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(Mark One) | ||
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
(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.) |
(Address of Principal Executive Offices) (Zip Code)
(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.Yesdays. Yesx Noo
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. Yesox Noo
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 | Accelerated Filer | Non-accelerated Filero | Smaller Reporting Companyo |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Nox
There were 45,715,44846,028,258 limited liability company interests without par value outstanding at August 3, 2010.2, 2011.
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PART I. FINANCIAL INFORMATION | |||||
Management’s Discussion and Analysis of Financial | 1 | ||||
Quantitative and Qualitative Disclosure About Market Risk | 30 | ||||
Controls and Procedures | 30 | ||||
Consolidated Condensed Balance Sheets as of June 30, December 31, | |||||
Consolidated Condensed Statements of Operations for the Quarters and Six Months Ended June 30, | |||||
Consolidated Condensed Statements of Cash Flows for the Six Months Ended June 30, | |||||
Notes to Consolidated Condensed Financial Statements (Unaudited) | |||||
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PART II. OTHER INFORMATION | |||||
Item 1. Legal Proceedings | |||||
Item 1A. Risk Factors | |||||
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | |||||
Item 3. Defaults Upon Senior Securities | |||||
Item 4.
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Item 5. Other Information | |||||
Item 6. Exhibits |
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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June 30, 2010 | December 31, 2009 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 29,274 | $ | 27,455 | ||||
Accounts receivable, less allowance for doubtful accounts of $1,481 and $1,629, respectively | 50,508 | 47,256 | ||||||
Inventories | 16,606 | 14,305 | ||||||
Prepaid expenses | 6,218 | 6,688 | ||||||
Deferred income taxes | 21,908 | 23,323 | ||||||
Other | 9,559 | 10,839 | ||||||
Assets of discontinued operations held for sale | — | 86,695 | ||||||
Total current assets | 134,073 | 216,561 | ||||||
Property, equipment, land and leasehold improvements, net | 569,193 | 580,087 | ||||||
Restricted cash | 13,780 | 16,016 | ||||||
Equipment lease receivables | 34,574 | 33,266 | ||||||
Investment in unconsolidated business | 213,858 | 207,491 | ||||||
Goodwill | 516,182 | 516,182 | ||||||
Intangible assets, net | 733,670 | 751,081 | ||||||
Deferred financing costs, net of accumulated amortization | 14,931 | 17,088 | ||||||
Other | 1,915 | 1,449 | ||||||
Total assets | $ | 2,232,176 | $ | 2,339,221 | ||||
LIABILITIES AND MEMBERS' EQUITY | ||||||||
Current liabilities: | ||||||||
Due to manager – related party | $ | 2,346 | $ | 1,977 | ||||
Accounts payable | 41,294 | 44,575 | ||||||
Accrued expenses | 18,920 | 17,432 | ||||||
Current portion of notes payable and capital leases | 233 | 235 | ||||||
Current portion of long-term debt | 53,153 | 45,900 | ||||||
Fair value of derivative instruments | 45,792 | 49,573 | ||||||
Customer deposits | 4,449 | 5,617 | ||||||
Other | 8,375 | 9,338 | ||||||
Liabilities of discontinued operations held for sale | — | 220,549 | ||||||
Total current liabilities | 174,562 | 395,196 | ||||||
Notes payable and capital leases, net of current portion | 1,267 | 1,498 | ||||||
Long-term debt, net of current portion | 1,127,391 | 1,166,379 | ||||||
Deferred income taxes | 149,078 | 107,840 | ||||||
Fair value of derivative instruments | 72,268 | 54,794 | ||||||
Other | 40,622 | 38,746 | ||||||
Total liabilities | 1,565,188 | 1,764,453 | ||||||
Commitments and contingencies | — | — | ||||||
Members’ equity: | ||||||||
LLC interests, no par value; 500,000,000 authorized; 45,714,368 LLC interests issued and outstanding at June 30, 2010 and 45,292,913 LLC interests issued and outstanding at December 31, 2009 | 964,426 | 959,897 | ||||||
Additional paid in capital | 21,167 | 21,956 | ||||||
Accumulated other comprehensive loss | (33,494 | ) | (43,232 | ) | ||||
Accumulated deficit | (282,610 | ) | (360,095 | ) | ||||
Total members’ equity | 669,489 | 578,526 | ||||||
Noncontrolling interests | (2,501 | ) | (3,758 | ) | ||||
Total equity | 666,988 | 574,768 | ||||||
Total liabilities and equity | $ | 2,232,176 | $ | 2,339,221 |
See accompanying notes to the consolidated condensed financial statements.
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Quarter Ended | Six Months Ended | |||||||||||||||
June 30, 2010 | June 30, 2009(1) | June 30, 2010 | June 30, 2009(1) | |||||||||||||
Revenue | ||||||||||||||||
Revenue from product sales | $ | 125,177 | $ | 89,430 | $ | 245,195 | $ | 178,622 | ||||||||
Revenue from product sales – utility | 28,450 | 21,414 | 55,285 | 41,581 | ||||||||||||
Service revenue | 49,794 | 51,359 | 103,000 | 108,304 | ||||||||||||
Financing and equipment lease income | 1,271 | 1,205 | 2,516 | 2,397 | ||||||||||||
Total revenue | 204,692 | 163,408 | 405,996 | 330,904 | ||||||||||||
Costs and expenses | ||||||||||||||||
Cost of product sales | 79,887 | 50,645 | 156,941 | 100,411 | ||||||||||||
Cost of product sales – utility | 23,151 | 16,549 | 44,464 | 31,936 | ||||||||||||
Cost of services | 13,318 | 11,069 | 24,463 | 22,140 | ||||||||||||
Selling, general and administrative | 49,522 | 48,725 | 100,256 | 104,868 | ||||||||||||
Fees to manager – related party | 2,268 | 851 | 4,457 | 1,313 | ||||||||||||
Goodwill impairment | — | 53,200 | — | 71,200 | ||||||||||||
Depreciation | 7,202 | 9,270 | 14,924 | 22,420 | ||||||||||||
Amortization of intangibles | 8,740 | 12,532 | 17,411 | 42,797 | ||||||||||||
Total operating expenses | 184,088 | 202,841 | 362,916 | 397,085 | ||||||||||||
Operating income (loss) | 20,604 | (39,433 | ) | 43,080 | (66,181 | ) | ||||||||||
Other income (expense) | ||||||||||||||||
Interest income | 4 | 34 | 20 | 101 | ||||||||||||
Interest expense(2) | (38,974 | ) | (2,103 | ) | (73,661 | ) | (35,669 | ) | ||||||||
Equity in earnings and amortization charges of investee | 5,774 | 10,028 | 11,367 | 15,477 | ||||||||||||
Loss on derivative instruments | — | — | — | (25,238 | ) | |||||||||||
Other (expense) income, net | (496 | ) | (186 | ) | (448 | ) | 850 | |||||||||
Net loss from continuing operations before income taxes | (13,088 | ) | (31,660 | ) | (19,642 | ) | (110,660 | ) | ||||||||
Benefit for income taxes | 13,488 | 4,822 | 14,577 | 37,387 | ||||||||||||
Net income (loss) from continuing operations | $ | 400 | $ | (26,838 | ) | $ | (5,065 | ) | $ | (73,273 | ) | |||||
Net income (loss) from discontinued operations, net of taxes | 85,212 | (3,159 | ) | 81,199 | (9,583 | ) | ||||||||||
Net income (loss) | $ | 85,612 | $ | (29,997 | ) | $ | 76,134 | $ | (82,856 | ) | ||||||
Less: net loss attributable to noncontrolling interests | (238 | ) | (1,039 | ) | (1,351 | ) | (872 | ) | ||||||||
Net income (loss) attributable to MIC LLC | $ | 85,850 | $ | (28,958 | ) | $ | 77,485 | $ | (81,984 | ) | ||||||
Basic income (loss) per share from continuing operations attributable to MIC LLC interest holders | $ | 0.02 | $ | (0.60 | ) | $ | (0.08 | ) | $ | (1.64 | ) | |||||
Basic income (loss) per share from discontinued operations attributable to MIC LLC interest holders | 1.87 | (0.04 | ) | 1.79 | (0.18 | ) | ||||||||||
Basic income (loss) per share attributable to MIC LLC interest holders | $ | 1.89 | $ | (0.64 | ) | $ | 1.71 | $ | (1.82 | ) | ||||||
Weighted average number of shares outstanding: basic | 45,467,413 | 44,951,176 | 45,381,413 | 44,949,942 | ||||||||||||
Diluted income (loss) per share from continuing operations attributable to MIC LLC interest holders | $ | 0.02 | $ | (0.60 | ) | $ | (0.08 | ) | $ | (1.64 | ) | |||||
Diluted income (loss) per share from discontinued operations attributable to MIC LLC interest holders | 1.86 | (0.04 | ) | 1.78 | (0.18 | ) | ||||||||||
Diluted income (loss) per share attributable to MIC LLC interest holders | $ | 1.88 | $ | (0.64 | ) | $ | 1.70 | $ | (1.82 | ) | ||||||
Weighted average number of shares outstanding: diluted | 45,604,064 | 44,951,176 | 45,513,864 | 44,949,942 |
See accompanying notes to the consolidated condensed financial statements.
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Six Months Ended | ||||||||
June 30, 2010 | June 30, 2009(1) | |||||||
Operating activities | ||||||||
Net income (loss) before noncontrolling interests | $ | 76,134 | $ | (82,856 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by operating activities from continuing operations: | ||||||||
Net (income) loss from discontinued operations before noncontrolling interests | (81,199 | ) | 9,583 | |||||
Non-cash goodwill impairment | — | 71,200 | ||||||
Depreciation and amortization of property and equipment | 18,195 | 25,385 | ||||||
Amortization of intangible assets | 17,411 | 42,797 | ||||||
Equity in earnings and amortization charges of investees | (11,367 | ) | (15,477 | ) | ||||
Equity distributions from investees | 5,000 | 7,000 | ||||||
Amortization of debt financing costs | 2,256 | 2,514 | ||||||
Non-cash derivative loss | 31,674 | 12,173 | ||||||
Base management fees settled in LLC interests | 2,189 | 851 | ||||||
Equipment lease receivable, net | 1,451 | 1,407 | ||||||
Deferred rent | 145 | 87 | ||||||
Deferred taxes | (16,046 | ) | (38,131 | ) | ||||
Other non-cash expenses (income), net | 2,112 | (350 | ) | |||||
Changes in other assets and liabilities, net of acquisitions: | ||||||||
Restricted cash | 50 | — | ||||||
Accounts receivable | (4,718 | ) | 6,881 | |||||
Inventories | (2,376 | ) | 1,598 | |||||
Prepaid expenses and other current assets | 1,299 | 5,394 | ||||||
Due to manager – related party | 2,263 | (3,493 | ) | |||||
Accounts payable and accrued expenses | (1,281 | ) | (5,213 | ) | ||||
Income taxes payable | (406 | ) | 40 | |||||
Other, net | (1,140 | ) | (1,628 | ) | ||||
Net cash provided by operating activities from continuing operations | 41,646 | 39,762 | ||||||
Investing activities | ||||||||
Purchases of property and equipment | (7,315 | ) | (11,864 | ) | ||||
Investment in capital leased assets | (2,400 | ) | — | |||||
Other | 658 | 92 | ||||||
Net cash used in investing activities from continuing operations | (9,057 | ) | (11,772 | ) |
See accompanying notes to the consolidated condensed financial statements.
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Six Months Ended | ||||||||
June 30, 2010 | June 30, 2009 | |||||||
Financing activities | ||||||||
Net proceeds on line of credit facilities | $ | — | $ | 3,600 | ||||
Contributions received from noncontrolling interests | 300 | — | ||||||
Distributions paid to noncontrolling interests | (1,261 | ) | (314 | ) | ||||
Payment of long-term debt | (31,736 | ) | (60,620 | ) | ||||
Change in restricted cash | 2,236 | (33 | ) | |||||
Payment of notes and capital lease obligations | (164 | ) | (94 | ) | ||||
Net cash used in financing activities from continuing operations | (30,625 | ) | (57,461 | ) | ||||
Net change in cash and cash equivalents from continuing operations | 1,964 | (29,471 | ) | |||||
Cash flows provided by (used in) discontinued operations: | ||||||||
Net cash used in operating activities | (12,703 | ) | (2,909 | ) | ||||
Net cash provided by (used in) in investing activities | 134,356 | (312 | ) | |||||
Net cash (used in) provided by financing activities | (124,183 | ) | 2,513 | |||||
Cash used in discontinued operations(2) | (2,530 | ) | (708 | ) | ||||
Change in cash of discontinued operations held for sale(2) | 2,385 | (945 | ) | |||||
Net change in cash and cash equivalents | 1,819 | (31,124 | ) | |||||
Cash and cash equivalents, beginning of period | 27,455 | 66,054 | ||||||
Cash and cash equivalents, end of period – continuing operations | $ | 29,274 | $ | 34,930 | ||||
Supplemental disclosures of cash flow information for continuing operations: | ||||||||
Non-cash investing and financing activities: | ||||||||
Accrued purchases of property and equipment | $ | 1,092 | $ | 1,238 | ||||
Issuance of LLC interests to manager for base management fees | $ | 4,083 | $ | 851 | ||||
Issuance of LLC interests to independent directors | $ | 446 | $ | 450 | ||||
Taxes paid | $ | 1,508 | $ | 508 | ||||
Interest paid | $ | 40,015 | $ | 46,946 |
See accompanying notes to the consolidated condensed financial statements.
Macquarie Infrastructure Company LLC, a Delaware limited liability company, was formed on April 13, 2004. Macquarie Infrastructure Company LLC, both on an individual entity basis and together with its consolidated subsidiaries, is referred to in these financial statements as the “Company” or “MIC”. The Company owns, operates and invests in a diversified group of infrastructure businesses in the United States. Macquarie Infrastructure Management (USA) Inc. is the Company’s manager and is referred to in these financial statements as the Manager. The Manager is a wholly-owned subsidiary within the Macquarie Group of companies, which is comprised of Macquarie Group Limited and its subsidiaries and affiliates worldwide. Macquarie Group Limited is headquartered in Australia and is listed on the Australian Stock Exchange.
The Company is an operating entity with a Board of Directors and other corporate governance responsibilities generally consistent with those of a Delaware corporation.
The Company owns its businesses through its wholly-owned subsidiary, Macquarie Infrastructure Company Inc., or MIC Inc. The Company’s businesses operate predominantly in the United States and consist of the following:
Atlantic Aviation — an airport services business providing products and services, including fuel and aircraft hangaring/parking, to owners and operators of private jets at 68 airports and one heliport in the U.S.
The unaudited consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X for interim financial information. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The preparation of consolidated condensed financial statements in conformity with GAAP requires estimates and assumptions. Management evaluates these estimates and assumptions on an ongoing basis. Actual results may differ from the estimates and assumptions used in the financial statements and notes. Operating results for the quarter and six months ended June 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.
The consolidated balance sheet at December 31, 2009 has been derived from audited financial statements but does not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. Certain reclassifications were made to the financial statements for the prior period to conform to current period presentation.
The interim financial information contained herein should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2009 included in the Company’s Annual Report on Form 10-K, as filed with the SEC on February 25, 2010.
In April 2009, the Financial Accounting Standards Board, or FASB, issued ASC 825-10-65Financial Instruments, which is effective for interim reporting periods ending after June 15, 2009. This guidance requires disclosures about the fair value of financial instruments for interim reporting periods in addition to the current requirement to make disclosure in annual financial statements. This guidance also requires disclosure of the methods and significant assumptions used to estimate the fair value of financial instruments and description of changes in the methods and significant assumptions. The Company adopted this guidance during the second quarter of 2009. Since this guidance requires only additional disclosures, the adoption did not have a material impact on the Company’s financial results of operations and financial condition.
The Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and variable rate senior debt, are carried at cost, which approximates their fair value because of either the short-term maturity, or variable or competitive interest rates assigned to these financial instruments.
Following is a reconciliation of the basic and diluted number of shares used in computing income (loss) per share:
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Quarter Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Weighted average number of shares outstanding: basic | 45,467,413 | 44,951,176 | 45,381,413 | 44,949,942 | ||||||||||||
Dilutive effect of restricted stock unit grants | 136,651 | — | 132,451 | — | ||||||||||||
Weighted average number of shares outstanding: diluted | 45,604,064 | 44,951,176 | 45,513,864 | 44,949,942 |
The effect of potentially dilutive shares for the quarter and six months ended June 30, 2010 is calculated assuming that the 31,989 restricted stock unit grants provided to the independent directors on June 3, 2010 and the 128,205 restricted stock unit grants provided to the independent directors on June 4, 2009 had been fully converted to shares on those dates. However, the restricted stock unit grants were anti-dilutive for the quarter and six months ended June 30, 2009, due to the Company’s net loss for those periods.
On June 2, 2010, the Company 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 the Company’s consolidated condensed balance sheet. 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 the Company. The Company received $602,000 from the PCAA bankruptcy estate for expenses paid on behalf of PCAA during its operations.
As a result of the approval of the sale of PCAA's assets in bankruptcy and the expected dissolution of PCAA during 2010, the Company has reduced its valuation allowance on the realization of a portion of the deferred tax assets attributable to its basis in PCAA and its consolidated federal net operating losses. The change in the valuation allowance recorded in discontinued operations was $10.0 million.
The results of operations from this business, for all periods presented, and the gain from the bankruptcy sale are separately reported as a discontinued operations in the Company’s consolidated condensed financial statements. This business is no longer a reportable segment. The assets and liabilities of the business being sold are included in assets of discontinued operations held for sale and liabilities of discontinued operations held for sale on the Company’s consolidated condensed balance sheet at December 31, 2009.
The following is a summary of the assets and liabilities of discontinued operations held for sale related to PCAA at December 31, 2009:
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December 31, 2009 | ||||
($ in Thousands) | ||||
Assets | ||||
Total current assets | $ | 7,676 | ||
Property, equipment, land and leasehold improvements, net | 77,524 | |||
Other non-current assets | 1,495 | |||
Total assets | $ | 86,695 | ||
Liabilities | ||||
Current portion of long-term debt | $ | 200,999 | ||
Other current liabilities | 10,761 | |||
Total current liabilities | 211,760 | |||
Other non-current liabilities | 8,789 | |||
Total liabilities | 220,549 | |||
Noncontrolling interests | (1,863 | ) | ||
Total liabilities and noncontrolling interests | $ | 218,686 |
Summarized financial information for discontinued operations related to PCAA for the quarters and six months ended June 30, 2010 and 2009 are as follows:
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For the Quarter Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
($ in Thousands, Except Share Data) | ||||||||||||||||
Service revenue | $ | 12,319 | $ | 17,439 | $ | 28,826 | $ | 34,046 | ||||||||
Gain on sale of assets through bankruptcy (pre-tax) | 130,260 | — | 130,260 | — | ||||||||||||
Net income (loss) from discontinued operations before income taxes | $ | 135,726 | $ | (4,026 | ) | $ | 132,709 | $ | (13,544 | ) | ||||||
(Provision) benefit for income taxes | (50,514 | ) | 867 | (51,510 | ) | 3,961 | ||||||||||
Net income (loss) from discontinued operations | 85,212 | (3,159 | ) | 81,199 | (9,583 | ) | ||||||||||
Less: net income (loss) attributable to noncontrolling interests | 302 | (1,213 | ) | 136 | (1,213 | ) | ||||||||||
Net income (loss) from discontinued operations attributable to MIC LLC | $ | 84,910 | $ | (1,946 | ) | $ | 81,063 | $ | (8,370 | ) | ||||||
Basic income (loss) per share from discontinued operations attributable to MIC LLC interest holders | $ | 1.87 | $ | (0.04 | ) | $ | 1.79 | $ | (0.18 | ) | ||||||
Weighted average number of shares outstanding at the Company level: basic | 45,467,413 | 44,951,176 | 45,381,413 | 44,949,942 | ||||||||||||
Diluted income (loss) per share from discontinued operations attributable to MIC LLC interest holders | $ | 1.86 | $ | (0.04 | ) | $ | 1.78 | $ | (0.18 | ) | ||||||
Weighted average number of shares outstanding at the Company level: diluted | 45,604,064 | 44,951,176 | 45,513,864 | 44,949,942 |
Property, equipment, land and leasehold improvements at June 30, 2010 and December 31, 2009 consist of the following ($ in thousands):
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June 30, 2010 | December 31, 2009 | |||||||
Land | $ | 4,618 | $ | 4,618 | ||||
Easements | 5,624 | 5,624 | ||||||
Buildings | 24,796 | 24,789 | ||||||
Leasehold and land improvements | 317,512 | 312,881 | ||||||
Machinery and equipment | 332,064 | 330,226 | ||||||
Furniture and fixtures | 9,441 | 9,395 | ||||||
Construction in progress | 16,394 | 16,519 | ||||||
Property held for future use | 1,561 | 1,561 | ||||||
712,010 | 705,613 | |||||||
Less: accumulated depreciation | (142,817 | ) | (125,526 | ) | ||||
Property, equipment, land and leasehold improvements, net(1) | $ | 569,193 | $ | 580,087 |
The Company recognized non-cash impairment charges of $2.2 million and $7.5 million during the quarter and six months ended June 30, 2009, respectively, primarily relating to leasehold and land improvements; buildings; machinery and equipment; and furniture and fixtures at Atlantic Aviation. These charges are recorded in depreciation expense in the consolidated condensed statements of operations. There was no impairment charge in the first six months of 2010.
Intangible assets at June 30, 2010 and December 31, 2009 consist of the following ($ in thousands):
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Weighted Average Life (Years) | June 30, 2010 | December 31, 2009 | ||||||||||
Contractual arrangements | 31.1 | $ | 774,309 | $ | 774,309 | |||||||
Non-compete agreements | 2.5 | 9,515 | 9,515 | |||||||||
Customer relationships | 10.6 | 78,596 | 78,596 | |||||||||
Leasehold rights | 12.5 | 3,331 | 3,331 | |||||||||
Trade names | Indefinite | 15,401 | 15,401 | |||||||||
Technology | 5.0 | 460 | 460 | |||||||||
881,612 | 881,612 | |||||||||||
Less: accumulated amortization | (147,942 | ) | (130,531 | ) | ||||||||
Intangible assets, net | $ | 733,670 | $ | 751,081 |
As a result of a decline in the performance of certain asset groups during the quarter and six months ended June 30, 2009, the Company evaluated such asset groups for impairment and determined that the asset groups were impaired. The Company estimated the fair value of each of the impaired asset groups using the discounted cash flow model. Accordingly, the Company recognized non-cash impairment charges of $2.9 million and $23.3 million related to contractual arrangements at Atlantic Aviation during the quarter and six months ended June 30, 2009, respectively. These charges are recorded in amortization of intangibles in the consolidated condensed statement of operations. There was no impairment charge in the first six months of 2010.
The goodwill balance as of June 30, 2010 and December 31, 2009 is comprised of the following ($ in thousands):
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Goodwill acquired in business combinations, net of disposals | $ | 639,382 | ||
Less: accumulated impairment charges | (123,200 | ) | ||
Balance at June 30, 2010 and December 31, 2009 | $ | 516,182 |
The Company tests for goodwill impairment at the reporting unit level on an annual basis and between annual tests if a triggering event indicates impairment. The decline in the Company’s stock price over the latter part of 2008 and the first half of 2009 caused the book value of the Company to exceed its market capitalization. In addition to its annual goodwill impairment testing conducted routinely on October 1st of each year, the Company performed goodwill impairment testing during the quarter and six months ended June 30, 2009 due to the triggering event of the Company’s stock price decline. Based on the testing performed, the Company recorded goodwill impairment charges of $53.2 million and $71.2 million at Atlantic Aviation during the quarter and six months ended June 30, 2009, respectively, which is included in the accumulated impairment charges in the above table. There was no goodwill impairment charge in the first six months of 2010.
The following major categories of nonfinancial assets at the impaired asset groups were written down to fair value during the quarter and six months ended June 30, 2009 at Atlantic Aviation ($ in thousands):
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Total Losses | ||||||||||||
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)(1) | Quarter Ended June 30, 2009 | Six Months Ended June 30, 2009 | ||||||||||
Property, equipment, land and leasehold improvements, net | $ | 5,122 | $ | 2,200 | $ | 7,521 | ||||||
Intangible assets | 14,430 | 2,962 | 23,326 | |||||||||
Goodwill | 377,343 | 53,200 | 71,200 | |||||||||
Total | $ | 396,895 | $ | 58,362 | $ | 102,047 |
The Company estimated the fair value of each of the impaired asset groups using discounted cash flows. Property, equipment, land and leasehold improvements for Atlantic Aviation with a carrying value of $12.6 million were written down to fair value of $5.1 million during the six months ended June 30, 2009. The non-cash impairment charge of $7.5 million was recorded in depreciation expense in the consolidated condensed statement of operations for the six months ended June 30, 2009. There was no impairment charge in the first six months of 2010.
Additionally, intangible assets at Atlantic Aviation with a carrying value of $37.7 million were written down to their fair value of $14.4 million during the six months ended June 30, 2009. The non-cash impairment charge of $23.3 million was recorded in amortization of intangibles expense in the consolidated condensed statement of operations. There was no impairment charge in the first six months of 2010.
As discussed in Note 7, “Intangible Assets”, the Company performed goodwill impairment analyses during the quarter and six months ended June 30, 2009. As a result of these analyses, goodwill at Atlantic Aviation with a carrying value of $448.5 million was written down to its implied fair value of $377.3 million resulting in a non-cash impairment charge of $71.2 million. This non-cash impairment charge was included in goodwill impairment in the consolidated condensed statement of operations. There was no goodwill impairment charge in the first six months of 2010.
The significant unobservable inputs (“level 3”) used for all fair value measurements in the above table included forecasted cash flows of Atlantic Aviation and its asset groups, the discount rate and, in the case of goodwill, the terminal value. The forecasted cash flows for this business were developed using actual cash flows from 2009, forecasted jet fuel volumes from the Federal Aviation Administration, forecasted consumer price indices and forecasted LIBOR rates based on proprietary models using various published sources. The discount rate was developed using a capital asset pricing model.
