90.1 | ) | ||||||||||||||||||||
| Gross profit | 60,992 | 81,174 | (20,182 | ) | (24.9 | ) | 175,860 | 214,430 | (38,570 | ) | (18.0 | ) | ||||||||||||||||||||
| General and administrative expenses | 7,995 | 10,839 | 2,844 | 26.2 | 23,575 | 29,802 | 6,227 | 20.9 | ||||||||||||||||||||||||
| Depreciation and amortization | 16,052 | 16,602 | 550 | 3.3 | 48,087 | 46,136 | (1,951 | ) | (4.2 | ) | ||||||||||||||||||||||
| Operating income | 36,945 | 53,733 | (16,788 | ) | (31.2 | ) | 104,198 | 138,492 | (34,294 | ) | (24.8 | ) | ||||||||||||||||||||
| Interest expense, net(1) | (24,319 | ) | (20,586 | ) | (3,733 | ) | (18.1 | ) | (45,313 | ) | (58,485 | ) | 13,172 | 22.5 | ||||||||||||||||||
| Other income | 94 | 220 | (126 | ) | (57.3 | ) | 1,214 | 1,581 | (367 | ) | (23.2 | ) | ||||||||||||||||||||
| Provision for income taxes | (5,537 | ) | (15,546 | ) | 10,009 | 64.4 | (24,984 | ) | (35,902 | ) | 10,918 | 30.4 | ||||||||||||||||||||
| Noncontrolling interest | 94 | 153 | (59 | ) | (38.6 | ) | 185 | (247 | ) | 432 | 174.9 | |||||||||||||||||||||
| Net income | 7,277 | 17,974 | (10,697 | ) | (59.5 | ) | 35,300 | 45,439 | (10,139 | ) | (22.3 | ) | ||||||||||||||||||||
| Reconciliation of net income to EBITDA excluding non-cash items: |
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| Net income | 7,277 | 17,974 | 35,300 | 45,439 | ||||||||||||||||||||||||||||
| Interest expense, net(1) | 24,319 | 20,586 | 45,313 | 58,485 | ||||||||||||||||||||||||||||
| Provision for income taxes | 5,537 | 15,546 | 24,984 | 35,902 | ||||||||||||||||||||||||||||
| Depreciation and amortization | 16,052 | 16,602 | 48,087 | 46,136 | ||||||||||||||||||||||||||||
| Other non-cash income | (102 | ) | (518 | ) | (156 | ) | (273 | ) | ||||||||||||||||||||||||
| EBITDA excluding non-cash items | 53,083 | 70,190 | (17,107 | ) | (24.4 | ) | 153,528 | 185,689 | (32,161 | ) | (17.3 | ) | ||||||||||||||||||||
| EBITDA excluding non-cash items | 53,083 | 70,190 | 153,528 | 185,689 | ||||||||||||||||||||||||||||
| Interest expense, net(1) | (24,319 | ) | (20,586 | ) | (45,313 | ) | (58,485 | ) | ||||||||||||||||||||||||
| Non-cash derivative losses recorded in interest expense(1) | 15,345 | 11,041 | 18,653 | 33,094 | ||||||||||||||||||||||||||||
| Amortization of debt financing costs(1) | 808 | 618 | 2,426 | 1,328 | ||||||||||||||||||||||||||||
| Provision for income taxes, net of changes in deferred taxes | (6,181 | ) | (6,580 | ) | (13,765 | ) | (10,812 | ) | ||||||||||||||||||||||||
| Changes in working capital | (17,621 | ) | 7,761 | (30,468 | ) | (19,693 | ) | |||||||||||||||||||||||||
| Cash provided by operating activities | 21,115 | 62,444 | 85,061 | 131,121 | ||||||||||||||||||||||||||||
| Changes in working capital | 17,621 | (7,761 | ) | 30,468 | 19,693 | |||||||||||||||||||||||||||
| Maintenance capital expenditures | (14,539 | ) | (10,138 | ) | (36,058 | ) | (29,169 | ) | ||||||||||||||||||||||||
| Free cash flow | 24,197 | 44,545 | (20,348 | ) | (45.7 | ) | 79,471 | 121,645 | (42,174 | ) | (34.7 | ) | ||||||||||||||||||||
| (1) | Interest expense, net, includes non-cash losses on derivative instruments and non-cash amortization of deferred financing fees. |
10
Energy-Related Business: IMTT – (continued)
Revenue and Gross Profit
The increase in terminal revenue primarily reflects growth in storage revenue. Storage revenue grew due to an increase in average rental rates of 13.6% and 13.4% during the quarter and nine months ended September 30, 2011 as compared with the first nine months of 2010. IMTT management now expects full year average rental rates to increase by approximately 13.0%.