Model inputs included:
The terminal value was based on observed earnings before interest, taxes, depreciation and amortization, or EBITDA, and multiples historically paid in transactions for comparable businesses.
At June 30, 2010 and December 31, 2009, the Company’s consolidated long-term debt consisted of the following ($ in thousands):
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June 30, 2010 | December 31, 2009 | |||||||
The Gas Company | $ | 179,000 | $ | 179,000 | ||||
District Energy | 170,000 | 170,000 | ||||||
Atlantic Aviation | 831,544 | 863,279 | ||||||
Total | 1,180,544 | 1,212,279 | ||||||
Less: current portion | (53,153 | ) | (45,900 | ) | ||||
Long-term portion | $ | 1,127,391 | $ | 1,166,379 |
Until March 31, 2010, MIC Inc. had a revolving credit facility with various financial institutions. The facility was repaid in full in December 2009 and no amounts were outstanding under the revolving credit facility as of December 31, 2009 or at the facility’s maturity on March 31, 2010.
On February 25, 2009, Atlantic Aviation amended its credit facility to provide the business additional financial flexibility over the near and medium term. Under the amended terms, the business will apply all excess cash flow from the business to prepay additional debt whenever the leverage ratio (debt to adjusted EBITDA) is equal to or greater than 6.0x to 1.0 for the trailing twelve months and will use 50% of excess cash flow to prepay debt whenever the leverage ratio is equal to or greater than 5.5x to 1.0 and below 6.0x to 1.0. For the quarter and six months ended June 30, 2010, Atlantic Aviation used $7.7 million and $34.9 million, respectively, of excess cash flow to prepay $7.0 million and $31.7 million, respectively, of the outstanding principal balance of the term loan debt under the facility and $695,000 and $3.2 million, respectively, in interest rate swap breakage fees. The Company has classified $53.2 million relating to Atlantic Aviation’s debt in current portion of long-term debt in the consolidated condensed balance sheet at June 30, 2010, as it expects to repay this amount within one year.
In August 2010, Atlantic Aviation used $9.9 million of excess cash flow to prepay $9.0 million of the outstanding principal balance of the term loan debt under this facility and incurred $935,000 in interest rate swap breakage fees.
The Company and its businesses have in place variable-rate debt. Management believes that it is prudent to limit the variability of a portion of the business’ interest payments. To meet this objective, the Company enters into interest rate swap agreements to manage fluctuations in cash flows resulting from interest rate risk on a majority of its debt with a variable-rate component.
At June 30, 2010, the Company had $1.2 billion of current and long-term debt, $1.1 billion of which was economically hedged with interest rate swaps and $83.9 million of which was unhedged.
As discussed in Note 9, “Long-Term Debt”, Atlantic Aviation applies its excess cash flow to prepay debt. As a result, $4.9 million and $11.1 million of accumulated other comprehensive loss in the consolidated condensed balance sheet related to Atlantic Aviation’s derivative instruments were reclassified to interest expense in the consolidated condensed statement of operations for the quarter and six months ended June 30, 2010, respectively. Atlantic Aviation expects to record further reclassifications from accumulated other comprehensive loss to interest expense as the business continues to pay down its debt.
In March 2009, Atlantic Aviation, The Gas Company and District Energy entered into interest rate basis swap contracts that expired on March 31, 2010. These contracts effectively changed the interest rate index on each business’ existing swap contracts from the 90-day LIBOR rate to the 30-day LIBOR rate plus a margin of 19.50 basis points for Atlantic Aviation and 24.75 basis points for The Gas Company and District Energy. This transaction, adjusted for the prepayments of outstanding principal on the term loan debt at Atlantic Aviation, resulted in $580,000 and $1.8 million lower interest expense for these businesses for the quarter ended March 31, 2010 and the year ended December 31, 2009, respectively.
Effective February 25, 2009 for Atlantic Aviation and effective April 1, 2009 for the Company’s other businesses, the Company elected to discontinue hedge accounting. In prior periods, when the Company applied hedge accounting, changes in the fair value of derivatives that effectively offset the variability of cash flows on the Company’s debt interest obligations were recorded in other comprehensive income or loss. From the dates that hedge accounting was discontinued, all movements in the fair value of the interest rate swaps are recorded directly through earnings. As interest payments are made, a portion of the other comprehensive loss recorded under hedge accounting is also reclassified into earnings. The Company will reclassify into earnings $56.9 million of net derivative losses, included in accumulated other comprehensive loss as of June 30, 2010 over the remaining life of the existing interest rate swaps, of which approximately $24.1 million will be reclassified over the next 12 months.
The Company measures derivative instruments at fair value using the income approach which discounts the future net cash settlements expected under the derivative contracts to a present value. These valuations utilize primarily observable (“level 2”) inputs, including contractual terms, interest rates and yield curves observable at commonly quoted intervals.
The Company’s fair value measurements of its derivative instruments and the related location of the liabilities associated with the hedging instruments within the consolidated condensed balance sheets at June 30, 2010 and December 31, 2009 were as follows:
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Liabilities at Fair Value(1) | ||||||||
Interest Rate Swap Contracts Not Designated as Hedging Instruments | ||||||||
Balance Sheet Location | June 30, 2010 | December 31, 2009 | ||||||
($ In Thousands) | ||||||||
Fair value of derivative instruments – current liabilities | $ | (45,792 | ) | $ | (49,573 | ) | ||
Fair value of derivative instruments – non-current liabilities | (72,268 | ) | (54,794 | ) | ||||
Total interest rate derivative contracts | $ | (118,060 | ) | $ | (104,367 | ) |
The Company’s hedging activities for the quarter and six months ended June 30, 2010 and 2009 and the related location within the consolidated condensed financial statements were as follows:
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Derivatives Not Designated as Hedging Instruments(1) | ||||||||
Amount of (Loss) Gain Recognized in Interest Expense for the Quarter Ended June 30, | ||||||||
Financial Statement Account | 2010(2) | 2009(3) | ||||||
($ In Thousands) | ||||||||
Interest expense | $ | (36,008 | ) | $ | 5,395 | |||
Total | $ | (36,008 | ) | $ | 5,395 |
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Derivatives Designated as Hedging Instruments(1) | Derivatives Not Designated as Hedging Instruments(1) | |||||||||||||||||||||||||||||||
Amount of Gain Recognized in OCI on Derivatives (Effective Portion) for the Six Months Ended June 30, | Amount of Loss Reclassified from OCI into Income (Effective Portion) for the Six Months Ended June 30, | Amount of Loss Recognized in Loss on Derivative Instruments (Ineffective Portion) for the Six Months Ended June 30, | Amount of Loss Recognized in Interest Expense for the Six Months Ended June 30, | |||||||||||||||||||||||||||||
Financial Statement Account | 2010 | 2009 | 2010 | 2009(2) | 2010 | 2009 | 2010(3) | 2009(4) | ||||||||||||||||||||||||
($ In Thousands) | ||||||||||||||||||||||||||||||||
Interest expense | $ | — | $ | — | $ | — | $ | (15,691 | ) | $ | — | $ | — | $ | (63,142 | ) | $ | (1,592 | ) | |||||||||||||
Loss on derivative instruments | — | — | — | (25,154 | ) | — | (84 | ) | — | — | ||||||||||||||||||||||
Accumulated other comprehensive loss | — | 2,848 | — | — | — | — | — | — | ||||||||||||||||||||||||
Total | $ | — | $ | 2,848 | $ | — | $ | (40,845 | ) | $ | — | $ | (84 | ) | $ | (63,142 | ) | $ | (1,592 | ) |
All of the Company’s derivative instruments are collateralized by all of the assets of the respective businesses.
Other comprehensive income (loss) includes primarily the change in fair value of derivative instruments which qualified for hedge accounting until the dates that hedge accounting was discontinued, as discussed in Note 10, “Derivative Instruments and Hedging Activities”.
The difference between net income (loss) and comprehensive income (loss) for the quarter and six months ended June 30, 2010 and 2009 was as follows ($ in thousands):
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Quarter Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net income (loss) attributable to MIC LLC | $ | 85,850 | $ | (28,958 | ) | $ | 77,485 | $ | (81,984 | ) | ||||||
Unrealized gain in fair value of derivatives, net of taxes | — | — | — | 1,498 | ||||||||||||
Reclassification of realized losses into earnings, net of taxes | 4,390 | 8,673 | 9,738 | 34,663 | ||||||||||||
Comprehensive income (loss) | $ | 90,240 | $ | (20,285 | ) | $ | 87,223 | $ | (45,823 | ) |
For further discussion on derivative instruments and hedging activities, see Note 10, “Derivative Instruments and Hedging Activities”.
The Company is authorized to issue 500,000,000 LLC interests. Each outstanding LLC interest of the Company is entitled to one vote on any matter with respect to which holders of LLC interests are entitled to vote.
The Company’s operations are broadly classified into the energy-related businesses and Atlantic Aviation. The energy-related businesses consist of two reportable segments: The Gas Company and District Energy. The energy-related businesses also include a 50% investment in IMTT, which is accounted for under the equity method. Financial information for IMTT’s business as a whole is presented below ($ in thousands) (unaudited):
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Quarter Ended, and as of, June 30, | Six Months Ended, and as of, June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenue | $ | 158,235 | $ | 81,974 | $ | 265,273 | $ | 168,777 | ||||||||
Net income | $ | 14,222 | $ | 22,423 | $ | 27,465 | $ | 35,686 | ||||||||
Interest expense (income), net | 25,774 | (17,671 | ) | 37,899 | (10,610 | ) | ||||||||||
Provision for income taxes | 10,750 | 14,959 | 20,356 | 23,898 | ||||||||||||
Depreciation and amortization expense | 14,916 | 13,454 | 29,534 | 26,278 | ||||||||||||
Unrealized gains on derivative instruments | — | — | — | (3,306 | ) | |||||||||||
Other non-cash expense (income) | 12 | 157 | 245 | (669 | ) | |||||||||||
EBITDA excluding non-cash items (1) | $ | 65,674 | $ | 33,322 | $ | 115,499 | $ | 71,277 | ||||||||
Capital expenditures paid | $ | 17,741 | $ | 41,482 | $ | 37,171 | $ | 81,424 | ||||||||
Property, equipment, land and leasehold improvements, net | 993,427 | 953,907 | 993,427 | 953,907 | ||||||||||||
Total assets balance | 1,127,169 | 1,041,219 | 1,127,169 | 1,041,219 |
All of the business segments are managed separately and management has chosen to organize the Company around the distinct products and services offered.
IMTT provides bulk liquid storage and handling services in North America through ten terminals located on the East, West and Gulf Coasts, the Great Lakes region of the United States and partially owned terminals in Quebec and Newfoundland, Canada. IMTT derives the majority of its revenue from storage and handling of petroleum products, various chemicals, renewable fuels, and vegetable and animal oils. Based on storage capacity, IMTT operates one of the largest third-party bulk liquid storage terminal businesses in the United States.
The revenue from The Gas Company segment is included in revenue from product sales. Revenue is generated from the distribution and sales of synthetic natural gas, or SNG, and liquefied petroleum gas, or LPG. Revenue is primarily a function of the volume of SNG and LPG consumed by customers and the price per thermal unit or gallon charged to customers. Because both SNG and LPG are derived from petroleum, revenue levels, without organic growth, will generally track global oil prices. The utility revenue of The Gas Company reflects fuel adjustment charges, or FACs, through which changes in fuel costs are passed through to customers.
The revenue from the District Energy segment is included in service revenue and financing and equipment lease income. Included in service revenue is capacity revenue, which relates to monthly fixed contract charges, and consumption revenue, which relates to contractual rates applied to actual usage. Financing and equipment lease income relates to direct financing lease transactions and equipment leases to the business’ various customers. District Energy provides its services to buildings primarily in the downtown Chicago, Illinois area and to a casino and a shopping mall located in Las Vegas, Nevada.
The Atlantic Aviation segment derives the majority of its revenues from fuel sales and from other airport services, including de-icing, aircraft hangarage and other aviation services. All of the revenue of Atlantic Aviation is generated in the United States at 68 airports and one heliport.
Selected information by segment is presented in the following tables. The tables do not include financial data for the Company’s equity investment in IMTT.
Revenue from external customers for the Company’s consolidated reportable segments was as follows($ in thousands) (unaudited):
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Quarter Ended June 30, 2010 | ||||||||||||||||
Energy-related Businesses | ||||||||||||||||
The Gas Company | District Energy | Atlantic Aviation | Total | |||||||||||||
Revenue from Product Sales | ||||||||||||||||
Product sales | $ | 24,236 | $ | — | $ | 100,941 | $ | 125,177 | ||||||||
Product sales – utility | 28,450 | — | — | 28,450 | ||||||||||||
52,686 | — | 100,941 | 153,627 | |||||||||||||
Service Revenue | ||||||||||||||||
Other services | — | 803 | 36,552 | 37,355 | ||||||||||||
Cooling capacity revenue | — | 5,295 | — | 5,295 | ||||||||||||
Cooling consumption revenue | — | 7,144 | — | 7,144 | ||||||||||||
— | 13,242 | 36,552 | 49,794 | |||||||||||||
Financing and Lease Income | ||||||||||||||||
Financing and equipment lease | — | 1,271 | — | 1,271 | ||||||||||||
— | 1,271 | — | 1,271 | |||||||||||||
Total Revenue | $ | 52,686 | $ | 14,513 | $ | 137,493 | $ | 204,692 |
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Quarter Ended June 30, 2009 | ||||||||||||||||
Energy-related Businesses | ||||||||||||||||
The Gas Company | District Energy | Atlantic Aviation | Total | |||||||||||||
Revenue from Product Sales | ||||||||||||||||
Product sales | $ | 18,390 | $ | — | $ | 71,040 | $ | 89,430 | ||||||||
Product sales – utility | 21,414 | — | — | 21,414 | ||||||||||||
39,804 | — | 71,040 | 110,844 | |||||||||||||
Service Revenue | ||||||||||||||||
Other services | — | 743 | 40,004 | 40,747 | ||||||||||||
Cooling capacity revenue | — | 5,110 | — | 5,110 | ||||||||||||
Cooling consumption revenue | — | 5,502 | — | 5,502 | ||||||||||||
— | 11,355 | 40,004 | 51,359 | |||||||||||||
Financing and Lease Income | ||||||||||||||||
Financing and equipment lease | — | 1,205 | — | 1,205 | ||||||||||||
— | 1,205 | — | 1,205 | |||||||||||||
Total Revenue | $ | 39,804 | $ | 12,560 | $ | 111,044 | $ | 163,408 |
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Six Months Ended June 30, 2010 | ||||||||||||||||
Energy-related Businesses | ||||||||||||||||
The Gas Company | District Energy | Atlantic Aviation | Total | |||||||||||||
Revenue from Product Sales | ||||||||||||||||
Product sales | $ | 49,546 | $ | — | $ | 195,649 | $ | 245,195 | ||||||||
Product sales – utility | 55,285 | — | — | 55,285 | ||||||||||||
104,831 | — | 195,649 | 300,480 | |||||||||||||
Service Revenue | ||||||||||||||||
Other services | — | 1,667 | 81,893 | 83,560 | ||||||||||||
Cooling capacity revenue | — | 10,533 | — | 10,533 | ||||||||||||
Cooling consumption revenue | — | 8,907 | — | 8,907 | ||||||||||||
— | 21,107 | 81,893 | 103,000 | |||||||||||||
Financing and Lease Income | ||||||||||||||||
Financing and equipment lease | — | 2,516 | — | 2,516 | ||||||||||||
— | 2,516 | — | 2,516 | |||||||||||||
Total Revenue | $ | 104,831 | $ | 23,623 | $ | 277,542 | $ | 405,996 |
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Six Months Ended June 30, 2009 | ||||||||||||||||
Energy-related Businesses | ||||||||||||||||
The Gas Company | District Energy | Atlantic Aviation | Total | |||||||||||||
Revenue from Product Sales | ||||||||||||||||
Product sales | $ | 39,465 | $ | — | $ | 139,157 | $ | 178,622 | ||||||||
Product sales – utility | 41,581 | — | — | 41,581 | ||||||||||||
81,046 | — | 139,157 | 220,203 | |||||||||||||
Service Revenue | ||||||||||||||||
Other services | — | 1,499 | 89,068 | 90,567 | ||||||||||||
Cooling capacity revenue | — | 10,007 | — | 10,007 | ||||||||||||
Cooling consumption revenue | — | 7,730 | — | 7,730 | ||||||||||||
— | 19,236 | 89,068 | 108,304 | |||||||||||||
Financing and Lease Income | ||||||||||||||||
Financing and equipment lease | — | 2,397 | — | 2,397 | ||||||||||||
— | 2,397 | — | 2,397 | |||||||||||||
Total Revenue | $ | 81,046 | $ | 21,633 | $ | 228,225 | $ | 330,904 |
In accordance with FASB ASC 280Segment Reporting, the Company has disclosed earnings before interest, taxes, depreciation and amortization (EBITDA) excluding non-cash items as a key performance metric relied on by management in the evaluation of the Company’s performance. Non-cash items include impairments, derivative gains and losses and adjustments for other non-cash items reflected in the statements of operations. The Company believes EBITDA excluding non-cash items provides additional insight into the performance of the 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. EBITDA excluding non-cash items is reconciled to net income or loss.
During the quarter and six months ended June 30, 2009, the Company disclosed EBITDA excluding only non-cash gains (losses) on derivative instruments. The following tables, reflecting results of operations for the consolidated group and for each of the businesses for the quarter and six months ended June 30, 2009, have been conformed to current periods’ presentation reflecting EBITDA excluding all non-cash items.
EBITDA excluding non-cash items for the Company’s consolidated reportable segments is shown in the tables below ($ in thousands) (unaudited). Allocation of corporate expense and the federal tax effect have been excluded as they are eliminated on consolidation.
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Quarter Ended June 30, 2010 | ||||||||||||||||
Energy-related Businesses | Atlantic Aviation | Total Reportable Segments | ||||||||||||||
The Gas Company | District Energy | |||||||||||||||
Net income (loss) | $ | 1,212 | $ | (2,705 | ) | $ | (8,538 | ) | $ | (10,031 | ) | |||||
Interest expense, net | 5,926 | 7,976 | 26,688 | 40,590 | ||||||||||||
Benefit (provision) for income taxes | 780 | (1,767 | ) | (5,764 | ) | (6,751 | ) | |||||||||
Depreciation | 1,511 | 1,636 | 5,691 | 8,838 | ||||||||||||
Amortization of intangibles | 205 | 341 | 8,194 | 8,740 | ||||||||||||
Other non-cash expense | 531 | 232 | 558 | 1,321 | ||||||||||||
EBITDA excluding non-cash items | $ | 10,165 | $ | 5,713 | $ | 26,829 | $ | 42,707 |
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Quarter Ended June 30, 2009 | ||||||||||||||||
Energy-related Businesses | Atlantic Aviation(1) | Total Reportable Segments | ||||||||||||||
The Gas Company | District Energy | |||||||||||||||
Net income (loss) | $ | 4,518 | $ | 3,514 | $ | (30,876 | ) | $ | (22,844 | ) | ||||||
Interest (income) expense, net | (1,249 | ) | (2,728 | ) | 4,936 | 959 | ||||||||||
Benefit (provision) for income taxes | 2,908 | 2,296 | (20,844 | ) | (15,640 | ) | ||||||||||
Depreciation | 1,520 | 1,502 | 7,750 | 10,772 | ||||||||||||
Amortization of intangibles | 212 | 341 | 11,979 | 12,532 | ||||||||||||
Goodwill impairment | — | — | 53,200 | 53,200 | ||||||||||||
Other non-cash expense (income) | 564 | 172 | (430 | ) | 306 | |||||||||||
EBITDA excluding non-cash items | $ | 8,473 | $ | 5,097 | $ | 25,715 | $ | 39,285 |
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Six Months Ended June 30, 2010 | ||||||||||||||||
Energy-related Businesses | Atlantic Aviation | Total Reportable Segments | ||||||||||||||
The Gas Company | District Energy | |||||||||||||||
Net income (loss) | $ | 3,466 | $ | (5,336 | ) | $ | (11,927 | ) | $ | (13,797 | ) | |||||
Interest expense, net | 10,733 | 14,004 | 48,674 | 73,411 | ||||||||||||
Benefit (provision) for income taxes | 2,231 | (3,487 | ) | (8,051 | ) | (9,307 | ) | |||||||||
Depreciation | 3,023 | 3,271 | 11,901 | 18,195 | ||||||||||||
Amortization of intangibles | 411 | 678 | 16,322 | 17,411 | ||||||||||||
Other non-cash expense | 1,065 | 387 | 605 | 2,057 | ||||||||||||
EBITDA excluding non-cash items | $ | 20,929 | $ | 9,517 | $ | 57,524 | $ | 87,970 |
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Six Months Ended June 30, 2009 | ||||||||||||||||
Energy-related Businesses | Atlantic Aviation(1) | Total Reportable Segments | ||||||||||||||
The Gas Company | District Energy | |||||||||||||||
Net income (loss) | $ | 7,633 | $ | 1,868 | $ | (80,482 | ) | $ | (70,981 | ) | ||||||
Interest expense, net | 1,368 | 227 | 31,440 | 33,035 | ||||||||||||
Benefit (provision) for income taxes | 4,913 | 1,221 | (54,330 | ) | (48,196 | ) | ||||||||||
Depreciation | 2,996 | 2,965 | 19,424 | 25,385 | ||||||||||||
Amortization of intangibles | 426 | 678 | 41,693 | 42,797 | ||||||||||||
Goodwill impairment | — | — | 71,200 | 71,200 | ||||||||||||
Loss on derivative instruments | 327 | 1,378 | 23,331 | 25,036 | ||||||||||||
Other non-cash expense (income) | 1,015 | 276 | (367 | ) | 924 | |||||||||||
EBITDA excluding non-cash items | $ | 18,678 | $ | 8,613 | $ | 51,909 | $ | 79,200 |
Reconciliations of consolidated reportable segments’ EBITDA excluding non-cash items to consolidated net loss from continuing operations before income taxes are as follows ($ in thousands) (unaudited):
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Quarter Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Total reportable segments EBITDA excluding non-cash items | $ | 42,707 | $ | 39,285 | $ | 87,970 | $ | 79,200 | ||||||||
Interest income | 4 | 34 | 20 | 101 | ||||||||||||
Interest expense | (38,974 | ) | (2,103 | ) | (73,661 | ) | (35,669 | ) | ||||||||
Depreciation(1) | (8,838 | ) | (10,772 | ) | (18,195 | ) | (25,385 | ) | ||||||||
Amortization of intangibles(2) | (8,740 | ) | (12,532 | ) | (17,411 | ) | (42,797 | ) | ||||||||
Selling, general and administrative – corporate | (1,628 | ) | (1,417 | ) | (3,608 | ) | (4,348 | ) | ||||||||
Fees to manager | (2,268 | ) | (851 | ) | (4,457 | ) | (1,313 | ) | ||||||||
Equity in earnings and amortization charges of investees | 5,774 | 10,028 | 11,367 | 15,477 | ||||||||||||
Goodwill impairment | — | (53,200 | ) | — | (71,200 | ) | ||||||||||
Loss on derivative instruments | — | — | — | (25,238 | ) | |||||||||||
Other (expense) income, net | (1,125 | ) | (132 | ) | (1,667 | ) | 512 | |||||||||
Total consolidated net loss from continuing operations before income taxes | $ | (13,088 | ) | $ | (31,660 | ) | $ | (19,642 | ) | $ | (110,660 | ) |
Capital expenditures for the Company’s reportable segments were as follows ($ in thousands) (unaudited):
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Quarter Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
The Gas Company | $ | 1,555 | $ | 1,716 | $ | 3,886 | $ | 3,581 | ||||||||
District Energy | 500 | 1,784 | 846 | 3,403 | ||||||||||||
Atlantic Aviation | 1,247 | 1,635 | 2,583 | 4,880 | ||||||||||||
Total | $ | 3,302 | $ | 5,135 | $ | 7,315 | $ | 11,864 |
Property, equipment, land and leasehold improvements, goodwill and total assets for the Company’s reportable segments as of June 30 were as follows ($ in thousands) (unaudited):
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Property, Equipment, Land and Leasehold Improvements | Goodwill | Total Assets | ||||||||||||||||||||||
2010 | 2009(1) | 2010(2) | 2009(2) | 2010 | 2009 | |||||||||||||||||||
The Gas Company | $ | 143,641 | $ | 143,251 | $ | 120,193 | $ | 120,193 | $ | 352,623 | $ | 336,565 | ||||||||||||
District Energy | 148,882 | 146,837 | 18,646 | 18,646 | 231,081 | 228,510 | ||||||||||||||||||
Atlantic Aviation | 276,670 | 289,275 | 377,343 | 377,343 | 1,452,519 | 1,505,430 | ||||||||||||||||||
Total | $ | 569,193 | $ | 579,363 | $ | 516,182 | $ | 516,182 | $ | 2,036,223 | $ | 2,070,505 |
Reconciliation of reportable segments’ total assets to consolidated total assets ($ in thousands) (unaudited):
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As of June 30, | ||||||||
2010 | 2009 | |||||||
Total assets of reportable segments | $ | 2,036,223 | $ | 2,070,505 | ||||
Investment in IMTT | 213,858 | 200,408 | ||||||
Assets of discontinued operations held for sale | — | 95,148 | ||||||
Corporate and other | (17,905 | ) | (8,699 | ) | ||||
Total consolidated assets | $ | 2,232,176 | $ | 2,357,362 |
As of June 30, 2010, the Manager held 3,797,557 LLC interests of the Company, which were acquired concurrently with the closing of the initial public offering in December 2004 and by reinvesting base management and performance fees in the Company. In addition, the Macquarie Group held LLC interests acquired in open market purchases.
The Company entered into a management services agreement, or Management Agreement, with the Manager pursuant to which the Manager manages the Company’s day-to-day operations and oversees the management teams of the Company’s operating businesses. In addition, the Manager has the right to appoint the Chairman of the Board of the Company, and an alternate, subject to minimum equity ownership, and to
assign, or second, to the Company, on a permanent and wholly-dedicated basis, employees to assume the role of Chief Executive Officer and Chief Financial Officer and second or make other personnel available as required.
In accordance with the Management Agreement, the Manager is entitled to a quarterly base management fee based primarily on the Company’s market capitalization, and a performance fee, based on the performance of the Company’s stock relative to a U.S. utilities index. For the six months ended June 30, 2010 and 2009, the Company incurred base management fees of $4.5 million and $1.3 million, respectively. The unpaid portion of the fees at the end of each reporting period is included in due to manager-related party in the consolidated condensed balance sheets. The Manager elected to reinvest the base management fee of $2.2 million for the first quarter of 2010 in LLC interests and the Company issued 155,375 LLC interests to the Manager during the second quarter of 2010. The base management fee of $2.3 million for the second quarter of 2010 will be paid in cash during the third quarter of 2010.
The Manager is not entitled to any other compensation and all costs incurred by the Manager, including compensation of seconded staff, are paid by the Manager out of its management fee. However, the Company is responsible for other direct costs including, but not limited to, expenses incurred in the administration or management of the Company and its subsidiaries and investments, income taxes, audit and legal fees, acquisitions and dispositions and its compliance with applicable laws and regulations. During the six months ended June 30, 2010 and 2009, the Manager charged the Company $169,000 and $136,000, respectively, for reimbursement of out-of-pocket expenses. The unpaid portion of the out-of-pocket expenses at the end of the reporting period is included in due to manager-related party in the consolidated condensed balance sheet.
The Macquarie Group, and wholly-owned subsidiaries within the Macquarie Group, including Macquarie Bank Limited, or MBL, and Macquarie Capital (USA) Inc., or MCUSA, have provided various advisory and other services and incurred expenses in connection with the Company’s equity raising activities, acquisitions and debt structuring for the Company and its businesses. Underwriting fees are recorded in members’ equity as a direct cost of equity offerings. Advisory fees and out-of-pocket expenses relating to acquisitions are expensed as incurred. Debt arranging fees are deferred and amortized over the term of the credit facility. Amounts relating to these transactions comprise the following ($ in thousands):
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Strategic review of alternatives available to the Company – advisory services from MCUSA | $ | 500 |
Until March 31, 2010, the Company had a revolving credit facility provided by various financial institutions, including entities within the Macquarie Group. The facility was repaid in full during 2009 and no amounts were outstanding under the revolving credit facility as of December 31, 2009 or at the facility’s
maturity on March 31, 2010. Amounts relating to the Macquarie Group’s portion of this revolving credit facility comprised of the following ($ in thousands):
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Revolving credit facility commitment provided by Macquarie Group during January 1, 2010 through March 30, 2010(1) | $ | 4,444 | ||||||
Revolving credit facility commitment provided by Macquarie Group at March 31, 2010(2) | — | |||||||
Portion of revolving credit facility commitment from Macquarie Group drawn down, as of March 31, 2010(2)(3) | — | |||||||
Interest expense on Macquarie Group portion of the drawn down commitment, for the quarter ended March 31, 2010 | — | |||||||
Commitment fees to the Macquarie Group, for quarter ended March 31, 2010 | 5 |
The Company has derivative instruments in place to fix the interest rate on certain outstanding variable-rate term loan facilities. MBL has provided interest rate swaps for Atlantic Aviation and The Gas Company. At June 30, 2010, Atlantic Aviation had $786.6 million of its variable-rate term loans hedged, of which MBL provided the interest rate swaps for a notional amount of $278.8 million. The remainder of the swaps are from an unrelated third party. During the six months ended June 30, 2010, Atlantic Aviation made net payments to MBL of $7.0 million in relation to these swaps.
As discussed in Note 9, “Long-Term Debt”, for the six months ended June 30, 2010, Atlantic Aviation paid $3.2 million in interest rate swap breakage fees, of which $383,000 was paid to MBL.
In August 2010, Atlantic Aviation used $9.9 million of excess cash flow to prepay $9.0 million of the outstanding principal balance of the term loan debt and incurred $935,000 in interest rate swap breakage fees, of which $65,000 was paid to MBL.
At June 30, 2010, The Gas Company had $160.0 million of its term loans hedged, of which MBL provided the interest rate swaps for a notional amount of $48.0 million. The remainder of the swaps are from an unrelated third party. During the six months ended June 30, 2010, The Gas Company made net payments to MBL of $1.1 million in relation to these swaps.
On March 30, 2009, The Gas Company entered into licensing agreements with Utility Service Partners, Inc. and America’s Water Heater Rentals, LLC, both indirect subsidiaries of Macquarie Group Limited, to enable these entities to offer products and services to The Gas Company’s customer base. No payments were made under these arrangements during the six months ended June 30, 2010.
On August 29, 2008, Macquarie Global Opportunities Partners, or MGOP, a private equity fund managed by the Macquarie Group, completed the acquisition of the jet membership, retail charter and fuel management business units previously owned by Sentient Jet Holdings, LLC. The new company is called Sentient Flight Group (referred to hereafter as “Sentient”). Sentient was an existing customer of Atlantic Aviation. For the six
months ended June 30, 2010, Atlantic Aviation recorded $8.4 million in revenue from Sentient. As of June 30, 2010, Atlantic Aviation had $132,000 in receivables from Sentient, which is included in accounts receivable in the consolidated condensed balance sheets. During the quarter ended June 30, 2010, Atlantic Aviation paid $15,000 to Sentient for charter services rendered.
In addition, the Company and several of its subsidiaries have entered into a licensing agreement with the Macquarie Group related to the use of the Macquarie name and trademark. The Macquarie Group does not charge the Company any fees for this license.
The Company expects to incur a net operating loss for federal consolidated income tax purposes for the year ending December 31, 2010. The Company believes that it will be able to utilize the projected federal and certain state consolidated 2010 and prior year net operating losses. Accordingly, the Company has not provided a valuation allowance against any deferred tax assets generated in 2010, except as noted below. Two of the Company’s businesses, IMTT and District Energy, are less than 80% owned by the Company, and those businesses file separate federal consolidated income tax returns.
In the first six months of 2010, the Company revised the valuation allowance from $20.6 million at December 31, 2009 to $8.0 million, a decrease of $12.6 million. Approximately $2.6 million of this decrease was recorded in benefit for income taxes from continuing operations in the consolidated condensed statements of operations during the six months ended June 30, 2010, and the remaining $10.0 million decrease recorded in discontinued operations.
As discussed in Note 5, “Discontinued Operations”, as a result of the approval of the sale of PCAA's assets in bankruptcy and the expected dissolution of PCAA during 2010, the Company has reduced its valuation allowance on the realization of a portion of the deferred tax assets attributable to its basis in PCAA and its consolidated federal net operating loss.
The Company and its subsidiaries file separate and combined state income tax returns. In calculating its consolidated projected effective state tax rate for 2010, the Company has taken into consideration an expected need to provide a valuation allowance for certain state income tax net operating loss carryforwards, the utilization of which is not assured beyond a reasonable doubt. In addition, the Company and its subsidiaries expect to incur certain expenses that will not be deductible in determining state taxable income. Accordingly, these expenses have also been excluded in projecting the Company’s effective state tax rate.
At December 31, 2009, the Company and its subsidiaries had a reserve of approximately $336,000 for benefits taken during 2009 and prior tax periods attributable to tax positions for which the probability of recognition is considered to be less than more likely than not. There was no material change in that reserve as of June 30, 2010, and no material change is expected for the year ended December 31, 2010.
There are no material legal proceedings other than as disclosed in Part I, Item 3 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009, filed with the SEC on February 25, 2010.
The following discussion of the financial condition and results of operationsoperation of Macquarie Infrastructure Company LLC (“the CompanyCompany” or “MIC”) should be read in conjunction with the consolidated condensed financial statements and the notes to those statements included elsewhere herein.
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.
On August 1, 2011, our board of directors declared a dividend of $0.20 per share for the quarter ended June 30, 2011, which will be paid on August 18, 2011 to holders of record on August 15, 2011. On May 18, 2011, we paid a dividend of $0.20 per share for the quarter ended March 31, 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.
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 Service. Any portion that is characterized as a return of capital for tax purposes would 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.
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 wholly 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 has become 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.
Our energy-related businesses were largely resistant to the recent economic downturn, primarily due 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.
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 is reinvesting proceeds into markets which it views as having better growth profiles. Accordingly, Atlantic Aviation recorded a $1.2 million non-cash loss on disposal of assets.
On June 21, 2011, Atlantic Aviation opened its newest facility at Will Rogers Airport in Oklahoma City. On July 13, 2011, Atlantic Aviation entered into an asset purchase agreement for FBOs at the Portland International and Eugene airports in Oregon. This acquisition will expand the business’ network into the Pacific Northwest and follows the successful sale of smaller FBOs during the quarter and six months ended June 30, 2011. The transaction reflects reinvestment of proceeds from these sales. Subject to the satisfaction of the conditions precedent in the purchase agreement, including consent of the relevant airport authorities, Atlantic Aviation expects to close the transaction in August.
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, the distribution 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% dividend received deduction.
As a result of having federal net operating loss, or NOL, carryforwards, we do not expect to have consolidated regular federal taxable income or regular federal tax payments at least through the 2013 tax year. However, we expect to pay an Alternative Minimum Tax of approximately $409,000 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.
In December 2010, the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (the “Act”) was signed. The Act provides for 100% bonus depreciation for certain fixed assets placed in service after September 8, 2010 and before January 1, 2012, and 50% bonus depreciation for certain fixed assets placed in service during 2012 for federal income tax purposes. Generally, states do not allow this bonus depreciation deduction in determining state taxable income. Importantly, Illinois and Louisiana, two states in which we have significant operations, do permit the use of bonus depreciation 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.
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 six months ended June 30, 2011, reflects a change in the deferred tax liability of this business to reflect the change in Illinois law.
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 a 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. We received $602,000 from the PCAA bankruptcy estate for expenses paid on behalf of PCAA during its operations. See Note 5,4, “Discontinued Operations”, in our consolidated condensed financial statements in Part I Item 1 of this Form 10-Q for financial information and further discussions.
Our infrastructure businesses generally operate in sectors with limited competition and 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.
Our energy-related businesses have proven, to date, largely resistant to the recent economic downturn, primarily due 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.
The results of Atlantic Aviation have been negatively affected since mid-2008 by the slower economy and declining general aviation activity levels through mid-2009. However, general aviation activity levels stabilized in the second half of 2009 and showed year on year growth in December 2009 and through the second quarter of 2010. This stabilization, combined with expense reduction efforts, results in an improving outlook for the business.
We will continue to apply excess cash flow generated by Atlantic Aviation to the reduction of that business’ term loan principal, consistent with the amendments to the debt facility that we agreed to in February 2009. In addition to maintaining compliance with agreed upon covenants, such repayments further enables us to be able to successfully refinance this debt when it matures in 2014. We expect that we will have further excess cash of $30.0 million to $40.0 million prior to the end of 2010. We intend to pursue a two-part strategy over the next several months with respect to deployment of the potentially excess cash. First, we will engage with lenders with the objective of pre-paying a portion of our long-term debt on favorable terms. Second, we will explore alternatives to return the excess cash to shareholders, including an undertaking analysis of an appropriate share repurchase program. We are neutral as to whether the cash is used to pre-pay debt or repurchase shares, assuming the benefit to shareholders is comparable.
Until March 31, 2010, the Company had a revolving credit facility provided by various financial institutions, including entities within the Macquarie Group. The facility was repaid in full in December 2009 and no amounts were outstanding under the revolving credit facility as of December 31, 2009 or at the facility’s maturity on March 31, 2010.
We file a consolidated federal income tax return that includes the taxable income of all our businesses, except IMTT and District Energy, which businesses will file separate income tax returns. We will include in our taxable income the taxable portion of any distributions from those businesses, which qualify for the 80% dividends received deduction.
As a result of available federal net operating loss carryforwards, we do not expect to have consolidated regular federal taxable income or regular federal tax payments at least through the 2012 tax year. 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.
Our consolidated results of operations are as follows:
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Quarter Ended June 30, | Change (from 2009 to 2010) Favorable/(Unfavorable) | Six Months Ended June 30, | Change (from 2009 to 2010) Favorable/(Unfavorable) | Quarter Ended June 30, | Change Favorable/(Unfavorable) | Six Months Ended June 30, | Change Favorable/(Unfavorable) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2010 | 2009 (1) | $ | % | 2010 | 2009 (1) | $ | % | 2011 | 2010 | $ | % | 2011 | 2010 | $ | % | |||||||||||||||||||||||||||||||||||||||||||||||||
($ in Thousands) (Unaudited) | ($ In Thousands) (Unaudited) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Revenue | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Revenue from product sales | $ | 125,177 | $ | 89,430 | 35,747 | 40.0 | $ | 245,195 | $ | 178,622 | 66,573 | 37.3 | $ | 161,582 | $ | 125,177 | 36,405 | 29.1 | $ | 314,646 | $ | 245,195 | 69,451 | 28.3 | ||||||||||||||||||||||||||||||||||||||||
Revenue from product sales – utility | 28,450 | 21,414 | 7,036 | 32.9 | 55,285 | 41,581 | 13,704 | 33.0 | 36,421 | 28,450 | 7,971 | 28.0 | 70,694 | 55,285 | 15,409 | 27.9 | ||||||||||||||||||||||||||||||||||||||||||||||||
Service revenue | 49,794 | 51,359 | (1,565 | ) | (3.0 | ) | 103,000 | 108,304 | (5,304 | ) | (4.9 | ) | 47,923 | 49,794 | (1,871 | ) | (3.8 | ) | 99,170 | 103,000 | (3,830 | ) | (3.7 | ) | ||||||||||||||||||||||||||||||||||||||||
Financing and equipment lease income | 1,271 | 1,205 | 66 | 5.5 | 2,516 | 2,397 | 119 | 5.0 | 1,261 | 1,271 | (10 | ) | (0.8 | ) | 2,548 | 2,516 | 32 | 1.3 | ||||||||||||||||||||||||||||||||||||||||||||||
Total revenue | 204,692 | 163,408 | 41,284 | 25.3 | 405,996 | 330,904 | 75,092 | 22.7 | 247,187 | 204,692 | 42,495 | 20.8 | 487,058 | 405,996 | 81,062 | 20.0 | ||||||||||||||||||||||||||||||||||||||||||||||||
Costs and expenses | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cost of product sales | 79,887 | 50,645 | (29,242 | ) | (57.7 | ) | 156,941 | 100,411 | (56,530 | ) | (56.3 | ) | 113,226 | 79,887 | (33,339 | ) | (41.7 | ) | 218,551 | 156,941 | (61,610 | ) | (39.3 | ) | ||||||||||||||||||||||||||||||||||||||||
Cost of product sales – utility | 23,151 | 16,549 | (6,602 | ) | (39.9 | ) | 44,464 | 31,936 | (12,528 | ) | (39.2 | ) | 30,772 | 23,151 | (7,621 | ) | (32.9 | ) | 57,637 | 44,464 | (13,173 | ) | (29.6 | ) | ||||||||||||||||||||||||||||||||||||||||
Cost of services | 13,318 | 11,069 | (2,249 | ) | (20.3 | ) | 24,463 | 22,140 | (2,323 | ) | (10.5 | ) | 12,690 | 13,318 | 628 | 4.7 | 24,844 | 24,463 | (381 | ) | (1.6 | ) | ||||||||||||||||||||||||||||||||||||||||||
Gross profit | 88,336 | 85,145 | 3,191 | 3.7 | 180,128 | 176,417 | 3,711 | 2.1 | 90,499 | 88,336 | 2,163 | 2.4 | 186,026 | 180,128 | 5,898 | 3.3 | ||||||||||||||||||||||||||||||||||||||||||||||||
Selling, general and administrative | 49,522 | 48,725 | (797 | ) | (1.6 | ) | 100,256 | 104,868 | 4,612 | 4.4 | 48,309 | 49,522 | 1,213 | 2.4 | 99,979 | 100,256 | 277 | 0.3 | ||||||||||||||||||||||||||||||||||||||||||||||
Fees to manager – related party | 2,268 | 851 | (1,417 | ) | (166.5 | ) | 4,457 | 1,313 | (3,144 | ) | NM | 4,156 | 2,268 | (1,888 | ) | (83.2 | ) | 7,788 | 4,457 | (3,331 | ) | (74.7 | ) | |||||||||||||||||||||||||||||||||||||||||
Goodwill impairment | — | 53,200 | 53,200 | NM | — | 71,200 | 71,200 | NM | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Depreciation | 7,202 | 9,270 | 2,068 | 22.3 | 14,924 | 22,420 | 7,496 | 33.4 | 8,623 | 7,202 | (1,421 | ) | (19.7 | ) | 15,833 | 14,924 | (909 | ) | (6.1 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Amortization of intangibles | 8,740 | 12,532 | 3,792 | 30.3 | 17,411 | 42,797 | 25,386 | 59.3 | 16,044 | 8,740 | (7,304 | ) | (83.6 | ) | 24,763 | 17,411 | (7,352 | ) | (42.2 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Loss on disposal of assets | 1,225 | — | (1,225 | ) | NM | 1,225 | — | (1,225 | ) | NM | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total operating expenses | 67,732 | 124,578 | 56,846 | 45.6 | 137,048 | 242,598 | 105,550 | 43.5 | 78,357 | 67,732 | (10,625 | ) | (15.7 | ) | 149,588 | 137,048 | (12,540 | ) | (9.2 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Operating income (loss) | 20,604 | (39,433 | ) | 60,037 | 152.3 | 43,080 | (66,181 | ) | 109,261 | 165.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Operating income | 12,142 | 20,604 | (8,462 | ) | (41.1 | ) | 36,438 | 43,080 | (6,642 | ) | (15.4 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Other income (expense) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest income | 4 | 34 | (30 | ) | (88.2 | ) | 20 | 101 | (81 | ) | (80.2 | ) | 97 | 4 | 93 | NM | 101 | 20 | 81 | NM | ||||||||||||||||||||||||||||||||||||||||||||
Interest expense | (38,974 | ) | (2,103 | ) | (36,871 | ) | NM | (73,661 | ) | (35,669 | ) | (37,992 | ) | (106.5 | ) | (19,866 | ) | (38,974 | ) | 19,108 | 49.0 | (34,335 | ) | (73,661 | ) | 39,326 | 53.4 | |||||||||||||||||||||||||||||||||||||
Equity in earnings and amortization charges of investees | 5,774 | 10,028 | (4,254 | ) | (42.4 | ) | 11,367 | 15,477 | (4,110 | ) | (26.6 | ) | 3,270 | 5,774 | (2,504 | ) | (43.4 | ) | 11,632 | 11,367 | 265 | 2.3 | ||||||||||||||||||||||||||||||||||||||||||
Loss on derivative instruments | — | — | — | — | — | (25,238 | ) | 25,238 | NM | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other (expense) income, net | (496 | ) | (186 | ) | (310 | ) | (166.7 | ) | (448 | ) | 850 | (1,298 | ) | (152.7 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Net loss from continuing operations before income taxes | (13,088 | ) | (31,660 | ) | 18,572 | 58.7 | (19,642 | ) | (110,660 | ) | 91,018 | 82.3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Benefit for income taxes | 13,488 | 4,822 | 8,666 | 179.7 | 14,577 | 37,387 | (22,810 | ) | (61.0 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income (loss) from continuing operations | $ | 400 | $ | (26,838 | ) | 27,238 | 101.5 | $ | (5,065 | ) | $ | (73,273 | ) | 68,208 | 93.1 | |||||||||||||||||||||||||||||||||||||||||||||||||
Net income (loss) from discontinued operations, net of taxes | 85,212 | (3,159 | ) | 88,371 | NM | 81,199 | (9,583 | ) | 90,782 | NM | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income (loss) | $ | 85,612 | $ | (29,997 | ) | 115,609 | NM | $ | 76,134 | $ | (82,856 | ) | 158,990 | 191.9 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Other expense, net | (46 | ) | (496 | ) | 450 | 90.7 | (395 | ) | (448 | ) | 53 | 11.8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Net (loss) income from continuing operations before income taxes | (4,403 | ) | (13,088 | ) | 8,685 | 66.4 | 13,441 | (19,642 | ) | 33,083 | 168.4 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Benefit (provision) for income taxes | 488 | 13,488 | (13,000 | ) | (96.4 | ) | (6,498 | ) | 14,577 | (21,075 | ) | (144.6 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||
Net (loss) income from continuing operations | $ | (3,915 | ) | $ | 400 | (4,315 | ) | NM | $ | 6,943 | $ | (5,065 | ) | 12,008 | NM | |||||||||||||||||||||||||||||||||||||||||||||||||
Net income from discontinued operations, net of taxes | — | 85,212 | (85,212 | ) | (100.0 | ) | — | 81,199 | (81,199 | ) | (100.0 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Net (loss) income | $ | (3,915 | ) | $ | 85,612 | (89,527 | ) | (104.6 | ) | $ | 6,943 | $ | 76,134 | (69,191 | ) | (90.9 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
Less: net loss attributable to noncontrolling interests | (238 | ) | (1,039 | ) | (801 | ) | (77.1 | ) | (1,351 | ) | (872 | ) | 479 | 54.9 | (1,425 | ) | (238 | ) | 1,187 | NM | (1,732 | ) | (1,351 | ) | 381 | 28.2 | ||||||||||||||||||||||||||||||||||||||
Net income (loss) attributable to MIC LLC | $ | 85,850 | $ | (28,958 | ) | 114,808 | NM | $ | 77,485 | $ | (81,984 | ) | 159,469 | 194.5 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Net (loss) income attributable to MIC LLC | $ | (2,490 | ) | $ | 85,850 | (88,340 | ) | (102.9 | ) | $ | 8,675 | $ | 77,485 | (68,810 | ) | (88.8 | ) |
NM — Not meaningful
(1) |
Interest expense includes non-cash losses on derivative instruments of $545,000 and non-cash gains on derivatives of $5.0 million for the quarter and six months ended June 30, 2011, respectively. For the quarter and six months ended June 30, 2010, interest expense includes includes non-cash losses on derivative instruments of $20.5 million and $31.7 |
Consolidated gross profit increased reflecting improved results at our energy-related businesses andfor fuel-related services at Atlantic Aviation and The Gas Company, partially offset by a decrease in non-fuel gross profit fromrelated services at Atlantic Aviation.
Selling, general and administrative expenses for the six months ended June 30, 2010 decreased primarily as result of cost reduction efforts at Atlantic Aviation and at The Gas Company. Selling, general and administrative expenses at Atlantic Aviation decreased primarily due to lower rent expense resulting from the sale of non-core FBOs, partially offset by increases forhigher motor fuel costs and higher weather-related expense in the first quarter of 2011. Selling, general and six months ended June 30, 2010administrative expenses at our consolidated energy-related businesses.The Gas Company decreased primarily due to increased allocation of labor costs to capital projects, partially offset by higher professional fees.
Base management fees to our Manager increased due to higherin line with our increased market capitalization. Our Manager elected to reinvest its first quarter 2011 base management fee of $3.6 million in additional LLC interests and 144,742 LLC interests were issued to our Manager on June 6, 2011. Our Manager has elected to reinvest its second quarter 2011 base management fee of $4.2 million in additional LLC interests. These LLC interests will be issued during the third quarter of 2011.
Our Manager elected to reinvest its first quarter 2010 base management fees of $2.2 million in additional LLC interests.interests and 155,375 LLC interests for the first quarter of 2010 were issued to our Manager during the second quarter ofon June 11, 2010. The base management fee in the amount of $2.3 million for the second quarter of 2010 will bewas paid in cash to our Manager during the third quarter of 2010.
The increase in depreciation primarily reflects the non-cash asset impairment charge of $1.4 million recorded at Atlantic Aviation during the quarter ended June 30, 2011. The impairment charge resulted from adverse conditions specific to three small locations.
The increase in amortization of intangibles expense reflects the non-cash impairment charge of $7.3 million recorded at Atlantic Aviation during the quarter ended June 30, 2011. The impairment charge resulted from adverse conditions specific to three small locations.
During the quarter and the six months ended June 30, 2009, we recognized2011, Atlantic Aviation concluded that several of its sites did not have sufficient scale or serve a goodwill impairment chargesmarket with sufficiently strong growth prospects to warrant continued operations at these sites. Atlantic Aviation has sold certain FBOs and is reinvesting proceeds into markets which it views as having better growth profiles. Accordingly, Atlantic Aviation recorded a $1.2 million non-cash loss on disposal of $53.2assets.
Interest expense includes non-cash losses on derivative instruments of $545,000 and non-cash gains on derivative instruments of $5.0 million and $71.2 million, respectively, at Atlantic Aviation. There were no impairment charges in 2010.
The decrease in depreciation reflects non-cash asset impairment charges of $2.2 million and $7.5 million recorded duringfor the quarter and six months ended June 30, 2009,2011, respectively, at Atlantic Aviation.
The decrease in amortization of intangibles expense reflects non-cash asset impairment charges of $2.9 million and $23.3 million recorded by Atlantic Aviation during the quarter and six months ended June 30, 2009, respectively. The impairments reduced the amortizable balance and the amount of amortization expense in 2010.
Interest expense, net, includes non-cash losses on derivative instruments of $20.5 million and $31.7 million for the quarter and six months ended June 30, 2010, respectively. For the quarter and six months ended June 30, 2009, interest expense, net, includes non-cash gains on derivative instruments of $20.1 million and $13.1 million, respectively.
The increasechange in the non-cash losses(losses) gains on derivatives recorded both in interest expense and in loss on derivative instruments 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, as Atlantic Aviation pays down its debt more quickly than anticipated.
earnings. Excluding the portion related to non-cash losses(losses) gains on derivatives, interest expense decreased primarily due to a $113.4 million reduction of term loan debtlower principal balance at Atlantic Aviation, partially offset by the repaymentexpiration of an interest rate basis swap agreement in the full amountMarch 2010 at each of the outstanding balance of $66.4 million of MIC holding company debt during December 2009 and a decrease in interest rate swap break fees associated with the debt prepayments at Atlantic Aviation.