Capacity utilization was 94.1% and 94.0% for the quarter and nine months ended September 30, 2011, respectively, compared with 93.0% and 94.6% for the quarter and nine months ended September 30, 2010, respectively. IMTT management expects utilization rates to remain at approximately 94.0% for the remainder of 2011.
Terminal operating costs increased during the quarter and nine months ended September 30, 2011. IMTT management has explained that the causes of the year to date cost growth include: one-time factors beyond their control, such as medical costs and storm related damages; certain costs pulled forward into the second and third quarters of 2011; increased tank repair and cleaning costs; and increased labor costs.
Tank repair and cleaning costs were the largest cost increases to date. Approximately one quarter of the increase in tank repair costs relates to the repair of a construction defect in tanks recently constructed at Bayonne, with the balance relating to repairs arising as a result of IMTT’s various tank inspection programs.
Revenue and gross profit from environmental response services decreased during the quarter and nine months ended September 30, 2011 compared with 2010 due primarily to a lower level of spill response activity as a result of the BP oil spill in 2010.
General and Administrative Expenses
General and administrative expenses for the quarter and nine months ended September 30, 2011 decreased due primarily to the current absence of the costs of the spill response activity associated with the BP oil spill that occurred in the second and third quarters of 2010.
Depreciation and Amortization
Depreciation and amortization expense increased as IMTT completed several major expansion projects, resulting in higher asset balances.
Interest Expense, Net
Interest expense, net, includes non-cash losses on derivative instruments of $15.3 million and $18.7 million for the quarter and nine months ended September 30, 2011, respectively. For the quarter and nine months ended September 30, 2010, interest expense, net, includes non-cash losses on derivative instruments of $11.0 million and $33.1 million, respectively.
Excluding the non-cash losses on derivative instruments, interest expense for the nine months ended September 30, 2011 was higher due to increased rates on the amended revolving credit facility and letter of credit fees associated with the tax-exempt debt. For the quarter ended September 30, 2011, interest expense excluding non-cash losses on derivative instruments was lower due to lower drawn amounts on the amended revolving credit facility. Cash interest paid was $8.7 million and $25.5 million for the quarter and nine months ended September 30, 2011, respectively, and $9.1 million and $25.0 million for the quarter and nine months ended September 30, 2010, respectively.
Income Taxes
For the nine months ended September 30, 2011, IMTT recorded $8.7 million of current federal income tax expense and $5.0 million of current state income tax expense. IMTT management has advised it expects IMTT to pay cash federal taxes of $5.0 million to $10.0 million and pay cash state taxes of $5.0 million for the year ended December 31, 2011. Most of IMTT’s capital projects completed in 2011 are subject to favorable federal tax depreciation.
11
Energy-Related Business: IMTT – (continued)
The wide range of federal cash taxes IMTT expects to pay in 2011 is due to IMTT management's difficulty in determining at this time whether projects which are currently in process will be placed in service by December 31, 2011 with a sufficient degree of certainty. Projected 2011 cash taxes are based on the estimated timing at which capital expenditure projects are placed into service. Given the 100% tax depreciation that will apply to some of these projects, it is more difficult this year to estimate the full year cash tax payment than in other years.
For the year ended December 31, 2010, IMTT recorded $5.5 million of current federal income tax expense and $7.0 million of current state income tax expense. At December 31, 2009, IMTT had federal NOLs of $50.5 million, of which $5.8 million was carriedback to and used in 2008 and $44.7 million was carriedforward and fully utilized in 2010.
A significant difference between IMTT’s book and federal taxable income relates to depreciation of terminalling fixed assets. For book purposes, these fixed assets are depreciated primarily over 15 to 30 years using the straight-line method of depreciation. For federal income tax purposes, these fixed assets are depreciated primarily over 5 to 15 years using accelerated methods. Most terminalling fixed assets placed in service in 2010 and 2011 qualify for the federal 50% or 100% tax depreciation, except assets placed in service in Louisiana financed with GO Zone Bonds. A significant portion of Louisiana terminalling fixed assets constructed since Hurricane Katrina are or will be financed with Gulf Opportunity Zone Bonds (“GO Zone Bonds”). GO Zone Bond financed assets are depreciated, for tax purposes, primarily over 9 to 20 years using the straight-line depreciation method. Most of the states in which the business operates do not allow the use of the federal tax depreciation calculation methods.