Our equity in the earnings of IMTT decreased reflecting our share of the non-cash derivative losses in 2010 compared with our share of non-cash derivative gains in 2009, offset by improvedconsolidated operating results of the business.businesses.
The decrease in equity in the earnings of IMTT, predominantly in the quarter ended June 30, 2011, primarily reflects our share of the decrease in operating results of the business, partially offset by lower non-cash derivative losses compared with 2010.
Tax provision on continuing operations:
For 2010,2011, we expect tothat any consolidated taxable income we report a consolidated federal net operating loss, for which we will record a deferred tax benefit, andbe fully offset by our NOL carryforwards. For 2011, we expect to pay a nominal federal Alternative Minimum Tax.Tax of approximately $409,000.
As we own less than 80% of IMTT and District Energy, these businesses are not included in our consolidated federal tax return. These businesses file separate consolidated income tax returns, and we include the20% of any dividends received from IMTT and District Energy in our consolidated income tax return. Further, we expect that any dividends from IMTT and District Energy in 20102011 will be treated as taxable dividends whichand qualify for the 80% Dividends Received Deduction (DRD).
The following table reconciles our net lossincome from continuing operations before income taxes and noncontrolling interests to our federal taxable lossincome for the six months ended June 30, 20102011 ($ in thousands):
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Net loss from continuing operations before income taxes and noncontrolling interests | $ | (19.6 | ) | |||||
Net income from continuing operations before income taxes and noncontrolling interests | $ | 13,441 | ||||||
Adjustments for less than 80% owned businesses | (11.0 | ) | (398 | ) | ||||
State income taxes | 1.9 | (2,100 | ) | |||||
Other adjustments | (0.2 | ) | 1,623 | |||||
Taxable loss for the six months ended June 30, 2010 | $ | (28.9 | ) | |||||
Federal book taxable income for the six months ended June 30, 2011 | $ | 12,566 | ||||||
Accordingly, our tax expense for the six months ended June 30, 2011 is as follows: | ||||||||
Federal tax at 35% of the taxable income | $ | 4,398 | ||||||
State income tax expense | 2,100 | |||||||
Total tax provision | $ | 6,498 |
Accordingly, our tax benefit for the six months ended June 30, 2010 is as follows ($ in thousands):
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Federal tax benefit at 35% on the tax loss for the six months ended June 30, 2010 | $ | 10.1 | ||
Reduction in valuation allowance (discussed below) | 2.6 | |||
State income tax benefit | 1.9 | |||
Total tax benefit | $ | 14.6 |
In determining the effective tax rate for the six months ended June 30, 2009, we excluded the write-down to fair value of certain assets from ordinary income. Further, approximately $13.5 million of the write-down was attributable to goodwill and was a permanent book-tax difference, for which no tax benefit was recognized.
Valuation allowance:
As discussed in Note 18,17, “Income Taxes” in our consolidated financial statements, in Part II, Item 8 of our Form 10-K for 2009,2010, 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, 2009,2010, our valuation allowance was approximately $20.6$9.2 million. In calculating our consolidated income tax provision for the six months ended June 30, 2011, we did not provide for an increase in the valuation allowance.
During the six months ended June 30, 2010, we reduced the valuation allowance toby approximately $8.0 million, resulting in a$2.6 million. This decrease of $12.6 million. Of this decrease, $2.6 million has beenwas recorded as part of the benefit for income taxes included in continuing operations on the consolidated condensed statements of operations. The remaining balance of the decrease of $10.0 million is included in net income from discontinued operations.
In calculating our consolidated state income tax provision, we have provided a valuation allowance for certain state income tax NOL carryforwards, the utilization of which is not assured beyond a reasonable doubt. In addition, we expect to incur certain expenses that will not be deductible in determining state taxable income. Accordingly, these expenses have also been excluded in determining our state income tax expense.
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 a discontinued operations in our consolidated condensed financial statements and prior comparable periods have been restated to conform to the current period presentation.statements. See Note 5,4, “Discontinued Operations”, in our consolidated condensed financial statements in Part I Item 1 of this Form 10-Q for financial information and further discussions.
In accordance with GAAP, we have disclosed EBITDA excluding non-cash items for our Company and each of our operating segments in Note 13,11, “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 non-cashnoncash 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.
In the quarter and six months ended June 30, 2009, we disclosed EBITDA excluding only non-cash gains (losses) on derivative instruments. The following tables, reflecting results of operations for the consolidated group and for our businesses for the quarter and six months ended June 30, 2009, have been conformed to current periods’ presentation reflecting EBITDA excluding all non-cash items and Free Cash Flow.
A reconciliation of net (loss) income (loss) attributable to MIC LLC from continuing operations to free cash flowEBITDA 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 June 30, | Change (from 2009 to 2010) Favorable/(Unfavorable) | Six Months Ended June 30, | Change (from 2009 to 2010) Favorable/(Unfavorable) | Quarter Ended June 30, | Change Favorable/(Unfavorable) | Six Months Ended June 30, | Change Favorable/(Unfavorable) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2010 | 2009(1) | $ | % | 2010 | 2009(1) | $ | % | 2011 | 2010 | $ | % | 2011 | 2010 | $ | % | |||||||||||||||||||||||||||||||||||||||||||||||||
($ in Thousands) (Unaudited) | ($ In Thousands) (Unaudited) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income (loss) attributable to MIC LLC from continuing operations(2) | $ | 940 | $ | (27,012 | ) | $ | (3,578 | ) | $ | (73,614 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest expense, net(3) | 38,970 | 2,069 | 73,641 | 35,568 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Benefit for income taxes | (13,488 | ) | (4,822 | ) | (14,577 | ) | (37,387 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net (loss) income attributable to MIC LLC from continuing operations(1) | $ | (2,490 | ) | $ | 940 | $ | 8,675 | $ | (3,578 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest expense, net(2) | 19,769 | 38,970 | 34,234 | 73,641 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Benefit) provision for income taxes | (488 | ) | (13,488 | ) | 6,498 | (14,577 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Depreciation | 7,202 | 9,270 | 14,924 | 22,420 | 8,623 | 7,202 | 15,833 | 14,924 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Depreciation – cost of services | 1,636 | 1,502 | 3,271 | 2,965 | 1,658 | 1,636 | 3,305 | 3,271 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Amortization of intangibles | 8,740 | 12,532 | 17,411 | 42,797 | 16,044 | 8,740 | 24,763 | 17,411 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Goodwill impairment | — | 53,200 | — | 71,200 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loss on derivative instruments | — | — | — | 25,238 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity in earnings and amortization charges of investees(6) | (5,774 | ) | (8,477 | ) | (6,367 | ) | (8,477 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Base management fees settled in LLC interests | — | 851 | 2,189 | 851 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loss on disposal of assets | 1,153 | — | 1,153 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity in earnings and amortization charges of investees(5) | (3,270 | ) | (5,774 | ) | (11,632 | ) | (6,367 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Base management fees settled/to be settled in LLC interests | 4,156 | — | 7,788 | 2,189 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other non-cash (income) expense, net | (671 | ) | 420 | 770 | 78 | (759 | ) | (671 | ) | (313 | ) | 770 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
EBITDA excluding non-cash items from continuing operations | $ | 37,555 | $ | 39,533 | (1,978 | ) | (5.0 | ) | $ | 87,684 | $ | 81,639 | 6,045 | 7.4 | $ | 44,396 | $ | 37,555 | 6,841 | 18.2 | $ | 90,304 | $ | 87,684 | 2,620 | 3.0 | ||||||||||||||||||||||||||||||||||||||
EBITDA excluding non-cash items from continuing operations | $ | 37,555 | $ | 39,533 | $ | 87,684 | $ | 81,639 | $ | 44,396 | $ | 37,555 | $ | 90,304 | $ | 87,684 | ||||||||||||||||||||||||||||||||||||||||||||||||
Interest expense, net(3) | (38,970 | ) | (2,069 | ) | (73,641 | ) | (35,568 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest expense, net(2) | (19,769 | ) | (38,970 | ) | (34,234 | ) | (73,641 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate swap breakage fees(2) | (627 | ) | (695 | ) | (1,732 | ) | (3,205 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Non-cash derivative losses (gains) recorded in interest expense | 20,548 | (20,052 | ) | 31,674 | (13,065 | ) | 1,172 | 21,243 | (3,233 | ) | 34,879 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Amortization of debt financing costs | 955 | 1,347 | 2,256 | 2,514 | 1,030 | 955 | 2,060 | 2,256 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equipment lease receivables, net | 739 | 641 | 1,451 | 1,407 | 753 | 739 | 1,493 | 1,451 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Benefit for income taxes, net of changes in deferred taxes | (591 | ) | (219 | ) | (1,469 | ) | (744 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Provision for income taxes, net of changes in deferred taxes | (196 | ) | (591 | ) | (1,128 | ) | (1,469 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Changes in working capital | (9,396 | ) | 2,470 | (6,309 | ) | 3,579 | (7,014 | ) | (9,396 | ) | (12,243 | ) | (6,309 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Cash provided by operating activities | 10,840 | 21,651 | 41,646 | 39,762 | 19,745 | 10,840 | 41,287 | 41,646 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Changes in working capital | 9,396 | (2,470 | ) | 6,309 | (3,579 | ) | 7,014 | 9,396 | 12,243 | 6,309 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Maintenance capital expenditures | (2,002 | ) | (1,693 | ) | (3,749 | ) | (3,235 | ) | (3,912 | ) | (2,002 | ) | (7,074 | ) | (3,749 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Free cash flow from continuing operations | $ | 18,234 | $ | 17,488 | 746 | 4.3 | $ | 44,206 | $ | 32,948 | 11,258 | 34.2 | $ | 22,847 | $ | 18,234 | 4,613 | 25.3 | $ | 46,456 | $ | 44,206 | 2,250 | 5.1 |
(1) |
Net (loss) income |
Interest expense, net, includes non-cash |
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 $1.9 million and $3.6 million for the quarter and six months ended June 30, 2011, respectively, and $1.7 million and $3.4 million for |
(4) | Amortization of intangibles does not include acquisition-related step-up amortization expense of $151,000 and $435,000 for the quarter and six months ended June 30, 2011, respectively, and $283,000 and $567,000 for the quarter and six months ended June 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. |
We account for our 50% interest in this businessIMTT under the equity method. We recognized income of $11.4 million in our consolidated results for the six months ended June 30, 2010. This includes our 50% share of IMTT’s net income, equal to $13.7 million for the period, offset by $2.3 million of acquisition-related step-up depreciation and amortization expense (net of taxes). For the six months ended June 30, 2009, we recognized income of $15.5 million in our consolidated results. This included our 50% share of IMTT’s net income, equal to $17.8 million for the period, offset by $2.3 million of acquisition-related step-up depreciation and amortization expense (net of taxes).
Distributions from IMTT, to the degree classified as taxable dividends and not a return of capital for income tax purposes, are expected to qualify for the federal dividends received deduction. Therefore, 80% of any dividend is excluded in calculating our consolidated federal taxable income. Any distributions classified as a return of capital for income tax purposes will reduce our tax basis in IMTT.
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.
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Quarter Ended June 30, | Change Favorable/(Unfavorable) | Six Months Ended June 30, | Change Favorable/(Unfavorable) | Quarter Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2010 | 2009(1) | 2010 | 2009(1) | 2011 | 2010 | Change Favorable/(Unfavorable) | 2011 | 2010 | Change Favorable/(Unfavorable) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
$ | $ | $ | % | $ | $ | $ | % | $ | $ | $ | % | $ | $ | $ | % | |||||||||||||||||||||||||||||||||||||||||||||||||
($ In Thousands) (Unaudited) | ($ In Thousands) (Unaudited) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Revenue | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Terminal revenue | 90,743 | 77,752 | 12,991 | 16.7 | 186,297 | 161,562 | 24,735 | 15.3 | 101,436 | 90,743 | 10,693 | 11.8 | 207,451 | 186,297 | 21,154 | 11.4 | ||||||||||||||||||||||||||||||||||||||||||||||||
Environmental response revenue | 67,492 | 4,222 | 63,270 | NM | 78,976 | 7,215 | 71,761 | NM | 5,514 | 67,492 | (61,978 | ) | (91.8 | ) | 10,330 | 78,976 | (68,646 | ) | (86.9 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Total revenue | 158,235 | 81,974 | 76,261 | 93.0 | 265,273 | 168,777 | 96,496 | 57.2 | 106,950 | 158,235 | (51,285 | ) | (32.4 | ) | 217,781 | 265,273 | (47,492 | ) | (17.9 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Costs and expenses | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Terminal operating costs | 39,934 | 38,014 | (1,920 | ) | (5.1 | ) | 82,546 | 76,463 | (6,083 | ) | (8.0 | ) | 48,121 | 39,934 | (8,187 | ) | (20.5 | ) | 94,170 | 82,546 | (11,624 | ) | (14.1 | ) | ||||||||||||||||||||||||||||||||||||||||
Environmental response operating costs | 41,271 | 4,130 | (37,141 | ) | NM | 49,471 | 7,930 | (41,541 | ) | NM | 4,012 | 41,271 | 37,259 | 90.3 | 8,743 | 49,471 | 40,728 | 82.3 | ||||||||||||||||||||||||||||||||||||||||||||||
Total operating costs | 81,205 | 42,144 | (39,061 | ) | (92.7 | ) | 132,017 | 84,393 | (47,624 | ) | (56.4 | ) | 52,133 | 81,205 | 29,072 | 35.8 | 102,913 | 132,017 | 29,104 | 22.0 | ||||||||||||||||||||||||||||||||||||||||||||
Terminal gross profit | 50,809 | 39,738 | 11,071 | 27.9 | 103,751 | 85,099 | 18,652 | 21.9 | 53,315 | 50,809 | 2,506 | 4.9 | 113,281 | 103,751 | 9,530 | 9.2 | ||||||||||||||||||||||||||||||||||||||||||||||||
Environmental response gross profit | 26,221 | 92 | 26,129 | NM | 29,505 | (715 | ) | 30,220 | NM | 1,502 | 26,221 | (24,719 | ) | (94.3 | ) | 1,587 | 29,505 | (27,918 | ) | (94.6 | ) | |||||||||||||||||||||||||||||||||||||||||||
Gross profit | 77,030 | 39,830 | 37,200 | 93.4 | 133,256 | 84,384 | 48,872 | 57.9 | 54,817 | 77,030 | (22,213 | ) | (28.8 | ) | 114,868 | 133,256 | (18,388 | ) | (13.8 | ) | ||||||||||||||||||||||||||||||||||||||||||||
General and administrative expenses | 11,697 | 6,583 | (5,114 | ) | (77.7 | ) | 18,963 | 12,567 | (6,396 | ) | (50.9 | ) | 7,717 | 11,697 | 3,980 | 34.0 | 15,580 | 18,963 | 3,383 | 17.8 | ||||||||||||||||||||||||||||||||||||||||||||
Depreciation and amortization | 14,916 | 13,454 | (1,462 | ) | (10.9 | ) | 29,534 | 26,278 | (3,256 | ) | (12.4 | ) | 16,360 | 14,916 | (1,444 | ) | (9.7 | ) | 32,035 | 29,534 | (2,501 | ) | (8.5 | ) | ||||||||||||||||||||||||||||||||||||||||
Operating income | 50,417 | 19,793 | 30,624 | 154.7 | 84,759 | 45,539 | 39,220 | 86.1 | 30,740 | 50,417 | (19,677 | ) | (39.0 | ) | 67,253 | 84,759 | (17,506 | ) | (20.7 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Interest (expense) income, net(2) | (25,774 | ) | 17,671 | (43,445 | ) | NM | (37,899 | ) | 10,610 | (48,509 | ) | NM | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Other income (expense) | 580 | (10 | ) | 590 | NM | 1,361 | (168 | ) | 1,529 | NM | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Unrealized gains on derivative instruments | — | — | — | — | — | 3,306 | (3,306 | ) | NM | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest expense, net(1) | (16,311 | ) | (25,774 | ) | 9,463 | 36.7 | (20,994 | ) | (37,899 | ) | 16,905 | 44.6 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Other income | 341 | 580 | (239 | ) | (41.2 | ) | 1,120 | 1,361 | (241 | ) | (17.7 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Provision for income taxes | (10,750 | ) | (14,959 | ) | 4,209 | 28.1 | (20,356 | ) | (23,898 | ) | 3,542 | 14.8 | (5,903 | ) | (10,750 | ) | 4,847 | 45.1 | (19,447 | ) | (20,356 | ) | 909 | 4.5 | ||||||||||||||||||||||||||||||||||||||||
Noncontrolling interests | (251 | ) | (72 | ) | (179 | ) | NM | (400 | ) | 297 | (697 | ) | NM | |||||||||||||||||||||||||||||||||||||||||||||||||||
Noncontrolling interest | 66 | (251 | ) | 317 | 126.3 | 91 | (400 | ) | 491 | 122.8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income | 14,222 | 22,423 | (8,201 | ) | (36.6 | ) | 27,465 | 35,686 | (8,221 | ) | (23.0 | ) | 8,933 | 14,222 | (5,289 | ) | (37.2 | ) | 28,023 | 27,465 | 558 | 2.0 | ||||||||||||||||||||||||||||||||||||||||||
Reconciliation of net income to EBITDA excluding non-cash items: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income | 14,222 | 22,423 | 27,465 | 35,686 | 8,933 | 14,222 | 28,023 | 27,465 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest expense (income), net(2) | 25,774 | (17,671 | ) | 37,899 | (10,610 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest expense, net(1) | 16,311 | 25,774 | 20,994 | 37,899 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Provision for income taxes | 10,750 | 14,959 | 20,356 | 23,898 | 5,903 | 10,750 | 19,447 | 20,356 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Depreciation and amortization | 14,916 | 13,454 | 29,534 | 26,278 | 16,360 | 14,916 | 32,035 | 29,534 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Unrealized gains on derivative instruments | — | — | — | (3,306 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other non-cash expenses (income) | 12 | 157 | 245 | (669 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other non-cash (income) expenses | (46 | ) | 12 | (54 | ) | 245 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
EBITDA excluding non-cash items | 65,674 | 33,322 | 32,352 | 97.1 | 115,499 | 71,277 | 44,222 | 62.0 | 47,461 | 65,674 | (18,213 | ) | (27.7 | ) | 100,445 | 115,499 | (15,054 | ) | (13.0 | ) | ||||||||||||||||||||||||||||||||||||||||||||
EBITDA excluding non-cash items | 65,674 | 33,322 | 115,499 | 71,277 | 47,461 | 65,674 | 100,445 | 115,499 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest (expense) income, net(2) | (25,774 | ) | 17,671 | (37,899 | ) | 10,610 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Non-cash derivative losses (gains) recorded in interest (expense) income(2) | 17,380 | (25,222 | ) | 22,053 | (25,222 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Amortization of debt financing costs | 538 | 117 | 710 | 235 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Provision for income taxes, net of changes in deferred taxes | (2,965 | ) | (790 | ) | (4,232 | ) | (1,547 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest expense, net(1) | (16,311 | ) | (25,774 | ) | (20,994 | ) | (37,899 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Non-cash derivative losses recorded in interest expense(1) | 7,640 | 17,380 | 3,308 | 22,053 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Amortization of debt financing costs(1) | 807 | 538 | 1,618 | 710 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Benefit (provision) for income taxes, net of changes in deferred taxes | 304 | (2,965 | ) | (7,584 | ) | (4,232 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Changes in working capital | (24,220 | ) | 13,085 | (27,454 | ) | 11,483 | (14,479 | ) | (24,220 | ) | (12,847 | ) | (27,454 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Cash provided by operating activities | 30,633 | 38,183 | 68,677 | 66,836 | 25,422 | 30,633 | 63,946 | 68,677 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Changes in working capital | 24,220 | (13,085 | ) | 27,454 | (11,483 | ) | 14,479 | 24,220 | 12,847 | 27,454 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Maintenance capital expenditures | (11,236 | ) | (8,342 | ) | (19,031 | ) | (16,681 | ) | (13,005 | ) | (11,236 | ) | (21,519 | ) | (19,031 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Free cash flow | 43,617 | 16,756 | 26,861 | 160.3 | 77,100 | 38,672 | 38,428 | 99.4 | 26,896 | 43,617 | (16,721 | ) | (38.3 | ) | 55,274 | 77,100 | (21,826 | ) | (28.3 | ) |
NM — Not meaningful
(1) |
Interest |
The increase in terminal revenue primarily reflects growth in storage revenue. Storage revenue grew due to an increase in average rental rates of 8.1%13.2% during the first six months of 2011 as compared with the first six months of 2010. IMTT expects full year average rental rates to rise by approximately 11.0%.
Capacity utilization was 94.3% and 9.2% during94.0% for the quarter and six months ended June 30, 2010,2011, respectively, and an increase in storage capacity and capacity utilization mainly attributable to certain expansion projects at IMTT’s Louisiana facilities.
Capacity utilization increased from 93.1% tocompared with 94.8% and 93.8% to 95.4% duringfor the quarter and six months ended June 30, 2010, respectively. DemandUtilization rates were lower in the first six months of 2011, primarily due to tank modifications for bulk liquid storage generally remains strong; however, utilization rates are expected to revert to approximately 94.0% over the balance of 2010certain customers as certainwell as tanks arebeing taken out of service for inspection and repairs and maintenance. IMTT expects utilization rates to remain between approximately 93.0% and 94.0% throughout 2011.
Terminal operating costs increased during the first six months ended June 30, 2010 primarily as a result of higher2011, predominantly in the second quarter. IMTT management has explained that the cause of the second quarter cost growth was one-time factors beyond their control and because certain costs were pulled forward into the second quarter. The two largest cost increases were medical costs and tank repairs and maintenance and ancleaning costs. The majority of the increase in salaries and wages.tank repair costs relates to the repair of a construction defect in tanks recently constructed at Bayonne. These repairs are approximately two-thirds completed.
Revenue and gross profit from environmental response services increased substantiallydecreased during the first six months of 2011, predominantly in the second quarter of 2011, compared with the first six months of 2010 primarily due to the increase ina lower level of spill response activities followingactivity as a result of the April 20, 2010 BP oil spill in the Gulf of Mexico and the January 2010 fuel oil spill on the Texas coast near Port Arthur. The business is not aware of any reliable estimate of how long clean-up efforts in the Gulf will continue and the business is unable to estimate the extent to which IMTT/Oil Mop will continue to provide environmental response services for this spill incident.2010.
General and administrative costs increasedexpenses for the first six months of 2011 decreased primarily due to an increase in environmental response servicesthe current absence of $5.7 million as compared to the prior comparable periods. The increase reflects cash and accrued bonuses and sales commissions relating tocosts associated with the BP oil spill.spill that occurred in the second quarter of 2010.
Depreciation and amortization expense increased as IMTT completed several major expansion projects, resulting in higher asset balances.
Interest (expense) income,expense, net, includes non-cash losses on derivative instruments of $7.6 million and $3.3 million for the quarter and six months ended June 30, 2011, respectively. For the quarter and six months ended June 30, 2010, interest expense, net, includes non-cash losses on derivative instruments of $17.4 million and $22.1 million, respectively.
Excluding the non-cash losses on derivative instruments, interest expense is higher due to increased rates on the amended revolving credit facility and letter of credit fees associated with the tax-exempt debt. Cash interest paid was $8.2 million and $16.8 million for the quarter and six months ended June 30, 2010, respectively. For the quarter2011, respectively, and six months ended June 30, 2009, interest (expense) income, net, includes non-cash gains on derivative instruments of $25.2 million.
Cash interest paid was $8.5 million and $15.9 million for the quarter and six months ended June 30, 2010, respectively, and $6.4 million and $14.2 million for the quarter and six months ended June 30, 2009, respectively.
IMTT expects to pay approximately $12.0 million in federal and state income taxes in 2010. For the six months ended June 30, 2011, IMTT recorded $4.2 million of current federal income tax expense and $3.4 million of current state income tax expense. As assets are placed in service for the remainder of 2011, IMTT expects federal taxable income to decrease due to tax depreciation applicable to these assets. As a result, IMTT expects to pay cash federal taxes of $1.5 million and pay cash state taxes of $5.5 million for the year ended December 31, 2011.
For the year ended December 31, 2010, IMTT accrued $1.0recorded $5.5 million of current federal income taxestax expense and $3.2$7.0 million of current state income taxes.tax expense. At December 31, 2009, IMTT had a federal net operating lossesNOL of approximately $50.0 million. This is expected$50.5 million, of which $5.8 million was carried back to beand used in year 2008 and $44.7 million was carried forward to and was fully utilized in 2010.
A significant difference between the 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. In addition, a significant portion of theMost terminalling fixed assets placed in service in 2009 qualified2010 and 2011 qualify for the federal 50% federalor 100% bonus depreciation.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 bonus depreciation calculation methods. Louisiana is the only state where the business operates that allows the bonus depreciation deduction. The 50% federal bonus depreciation is not applicable to assets placed in service in 2010.
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Quarter Ended June 30, | Change Favorable/(Unfavorable) | Six Months Ended June 30, | Change Favorable/(Unfavorable) | |||||||||||||||||||||||||||||
2010 | 2009(1) | 2010 | 2009(1) | |||||||||||||||||||||||||||||
$ | $ | $ | % | $ | $ | $ | % | |||||||||||||||||||||||||
($ In Thousands) (Unaudited) | ||||||||||||||||||||||||||||||||
Contribution margin | ||||||||||||||||||||||||||||||||
Revenue – utility | 28,450 | 21,414 | 7,036 | 32.9 | 55,285 | 41,581 | 13,704 | 33.0 | ||||||||||||||||||||||||
Cost of revenue – utility | 19,402 | 13,045 | (6,357 | ) | (48.7 | ) | 37,274 | 25,330 | (11,944 | ) | (47.2 | ) | ||||||||||||||||||||
Contribution margin – utility | 9,048 | 8,369 | 679 | 8.1 | 18,011 | 16,251 | 1,760 | 10.8 | ||||||||||||||||||||||||
Revenue – non-utility | 24,236 | 18,390 | 5,846 | 31.8 | 49,546 | 39,465 | 10,081 | 25.5 | ||||||||||||||||||||||||
Cost of revenue – non-utility | 12,089 | 8,131 | (3,958 | ) | (48.7 | ) | 25,845 | 17,617 | (8,228 | ) | (46.7 | ) | ||||||||||||||||||||
Contribution margin – non-utility | 12,147 | 10,259 | 1,888 | 18.4 | 23,701 | 21,848 | 1,853 | 8.5 | ||||||||||||||||||||||||
Total contribution margin | 21,195 | 18,628 | 2,567 | 13.8 | 41,712 | 38,099 | 3,613 | 9.5 | ||||||||||||||||||||||||
Production | 1,728 | 1,647 | (81 | ) | (4.9 | ) | 3,408 | 3,094 | (314 | ) | (10.1 | ) | ||||||||||||||||||||
Transmission and distribution | 5,270 | 4,903 | (367 | ) | (7.5 | ) | 10,131 | 9,372 | (759 | ) | (8.1 | ) | ||||||||||||||||||||
Gross profit | 14,197 | 12,078 | 2,119 | 17.5 | 28,173 | 25,633 | 2,540 | 9.9 | ||||||||||||||||||||||||
Selling, general and administrative expenses | 4,537 | 4,023 | (514 | ) | (12.8 | ) | 8,298 | 7,845 | (453 | ) | (5.8 | ) | ||||||||||||||||||||
Depreciation and amortization | 1,716 | 1,732 | 16 | 0.9 | 3,434 | 3,422 | (12 | ) | (0.4 | ) | ||||||||||||||||||||||
Operating income | 7,944 | 6,323 | 1,621 | 25.6 | 16,441 | 14,366 | 2,075 | 14.4 | ||||||||||||||||||||||||
Interest (expense) income, net(2) | (5,926 | ) | 1,249 | (7,175 | ) | NM | (10,733 | ) | (1,368 | ) | (9,365 | ) | NM | |||||||||||||||||||
Other expense | (26 | ) | (146 | ) | 120 | 82.2 | (11 | ) | (125 | ) | 114 | 91.2 | ||||||||||||||||||||
Unrealized losses on derivative instruments | — | — | — | — | — | (327 | ) | 327 | NM | |||||||||||||||||||||||
Provision for income taxes | (780 | ) | (2,908 | ) | 2,128 | 73.2 | (2,231 | ) | (4,913 | ) | 2,682 | 54.6 | ||||||||||||||||||||
Net income(3) | 1,212 | 4,518 | (3,306 | ) | (73.2 | ) | 3,466 | 7,633 | (4,167 | ) | (54.6 | ) | ||||||||||||||||||||
Reconciliation of net income to EBITDA excluding non-cash items: | ||||||||||||||||||||||||||||||||
Net income(3) | 1,212 | 4,518 | 3,466 | 7,633 | ||||||||||||||||||||||||||||
Interest expense (income), net(2) | 5,926 | (1,249 | ) | 10,733 | 1,368 | |||||||||||||||||||||||||||
Provision for income taxes | 780 | 2,908 | 2,231 | 4,913 | ||||||||||||||||||||||||||||
Depreciation and amortization | 1,716 | 1,732 | 3,434 | 3,422 | ||||||||||||||||||||||||||||
Unrealized losses on derivative instruments | — | — | — | 327 | ||||||||||||||||||||||||||||
Other non-cash expenses | 531 | 564 | 1,065 | 1,015 | ||||||||||||||||||||||||||||
EBITDA excluding non-cash items | 10,165 | 8,473 | 1,692 | 20.0 | 20,929 | 18,678 | 2,251 | 12.1 | ||||||||||||||||||||||||
EBITDA excluding non-cash items | 10,165 | 8,473 | 20,929 | 18,678 | ||||||||||||||||||||||||||||
Interest (expense) income, net(2) | (5,926 | ) | 1,249 | (10,733 | ) | (1,368 | ) | |||||||||||||||||||||||||
Non-cash derivative losses (gains) recorded in interest (expense) income(2) | 3,620 | (3,452 | ) | 6,211 | (3,129 | ) | ||||||||||||||||||||||||||
Amortization of debt financing costs | 119 | 119 | 239 | 239 | ||||||||||||||||||||||||||||
Provision for income taxes, net of changes in deferred taxes | (1,270 | ) | (1,834 | ) | (2,754 | ) | (2,118 | ) | ||||||||||||||||||||||||
Changes in working capital | (3,202 | ) | 1,042 | (2,803 | ) | (471 | ) | |||||||||||||||||||||||||
Cash provided by operating activities | 3,506 | 5,597 | 11,089 | 11,831 | ||||||||||||||||||||||||||||
Changes in working capital | 3,202 | (1,042 | ) | 2,803 | 471 | |||||||||||||||||||||||||||
Maintenance capital expenditures | (422 | ) | (483 | ) | (978 | ) | (1,081 | ) | ||||||||||||||||||||||||
Free cash flow | 6,286 | 4,072 | 2,214 | 54.4 | 12,914 | 11,221 | 1,693 | 15.1 |
NM — Not meaningful
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Quarter Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||
2011 | 2010 | Change Favorable/(Unfavorable) | 2011 | 2010 | Change Favorable/(Unfavorable) | |||||||||||||||||||||||||||
$ | $ | $ | % | $ | $ | $ | % | |||||||||||||||||||||||||
($ In Thousands) (Unaudited) | ||||||||||||||||||||||||||||||||
Contribution margin | ||||||||||||||||||||||||||||||||
Revenue – utility | 36,421 | 28,450 | 7,971 | 28.0 | 70,694 | 55,285 | 15,409 | 27.9 | ||||||||||||||||||||||||
Cost of revenue – utility | 27,206 | 19,402 | (7,804 | ) | (40.2 | ) | 51,211 | 37,274 | (13,937 | ) | (37.4 | ) | ||||||||||||||||||||
Contribution margin – utility | 9,215 | 9,048 | 167 | 1.8 | 19,483 | 18,011 | 1,472 | 8.2 | ||||||||||||||||||||||||
Revenue – non-utility | 26,935 | 24,236 | 2,699 | 11.1 | 54,286 | 49,546 | 4,740 | 9.6 | ||||||||||||||||||||||||
Cost of revenue – non-utility | 14,315 | 12,089 | (2,226 | ) | (18.4 | ) | 30,372 | 25,845 | (4,527 | ) | (17.5 | ) | ||||||||||||||||||||
Contribution margin – non-utility | 12,620 | 12,147 | 473 | 3.9 | 23,914 | 23,701 | 213 | 0.9 | ||||||||||||||||||||||||
Total contribution margin | 21,835 | 21,195 | 640 | 3.0 | 43,397 | 41,712 | 1,685 | 4.0 | ||||||||||||||||||||||||
Production | 1,778 | 1,728 | (50 | ) | (2.9 | ) | 3,454 | 3,408 | (46 | ) | (1.3 | ) | ||||||||||||||||||||
Transmission and distribution | 5,021 | 5,270 | 249 | 4.7 | 9,419 | 10,131 | 712 | 7.0 | ||||||||||||||||||||||||
Gross profit | 15,036 | 14,197 | 839 | 5.9 | 30,524 | 28,173 | 2,351 | 8.3 | ||||||||||||||||||||||||
Selling, general and administrative expenses | 4,041 | 4,537 | 496 | 10.9 | 8,258 | 8,298 | 40 | 0.5 | ||||||||||||||||||||||||
Depreciation and amortization | 1,802 | 1,716 | (86 | ) | (5.0 | ) | 3,575 | 3,434 | (141 | ) | (4.1 | ) | ||||||||||||||||||||
Operating income | 9,193 | 7,944 | 1,249 | 15.7 | 18,691 | 16,441 | 2,250 | 13.7 | ||||||||||||||||||||||||
Interest expense, net(1) | (3,483 | ) | (5,926 | ) | 2,443 | 41.2 | (5,497 | ) | (10,733 | ) | 5,236 | 48.8 | ||||||||||||||||||||
Other expense | (127 | ) | (26 | ) | (101 | ) | NM | (279 | ) | (11 | ) | (268 | ) | NM | ||||||||||||||||||
Provision for income taxes | (2,310 | ) | (780 | ) | (1,530 | ) | (196.2 | ) | (5,212 | ) | (2,231 | ) | (2,981 | ) | (133.6 | ) | ||||||||||||||||
Net income(2) | 3,273 | 1,212 | 2,061 | 170.0 | 7,703 | 3,466 | 4,237 | 122.2 | ||||||||||||||||||||||||
Reconciliation of net income to EBITDA excluding non-cash items: | ||||||||||||||||||||||||||||||||
Net income(2) | 3,273 | 1,212 | 7,703 | 3,466 | ||||||||||||||||||||||||||||
Interest expense, net(1) | 3,483 | 5,926 | 5,497 | 10,733 | ||||||||||||||||||||||||||||
Provision for income taxes | 2,310 | 780 | 5,212 | 2,231 | ||||||||||||||||||||||||||||
Depreciation and amortization | 1,802 | 1,716 | 3,575 | 3,434 | ||||||||||||||||||||||||||||
Other non-cash expenses | 512 | 531 | 1,182 | 1,065 | ||||||||||||||||||||||||||||
EBITDA excluding non-cash items | 11,380 | 10,165 | 1,215 | 12.0 | 23,169 | 20,929 | 2,240 | 10.7 | ||||||||||||||||||||||||
EBITDA excluding non-cash items | 11,380 | 10,165 | 23,169 | 20,929 | ||||||||||||||||||||||||||||
Interest expense, net(1) | (3,483 | ) | (5,926 | ) | (5,497 | ) | (10,733 | ) | ||||||||||||||||||||||||
Non-cash derivative losses recorded in interest expense(1) | 1,173 | 3,620 | 897 | 6,211 | ||||||||||||||||||||||||||||
Amortization of debt financing costs(1) | 120 | 119 | 239 | 239 | ||||||||||||||||||||||||||||
Provision for income taxes, net of changes in deferred taxes | (1,260 | ) | (1,270 | ) | (3,545 | ) | (2,754 | ) | ||||||||||||||||||||||||
Changes in working capital | (2,034 | ) | (3,202 | ) | (6,449 | ) | (2,803 | ) | ||||||||||||||||||||||||
Cash provided by operating activities | 5,896 | 3,506 | 8,814 | 11,089 | ||||||||||||||||||||||||||||
Changes in working capital | 2,034 | 3,202 | 6,449 | 2,803 | ||||||||||||||||||||||||||||
Maintenance capital expenditures | (1,660 | ) | (422 | ) | (3,920 | ) | (978 | ) | ||||||||||||||||||||||||
Free cash flow | 6,270 | 6,286 | (16 | ) | (0.3 | ) | 11,343 | 12,914 | (1,571 | ) | (12.2 | ) |
NM — Not meaningful
Interest |
Corporate allocation expense, |
Management believes that the presentation and Operating Income
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'sCompany’s operations provides for the automatic pass through of increases or decreases in feedstock costs to utility customers. Changes in the cost of propane distributed to non-utility customers can be recovered in pricing, subject to competitive conditions generally.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.
Utility contribution margin was higher driven by an increase in sales volume.
Non-utility contribution margin was higher due to price increases partially offset by increased gas and transportation costs and lower non-utility volume resulting from local propane supply disruptions.
Production, transmission and distribution and selling, general and administrative expenses are primarily composed of labor-related expenses and professional fees. On a combined basis, these costs were lower in 2011, primarily driven by increased allocation of labor costs to capital projects. Underlying costs were higher due to higher professional fees and operating lease payments.
Interest expense, net, includes non-cash losses on derivative instruments of $1.2 million and $897,000 for the quarter and six months ended June 30, 2010 primarily due to implementation of the rate increase from June 11, 2009, partially offset by volume declines related almost entirely to commercial customers, whose demand is more sensitive to the variability of the economic cycle than residential customers. Sales volume in 2010 was approximately 3.6% lower than 2009 for both2011, respectively. For the quarter and six month periods.
On April 20,months ended June 30, 2010, the Hawaii Public Utilities Commission (HPUC) issued its Final Decision and Order on the rate case filed by The Gas Company in August 2008, authorizing a rate increase of $9.2 million. This is a reduction from the interim rate increase of $9.5 million implemented from June 11, 2009, and therefore, the utility contribution margin was reduced to reflect the retroactive adjustment to June 11, 2009 of $266,000 in 2010.
Non-utility contribution margin was higher as a result of effective margin management activities with volume essentially flat compared to 2009. Local refiners supplied The Gas Company with approximately 30% less propane in the first half of 2010 than they did in the first half of 2009. To the extent that local suppliers were unable to supply The Gas Company with a sufficient amount of propane, the business supplemented, and will continue to supplement, its supply from foreign sources. The cost per gallon of foreign supply is higher than locally-produced propane. The business believes that the cost differential of delivered foreign and locally-produced propane will have a minimal impact on non-utility contribution margin.
Increased production costs primarily reflected higher electricity costs. Transmission and distribution costs were higher primarily due to increased wage and benefit costs as well as higher repair and maintenance costs. Selling, general and administrative costs were higher primarily due to personnel costs and insurance costs.
Interest (expense) income,interest expense, net, includes non-cash losses on derivative instruments of $3.6 million and $6.2 million, respectively. Excluding the non-cash losses on derivative instruments, interest expense for the six months ended June 30, 2011 was slightly higher due to the expiration of an interest rate basis swap agreement in March 2010.
Cash interest paid was $2.1 million and $4.3 million for the quarter and six months ended June 30, 2010, respectively. For the quarter2011, respectively, and six months ended June 30, 2009, interest (expense) income, net, includes non-cash gains on derivative instruments of $3.5 million and $3.1 million, respectively. Excluding the non-cash (losses) gains on derivative instruments, interest expense was relatively flat.
Cash interest paid was $2.2 million and $4.3 million for the quarter and six months ended June 30, 2010, respectively, and $2.1 million and $4.3 million for the quarter and six months ended June 30, 2009, respectively.
Income from The Gas Company is included in our consolidated federal income tax return, and its income 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, 2010,2011, the business expects to pay cash state income taxes of approximately $1.2$1.4 million, of which $434,000$682,000 was recorded during the six months ended June 30, 2010.
TABLE OF CONTENTS2011. Any federal income tax liability is expected to be offset in consolidation from the application of NOLs.
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 ourthe 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 quarter.periods presented below.
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Quarter Ended June 30, | Change Favorable/(Unfavorable) | Six Months Ended June 30, | Change Favorable/(Unfavorable) | Quarter Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2010 | 2009(1) | 2010 | 2009(1) | 2011 | 2010 | Change Favorable/(Unfavorable) | 2011 | 2010 | Change Favorable/(Unfavorable) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
$ | $ | $ | % | $ | $ | $ | % | $ | $ | $ | % | $ | $ | $ | % | |||||||||||||||||||||||||||||||||||||||||||||||||
($ In Thousands) (Unaudited) | ($ In Thousands) (Unaudited) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cooling capacity revenue | 5,295 | 5,110 | 185 | 3.6 | 10,533 | 10,007 | 526 | 5.3 | 5,428 | 5,295 | 133 | 2.5 | 10,759 | 10,533 | 226 | 2.1 | ||||||||||||||||||||||||||||||||||||||||||||||||
Cooling consumption revenue | 7,144 | 5,502 | 1,642 | 29.8 | 8,907 | 7,730 | 1,177 | 15.2 | 5,924 | 7,144 | (1,220 | ) | (17.1 | ) | 8,354 | 8,907 | (553 | ) | (6.2 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Other revenue | 803 | 743 | 60 | 8.1 | 1,667 | 1,499 | 168 | 11.2 | 903 | 803 | 100 | 12.5 | 1,593 | 1,667 | (74 | ) | (4.4 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Finance lease revenue | 1,271 | 1,205 | 66 | 5.5 | 2,516 | 2,397 | 119 | 5.0 | 1,261 | 1,271 | (10 | ) | (0.8 | ) | 2,548 | 2,516 | 32 | 1.3 | ||||||||||||||||||||||||||||||||||||||||||||||
Total revenue | 14,513 | 12,560 | 1,953 | 15.5 | 23,623 | 21,633 | 1,990 | 9.2 | 13,516 | 14,513 | (997 | ) | (6.9 | ) | 23,254 | 23,623 | (369 | ) | (1.6 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Direct expenses – electricity | 4,664 | 3,784 | (880 | ) | (23.3 | ) | 5,987 | 5,388 | (599 | ) | (11.1 | ) | 3,675 | 4,664 | 989 | 21.2 | 5,621 | 5,987 | 366 | 6.1 | ||||||||||||||||||||||||||||||||||||||||||||
Direct expenses – other | 5,066 | 4,508 | (558 | ) | (12.4 | ) | 9,937 | 9,272 | (665 | ) | (7.2 | ) | 5,231 | 5,066 | (165 | ) | (3.3 | ) | 10,190 | 9,937 | (253 | ) | (2.5 | ) | ||||||||||||||||||||||||||||||||||||||||
Direct expenses – total | 9,730 | 8,292 | (1,438 | ) | (17.3 | ) | 15,924 | 14,660 | (1,264 | ) | (8.6 | ) | 8,906 | 9,730 | 824 | 8.5 | 15,811 | 15,924 | 113 | 0.7 | ||||||||||||||||||||||||||||||||||||||||||||
Gross profit | 4,783 | 4,268 | 515 | 12.1 | 7,699 | 6,973 | 726 | 10.4 | 4,610 | 4,783 | (173 | ) | (3.6 | ) | 7,443 | 7,699 | (256 | ) | (3.3 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Selling, general and administrative expenses | 799 | 716 | (83 | ) | (11.6 | ) | 1,557 | 1,354 | (203 | ) | (15.0 | ) | 762 | 799 | 37 | 4.6 | 1,685 | 1,557 | (128 | ) | (8.2 | ) | ||||||||||||||||||||||||||||||||||||||||||
Amortization of intangibles | 341 | 341 | — | — | 678 | 678 | — | — | 341 | 341 | — | — | 678 | 678 | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
Operating income | 3,643 | 3,211 | 432 | 13.5 | 5,464 | 4,941 | 523 | 10.6 | 3,507 | 3,643 | (136 | ) | (3.7 | ) | 5,080 | 5,464 | (384 | ) | (7.0 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Interest (expense) income, net(3) | (7,976 | ) | 2,728 | (10,704 | ) | NM | (14,004 | ) | (227 | ) | (13,777 | ) | NM | |||||||||||||||||||||||||||||||||||||||||||||||||||
Interest expense, net(2) | (4,925 | ) | (7,976 | ) | 3,051 | 38.3 | (7,184 | ) | (14,004 | ) | 6,820 | 48.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Other income | 59 | 45 | 14 | 31.1 | 109 | 94 | 15 | 16.0 | 55 | 59 | (4 | ) | (6.8 | ) | 111 | 109 | 2 | 1.8 | ||||||||||||||||||||||||||||||||||||||||||||||
Unrealized losses on derivative instruments | — | — | — | — | — | (1,378 | ) | 1,378 | NM | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Benefit (provision) for income taxes | 1,767 | (2,296 | ) | 4,063 | 177.0 | 3,487 | (1,221 | ) | 4,708 | NM | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Noncontrolling interests | (198 | ) | (174 | ) | (24 | ) | (13.8 | ) | (392 | ) | (341 | ) | (51 | ) | (15.0 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Net (loss) income(4) | (2,705 | ) | 3,514 | (6,219 | ) | (177.0 | ) | (5,336 | ) | 1,868 | (7,204 | ) | NM | |||||||||||||||||||||||||||||||||||||||||||||||||||
Reconciliation of net (loss) income to EBITDA excluding non-cash items: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net (loss) income(4) | (2,705 | ) | 3,514 | (5,336 | ) | 1,868 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest expense (income), net(3) | 7,976 | (2,728 | ) | 14,004 | 227 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Benefit) provision for income taxes | (1,767 | ) | 2,296 | (3,487 | ) | 1,221 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Depreciation(2) | 1,636 | 1,502 | 3,271 | 2,965 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Benefit for income taxes | 650 | 1,767 | (1,117 | ) | (63.2 | ) | 997 | 3,487 | (2,490 | ) | (71.4 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Noncontrolling interest | (213 | ) | (198 | ) | (15 | ) | (7.6 | ) | (426 | ) | (392 | ) | (34 | ) | (8.7 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Net loss | (926 | ) | (2,705 | ) | 1,779 | 65.8 | (1,422 | ) | (5,336 | ) | 3,914 | 73.4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Reconciliation of net loss to EBITDA excluding non-cash items: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net loss | (926 | ) | (2,705 | ) | (1,422 | ) | (5,336 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest expense, net(2) | 4,925 | 7,976 | 7,184 | 14,004 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Benefit for income taxes | (650 | ) | (1,767 | ) | (997 | ) | (3,487 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Depreciation(1) | 1,658 | 1,636 | 3,305 | 3,271 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Amortization of intangibles | 341 | 341 | 678 | 678 | 341 | 341 | 678 | 678 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Unrealized losses on derivative instruments | — | — | — | 1,378 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other non-cash expenses | 232 | 172 | 387 | 276 | 300 | 232 | 338 | 387 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
EBITDA excluding non-cash items | 5,713 | 5,097 | 616 | 12.1 | 9,517 | 8,613 | 904 | 10.5 | 5,648 | 5,713 | (65 | ) | (1.1 | ) | 9,086 | 9,517 | (431 | ) | (4.5 | ) | ||||||||||||||||||||||||||||||||||||||||||||
EBITDA excluding non-cash items | 5,713 | 5,097 | 9,517 | 8,613 | 5,648 | 5,713 | 9,086 | 9,517 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest (expense) income, net(3) | (7,976 | ) | 2,728 | (14,004 | ) | (227 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Non-cash derivative losses (gains) recorded in interest (expense) income(3) | 5,328 | (5,199 | ) | 8,826 | (4,808 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Amortization of debt financing costs | 170 | 170 | 340 | 340 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest expense, net(2) | (4,925 | ) | (7,976 | ) | (7,184 | ) | (14,004 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Non-cash derivative losses recorded in interest expense(2) | 2,304 | 5,328 | 1,943 | 8,826 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Amortization of debt financing costs(2) | 170 | 170 | 340 | 340 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equipment lease receivable, net | 739 | 641 | 1,451 | 1,407 | 753 | 739 | 1,493 | 1,451 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Benefit for income taxes, net of changes in deferred taxes | 230 | — | 185 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Changes in working capital | (2,799 | ) | (437 | ) | (3,569 | ) | (484 | ) | (1,142 | ) | (2,799 | ) | 181 | (3,569 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Cash provided by operating activities | 1,175 | 3,000 | 2,561 | 4,841 | 3,038 | 1,175 | 6,044 | 2,561 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Changes in working capital | 2,799 | 437 | 3,569 | 484 | 1,142 | 2,799 | (181 | ) | 3,569 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Maintenance capital expenditures | (400 | ) | (309 | ) | (564 | ) | (359 | ) | (59 | ) | (400 | ) | (125 | ) | (564 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Free cash flow | 3,574 | 3,128 | 446 | 14.3 | 5,566 | 4,966 | 600 | 12.1 | 4,121 | 3,574 | 547 | 15.3 | 5,738 | 5,566 | 172 | 3.1 |
NM – Not meaningful
(1) |
Includes depreciation expense of |
(2) | Interest expense, net, includes non-cash losses on derivative instruments and |
Gross profit decreased primarily due to cooler average temperatures during the second quarter 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.
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.
Interest expense, net, includes non-cash losses on derivative instruments of $2.3 million and $1.9 million for the quarter and six months ended June 30, 2011, respectively. For the quarter and six months ended June 30, 2010, interest expense, net, includes non-cash losses on derivative instruments of $5.3 million and $8.8 million, respectively. Excluding the non-cash losses on derivative instruments, interest expense for the six months ended June 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 $5.0 million for the quarter and six months ended June 30, 2011, respectively, and $2.6 million and $4.9 million for the quarter and six months ended June 30, 2010, respectively.
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 will file 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 has 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 $34,000 and state income taxes of approximately $179,000.
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 six months ended June 30, 2011, District Energy recorded approximately $147,000 of deferred state income tax expense due to the increase in Illinois corporate income tax rates enacted in 2011.