The Gas Company
Key Factors Affecting Operating Results:
| • | an increase in non-utility contribution margin driven by effective margin management and increase in the volume of gas sold, partially offset by increased gas and transportation costs; and |
| • | higher utility contribution margin driven by increase in the volume of gas sold, partially offset by transportation costs. |
12
Energy-Related Business: The Gas Company – (continued)
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| Quarter Ended September 30, | Change Favorable/(Unfavorable) | Nine Months Ended September 30, | Change Favorable/(Unfavorable) | |||||||||||||||||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||||||||||
| $ | $ | $ | % | $ | $ | $ | % | |||||||||||||||||||||||||
| ($ In Thousands) (Unaudited) | ||||||||||||||||||||||||||||||||
| Contribution margin |
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| Revenue – utility | 35,088 | 28,232 | 6,856 | 24.3 | 105,782 | 83,517 | 22,265 | 26.7 | ||||||||||||||||||||||||
| Cost of revenue – utility | 25,547 | 18,904 | (6,643 | ) | (35.1 | ) | 76,758 | 56,178 | (20,580 | ) | (36.6 | ) | ||||||||||||||||||||
| Contribution margin – utility | 9,541 | 9,328 | 213 | 2.3 | 29,024 | 27,339 | 1,685 | 6.2 | ||||||||||||||||||||||||
| Revenue – non-utility | 28,056 | 23,214 | 4,842 | 20.9 | 82,342 | 72,760 | 9,582 | 13.2 | ||||||||||||||||||||||||
| Cost of revenue – non-utility | 15,041 | 11,179 | (3,862 | ) | (34.5 | ) | 45,413 | 37,024 | (8,389 | ) | (22.7 | ) | ||||||||||||||||||||
| Contribution margin – non-utility | 13,015 | 12,035 | 980 | 8.1 | 36,929 | 35,736 | 1,193 | 3.3 | ||||||||||||||||||||||||
| Total contribution margin | 22,556 | 21,363 | 1,193 | 5.6 | 65,953 | 63,075 | 2,878 | 4.6 | ||||||||||||||||||||||||
| Production | 1,867 | 1,718 | (149 | ) | (8.7 | ) | 5,321 | 5,126 | (195 | ) | (3.8 | ) | ||||||||||||||||||||
| Transmission and distribution | 5,009 | 4,919 | (90 | ) | (1.8 | ) | 14,428 | 15,050 | 622 | 4.1 | ||||||||||||||||||||||
| Gross profit | 15,680 | 14,726 | 954 | 6.5 | 46,204 | 42,899 | 3,305 | 7.7 | ||||||||||||||||||||||||
| Selling, general and administrative expenses | 4,414 | 4,259 | (155 | ) | (3.6 | ) | 12,672 | 12,557 | (115 | ) | (0.9 | ) | ||||||||||||||||||||
| Depreciation and amortization | 1,843 | 1,492 | (351 | ) | (23.5 | ) | 5,418 | 4,926 | (492 | ) | (10.0 | ) | ||||||||||||||||||||
| Operating income | 9,423 | 8,975 | 448 | 5.0 | 28,114 | 25,416 | 2,698 | 10.6 | ||||||||||||||||||||||||
| Interest expense, net(1) | (2,415 | ) | (5,047 | ) | 2,632 | 52.1 | (7,912 | ) | (15,780 | ) | 7,868 | 49.9 | ||||||||||||||||||||
| Other income (expense) | 70 | 1 | 69 | NM | (209 | ) | (10 | ) | (199 | ) | NM | |||||||||||||||||||||
| Provision for income taxes | (2,689 | ) | (1,538 | ) | (1,151 | ) | (74.8 | ) | (7,901 | ) | (3,769 | ) | (4,132 | ) | (109.6 | ) | ||||||||||||||||
| Net income(2) | 4,389 | 2,391 | 1,998 | 83.6 | 12,092 | 5,857 | 6,235 | 106.5 | ||||||||||||||||||||||||
| Reconciliation of net income to EBITDA excluding non-cash items: |
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| Net income(2) | 4,389 | 2,391 | 12,092 | 5,857 | ||||||||||||||||||||||||||||
| Interest expense, net(1) | 2,415 | 5,047 | 7,912 | 15,780 | ||||||||||||||||||||||||||||
| Provision for income taxes | 2,689 | 1,538 | 7,901 | 3,769 | ||||||||||||||||||||||||||||
| Depreciation and amortization | 1,843 | 1,492 | 5,418 | 4,926 | ||||||||||||||||||||||||||||
| Other non-cash expenses | 736 | 534 | 1,918 | 1,599 | ||||||||||||||||||||||||||||
| EBITDA excluding non-cash items | 12,072 | 11,002 | 1,070 | 9.7 | 35,241 | 31,931 | 3,310 | 10.4 | ||||||||||||||||||||||||
| EBITDA excluding non-cash items | 12,072 | 11,002 | 35,241 | 31,931 | ||||||||||||||||||||||||||||
| Interest expense, net(1) | (2,415 | ) | (5,047 | ) | (7,912 | ) | (15,780 | ) | ||||||||||||||||||||||||