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Quarter Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||
2011 | 2010 | Change Favorable/(Unfavorable) | 2011 | 2010 | Change Favorable/(Unfavorable) | |||||||||||||||||||||||||||
$ | $ | $ | % | $ | $ | $ | % | |||||||||||||||||||||||||
($ In Thousands) (Unaudited) | ||||||||||||||||||||||||||||||||
Revenue | ||||||||||||||||||||||||||||||||
Fuel revenue | 134,647 | 100,941 | 33,706 | 33.4 | 260,360 | 195,649 | 64,711 | 33.1 | ||||||||||||||||||||||||
Non-fuel revenue | 35,668 | 36,552 | (884 | ) | (2.4 | ) | 78,464 | 81,893 | (3,429 | ) | (4.2 | ) | ||||||||||||||||||||
Total revenue | 170,315 | 137,493 | 32,822 | 23.9 | 338,824 | 277,542 | 61,282 | 22.1 | ||||||||||||||||||||||||
Cost of revenue | ||||||||||||||||||||||||||||||||
Cost of revenue – fuel | 95,678 | 64,549 | (31,129 | ) | (48.2 | ) | 181,732 | 124,747 | (56,985 | ) | (45.7 | ) | ||||||||||||||||||||
Cost of revenue – non-fuel | 3,785 | 3,587 | (198 | ) | (5.5 | ) | 9,033 | 8,539 | (494 | ) | (5.8 | ) | ||||||||||||||||||||
Total cost of revenue | 99,463 | 68,136 | (31,327 | ) | (46.0 | ) | 190,765 | 133,286 | (57,479 | ) | (43.1 | ) | ||||||||||||||||||||
Fuel gross profit | 38,969 | 36,392 | 2,577 | 7.1 | 78,628 | 70,902 | 7,726 | 10.9 | ||||||||||||||||||||||||
Non-fuel gross profit | 31,883 | 32,965 | (1,082 | ) | (3.3 | ) | 69,431 | 73,354 | (3,923 | ) | (5.3 | ) | ||||||||||||||||||||
Gross profit | 70,852 | 69,357 | 1,495 | 2.2 | 148,059 | 144,256 | 3,803 | 2.6 | ||||||||||||||||||||||||
Selling, general and administrative expenses | 41,624 | 42,558 | 934 | 2.2 | 86,675 | 86,793 | 118 | 0.1 | ||||||||||||||||||||||||
Depreciation and amortization | 22,524 | 13,885 | (8,639 | ) | (62.2 | ) | 36,343 | 28,223 | (8,120 | ) | (28.8 | ) | ||||||||||||||||||||
Loss on disposal of assets | 1,225 | — | (1,225 | ) | NM | 1,225 | — | (1,225 | ) | NM | ||||||||||||||||||||||
Operating income | 5,479 | 12,914 | (7,435 | ) | (57.6 | ) | 23,816 | 29,240 | (5,424 | ) | (18.5 | ) | ||||||||||||||||||||
Interest expense, net(1) | (11,361 | ) | (26,688 | ) | 15,327 | 57.4 | (21,554 | ) | (48,674 | ) | 27,120 | 55.7 | ||||||||||||||||||||
Other income (expense) | 50 | (528 | ) | 578 | 109.5 | (177 | ) | (544 | ) | 367 | 67.5 | |||||||||||||||||||||
Benefit (provision) for income taxes | 2,335 | 5,764 | (3,429 | ) | (59.5 | ) | (840 | ) | 8,051 | (8,891 | ) | (110.4 | ) | |||||||||||||||||||
Net (loss) income(2) | (3,497 | ) | (8,538 | ) | 5,041 | 59.0 | 1,245 | (11,927 | ) | 13,172 | 110.4 | |||||||||||||||||||||
Reconciliation of net (loss) income to EBITDA excluding non-cash items: | ||||||||||||||||||||||||||||||||
Net (loss) income(2) | (3,497 | ) | (8,538 | ) | 1,245 | (11,927 | ) | |||||||||||||||||||||||||
Interest expense, net(1) | 11,361 | 26,688 | 21,554 | 48,674 | ||||||||||||||||||||||||||||
(Benefit) provision for income taxes | (2,335 | ) | (5,764 | ) | 840 | (8,051 | ) | |||||||||||||||||||||||||
Depreciation and amortization | 22,524 | 13,885 | 36,343 | 28,223 | ||||||||||||||||||||||||||||
Loss on disposal of assets | 1,153 | — | 1,153 | — | ||||||||||||||||||||||||||||
Other non-cash (income) expenses | (43 | ) | 558 | 103 | 605 | |||||||||||||||||||||||||||
EBITDA excluding non-cash items | 29,163 | 26,829 | 2,334 | 8.7 | 61,238 | 57,524 | 3,714 | 6.5 | ||||||||||||||||||||||||
EBITDA excluding non-cash items | 29,163 | 26,829 | 61,238 | 57,524 | ||||||||||||||||||||||||||||
Interest expense, net(1) | (11,361 | ) | (26,688 | ) | (21,554 | ) | (48,674 | ) | ||||||||||||||||||||||||
Interest rate swap breakage fees(1) | (627 | ) | (695 | ) | (1,732 | ) | (3,205 | ) | ||||||||||||||||||||||||
Non-cash derivative (gains) losses recorded in interest expense(1) | (2,305 | ) | 12,299 | (6,073 | ) | 19,839 | ||||||||||||||||||||||||||
Amortization of debt financing costs(1) | 740 | 665 | 1,481 | 1,472 | ||||||||||||||||||||||||||||
Provision for income taxes, net of changes in deferred taxes | (121 | ) | (144 | ) | (616 | ) | (287 | ) | ||||||||||||||||||||||||
Changes in working capital | (3,085 | ) | (4,724 | ) | (2,862 | ) | 2,662 | |||||||||||||||||||||||||
Cash provided by operating activities | 12,404 | 7,542 | 29,882 | 29,331 | ||||||||||||||||||||||||||||
Changes in working capital | 3,085 | 4,724 | 2,862 | (2,662 | ) | |||||||||||||||||||||||||||
Maintenance capital expenditures | (2,193 | ) | (1,180 | ) | (3,029 | ) | (2,207 | ) | ||||||||||||||||||||||||
Free cash flow | 13,296 | 11,086 | 2,210 | 19.9 | 29,715 | 24,462 | 5,253 | 21.5 |
NM — Not meaningful
(1) | Interest expense, net, includes non-cash gains (losses) on derivative instruments, non-cash amortization of |
Corporate allocation expense, intercompany fees and the |
Gross profit increased primarily as a result of increased cooling consumption revenue related to higher ton-hour sales. Ton-hour sales were higher as a result of warmer average temperatures during the second quarter of 2010 compared with 2009. Cooling capacity revenue increased due to a net increase in contracted capacity provided to new customers that began service predominantly in the second quarter of 2009, and annual inflation-related increases of contract capacity rates in accordance with customer contract terms.
Selling, general and administrative expenses in 2009 included a reimbursement from a customer for professional fees related to the Las Vegas plant expansion that did not reoccur in 2010.
Interest (expense) income, net, includes non-cash losses on derivative instruments of $5.3 million and $8.8 million for the quarter and six months ended June 30, 2010, respectively. For the quarter and six months ended June 30, 2009, interest (expense) income, net, includes non-cash gains on derivative instruments of $5.2 million and $4.8 million, respectively. Excluding the non-cash (losses) gains on derivative instruments, interest expense was higher in 2010 compared with 2009 due to the expiration of an interest rate basis swap agreement, and a higher debt balance at June 30, 2010 compared with June 30, 2009.
Cash interest paid was $2.6 million and $4.9 million for the quarter and six months ended June 30, 2010, respectively, and $2.4 million and $4.8 million for the quarter and six months ended June 30, 2009, respectively.
For the period preceding the sale of a 49.99% noncontrolling interest in the business, 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.
Subsequent to the sale of the 49.99% noncontrolling interest, District Energy will file a separate federal income tax return, and will continue to file a separate Illinois state income tax return.
The business has approximately $26.0 million in federal and state NOL carryforwards available to offset positive taxable income. The business expects to have federal and state taxable income in 2011 and 2012, which will be wholly offset by NOL carryforwards.
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Quarter Ended June 30, | Change Favorable/(Unfavorable) | Six Months Ended June 30, | Change Favorable/(Unfavorable) | |||||||||||||||||||||||||||||
2010 | 2009(1) | 2010 | 2009(1) | |||||||||||||||||||||||||||||
$ | $ | $ | % | $ | $ | $ | % | |||||||||||||||||||||||||
($ In Thousands) (Unaudited) | ||||||||||||||||||||||||||||||||
Revenue | ||||||||||||||||||||||||||||||||
Fuel revenue | 100,941 | 71,040 | 29,901 | 42.1 | 195,649 | 139,157 | 56,492 | 40.6 | ||||||||||||||||||||||||
Non-fuel revenue | 36,552 | 40,004 | (3,452 | ) | (8.6 | ) | 81,893 | 89,068 | (7,175 | ) | (8.1 | ) | ||||||||||||||||||||
Total revenue | 137,493 | 111,044 | 26,449 | 23.8 | 277,542 | 228,225 | 49,317 | 21.6 | ||||||||||||||||||||||||
Cost of revenue | ||||||||||||||||||||||||||||||||
Cost of revenue-fuel | 64,549 | 39,468 | (25,081 | ) | (63.5 | ) | 124,747 | 76,935 | (47,812 | ) | (62.1 | ) | ||||||||||||||||||||
Cost of revenue-non-fuel | 3,587 | 2,777 | (810 | ) | (29.2 | ) | 8,539 | 7,480 | (1,059 | ) | (14.2 | ) | ||||||||||||||||||||
Total cost of revenue | 68,136 | 42,245 | (25,891 | ) | (61.3 | ) | 133,286 | 84,415 | (48,871 | ) | (57.9 | ) | ||||||||||||||||||||
Fuel gross profit | 36,392 | 31,572 | 4,820 | 15.3 | 70,902 | 62,222 | 8,680 | 14.0 | ||||||||||||||||||||||||
Non-fuel gross profit | 32,965 | 37,227 | (4,262 | ) | (11.4 | ) | 73,354 | 81,588 | (8,234 | ) | (10.1 | ) | ||||||||||||||||||||
Gross profit | 69,357 | 68,799 | 558 | 0.8 | 144,256 | 143,810 | 446 | 0.3 | ||||||||||||||||||||||||
Selling, general and administrative expenses(2) | 42,558 | 42,569 | 11 | — | 86,793 | 91,321 | 4,528 | 5.0 | ||||||||||||||||||||||||
Goodwill impairment | — | 53,200 | 53,200 | NM | — | 71,200 | 71,200 | NM | ||||||||||||||||||||||||
Depreciation and amortization | 13,885 | 19,729 | 5,844 | 29.6 | 28,223 | 61,117 | 32,894 | 53.8 | ||||||||||||||||||||||||
Operating income (loss) | 12,914 | (46,699 | ) | 59,613 | 127.7 | 29,240 | (79,828 | ) | 109,068 | 136.6 | ||||||||||||||||||||||
Interest expense, net(3) | (26,688 | ) | (4,936 | ) | (21,752 | ) | NM | (48,674 | ) | (31,440 | ) | (17,234 | ) | (54.8 | ) | |||||||||||||||||
Other expense | (528 | ) | (85 | ) | (443 | ) | NM | (544 | ) | (213 | ) | (331 | ) | (155.4 | ) | |||||||||||||||||
Unrealized losses on derivative instruments | — | — | — | — | — | (23,331 | ) | 23,331 | NM | |||||||||||||||||||||||
Benefit for income taxes | 5,764 | 20,844 | (15,080 | ) | (72.3 | ) | 8,051 | 54,330 | (46,279 | ) | (85.2 | ) | ||||||||||||||||||||
Net loss(4) | (8,538 | ) | (30,876 | ) | 22,338 | 72.3 | (11,927 | ) | (80,482 | ) | 68,555 | 85.2 | ||||||||||||||||||||
Reconciliation of net loss to EBITDA excluding non-cash items: | ||||||||||||||||||||||||||||||||
Net loss(4) | (8,538 | ) | (30,876 | ) | (11,927 | ) | (80,482 | ) | ||||||||||||||||||||||||
Interest expense, net(3) | 26,688 | 4,936 | 48,674 | 31,440 | ||||||||||||||||||||||||||||
Benefit for income taxes | (5,764 | ) | (20,844 | ) | (8,051 | ) | (54,330 | ) | ||||||||||||||||||||||||
Depreciation and amortization | 13,885 | 19,729 | 28,223 | 61,117 | ||||||||||||||||||||||||||||
Goodwill impairment | — | 53,200 | — | 71,200 | ||||||||||||||||||||||||||||
Unrealized losses on derivative instruments | — | — | — | 23,331 | ||||||||||||||||||||||||||||
Other non-cash expenses (income) | 558 | (430 | ) | 605 | (367 | ) | ||||||||||||||||||||||||||
EBITDA excluding non-cash items | 26,829 | 25,715 | 1,114 | 4.3 | 57,524 | 51,909 | 5,615 | 10.8 | ||||||||||||||||||||||||
EBITDA excluding non-cash items | 26,829 | 25,715 | 57,524 | 51,909 | ||||||||||||||||||||||||||||
Interest expense, net(3) | (26,688 | ) | (4,936 | ) | (48,674 | ) | (31,440 | ) | ||||||||||||||||||||||||
Non-cash derivative losses (gains) recorded in interest expense(3) | 11,604 | (11,520 | ) | 16,634 | (5,247 | ) | ||||||||||||||||||||||||||
Amortization of debt financing costs | 665 | 853 | 1,472 | 1,526 | ||||||||||||||||||||||||||||
Benefit for income taxes, net of changes in deferred taxes | (144 | ) | (26 | ) | (287 | ) | (262 | ) | ||||||||||||||||||||||||
Changes in working capital | (4,724 | ) | 3,773 | 2,662 | 10,252 | |||||||||||||||||||||||||||
Cash provided by operating activities | 7,542 | 13,859 | 29,331 | 26,738 | ||||||||||||||||||||||||||||
Changes in working capital | 4,724 | (3,773 | ) | (2,662 | ) | (10,252 | ) | |||||||||||||||||||||||||
Maintenance capital expenditures | (1,180 | ) | (901 | ) | (2,207 | ) | (1,795 | ) | ||||||||||||||||||||||||
Free cash flow | 11,086 | 9,185 | 1,901 | 20.7 | 24,462 | 14,691 | 9,771 | 66.5 |
NM – Not meaningful
The majority of the revenue and gross profit in Atlantic Aviation is generated through fueling general aviationGA aircraft at 6863 airports and one heliport in the U.S. Revenue is categorized according to who owns the fuel used to service these aircraft.aircrafts. If our business owns the fuel, it records the cost to purchase that fuel as cost of revenue-fuel. The business’ corresponding fuel revenue is its cost to purchase that fuel plus a margin. The business generally pursues a strategy of maintaining, and where appropriate increasing, dollar-based margins, thereby passing any increase in fuel prices to the customer.
Atlantic Aviation also has into-plane arrangements whereby it fuels aircraft with fuel owned by another party. It collects a fee for this service that is recorded as non-fuel revenue. Other non-fuel revenue also includes various services such as hangar rentals, de-icing, landing fees, tie-down fees and miscellaneous services.
The business’ fuel-related revenue and gross profit are driven by fuel volume and dollar-based margin per gallon. This applies to both fuel and into-plane revenue. Customers will occasionallysometimes move from one category to the other.
We believeThe business believes discussing total fuel-related revenue and gross profit, including both fuel sales and into-plane arrangements (as recorded in the non-fuel revenue line) and related key metrics on an aggregate basis, provides a more meaningful analysis of Atlantic Aviation.
GrossAviation’s gross profit than a discussion of each item. In the first six months of 2011, the business derived 64.7% of total gross profit from fuel and fuel-related services compared with 64.0% in the first halfsix months of 2010 was essentially flat compared to the first half of 2009 as a result of an increase in aggregate fuel-related gross profit, which was offset by lower gross profit from other services. 2010.
The increase in aggregate fuel-related gross profit resulted from a 4.7% increase in fuel volume driven by increased business jet traffic and a relatively minor increase in market share. This was partially offset by a 1.9% decrease in weighted average fuel margin driven by change in the relative volumes of customer segments, such as charter operators, change in the relative mix of locations and competitive pressure. The year-on-year change in fuel volumes and weighted average fuel margin also reflects military-related fuel volume (at two airports) in 2009 which did not re-occur in the first half of 2010. Excluding the impact of the non-recurring military-related volume, fuel volume would have increased 8.7% and weighted average fuel-related margin would have declined 4.2%. Gross profit from other services (primarily hangar rentals and miscellaneous services) decreased by 3.5% for the six months ended June 30, 2010 compared with the prior year comparable period, primarily driven by lower hangar rental, tie-down fees and miscellaneous revenue that was also attributable to the change in customer mix as noted above.
The decrease in selling, general and administrative expenses is primarily due to a 2.8% reduction in underlying costs as a result of the ongoing cost reduction initiatives.
The decrease is also due to a $2.4 million increase in bad debt reserves in the first quarter of 2009 due to the deterioration of the accounts receivable aging related to acquisitions. Acquisition-related receivables have improved and ongoing accounts receivable have not deteriorated, and as a result the business has recorded no further significant bad debt reserve adjustments.
Atlantic Aviation expects selling, general and administrative expense to amount to approximately $175.0 million for 2010.
The business performed an impairment test at the reporting unit level during the first half of 2009. Goodwill is considered impaired when the carrying amount of a reporting unit’s goodwill exceeds its implied fair value, as determined under a two step approach. Based on the testing performed, the business recognized goodwill impairment charges of $53.2 million and $71.2 million inboth the quarter and six months ended June 30, 2009,2011 resulted from an increase in fuel volume sold at marginally higher fuel margins, partially offset by the divestiture of non-core FBOs in the first half of 2011.
On a same store basis, gross profit increased by 4.2% and 4.0% for the quarter and six months ended June 30, 2011, respectively. No impairment charge was recordedOn the same basis, GA fuel volume sold increased by 4.5% for the quarter ended June 30, 2011 and GA average fuel margin increased by 0.5%. Non-fuel and non-GA gross profit increased by 2.9%.
Selling, general and administrative expenses for the first six months of 2011 were flat compared with the first six months of 2010. Higher weather-related expense in the first quarter of 2011 and higher motor fuel cost in the first six months of 2011 were offset by lower rent expense resulting from the sale of non-core FBOs during 2010.the second quarter of 2011.
On a same-store basis, SG&A increased 0.6% and 1.9% for the quarter and six months ending June 30, 2011, respectively.
On a same-store basis, EBITDA increased 9.4% and 6.9% for the quarter and six months ended June 30, 2011, respectively.
Depreciation and amortization expense includes non-cash impairment chargescharge of $5.1$8.7 million recorded at Atlantic Aviation during the quarter ended June 30, 2011. The impairment charge resulted from adverse conditions specific to three small locations.
During the quarter ended June 30, 2011, the business 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 is reinvesting proceeds into markets which it views as having better growth profiles. Accordingly, Atlantic Aviation recorded a $1.2 million non-cash loss on disposal of assets.
Interest expense, net, includes non-cash gains on derivative instruments of $2.9 million and $30.8$7.8 million infor the quarter and six months ended June 30, 2009,2011, respectively.
Interest For the quarter and six months ended June 30, 2010, interest expense, net, includes non-cash losses on derivative instruments of $11.6 million and $16.6 million, respectively. Excluding the non-cash losses on derivative instruments, interest incurred onexpense for the business’six months ended June 30, 2011 was lower due to the prepayment of term loan debt, amortizationpartially offset by the expiration of deferred financing costs,an interest rate basis swap agreement in March 2010.
Excluding cash paid for interest rate swap breakage fees, associated with debt prepaymentcash interest paid was $13.0 million and non-cash losses on derivatives instruments.$26.2 million for the quarter and six months ended June 30, 2011, respectively, and $13.8 million and $27.6 million for the quarter and six months ended June 30, 2010, respectively. Cash paid for interest rate swap breakage fees were $627,000 and $1.7 million for the quarter and six months ended June 30, 2011, respectively, and $695,000 and $3.2 million for the quarter and six months ended June 30, 2010, respectively. These itemsfees are summarizedexcluded from interest expense, net in the table below.
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Quarter Ended June 30, | Change Favorable/(Unfavorable) | Six Months Ended June 30, | Change Favorable/(Unfavorable) | |||||||||||||||||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||||||||||||||||||
$ | $ | $ | % | $ | $ | $ | % | |||||||||||||||||||||||||
($ In Thousands) | ||||||||||||||||||||||||||||||||
Interest income | — | (31 | ) | (31 | ) | NM | (14 | ) | (78 | ) | (64 | ) | (82.1 | ) | ||||||||||||||||||
Interest paid on debt facility | 13,825 | 14,279 | 454 | 3.2 | 27,575 | 29,298 | 1,723 | 5.9 | ||||||||||||||||||||||||
Swap breakage fees associated with debt prepayment | 695 | 1,547 | 852 | 55.1 | 3,205 | 6,706 | 3,501 | 52.2 | ||||||||||||||||||||||||
Amortization of deferred financing costs | 665 | 853 | 188 | 22.0 | 1,472 | 1,526 | 54 | 3.5 | ||||||||||||||||||||||||
Non-cash loss (gain) on derivative instruments | 11,604 | (11,520 | ) | (23,124 | ) | NM | 16,634 | (5,247 | ) | (21,881 | ) | NM | ||||||||||||||||||||
Less: capitalized interest | (101 | ) | (192 | ) | (91 | ) | (47.4 | ) | (198 | ) | (765 | ) | (567 | ) | (74.1 | ) | ||||||||||||||||
Total interest expense, net | 26,688 | 4,936 | (21,752 | ) | NM | 48,674 | 31,440 | (17,234 | ) | (54.8 | ) |
NM – Not meaningful
The decreasecurrent quarter as they have been included in interest paid on debt facility primarily reflects an aggregate $113.4 million of prepaymentsexpense, net in prior periods as part of the term loan principal since February 2009.mark-to-market derivative adjustments at Atlantic Aviation.
Income generated by Atlantic Aviation is included in our consolidated federal income tax return. The business files state income tax returns in more than 30 states in which it operates. The tax expense in the table above includes both state taxes and the portion of the consolidated federal tax liability attributable to the business.
While Atlantic Aviation as a whole expects to generate a current year federal income tax loss, certain entities within the business will generate state taxable income. For the year ending December 31, 2010, the business expects to pay state income taxes of approximately $574,000, of which $287,000 was recorded in the six months ended June 30, 2010.
The business has approximately $45.0$59.0 million of state NOL carryforwards.carryforwards at December 31, 2010. State NOL carryforwards are specific to the state in which the NOL was generated and various states impose limitations on the utilization of NOL carryforwards. Therefore, the business may incur state income tax liabilities in the near future, even if its consolidated state taxable income is less than $45.0$59.0 million.
TABLE OF CONTENTSAtlantic Aviation, as a whole, expects to generate a current year federal and state taxable income in 2011. For the year ended December 31, 2011, the business expects to pay state income taxes of approximately $1.2 million.
Atlantic Aviation recorded an increase of approximately $134,000 in its reserve for uncertain tax positions in the quarter ended June 30, 2011. The increase in the reserve was recorded as a state income tax expense for the period.
Our primary cash requirements include normal operating expenses, debt service, debt principal payments, payments of dividends and maintenance capital expenditures. Our primary source of cash is operating activities, although we couldmay borrow against existing credit facilities for growth capital expenditures, issue additional LLC interests or sell assets to generate cash.
UntilOn August 1, 2011, our board of directors declared a dividend of $0.20 per share for the quarter ended June 30, 2011, which will be paid on August 18, 2011 to holders of record on August 15, 2011. On May 18, 2011, we paid a dividend of $0.20 per share for the quarter ended March 31, 2010,2011.
The precise timing and amount of any future dividend will be based on the Company had a revolving credit facility provided by various financial institutions, including entities withincontinued stable performance of the Macquarie Group. The facility was repaid in full in December 2009Company’s businesses and no amounts were outstanding under the revolving credit facility as of December 31, 2009 oreconomic conditions prevailing at the facility’s maturity on March 31, 2010.time of any authorization.
We believe that our operating businesses will have sufficient liquidity and capital resources to meet future requirements, including servicing long-term debt obligations.obligations and making dividend payments. We base our assessment of the sufficiency of our liquidity and capital resources on the following assumptions:
We have capitalized our businesses, in part, using project financeproject-finance style debt. Project financeProject-finance style debt is limited-recourse, floating rate, non-amortizing debt with a medium term maturity of between five and seven years, although the principal balance on the term loan debt at Atlantic Aviation is being prepaid using the excess cash generated by the business. At June 30, 2010,2011, the average remaining maturity of the drawn balances of the primary debt facilities across all of our businesses, including our proportional interest in the revolving credit facility of IMTT, was approximately 4.03.1 years. In light of the improvement in the functioning of the credit markets generally, and the leverage and interest coverage ratios, we expect each of these businesses to successfully refinance their long-term debt on economically sensiblereasonable terms on or before maturity.
We have no holding company debt.
Due to the impact on financial markets of the recent process to raise the U.S. Government debt ceiling and approve a deficit reduction plan, we drew $35.0 million on revolving credit facilities at maturity.our portfolio companies to increase our short-term liquidity. This action was taken during July 2011 and is therefore not reflected in our June 30, 2011 financial statements.
The section below discusses the sources and uses of cash on a consolidated basis and for each of our businesses and investments. All inter-company activities such as corporate allocations, capital contributions to our businesses and distributions from our businesses have been excluded from the tables as these transactions are eliminated in consolidation.
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Six Months Ended June 30, | Change Favorable/(Unfavorable) | Six Months Ended June 30, | Change Favorable/(Unfavorable) | |||||||||||||||||||||||||||||
2010 | 2009 | 2011 | 2010 | |||||||||||||||||||||||||||||
$ | $ | $ | % | |||||||||||||||||||||||||||||
($ In Thousands) | ||||||||||||||||||||||||||||||||
($ In Thousands) | $ | $ | $ | % | ||||||||||||||||||||||||||||
Cash provided by operating activities | 41,646 | 39,762 | 1,884 | 4.7 | 41,287 | 41,646 | (359 | ) | (0.9 | ) | ||||||||||||||||||||||
Cash used in investing activities | (9,057 | ) | (11,772 | ) | 2,715 | 23.1 | ||||||||||||||||||||||||||
Cash provided by (used in) investing activities | 1,312 | (9,057 | ) | 10,369 | 114.5 | |||||||||||||||||||||||||||
Cash used in financing activities | (30,625 | ) | (57,461 | ) | 26,836 | 46.7 | (30,808 | ) | (30,625 | ) | (183 | ) | (0.6 | ) |
Consolidated cash provided by operating activities comprises primarily from the cash from operations of the businesses we own, as described in each of the business discussions below. The cash flow from our consolidated business’ operations is partially offset by expenses paid at the corporate level,holding company, including base management fees paid in cash, professional fees and interest incurred in the prior periods on any amounts drawn on our revolving credit facility.cost associated with being a public company.
The increasedecrease in consolidated cash provided by operating activities was primarily due to:
Distributions from IMTT are reflected in our consolidated cash provided by operating activities only up to our 50% share of IMTT’s positive earnings. Amounts in excess of this, and any distributions when IMTT records a net loss, are reflected in our consolidated cash from investing activities.activities as a return of investment in unconsolidated business. For the first six months of 2010, $5.0 million in distributions were included in cash from operating activities compared with $7.0 million in dividends received in 2009.activities.
The decreaseincrease in consolidated cash used inprovided by investing activities was primarily due to:
The decreaseincrease in consolidated cash used in financing activities was primarily due to:
Our businesses are capitalized with a mix of equity and project-financingproject-finance style debt. We believe we can prudently maintain relatively high levels of leverage due to the generally sustainable and stable long-term cash flows our businesses have provided in the past and which we expect to continue in the future as discussed above. Our project financeproject-finance debt is non-amortizing and we expect to be able to refinance the outstanding balances of the term loan aton or before maturity, except at Atlantic Aviation, where all excess cash flow from the business is being used to prepay the outstanding principal balance of the term loan. Similarly, excess cash flow generated at District Energy willmust be applied toward the principal balance of the term loan during the last two years before maturity. The majority of our businesses also maintain revolving capital expenditure and/or working capital facilities.
See below for further description of the cash flows related to our businesses.
The following analysis represents 100% of the cash flows of IMTT, rather than just the composition of cash flows that are included in our consolidated cash flows. We believe this is the most appropriate and meaningful approach to discussingdiscuss the historical cash flow trends of IMTT. We account for our 50% ownership of this business using the equity method. Distributions from IMTT when IMTT records a net loss, or pays distributions in excess of our share of its earnings, are reflected in investing activities in our consolidated cash flow.
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Six Months Ended June 30, | Change Favorable/(Unfavorable) | Six Months Ended June 30, | Change Favorable/(Unfavorable) | |||||||||||||||||||||||||||||
2010 | 2009 | 2011 | 2010 | |||||||||||||||||||||||||||||
$ | $ | $ | % | |||||||||||||||||||||||||||||
($ In Thousands) | ||||||||||||||||||||||||||||||||
($ In Thousands) | $ | $ | $ | % | ||||||||||||||||||||||||||||
Cash provided by operating activities | 68,677 | 66,836 | 1,841 | 2.8 | 63,946 | 68,677 | (4,731 | ) | (6.9 | ) | ||||||||||||||||||||||
Cash used in investing activities | (37,171 | ) | (83,119 | ) | 45,948 | 55.3 | (11,849 | ) | (37,171 | ) | 25,322 | 68.1 | ||||||||||||||||||||
Cash (used in) provided by financing activities | (28,018 | ) | 29,960 | (57,978 | ) | (193.5 | ) | |||||||||||||||||||||||||
Cash used in financing activities | (12,317 | ) | (28,018 | ) | 15,701 | 56.0 |
Cash provided by operating activities at IMTT is generated primarily from storage rentals and ancillary services that are billed monthly and paid on various terms. Cash used in operating activities is mainly for payroll and benefits costs, maintenance and repair of fixed assets, utilities and professional services, interest payments and payments to tax jurisdictions. Cash provided by operating activities increaseddecreased primarily due to improvedlower operating results, partially offset by ana smaller increase in working capital requirements in 2010.requirements.
Working capital declined in 2009 as we received payments from previously executed oil spill jobs. Conversely inIn 2010, working capital hasrequirements increased significantly due tosubstantially as a result of the timing of payments on work being performed in connection withon the BP oil spill in the Gulf of Mexico. Customers are paying as agreed under usual and customary terms.
CashThe decrease in cash used in investing activities was primarily relatesdue to the release of a tax-exempt bond escrow, partially offset by higher capital expenditures discussed below,in the first six months of 2011 as well ascompared with the paymentfirst six months of accrued purchases recorded in prior periods. Capital2010. Total capital expenditures decreasedincreased from $66.0 million in 2009 to $34.4 million in the first six months of 2010 to $49.9 million in the first six months of 2011 primarily reflecting a reductionan increase in growth capital expenditures.
IMTT incurs maintenance capital expenditures to prolong the useful lives and increase the service capacity of existing revenue-producing assets. Maintenance capital expenditures includesinclude the refurbishment of storage tanks, piping, dock facilities and environmental capital expenditures, principally in relation to improvements in containment measures and remediation.
DuringIMTT incurred $21.5 million and $19.0 million in the first six months ended June 30,of 2011 and the first six months of 2010, and 2009, IMTT incurred $19.0 million and $16.7 million, respectively, on maintenance capital expenditures, including (i) $16.6$19.6 million and $14.5$16.6 million, respectively, principally in relation to refurbishments of tanks, docks and other infrastructure and (ii) $2.4$1.9 million and $2.2$2.4 million, respectively, on environmental capital expenditures, principally in relation to improvements in containment measures and remediation.
For the full-year 2010,2011, IMTT expects to spend approximately $45.0 million to $50.0$55.0 million on maintenance capital expenditures. IMTT anticipates that maintenance capital expenditures will remain at elevated levels through 2014.2014 due to required cleaning and inspection program in Louisiana.
During the first six months of 2011, IMTT incurred growth capital expenditures of $28.4 million. This compares with growth capital expenditures incurred of $15.4 million for the first six months of 2010.
During the first half of 2011, IMTT committed to projects that are expected to cost $85.4 million, which are expected to add $13.6 million of EBITDA on an annualized basis. In addition, IMTT completed the construction and refurbishment of 1.4 million barrels at a total cost of $38.5 million, which will add $6.5 million to EBITDA on an annualized basis. These barrels were commissioned at various points throughout the first six months of 2011.
At June 30, 2011, IMTT is in the process of constructing and refurbishing 1.9 million barrels of storage. These projects are expected to cost $171.9 million in total and contribute $28.5 million to gross profit and EBITDA on an annualized basis. The projects are expected to be commissioned between 2011 and 2013. At June 30, 2011, $13.1 million of the $171.9 million had been spent or committed.
In addition, IMTT is engaged in the construction or upgrade of related infrastructure, primarily docks. These projects are expected to cost $55.4 million. During the first six months of 2011, IMTT spent $9.3 million on these infrastructure projects. At June 30, 2011, $34.9 million of the $55.4 million had been spent or committed.
DuringIn December 2010, the first halfTax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (the “Act”) was signed. The Act provides for 100% bonus depreciation for certain fixed assets placed in service after September 8, 2010 and before January 1, 2012, and 50% bonus depreciation for certain fixed assets placed in service during 2012 for federal income tax purposes. Generally, states do not allow this bonus depreciation deduction in determining state taxable income. Importantly, Louisiana, in which IMTT funded $15.4 millionhas significant operations, does permit the use of bonus depreciation in calculating state taxable income. IMTT will take into consideration the benefits of these accelerated depreciation provisions of the $54.8 million of previously announced pending growthAct when evaluating its capital projects and brought on line an additional 700,000 barrels of storage. This compares with growth capital expenditures of $49.3 million inexpenditure plans for the first half of 2009. The remainder of the announced spending will be largely completed by December 31, 2010.
As of June 30, 2010, IMTT has ongoing growth projects for the construction or refurbishment of 385,000 barrels of storage. The projects under construction or refurbishment are expected to have a total cost of $14.4 million2011 and will contribute approximately $6.2 million to IMTT's gross profit and EBITDA on an annualized basis. Of the $14.4 million, $9.9 million remained to be spent as of June 30, 2010.
In addition, IMTT is engaged in the construction or upgrade of storage related infrastructure. These projects are expected to cost $33.9 million, with $26.8 million remaining to be spent as of June 30, 2010.
IMTT continues to review numerous additional growth opportunities with an aggregate value between $200.0 million and $250.0 million and has been progressing on these opportunities. Discussions have progressed following the successful upsizing of its credit facility on June 18, 2010 as discussed below. IMTT expects to fund these potential projects with draw downs against the upsized credit facility and cash from operations.2012.
Cash flows fromused in financing activities decreased primarily due to net debt repayments ina distribution of $5.0 million to each shareholder on January 4, 2010 as compared with net borrowings in 2009. Inno distributions paid during the first six months of 2011 as well as debt refinancing costs in 2010 IMTT made a $5.0 million distribution to both of its shareholders, compared with $7.0 million in the first six months of 2009.that did not recur.
At June 30, 2010,2011, the outstanding balance on IMTT’s debt facilities, excluding capitalized leases, consisted of $338.6$336.3 million in letter of credit backed tax exempt bonds, $190.0 million in bank owned tax exempt bonds, a $65.0 million term loan, $22.3 million in revolving credit facilities $251.3 million in tax exempt bonds and $32.6$30.0 million in shareholder loans. The weighted average interest rate of the outstanding debt facilities, including any interest rate swaps and fees associated with outstanding letters of credit is 5.53%5.02%. Cash interest paid was $16.8 million and $15.9 million for six months ended June 30, 2011 and $14.2 million for 2010, and 2009, respectively.
On June 18, 2010, IMTT amended its revolving credit facility. The amendment increased the sizeFor a description of the facility from $625.0 million ($600.0 million U.S. dollar denominated and $25.0 million equivalent Canadian dollar denominated) to $1,100.0 million ($1,070.0 million U.S. dollar denominated and $30.0 million equivalent Canadian dollar denominated) and extended the maturity on $970.0 million two years from June 7, 2012 to June 7, 2014 with the remaining $130.0 million maturing on June 7, 2012. The facility was used to fully repay the $30.0 million Regions Term Loan as well as the $65.0 million DNB Term Loan.
In addition, the amendment removes a limitation on IMTT’s ability to grant liens when entering into additional debt agreements. Specifically, IMTT may enter into additional debt agreements and grant liens in relation to such debt agreements provided that obligations are secured on not less than a pari-passu basis. The increased commitment will be used to fund IMTT’s expansion and is expected to be more than adequate to fully fund existing and reasonably foreseeable growth capital expenditure plans.
The keymaterial terms of the amended credit facility are summarized below:
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USD Revolving Credit Facility – Extended | USD Revolving Credit Facility – Non Extended | USD DNB Nor Loans | CAD Revolving Credit Facility – Extended | |||||
Total Committed Amount | $875.0 million | $130.0 million | $65.0 million | $30.0 million | ||||
Maturity | June 7, 2014 | June 7, 2012 | December 31, 2012 (at which time it converts to USD Revolving Credit Facility — Extended) | June 7, 2014 | ||||
Uncommitted Expansion Amounts | $130.0 million, subject to corresponding reductions in other commitments | $0 | $0 | $0 | ||||
Amortization | Revolving, payable at maturity | Revolving, payable at maturity | Term loan, payable at maturity | Revolving, payable at maturity | ||||
Interest Rate | Floating at LIBOR plus a margin based on the ratio of Debt to adjusted EBITDA of IMTT and its affiliates, as follows: | Floating at LIBOR plus a margin based on the ratio of Debt to adjusted EBITDA of IMTT and its affiliates, as follows: | Floating at LIBOR plus 1.00% through December 2012, thereafter per the terms of the USD Revolving Credit Facility | Floating at Bankers’ Acceptances (BA) Rate plus a margin based on the ratio of Debt to adjusted EBITDA of IMTT and its affiliates, as follows: | ||||
< 2.0x L+1.50% < 2.5x L+1.75% < 3.0x L+2.00% < 3.75x L+2.25% < 4.0x L+2.50% > = 4.0x L+2.75% | < 2.0x L+0.55% < 2.5x L+0.70% < 3.0x L+0.85% < 3.75x L+1.00% < 4.0x L+1.25% > = 4.0x L+1.50% | < 2.0x BA+1.50% < 2.5x BA+1.75% < 3.0x BA+2.00% < 3.75x BA+2.25% < 4.0x BA+2.50% > = 4.0x BA+2.75% | ||||||
Commitment Fees | A percentage of undrawn committed amounts based on the ratio of Debt to adjusted EBITDA of IMTT and its affiliates, as follows: | A percentage of undrawn committed amounts based on the ratio of Debt to adjusted EBITDA of IMTT and its affiliates, as follows: | N/A | A percentage of undrawn committed amounts based on the ratio of Debt to adjusted EBITDA of IMTT and its affiliates, as follows: | ||||
< 2.0x 0.250% < 2.5x 0.250% < 3.0x 0.250% < 3.75x 0.375% < 4.0x 0.375% > = 4.0x 0.500% | < 2.0x 0.125% < 2.5x 0.150% < 3.0x 0.175% < 3.75x 0.200% < 4.0x 0.250% > = 4.0x 0.250% | < 2.0x 0.250% < 2.5x 0.250% < 3.0x 0.250% < 3.75x 0.375% < 4.0x 0.375% > = 4.0x 0.500% |
Except for the changes discussed above, the terms of the facility, including covenants and events of default, were not amended. Interest rate swap contracts hedging a portion of the original facility have been maintained.
The financial covenant requirements under IMTT’s credit facilities, see “Liquidity and Capital Resources” in Part II, Item 7 of our Annual Report on Form 10-K for the calculation offiscal year ended December 31, 2010. IMTT has not had any material changes to these measures at June 30, 2010, were as follows:
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TABLE OF CONTENTScredit facilities since February 23, 2011, our 10-K filing date.
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Six Months Ended June 30, | Change Favorable/(Unfavorable) | Six Months Ended June 30, | Change Favorable/(Unfavorable) | |||||||||||||||||||||||||||||
2010 | 2009 | 2011 | 2010 | |||||||||||||||||||||||||||||
$ | $ | $ | % | |||||||||||||||||||||||||||||
($ In Thousands) | ||||||||||||||||||||||||||||||||
($ In Thousands) | $ | $ | $ | % | ||||||||||||||||||||||||||||
Cash provided by operating activities | 11,089 | 11,831 | (742 | ) | (6.3 | ) | 8,814 | 11,089 | (2,275 | ) | (20.5 | ) | ||||||||||||||||||||
Cash used in investing activities | (3,910 | ) | (3,497 | ) | (413 | ) | (11.8 | ) | (7,806 | ) | (3,910 | ) | (3,896 | ) | (99.6 | ) | ||||||||||||||||
Cash provided by financing activities | — | — | — | — | ||||||||||||||||||||||||||||
Cash (used in) provided by financing activities | — | — | — | — |
The main driver forof cash provided by operating activities is customer receipts. These are offset in part by the timing ofThe business incurs payments for fuel, materials, pipeline repairs, vendor services and supplies, payroll and benefit costs, revenue-based taxes and payment of administrative costs. Customers are generally billed monthly and make payments on account. Vendors and suppliers generally bill the business when services are rendered or when products are shipped.
The decrease from 2009the 2010 to 20102011 was primarily driven by higher working capital requirements due to higher inventory, lower accounts payable and timing of prepaid insurance payments,increased fuel costs to be recovered from customers, partially offset by improved operating results and lower revenue-based taxes.during 2011.
Cash used in investing activities is composed primarily comprised of capital expenditures. Capital expenditures for the non-utility business are funded by cash from operating activities and capital expenditures for the utility business are funded by drawing on credit facilities as well as cash from operating activities.
Maintenance capital expenditures include replacement of pipeline sections, improvements to the business’ transmission system and SNG plant, improvements to buildings and other property and the purchase of equipment. These expenditures were higher compared to the prior year due to a higher level of pipeline renewals, expenditures for SNG plant components and facility upgrades.
Growth capital expenditures include the purchase of meters, regulators and propane tanks for new customers, the cost of installing pipelines for new residential and commercial construction, and the renewable feedstock pilot program.program and the expansion of gas storage facilities.
The following table sets forth information about capital expenditures in The Gas Company:
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Maintenance | Growth | |||||||
Six months ended June 30, 2010 | $1.7 million | $2.2 million | ||||||
Six months ended June 30, 2011 | $5.3 million | $2.5 million | ||||||
2011 full year projected | $6.2 million | $7.4 million | ||||||
Commitments at June 30, 2011 | $367,000 | $227,000 |
The business expects to fund its total 20102011 capital expenditures primarily from cash from operating activities and available debt facilities. Capital expenditures for 20102011 are expected to be higher than previous yearsin 2010 due to requiredcompletion of the renewable feedstock project, pipeline maintenance and inspection involvingprojects related to the relocation and upgrade of two sections of the transmission pipeline near the SNG plant as part of an integrity management program due(expected to be completed by 20122012) and a pilot project atexpansion of storage facilities. These are reflected in the SNG plant to create gas from renewable feedstock sources. Commitmentsincrease in capital expenditure for the six months ended June 30, 2011 and committed at June 30, 2011.
December 2010, primarily relate to the renewable feedstock project.Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (the “Act”) was signed. The Act provides for 100% bonus depreciation for certain fixed assets placed in service after September 8, 2010 and before January 1, 2012, and 50% bonus depreciation for certain fixed assets placed in service during 2012 for federal income tax purposes. Generally, states do not allow this bonus depreciation deduction in determining state taxable income. The business will take into consideration the benefits of these accelerated depreciation provisions of the Act when evaluating its capital expenditure plans for the remainder of 2011 and 2012.
The main drivers for cash from financing activities are debt financings for capital expenditures and the repayment of outstanding credit facilities. At June 30, 2010,2011, the outstanding balance on the business’ debt facilities consisted of $160.0 million in term loan facility borrowings and $19.0 million in capital expenditure facility borrowings. In July 2010, the business repaid $10.0$19.0 million of its capital expenditure facility borrowings.borrowings and no amount was outstanding at June 30, 2011.
The Gas Company has interest rate swaps hedging 100% of the interest rate exposure under the two $80.0 million floating rate term loan facilities that effectively fix the interest rate at 4.8375% (excluding the margin). In March 2009,rate. The Gas Company entered into an interest rate basis swap agreement with its existing debt and swap counterparties. The basis swap, which reduced the weighted average annual interest rate on the business’ primary debt facilities by approximately 24.75 basis points, expired in March 2010. The resulting weighted average interest rate of the outstanding debt facilities, including any interest rate swaps at June 30, 2010 is 4.85%.2011, was 5.44%, which includes a ten basis point step-up in the LIBOR margin, effective June 8, 2011, for each of two $80.0 million term loan facilities. The business paid approximately $4.3 million in interest expense related to its debt facilities for the six months ended June 30, 2011 and 2010. Cash interest expense was slightly higher in 2010 and 2009.the first six months of 2011 due to the expiration of an interest rate basis swap agreement in March 2010.
The Gas Company also has an uncommitted unsecured short-term borrowing facility of $7.5 million that was renewed during the second quarter of 2010.2011. This credit line bears interest at the lending bank’s quoted rate or prime rate. The facility is available for working capital needs. No amounts wereamount was outstanding as offor this facility at June 30, 2010.
The main drivers for cash from financing activities are debt financings for capital expenditures and the repayment of outstanding credit facilities. There were no borrowings or repayments during the quarter.2011.
The financial covenants triggering distribution lock-up or default under the business’ credit facility are as follows:
Additionally, the HPUC requires the consolidated debt to total capital for HGC Holdings not to exceed 65.0%65% and $20.0 million to be readily available in cash resources at The Gas Company, HGC Holdings or MIC. At June 30, 2010,2011, the debt to total capital ratio was 62.4%56.6% and $20.0 million in cash resources was readily available.
For a description of the material terms of The Gas Company’s credit facilities, see “Liquidity and Capital Resources” in Part II, Item 7 of our Annual Report ofon Form 10-K for the fiscal year ended December 31, 2009.2010. We have not had any material changes to these credit facilities since February 25, 2010,23, 2011, our 10-K filing date.
The following analysis represents 100% of the cash flows of District Energy.
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Six Months Ended June 30, | Change Favorable/(Unfavorable) | Six Months Ended June 30, | Change Favorable/(Unfavorable) | |||||||||||||||||||||||||||||
2010 | 2009 | 2011 | 2010 | |||||||||||||||||||||||||||||
$ | $ | $ | % | |||||||||||||||||||||||||||||
($ In Thousands) | ||||||||||||||||||||||||||||||||
($ In Thousands) | $ | $ | $ | % | ||||||||||||||||||||||||||||
Cash provided by operating activities | 2,561 | 4,841 | (2,280 | ) | (47.1 | ) | 6,044 | 2,561 | 3,483 | 136.0 | ||||||||||||||||||||||
Cash used in investing activities | (3,246 | ) | (3,403 | ) | 157 | 4.6 | (1,001 | ) | (3,246 | ) | 2,245 | 69.2 | ||||||||||||||||||||
Cash (used in) provided by financing activities | (172 | ) | 2,686 | (2,858 | ) | (106.4 | ) | |||||||||||||||||||||||||
Cash used in financing activities | (3,951 | ) | (960 | ) | (2,991 | ) | NM |
NM — Not meaningful
Cash provided by operating activities is primarily driven primarily by customer receipts for services provided and leased equipment payments received (including non-revenue lease principal). Cash used in operating activities is driven by the timing of payments for electricity, vendor services or supplies and the payment of payroll and benefit costs. The decline in cash provided byCash from operating activities was due primarily toincreased as a result of the timing of receipt of certain equipment lease payments in 2011 compared with 2010 and the expiration of a requirement that the business prepay a portion of its 2010 electricity supply contract one month in advance. District Energy accepted these prepayment terms to minimize the overall per unit cost of electricity. These cost savings are passed on to the business’ customers. The business did not need to prepay its electricity cost under its 2009 supply contract nor will it need to prepay under the terms of its 2011 supply contract.supply.
Cash used in investing activities mainly comprises capital expenditures, which are generally funded by drawing on available facilities. Cash used in investing activities in 20092011 and 2010 primarily funded growth capital expenditures for new customer connections and plant expansion.
The business expects to spend approximately $1.0 million per year on capital expenditures relating to the replacement of parts, system reliability, customer service improvements and minor system modifications. Maintenance capital expenditures will be funded from available debt facilities and cash from operating activities. These expenditures were higher inlower during the first six months of 20102011 due to the timing of spend on ordinary course maintenance projects.
The following table summarizes growth capital expenditures committed by District Energy signed contracts with five additional customers and committed to spend $1.9 million on interconnection, of which it had spent $1.0 million as wellof June 30, 2011, with $900,000 remaining to be spent. The business anticipates it will receive reimbursements from customers for approximately $1.1 million of the total $1.9 million expenditure, of which it had received $200,000 as theof June 30, 2011. These additional customers are expected to contribute $625,000 to gross profit and EBITDA expectedon an annualized basis.
The business continues to be generated by those expenditures. Of the $25.0 million total, approximately $24.2 million, or 97%, has been spent as of June 30, 2010.
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Capital Expenditure Cost | Gross Profit/EBITDA(1) | Expected Date for Gross Profit/EBITDA | ||||||||||
($ in Millions) | ||||||||||||
Chicago Plant and Distribution System Expansion | $ | 7.7 | ||||||||||
New Chicago Customer Connections and Minor System Modifications | 6.6 | |||||||||||
$ | 14.3 | $ | 4.9 | 2007 – 2013 | ||||||||
Chicago Plant Renovation and Expansion | 10.7 | 1.3 | 2009 – 2011 | |||||||||
Total | $ | 25.0 | $ | 6.2 |
actively market to new potential customers. New customers will typically reimburse the business for a substantial portion of expenditures related to connecting them to the business’ system, thereby reducing the impact of this element of capital expenditure. In addition, new customers generally have up to two years after their initial service date to increase capacity up to their final contracted tons, which may defer a small portion of the expected gross profit and EBITDA. As of August 4, 2010, the business has signed contracts representing approximately 80% of expected additional gross profit and EBITDA relating to the Chicago projects in the table above. Customers representing approximately 55%, of the $6.2 million of expected additional gross profit and EBITDA, are currently in service.
The business expects to fund the capital expenditures for system expansion and interconnection by drawing on debt facilities. The following table sets forth information about District Energy’s capital expenditures:
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Maintenance | Growth | |||||||
Six months ended June 30, 2009 | $175,000 | $3.2 million | ||||||
Six months ended June 30, 2010 | $719,000 | $127,000 | ||||||
2010 full year projected | $1.1 million | $1.4 million | ||||||
Commitments at June 30, 2010 | $349,000 | $702,000 |
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Maintenance | Growth | |||||||
Six months ended June 30, 2010 | $719,000 | $127,000 | ||||||
Six months ended June 30, 2011 | $478,000 | $523,000 | ||||||
2011 full year projected | $1.0 million | $1.7 million | ||||||
Commitments at June 30, 2011 | $45,000 | $38,000 |
In 2009, District Energy incurredGrowth capital expenditures relatedwere higher during the first six months of 2011 due to the Chicago plant renovation and expansion in additiontiming of spend related to connecting new customers to itsthe business’ district cooling system. This resulted in higher growth capital expenditures in 2009 as compared to 2010.
In early 2009, District Energy’s Las Vegas operation began providing service to a new customer building. This new customer began receiving full service in February 2010 and is expected to contribute approximately $300,000 per year to gross profit and EBITDA. This service required a $3.0 million system expansion of the Las Vegas facility, of which $300,000 was funded through a capital contribution from the noncontrolling interest shareholder of District Energy’s Las Vegas operation during the first quarter of 2010 (see “Financing Activities” below).
At June 30, 2010,2011, the outstanding balance on the business’ debt facilities consisted of $170.0 million in term loan facilities.
In March 2009, District Energy entered into an interest rate basis swap agreement with its existing debt and swap counterparties. The basis swap, which reduced the weighted average annual interest rate on the business’ primary debt facility by approximately 24.75 basis points, expired in March 2010. The resulting weighted average interest rate of the outstanding debt facilities, including any interest rate swaps and fees associated with outstanding letters of credit at June 30, 2010, is 5.53%2011, was 5.51%. Cash interest paid was $5.0 million and $4.9 million for the six months ended June 30, 2011 and $4.8 million for 2010, and 2009, respectively. Cash interest expense was slightly higher due to the expiration of an interest rate basis swap agreement in March 2010.
The decreaseincrease in cash provided byused in financing activities was primarily due to decreased borrowings underincreased distributions paid to the business’ credit facility to finance growth and maintenance capital expenditure, partiallynoncontrolling interest shareholders. In 2010, these distributions were offset by a $300,000 capital contribution from the noncontrolling interest shareholder of District Energy’s Las Vegas operations (as discussed above in “Investing Activities”).
The financial covenants triggering distribution lock-up or default under the business’ credit facility are as follows:
For a description of the material terms of District Energy’s credit facilities, see “Liquidity and Capital Resources” in Part II, Item 7 of our Annual Report ofon Form 10-K for the fiscal year ended December 31, 2009.2010. We have not had any material changes to these credit facilities since February 25, 2010,23, 2011, our 10-K filing date.