| Non-cash derivative losses recorded in interest expense(1) | 35 | 2,734 | 932 | 8,945 | ||||||||||||||||||||||||||||
| Amortization of debt financing costs(1) | 119 | 120 | 358 | 359 | ||||||||||||||||||||||||||||
| Provision for income taxes, net of changes in deferred taxes | (562 | ) | 1,478 | (4,107 | ) | (1,276 | ) | |||||||||||||||||||||||||
| Changes in working capital | (1,030 | ) | 1,483 | (7,479 | ) | (1,320 | ) | |||||||||||||||||||||||||
| Cash provided by operating activities | 8,219 | 11,770 | 17,033 | 22,859 | ||||||||||||||||||||||||||||
| Changes in working capital | 1,030 | (1,483 | ) | 7,479 | 1,320 | |||||||||||||||||||||||||||
| Maintenance capital expenditures | (2,368 | ) | (1,030 | ) | (6,288 | ) | (2,008 | ) | ||||||||||||||||||||||||
| Free cash flow | 6,881 | 9,257 | (2,376 | ) | (25.7 | ) | 18,224 | 22,171 | (3,947 | ) | (17.8 | ) | ||||||||||||||||||||
NM — Not meaningful
| (1) | Interest expense, net, includes non-cash losses on derivative instruments and non-cash amortization of deferred financing fees. |
| (2) | Corporate allocation expense, intercompany fees and the tax effect have been excluded from the above table as they are eliminated on consolidation at the MIC Inc. level. |
13
Energy-Related Business: The Gas Company – (continued)
Management believes that the presentation and analysis of contribution margin, a non-GAAP performance measure, is meaningful to understanding the business’ performance under both a utility rate structure and a non-utility unregulated pricing structure. Regulation of the utility portion of The Gas Company’s operations provides for the pass through of increases or decreases in feedstock costs to customers. Changes in the cost of propane distributed to non-utility customers can be recovered in pricing, subject to competitive conditions.
Contribution margin should not be considered an alternative to revenue, gross profit, operating income, or net income, determined in accordance with U.S. GAAP. A reconciliation of contribution margin to gross profit is presented in the above table. The business calculates contribution margin as revenue less direct costs of revenue other than production and transmission and distribution costs. Other companies may calculate contribution margin differently or may use different metrics and, therefore, the contribution margin presented for The Gas Company is not necessarily comparable with metrics of other companies.
Contribution Margin and Operating Income
Utility contribution margin was higher driven by an increase in the volume of gas sold as the Hawaiian economy continues to recover, partially offset by increased cost of inter-island barging.
Non-utility contribution margin improved as the result of effective margin management and an increase in volume of gas sold, partially offset by increased gas and transportation costs. The increase in transportation costs is due primarily to increase in inter-island barging costs.
The Gas Company renegotiated its liquefied petroleum gas, or LPG, contract and synthetic natural gas, or SNG, feedstock contract with Tesoro, with both contracts now expiring September 30, 2013. The feedstock contract is subject to approval by the Hawaii Public Utilities Commission (HPUC) that is expected by mid-2012. The Gas Company expects that the changes in cost of feedstock will be passed through to consumers via the fuel adjustment charge mechanism and will have no impact on utility contribution margin.
Production, transmission and distribution and selling, general and administrative expenses are composed primarily of labor-related expenses and professional fees. On a combined basis, these costs were lower for the nine months ended September 30, 2011, driven primarily by increased allocation of labor costs to capital projects. Underlying costs were higher due to vehicle lease expenses, welfare and benefits expense, labor costs and electricity cost, predominantly during the third quarter of 2011.
Interest Expense, Net
Interest expense, net, includes non-cash losses on derivative instruments of $35,000 and $932,000 for the quarter and nine months ended September 30, 2011, respectively. For the quarter and nine months ended September 30, 2010, interest expense, net, includes non-cash losses on derivative instruments of $2.7 million and $8.9 million, respectively. Excluding the non-cash losses on derivative instruments, interest expense for the nine months ended September 30, 2011 was slightly higher due to the expiration of an interest rate basis swap agreement in March 2010.
Cash interest paid was $2.2 million and $6.5 million for the quarter and nine months ended September 30, 2011, respectively, and $2.1 million and $6.4 million for the quarter and nine months ended September 30, 2010, respectively.
Income Taxes
Income from The Gas Company is included in our consolidated federal income tax return, and is subject to Hawaii state income taxes. The tax expense in the table above includes both state taxes and the portion of the consolidated federal tax liability attributable to the business. For the year ending December 31, 2011, the business expects to pay cash state income taxes of approximately $1.2 million, of which $899,000 was recorded during the nine months ended September 30, 2011. Any federal income tax liability is expected to be offset in consolidation from the application of NOLs.
For the nine months ended September 30, 2011, the “Provision for income taxes, net of changes in deferred taxes” of $4.1 million in the above table, includes $3.2 million of federal income taxes payable to MIC, which is offset by MIC’s NOLs.
14
Energy-Related Business: District Energy
Customers of District Energy pay two charges to receive chilled water services: a fixed charge based on contracted capacity and a variable charge based on the consumption of chilled water. Capacity charges are typically adjusted annually at a fixed rate or are indexed to the Consumer Price Index (CPI). The terms of the business’ customer contracts provide for the pass through of increases or decreases in electricity costs, the largest component of the business’ direct expenses.
The financial results discussed below reflect 100% of District Energy’s performance during the periods presented below.
Key Factors Affecting Operating Results:
| • | a decrease in consumption revenue and gross profit driven by cooler average temperatures during the second and third quarters of 2011 compared with 2010; and |
| • | increased other direct expenses due to higher real estate taxes and plant rent; partially offset by |
| • | an increase in capacity revenue from new customers and annual inflation-linked increases in contract capacity rates. |
15
Energy-Related Business: District Energy – (continued)
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| Quarter Ended September 30, | Change Favorable/(Unfavorable) | Nine Months Ended September 30, | Change Favorable/(Unfavorable) | |||||||||||||||||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||||||||||
| $ | $ | $ | % | $ | $ | $ | % | |||||||||||||||||||||||||
| ($ In Thousands) (Unaudited) | ||||||||||||||||||||||||||||||||
| Cooling capacity revenue | 5,523 | 5,302 | 221 | 4.2 | 16,282 | 15,835 | 447 | 2.8 | ||||||||||||||||||||||||
| Cooling consumption revenue | 11,091 | 12,596 | (1,505 | ) | (11.9 | ) | 19,445 | 21,503 | (2,058 | ) | (9.6 | ) | ||||||||||||||||||||
| Other revenue | 688 | 823 | (135 | ) | (16.4 | ) | 2,281 | 2,490 | (209 | ) | (8.4 | ) | ||||||||||||||||||||
| Finance lease revenue | 1,236 | 1,251 | (15 | ) | (1.2 | ) | 3,784 | 3,767 | 17 | 0.5 | ||||||||||||||||||||||
| Total revenue | 18,538 | 19,972 | (1,434 | ) | (7.2 | ) | 41,792 | 43,595 | (1,803 | ) | (4.1 | ) | ||||||||||||||||||||
| Direct expenses – electricity | 6,697 | 8,202 | 1,505 | 18.3 | 12,318 | 14,189 | 1,871 | 13.2 | ||||||||||||||||||||||||
| Direct expenses – other(1) | 5,056 | 4,941 | (115 | ) | (2.3 | ) | 15,246 | 14,878 | (368 | ) | (2.5 | ) | ||||||||||||||||||||
| Direct expenses – total | 11,753 | 13,143 | 1,390 | 10.6 | 27,564 | 29,067 | 1,503 | 5.2 | ||||||||||||||||||||||||
| Gross profit | 6,785 | 6,829 | (44 | ) | (0.6 | ) | 14,228 | 14,528 | (300 | ) | (2.1 | ) | ||||||||||||||||||||
| Selling, general and administrative expenses | 764 | 793 | 29 | 3.7 | 2,449 | 2,350 | (99 | ) | (4.2 | ) | ||||||||||||||||||||||
| Amortization of intangibles | 345 | 345 | — | — | 1,023 | 1,023 | — | — | ||||||||||||||||||||||||
| Operating income | 5,676 | 5,691 | (15 | ) | (0.3 | ) | 10,756 | 11,155 | (399 | ) | (3.6 | ) | ||||||||||||||||||||
| Interest expense, net(2) | (4,566 | ) | (6,862 | ) | 2,296 | 33.5 | (11,750 | ) | (20,866 | ) | 9,116 | 43.7 | ||||||||||||||||||||
| Other income | 1,201 | 1,427 | (226 | ) | (15.8 | ) | 1,312 | 1,536 | (224 | ) | (14.6 | ) | ||||||||||||||||||||
| (Provision) benefit for income taxes | (865 | ) | (23 | ) | (842 | ) | NM | 132 | 3,464 | (3,332 | ) | (96.2 | ) | |||||||||||||||||||
| Noncontrolling interest | (212 | ) | (198 | ) | (14 | ) | (7.1 | ) | (638 | ) | (590 | ) | (48 | ) | (8.1 | ) | ||||||||||||||||
| Net income (loss) | 1,234 | 35 | 1,199 | NM | (188 | ) | (5,301 | ) | 5,113 | 96.5 | ||||||||||||||||||||||
| Reconciliation of net income (loss) to EBITDA excluding non-cash items: |
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| Net income (loss) | 1,234 | 35 | (188 | ) | (5,301 | ) | ||||||||||||||||||||||||||
| Interest expense, net(2) | 4,566 | 6,862 | 11,750 | 20,866 | ||||||||||||||||||||||||||||
| Provision (benefit) for income taxes | 865 | 23 | (132 | ) | (3,464 | ) | ||||||||||||||||||||||||||
| Depreciation(1) | 1,664 | 1,639 | 4,969 | 4,910 | ||||||||||||||||||||||||||||
| Amortization of intangibles | 345 | 345 | 1,023 | 1,023 | ||||||||||||||||||||||||||||
| Other non-cash expenses | 313 | 265 | 651 | 652 | ||||||||||||||||||||||||||||
| EBITDA excluding non-cash items | 8,987 | 9,169 | (182 | ) | (2.0 | ) | 18,073 | 18,686 | (613 | ) | (3.3 | ) | ||||||||||||||||||||
| EBITDA excluding non-cash items | 8,987 | 9,169 | 18,073 | 18,686 | ||||||||||||||||||||||||||||
| Interest expense, net(2) | (4,566 | ) | (6,862 | ) | (11,750 | ) | (20,866 | ) | ||||||||||||||||||||||||
| Non-cash derivative losses recorded in interest expense(2) | 1,865 | 4,180 | 3,808 | 13,006 | ||||||||||||||||||||||||||||
| Amortization of debt financing costs(2) | 171 | 171 | 511 | 511 | ||||||||||||||||||||||||||||
| Equipment lease receivable, net | 778 | 751 | 2,271 | 2,202 | ||||||||||||||||||||||||||||
| Provision/benefit for income taxes, net of changes in deferred taxes | (1,277 | ) | — | (1,092 | ) | — | ||||||||||||||||||||||||||
| Changes in working capital | (789 | ) | (92 | ) | (608 | ) | (3,661 | ) | ||||||||||||||||||||||||
| Cash provided by operating activities | 5,169 | 7,317 | 11,213 | 9,878 | ||||||||||||||||||||||||||||
| Changes in working capital | 789 | 92 | 608 | 3,661 | ||||||||||||||||||||||||||||
| Maintenance capital expenditures | (164 | ) | (249 | ) | (289 | ) | (813 | ) | ||||||||||||||||||||||||
| Free cash flow | 5,794 | 7,160 | (1,366 | ) | (19.1 | ) | 11,532 | 12,726 | (1,194 | ) | (9.4 | ) | ||||||||||||||||||||
NM — Not meaningful
| (1) | Includes depreciation expense of $1.7 million and $5.0 million for the quarter and nine months ended September 30, 2011, respectively, and $1.6 million and $4.9 million for the quarter and nine months ended September 30, 2010, respectively. |
| (2) | Interest expense, net, includes non-cash losses on derivative instruments and non-cash amortization of deferred financing fees. |
16
Energy-Related Business: District Energy – (continued)
Gross Profit
Gross profit decreased due primarily to cooler average temperatures during the second and third quarters of 2011 compared with 2010 resulting in lower consumption revenue net of electricity costs. Gross profit also decreased due to higher real estate taxes and plant rent. The decline was partially offset by an increase in cooling capacity revenue from new customers and annual inflation-related increases of contract capacity rates in accordance with customer contract terms.
Selling, General and Administrative Expenses
Underlying selling, general and administrative expenses were relatively flat compared with 2010. The first quarter of 2010 included a reversal of accrued incentives that did not recur in 2011.
Other Income
Other income decreased due to lower payments received under agreements to manage the business’ energy demand during periods of peak demand on the Illinois electricity grid.
Interest Expense, Net
Interest expense, net, includes non-cash losses on derivative instruments of $1.9 million and $3.8 million for the quarter and nine months ended September 30, 2011, respectively. For the quarter and nine months ended September 30, 2010, interest expense, net, includes non-cash losses on derivative instruments of $4.2 million and $13.0 million, respectively. Excluding the non-cash losses on derivative instruments, interest expense for the nine months ended September 30, 2011 was slightly higher due to the expiration of an interest rate basis swap agreement in March 2010.
Cash interest paid was $2.5 million and $7.5 million for the quarter and nine months ended September 30, 2011, respectively, and $2.4 million and $7.3 million for the quarter and nine months ended September 30, 2010, respectively.
Income Taxes
For periods prior to the sale of 49.99% noncontrolling interest in the business in December 2009, the income from District Energy was included in our consolidated federal income tax return and District Energy filed a separate Illinois state income tax return.
For periods after December 2009, District Energy files a separate federal income tax return and will continue to file a separate Illinois state income tax return. As of December 31, 2010, the business had approximately $18.5 million in federal NOL carryforwards available to offset positive taxable income. For the year ending December 31, 2011, District Energy expects to pay a federal Alternative Minimum Tax of approximately $119,000 and state income taxes of approximately $626,000.
For the nine months ended September 30, 2011, the “Provision/benefit for income taxes, net of changes in deferred taxes” of $1.1 million in the above table, includes $150,000 of taxes paid in 2011, but attributable to 2010.
In 2011, Illinois enacted the Taxpayer Accountability and Budget Stabilization Act, which increases the state corporate income tax rate to 7.0% from 4.8% through 2014 and suspended the use of state NOL carryforwards through 2014. At December 31, 2010, the business had approximately $18.0 million in state NOL carryforwards. For the nine months ended September 30, 2011, District Energy recorded $147,000 of deferred state income tax expense due to the increase in Illinois corporate income tax rates enacted in 2011.
Aviation-Related Business
Atlantic Aviation
Key Factors Affecting Operating Results:
| • | higher general aviation (“GA”) volume of fuel sold and essentially flat weighted average GA fuel margins; |
| • | lower cash interest expense driven by reduced debt levels; and |
| • | flat selling, general and administrative expenses. |
17
Aviation-Related Business: Atlantic Aviation – (continued)
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| Quarter Ended September 30, | Change Favorable/(Unfavorable) | Nine Months Ended September 30, | Change Favorable/(Unfavorable) | |||||||||||||||||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||||||||||
| $ | $ | $ | % | $ | $ | $ | % | |||||||||||||||||||||||||
| ($ In Thousands) (Unaudited) | ||||||||||||||||||||||||||||||||
| Revenue |
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| Fuel revenue | 131,778 | 106,003 | 25,775 | 24.3 | 392,138 | 301,652 | 90,486 | 30.0 | ||||||||||||||||||||||||
| Non-fuel revenue | 38,118 | 35,877 | 2,241 | 6.2 | 116,582 | 117,770 | (1,188 | ) | (1.0 | ) | ||||||||||||||||||||||
| Total revenue | 169,896 | 141,880 | 28,016 | 19.7 | 508,720 | 419,422 | 89,298 | 21.3 | ||||||||||||||||||||||||
| Cost of revenue |
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| Cost of revenue – fuel | 89,217 | 64,590 | (24,627 | ) | (38.1 | ) | 270,949 | 189,337 | (81,612 | ) | (43.1 | ) | ||||||||||||||||||||
| Cost of revenue – non-fuel | 4,108 | 3,482 | (626 | ) | (18.0 | ) | 13,141 | 12,021 | (1,120 | ) | (9.3 | ) | ||||||||||||||||||||
| Total cost of revenue | 93,325 | 68,072 | (25,253 | ) | (37.1 | ) | 284,090 | 201,358 | (82,732 | ) | (41.1 | ) | ||||||||||||||||||||
| Fuel gross profit | 42,561 | 41,413 | 1,148 | 2.8 | 121,189 | 112,315 | 8,874 | 7.9 | ||||||||||||||||||||||||
| Non-fuel gross profit | 34,010 | 32,395 | 1,615 | 5.0 | 103,441 | 105,749 | (2,308 | ) | (2.2 | ) | ||||||||||||||||||||||
| Gross profit | 76,571 | 73,808 | 2,763 | 3.7 | 224,630 | 218,064 | 6,566 | 3.0 | ||||||||||||||||||||||||
| Selling, general and administrative expenses | 43,430 | 42,969 | (461 | ) | (1.1 | ) | 130,105 | 129,762 | (343 | ) | (0.3 | ) | ||||||||||||||||||||
| Depreciation and amortization | 16,521 | 13,879 | (2,642 | ) | (19.0 | ) | 52,864 | 42,102 | (10,762 | ) | (25.6 | ) | ||||||||||||||||||||
| Loss on disposal of assets | 518 | — | (518 | ) | NM | 1,743 | — | (1,743 | ) | NM | ||||||||||||||||||||||
| Operating income | 16,102 | 16,960 | (858 | ) | (5.1 | ) | 39,918 | 46,200 | (6,282 | ) | (13.6 | ) | ||||||||||||||||||||
| Interest expense, net(1) | (7,655 | ) | (12,938 | ) | 5,283 | 40.8 | (29,209 | ) | (61,612 | ) | 32,403 | 52.6 | ||||||||||||||||||||
| Other expense | (18 | ) | (101 | ) | 83 | 82.2 | (195 | ) | (645 | ) | 450 | 69.8 | ||||||||||||||||||||
| (Provision) benefit for income taxes | (3,396 | ) | (1,580 | ) | (1,816 | ) | (114.9 | ) | (4,236 | ) | 6,471 | (10,707 | ) | (165.5 | ) | |||||||||||||||||
| Net income (loss)(2) | 5,033 | 2,341 | 2,692 | 115.0 | 6,278 | (9,586 | ) | 15,864 | 165.5 | |||||||||||||||||||||||
| Reconciliation of net income (loss) to EBITDA excluding non-cash items: |
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| Net income (loss)(2) | 5,033 | 2,341 | 6,278 | (9,586 | ) | |||||||||||||||||||||||||||
| Interest expense, net(1) | 7,655 | 12,938 | 29,209 | 61,612 | ||||||||||||||||||||||||||||
| Provision (benefit) for income taxes | 3,396 | 1,580 | 4,236 | (6,471 | ) | |||||||||||||||||||||||||||
| Depreciation and amortization | 16,521 | 13,879 | 52,864 | 42,102 | ||||||||||||||||||||||||||||
| (Gain) loss on disposal of assets | (204 | ) | — | 949 | — | |||||||||||||||||||||||||||
| Other non-cash expenses | 207 | 149 | 310 | 754 | ||||||||||||||||||||||||||||
| EBITDA excluding non-cash items | 32,608 | 30,887 | 1,721 | 5.6 | 93,846 | 88,411 | 5,435 | 6.1 | ||||||||||||||||||||||||
| EBITDA excluding non-cash items | 32,608 | 30,887 | 93,846 | 88,411 | ||||||||||||||||||||||||||||
| Interest expense, net(1) | (7,655 | ) | (12,938 | ) | (29,209 | ) | (61,612 | ) | ||||||||||||||||||||||||
| Interest rate swap breakage fees(1) | (515 | ) | (1,484 | ) | (2,247 | ) | (4,689 | ) | ||||||||||||||||||||||||
| Non-cash derivative (gains) losses recorded in interest expense(1) | (5,993 | ) | (1,602 | ) | (12,066 | ) | 18,237 | |||||||||||||||||||||||||
| Amortization of debt financing costs(1) | 724 | 753 | 2,205 | 2,225 | ||||||||||||||||||||||||||||
| Provision/benefit for income taxes, net of changes in deferred taxes | (326 | ) | (11 | ) | (942 | ) | (298 | ) | ||||||||||||||||||||||||
| Changes in working capital | (4,620 | ) | (2,526 | ) | (7,482 | ) | 136 | |||||||||||||||||||||||||
| Cash provided by operating activities | 14,223 | 13,079 | 44,105 | 42,410 | ||||||||||||||||||||||||||||
| Changes in working capital | 4,620 | 2,526 | 7,482 | |||||||||||||||||||||||||||||