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Six Months Ended June 30, | Change Favorable/(Unfavorable) | |||||||||||||||
2010 | 2009 | |||||||||||||||
$ | $ | $ | % | |||||||||||||
($ In Thousands) | ||||||||||||||||
Cash provided by operating activities(1) | 29,331 | 26,738 | 2,593 | 9.7 | ||||||||||||
Cash used in investing activities | (2,504 | ) | (4,872 | ) | 2,368 | 48.6 | ||||||||||
Cash used in financing activities(2) | (29,605 | ) | (57,548 | ) | 27,943 | 48.6 |
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Six Months Ended June 30, | Change Favorable/(Unfavorable) | |||||||||||||||
2011 | 2010 | |||||||||||||||
($ In Thousands) | $ | $ | $ | % | ||||||||||||
Cash provided by operating activities | 29,882 | 29,331 | 551 | 1.9 | ||||||||||||
Cash provided by (used in) investing activities | 10,118 | (2,504 | ) | 12,622 | NM | |||||||||||
Cash used in financing activities | (17,688 | ) | (29,605 | ) | 11,917 | 40.3 |
TABLE OF CONTENTSNM — Not meaningful
Operating cash at Atlantic Aviation is generated from sales transactions primarily paid by credit cards. Some customers have extended payment terms and are billed accordingly. Cash is used in operating activities mainly for payments to vendors of fuel, aircraft services and professional services, as well as payroll costs and payments to tax jurisdictions. Cash provided by operating activities increased mainlyfrom the first six months of 2010 to the first six months of 2011 primarily due to:
Working capitalcash interest paid driven by reduced debt levels, increased as a result of higher receivables, partially offset by improved collection cycles. The increase in by;
Cash used inprovided by (used in) investing activities relates primarily to proceeds from the sale of FBOs and capital expenditures. The decreaseCash in investing activities increased from cash used in investing activity is primarily dueactivities during the first six months of 2010 to lower growthcash provided by investing activities during first six months of 2011 as a result of the proceeds received from the sale of FBO during the quarter ended June 30, 2011 offset by increase in capital expenditures by the business.during 2011.
Maintenance expenditures are generally funded by cash from operating activities and growth capital expenditures are generally funded with draw downsdraws on capital expenditure facilities.
Maintenance capital expenditures encompass repainting, replacing equipment as necessary and any ongoing environmental or required regulatory expenditure, such as installing safety equipment. These expenditures are generally funded from cash flow from operating activities.
Growth capital expenditures are incurred primarily in connection with lease extensions and only where the business expects to receive an appropriate return relative to its cost of capital. Historically these expenditures have included development of hangars, terminal buildings and ramp upgrades. The business has generally funded these projects through its growth capital expenditure facility or capital contributions from MIC.
The following table sets forth information about capital expenditures in Atlantic Aviation:
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Maintenance | Growth | |||||||
Six months ended June 30, 2009 | $1.5 million | $3.4 million | ||||||
Six months ended June 30, 2010 | $1.9 million | $676,000 | ||||||
2010 full year projected | $7.6 million | $6.7 million | ||||||
Commitments at June 30, 2010 | $300,000 | $200,000 |
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Maintenance | Growth | |||||||
Six months ended June 30, 2010 | $1.9 million | $676,000 | ||||||
Six months ended June 30, 2011 | $2.9 million | $3.9 million | ||||||
2011 full year projected | $11.5 million | $7.0 million | ||||||
Commitments at June 30, 2011 | $312,000 | $932,000 |
The decrease in growthGrowth capital expenditures from 2009 primarily relates to the completion of a terminal and ramp project in Nashville, Tennessee. The increaseincurred in the 2010 full year growth capital expendituresfirst six months of 2011 primarily reflects the construction costs of a greenfield fixed based operationnew FBO at Will Rogers Airport in Oklahoma City.City, construction of a hangar at Atlanta Peachtree and the construction of a new fuel farm at El Paso.
In December 2010, the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (the “Act”) was signed. The Act provides for 100% bonus depreciation for certain fixed assets placed in service after September 8, 2010 and before January 1, 2012, and 50% bonus depreciation for certain fixed assets placed in service during 2012 for federal income tax purposes. Generally, states do not allow this bonus depreciation deduction in determining state taxable income. The business will take into consideration the benefits of these accelerated depreciation provisions of the Act when evaluating its capital expenditure plans for the remainder of 2011 and 2012.
At June 30, 2010,2011, the outstanding balance on the business’Atlantic Aviation’s debt facilities consisted of $786.6$738.8 million in term loan facility borrowings, which is 100% hedged with interest rate swaps, and $44.9$49.8 million in capital expenditure facility borrowings. In March 2009, Atlantic Aviation entered into an interest rate basis swap agreement with its existing debt and swap counterparties. The basis swap, which reduced the weighted average annual interest rate on the business’ primary debt facility by approximately 19.50 basis points, expired in March 2010. The resulting weighted average interest rate on the term loan is 6.81%was 6.48%. The interest rate applicable on the capital expenditure facility is the three-month USU.S. Libor plus a margin of 1.60%. ForIn the first six months ended June 30, 20102011 and 2009,2010, the business paid approximately $26.2 million and $27.6 million, and $29.3 millionrespectively, in interest expense, respectively, excluding interest rate swap breakage fees, related to its debt facilities.
The decrease in cash used in financing activities is primarily due to a larger debt prepayment of the outstanding principal balance of the term loan debt in 2010 of $31.7 million compared with $24.5 million in 2011 and borrowings on long-term debt facility and line of credit during 2011.
The maximum permitted debt-to-EBITDA ratio dropped to 7.50x on March 31, 2011. The business expects to remain in compliance with the first halfmaximum leverage covenant through the maturity of 2009. Inits debt facilities if the six months ended June 30, 2010 and 2009,performance of the business pre-paid $31.7 million and $60.6 million, respectively, of debt principal and $3.2 million and $6.7 million, respectively, of interest rate swap breakage fees.
In August 2010, the business prepaid $9.0 million of term loan principal and incurred approximately $935,000 in swap breakage fees. As a result of this prepayment, the proforma leverage ratio would decrease to 7.27x based upon the trailing twelve months June 30, 2010 EBITDA, as calculated under the facility.remains at current levels.
The financial covenant requirements under Atlantic Aviation’s credit facility, and the calculation of these measures at June 30, 2010,2011, were as follows:
• | Debt Service Coverage Ratio > 1.2x (default threshold). The ratio at June 30, |
In cooperation with the business’ lenders, the terms of Atlantic Aviation’s loan agreement were amended on February 25, 2009. The amendments providerequire that the business apply all excess cash flow to prepay additional debt principal whenever the leverage ratio (debt to adjusted EBITDA) is equal to or greater than 6.0x to 1.0 for the trailing twelve months and willto use 50% of excess cash flow to prepay debt whenever the leverage ratio is equal to or greater than 5.5x to 1.0 and below 6.0x to 1.0. The revised
For a description of the material terms are outlined inof Atlantic Aviation’s credit facilities, see “Liquidity and Capital Resources”, in Part II, Item 7 of our Annual Report onof Form 10-K for the fiscal year ended December 31, 2009, filed on February 25, 2010. We have not had any material changes to thisthese credit facilityfacilities since February 25, 2010,23, 2011, our 10-K filing date.
At June 30, 20102011 there were no material changes in our future commitments and contingencies from December 31, 2009,2010, except for the mandatory prepayment we expect to make under the cash sweep terms of Atlantic Aviation’s credit facility from long-term debt to current portion of long-term debt in our consolidated condensed balance sheet.
Under the amended terms of Atlantic Aviation’s credit facility, the business will apply all excess cash flow from the business to prepay the debt principal for the foreseeable future. For the quarter and six months ended June 30, 2010,2011, Atlantic Aviation used $7.7$26.2 million and $34.9 million, respectively, of excess cash flow to prepay $7.0$24.5 million and $31.7 million, respectively, of the outstanding principal balance of the term loan debt under the facility and $695,000 and $3.2$1.7 million respectively, in interest rate swap breakage fees. Actual prepayment amounts in the periods beginning June 30, 20112012 through the maturity of the facility will depend on the performance of the business.
In August 2010, Atlantic Aviation used $9.9 million of excess cash flow to prepay $9.0 million of the outstanding principal balance of the term loan debt and incurred $935,000 in interest rate swap breakage fees.
See Note 9,7, “Long-Term Debt”, to our consolidated condensed financial statements in Part I Item 1 of this Form 10-Q for further discussion.
At June 30, 2010,2011, we did not have any outstanding material purchase obligations. For a discussion of our other future obligations, due by period, under the various contractual obligations, off-balance sheet arrangements and commitments, please see “Liquidity and Capital Resources — Commitments and Contingencies” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2009,2010, filed with the SEC on February 25, 2010.23, 2011. We have not had any material changes to our commitments except as discussed above.
In addition, at June 30, 2010,2011, we did not have any material reserves for contingencies. We have other contingencies, including pending threatened legal and administrative proceedings that are not reflected at this time as they are not ascertainable.
Our sources of cash to meet these obligations are as follows:
For critical accounting policies and estimates, see “Critical Accounting Policies and Estimates” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.2010. Our critical accounting policies and estimates have not changed materially from the description contained in that Annual Report.
Significant assets acquired in connection with our acquisition of The Gas Company, District Energy and Atlantic Aviation include contract rights, customer relationships, non-compete agreements, trademarks, domain names, property and equipment and goodwill.
Trademarks and domain names are generally considered to be indefinite life intangibles. Trademarks domain names and goodwill are not amortized in most circumstances. It may be appropriate to amortize some trademarks and domain names.trademarks. However, for unamortized intangible assets, we are required to perform annual impairment reviews and more frequently in certain circumstances.
The goodwill impairment test is a two-step process, which requires management to make judgments in determining what assumptions to use in the calculation. The first step of the process consists of estimating the fair value of each reporting unit based on a discounted cash flow model using revenue and profit forecasts and comparing those estimated fair values with the carrying values, which included the allocated goodwill. If the estimated fair value is less than the carrying value, a second step is performed to compute the amount of the impairment by determining an “implied fair value” of goodwill. The determination of a reporting unit’s “implied fair value” of goodwill requires the allocation of the estimated fair value of the reporting unit to the assets and liabilities of the reporting unit. Any unallocated fair value represents the “implied fair value” of goodwill, which is compared towith its corresponding carrying value. The Gas Company, District Energy and Atlantic Aviation are separate reporting units for purposes of this analysis. The impairment test for trademarks, and domain names, which are not amortized, requires the determination of the fair value of such assets. If the fair value of the trademarks and domain names isare less than their carrying value, an impairment loss is recognized in an amount equal to the difference. We cannot predict the occurrence of certain future events that might adversely affect the reported value of goodwill and/or intangible assets. Such events include, but are not limited to, strategic decisions made in response to economic and competitive conditions, the impact of the economic environment on our customer base, or material negative change in relationship with significant customers.
Property and equipment is initially stated at cost. Depreciation on property and equipment is computed using the straight-line method over the estimated useful lives of the property and equipment after consideration of historical results and anticipated results based on our current plans. Our estimated useful lives represent the period the asset remains in service assuming normal routine maintenance. We review the estimated useful lives assigned to property and equipment when our business experience suggests that they do not properly reflect the consumption of economic benefits embodied in the property and equipment nor result in the appropriate matching of cost against revenue. Factors that lead to such a conclusion may include physical observation of asset usage, examination of realized gains and losses on asset disposals and consideration of market trends such as technological obsolescence or change in market demand.
Significant intangibles, including contract rights, customer relationships, non-compete agreements and technology are amortized using the straight-line method over the estimated useful lives of the intangible asset after consideration of historical results and anticipated results based on our current plans. With respect to contract rights in our Atlantic Aviation business, we take into consideration the history of contract right renewals in determining our assessment of useful life and the corresponding amortization period.
We perform impairment reviews of property and equipment and intangibles subject to amortization, when events or circumstances indicate that assets are less than their carrying amount and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets. In this circumstance, the impairment charge is determined based upon the amount by which the net book value of the assets exceeds their fair market value. Any impairment is measured by comparing the fair value of the asset to its carrying value.
The “implied fair value” of reporting units and fair value of property and equipment and intangible assets is determined by our management and is generally based upon future cash flow projections for the acquired assets, discounted to present value. We use outside valuation experts when management considers that it is appropriate to do so.
We test for goodwill and indefinite-lived intangible assets when there is an indicator of impairment. Impairments of goodwill, property, equipment, land and leasehold improvementsimprovement and intangible assets during 2009the quarter ended June 30, 2011 relating to Atlantic Aviation isare discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations” in Part I Item 2 of this quarterly report on Form 10-Q.
See Note 3, “New Accounting Pronouncements”, to our consolidated condensed financial statements in Part I, Item I of this Form 10-Q for details on new accounting pronouncements which is incorporated herein by reference.
The discussion of the financial condition and results of operations of the Company 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, 2009.2010. 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.
For quantitative and qualitative disclosures about market risk, see Part II, Item 7A “Quantitative and Qualitative Disclosures about Market Risk” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.2010. Our exposure to market risk has not changed materially since February 25, 2010,23, 2011, our 10-K filing date.
Under the direction and with the participation of our Chief Executive Officer and Chief Financial Officer, we evaluated our disclosure controls and procedures (as such term is defined under Rule 13a-15(e) of the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2010.2011. There has been no change in our internal controls over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the six months ended June 30, 20102011 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
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June 30, 2011 | December 31, 2010(1) | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 36,354 | $ | 24,563 | ||||
Accounts receivable, less allowance for doubtful accounts of $507 and $613, respectively | 57,945 | 47,845 | ||||||
Inventories | 16,777 | 17,063 | ||||||
Prepaid expenses | 4,211 | 6,321 | ||||||
Deferred income taxes | 19,563 | 19,030 | ||||||
Other | 12,474 | 10,605 | ||||||
Total current assets | 147,324 | 125,427 | ||||||
Property, equipment, land and leasehold improvements, net | 553,343 | 563,451 | ||||||
Equipment lease receivables | 33,993 | 35,663 | ||||||
Investment in unconsolidated business | 227,122 | 223,792 | ||||||
Goodwill | 511,153 | 514,253 | ||||||
Intangible assets, net | 670,758 | 705,862 | ||||||
Other | 26,280 | 28,294 | ||||||
Total assets | $ | 2,169,973 | $ | 2,196,742 | ||||
LIABILITIES AND MEMBERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Due to manager – related party | $ | 4,233 | $ | 3,282 | ||||
Accounts payable | 33,985 | 36,036 | ||||||
Accrued expenses | 22,112 | 23,047 | ||||||
Current portion of long-term debt | 48,622 | 49,325 | ||||||
Fair value of derivative instruments | 44,820 | 43,496 | ||||||
Other | 15,463 | 16,100 | ||||||
Total current liabilities | 169,235 | 171,286 | ||||||
Long-term debt, net of current portion | 1,072,680 | 1,089,559 | ||||||
Deferred income taxes | 164,162 | 156,328 | ||||||
Fair value of derivative instruments | 33,348 | 51,729 | ||||||
Other | 40,877 | 41,145 | ||||||
Total liabilities | 1,480,302 | 1,510,047 | ||||||
Commitments and contingencies | — | — | ||||||
Members’ equity: | ||||||||
LLC interests, no par value; 500,000,000 authorized; 46,028,258 LLC interests issued and outstanding at June 30, 2011 and 45,715,448 LLC interests issued and outstanding at December 31, 2010 | 962,555 | 964,430 | ||||||
Additional paid in capital | 21,956 | 21,956 | ||||||
Accumulated other comprehensive loss | (24,614 | ) | (25,812 | ) | ||||
Accumulated deficit | (260,750 | ) | (269,425 | ) | ||||
Total members’ equity | 699,147 | 691,149 | ||||||
Noncontrolling interests | (9,476 | ) | (4,454 | ) | ||||
Total equity | 689,671 | 686,695 | ||||||
Total liabilities and equity | $ | 2,169,973 | $ | 2,196,742 |
(1) | Reclassified to conform to current period presentation. |
See accompanying notes to the consolidated condensed financial statements.
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Quarter Ended | Six Months Ended | |||||||||||||||
June 30, 2011 | June 30, 2010 | June 30, 2011 | June 30, 2010 | |||||||||||||
Revenue | ||||||||||||||||
Revenue from product sales | $ | 161,582 | $ | 125,177 | $ | 314,646 | $ | 245,195 | ||||||||
Revenue from product sales – utility | 36,421 | 28,450 | 70,694 | 55,285 | ||||||||||||
Service revenue | 47,923 | 49,794 | 99,170 | 103,000 | ||||||||||||
Financing and equipment lease income | 1,261 | 1,271 | 2,548 | 2,516 | ||||||||||||
Total revenue | 247,187 | 204,692 | 487,058 | 405,996 | ||||||||||||
Costs and expenses | ||||||||||||||||
Cost of product sales | 113,226 | 79,887 | 218,551 | 156,941 | ||||||||||||
Cost of product sales – utility | 30,772 | 23,151 | 57,637 | 44,464 | ||||||||||||
Cost of services | 12,690 | 13,318 | 24,844 | 24,463 | ||||||||||||
Selling, general and administrative | 48,309 | 49,522 | 99,979 | 100,256 | ||||||||||||
Fees to manager – related party | 4,156 | 2,268 | 7,788 | 4,457 | ||||||||||||
Depreciation | 8,623 | 7,202 | 15,833 | 14,924 | ||||||||||||
Amortization of intangibles | 16,044 | 8,740 | 24,763 | 17,411 | ||||||||||||
Loss on disposal of assets | 1,225 | — | 1,225 | — | ||||||||||||
Total operating expenses | 235,045 | 184,088 | 450,620 | 362,916 | ||||||||||||
Operating income | 12,142 | 20,604 | 36,438 | 43,080 | ||||||||||||
Other income (expense) | ||||||||||||||||
Interest income | 97 | 4 | 101 | 20 | ||||||||||||
Interest expense(1) | (19,866 | ) | (38,974 | ) | (34,335 | ) | (73,661 | ) | ||||||||
Equity in earnings and amortization charges of investee | 3,270 | 5,774 | 11,632 | 11,367 | ||||||||||||
Other expense, net | (46 | ) | (496 | ) | (395 | ) | (448 | ) | ||||||||
Net (loss) income from continuing operations before income taxes | (4,403 | ) | (13,088 | ) | 13,441 | (19,642 | ) | |||||||||
Benefit (provision) for income taxes | 488 | 13,488 | (6,498 | ) | 14,577 | |||||||||||
Net (loss) income from continuing operations | $ | (3,915 | ) | $ | 400 | $ | 6,943 | $ | (5,065 | ) | ||||||
Net income from discontinued operations, net of taxes | — | 85,212 | — | 81,199 | ||||||||||||
Net (loss) income | $ | (3,915 | ) | $ | 85,612 | $ | 6,943 | $ | 76,134 | |||||||
Less: net loss attributable to noncontrolling interests | (1,425 | ) | (238 | ) | (1,732 | ) | (1,351 | ) | ||||||||
Net (loss) income attributable to MIC LLC | $ | (2,490 | ) | $ | 85,850 | $ | 8,675 | $ | 77,485 | |||||||
Basic (loss) income per share from continuing operations attributable to MIC LLC interest holders | $ | (0.05 | ) | $ | 0.02 | $ | 0.19 | $ | (0.08 | ) | ||||||
Basic income per share from discontinued operations attributable to MIC LLC interest holders | — | 1.87 | — | 1.79 | ||||||||||||
Basic (loss) income per share attributable to MIC LLC interest holders | $ | (0.05 | ) | $ | 1.89 | $ | 0.19 | $ | 1.71 | |||||||
Weighted average number of shares outstanding: basic | 45,901,486 | 45,467,413 | 45,816,499 | 45,381,413 | ||||||||||||
Diluted (loss) income per share from continuing operations attributable to MIC LLC interest holders | $ | (0.05 | ) | $ | 0.02 | $ | 0.19 | $ | (0.08 | ) | ||||||
Diluted income per share from discontinued operations attributable to MIC LLC interest holders | — | 1.86 | — | 1.78 | ||||||||||||
Diluted (loss) income per share attributable to MIC LLC interest holders | $ | (0.05 | ) | $ | 1.88 | $ | 0.19 | $ | 1.70 | |||||||
Weighted average number of shares outstanding: diluted | 45,901,486 | 45,604,064 | 45,846,235 | 45,513,864 | ||||||||||||
Cash distributions declared per share | $ | 0.20 | $ | — | $ | 0.40 | $ | — |
(1) | Interest expense includes non-cash losses on derivative instruments of $545,000 and non-cash gains on derivatives of $5.0 million for the quarter and six months ended June 30, 2011, respectively. For the quarter and six months ended June 30, 2010, interest expense includes includes non-cash losses on derivative instruments of $20.5 million and $31.7 million, respectively. |
See accompanying notes to the consolidated condensed financial statements.
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Six Months Ended | ||||||||
June 30, 2011 | June 30, 2010 | |||||||
Operating activities | ||||||||
Net income | $ | 6,943 | $ | 76,134 | ||||
Adjustments to reconcile net income to net cash provided by operating activities from continuing operations: | ||||||||
Net income from discontinued operations before noncontrolling interests | — | (81,199 | ) | |||||
Depreciation and amortization of property and equipment | 19,138 | 18,195 | ||||||
Amortization of intangible assets | 24,763 | 17,411 | ||||||
Loss on disposal of assets | 1,153 | — | ||||||
Equity in earnings and amortization charges of investees | (11,632 | ) | (11,367 | ) | ||||
Equity distributions from investees | — | 5,000 | ||||||
Amortization of debt financing costs | 2,060 | 2,256 | ||||||
Non-cash derivative (gains) losses | (4,965 | ) | 31,674 | |||||
Base management fees settled in LLC interests | 7,788 | 2,189 | ||||||
Equipment lease receivable, net | 1,493 | 1,451 | ||||||
Deferred rent | 201 | 145 | ||||||
Deferred taxes | 5,370 | (16,046 | ) | |||||
Other non-cash expenses, net | 1,218 | 2,112 | ||||||
Changes in other assets and liabilities: | ||||||||
Accounts receivable | (10,634 | ) | (4,718 | ) | ||||
Inventories | (45 | ) | (2,376 | ) | ||||
Prepaid expenses and other current assets | 1,112 | 1,299 | ||||||
Due to manager – related party | 8 | 2,263 | ||||||
Accounts payable and accrued expenses | (1,436 | ) | (1,281 | ) | ||||
Income taxes payable | (251 | ) | (406 | ) | ||||
Other, net | (997 | ) | (1,090 | ) | ||||
Net cash provided by operating activities from continuing operations | 41,287 | 41,646 | ||||||
Investing activities | ||||||||
Proceeds from sale of assets | 16,916 | — | ||||||
Purchases of property and equipment | (15,587 | ) | (7,315 | ) | ||||
Investment in capital leased assets | (24 | ) | (2,400 | ) | ||||
Other | 7 | 658 | ||||||
Net cash provided by (used in) investing activities from continuing operations | 1,312 | (9,057 | ) | |||||
Financing activities | ||||||||
Proceeds from long-term debt | 2,489 | — | ||||||
Net proceeds on line of credit facilities | 4,400 | — | ||||||
Dividends paid to holders of LLC interests | (9,170 | ) | — | |||||
Contributions received from noncontrolling interests | — | 300 | ||||||
Distributions paid to noncontrolling interests | (3,951 | ) | (1,261 | ) | ||||
Payment of long-term debt | (24,500 | ) | (31,736 | ) | ||||
Change in restricted cash | — | 2,236 | ||||||
Payment of notes and capital lease obligations | (76 | ) | (164 | ) | ||||
Net cash used in financing activities from continuing operations | (30,808 | ) | (30,625 | ) | ||||
Net change in cash and cash equivalents from continuing operations | 11,791 | 1,964 |
See accompanying notes to the consolidated condensed financial statements.
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Six Months Ended | ||||||||
June 30, 2011 | June 30, 2010 | |||||||
Cash flows (used in) provided by discontinued operations: | ||||||||
Net cash used in operating activities | — | (12,703 | ) | |||||
Net cash provided by investing activities | — | 134,356 | ||||||
Net cash used in financing activities | — | (124,183 | ) | |||||
Cash used in discontinued operations(1) | — | (2,530 | ) | |||||
Change in cash of discontinued operations held for sale(1) | — | 2,385 | ||||||
Net change in cash and cash equivalents | 11,791 | 1,819 | ||||||
Cash and cash equivalents, beginning of period | 24,563 | 27,455 | ||||||
Cash and cash equivalents, end of period – continuing operations | $ | 36,354 | $ | 29,274 | ||||
Supplemental disclosures of cash flow information for continuing operations: | ||||||||
Non-cash investing and financing activities: | ||||||||
Accrued purchases of property and equipment | $ | 2,456 | $ | 1,092 | ||||
Issuance of LLC interests to manager for base management fees | $ | 6,846 | $ | 4,083 | ||||
Issuance of LLC interests to independent directors | $ | 450 | $ | 446 | ||||
Taxes paid | $ | 1,349 | $ | 1,508 | ||||
Interest paid | $ | 37,296 | $ | 40,015 |
(1) | Cash of discontinued operations held for sale is reported in assets of discontinued operations held for sale in the accompanying consolidated condensed balance sheets. The cash used in discontinued operations is different than the change in cash of discontinued operations held for sale due to intercompany transactions that are eliminated in consolidation. |
See accompanying notes to the consolidated condensed financial statements.
Macquarie Infrastructure Company LLC, a Delaware limited liability company, was formed on April 13, 2004. Macquarie Infrastructure Company LLC, both on an individual entity basis and together with its consolidated subsidiaries, is referred to in these financial statements as the “Company” or “MIC”. The Company owns, operates and invests in a diversified group of infrastructure businesses in the United States. Macquarie Infrastructure Management (USA) Inc. is the Company’s manager and is referred to in these financial statements as the Manager. The Manager is a wholly-owned subsidiary within the Macquarie Group of companies, which is comprised of Macquarie Group Limited and its subsidiaries and affiliates worldwide. Macquarie Group Limited is headquartered in Australia and is listed on the Australian Stock Exchange.
MIC LLC is a non-operating holding company with a Board of Directors and other corporate governance responsibilities generally consistent with those of a Delaware corporation. MIC LLC has made an election to be treated as a corporation for tax purposes.
The Company owns its businesses through its wholly-owned subsidiary, Macquarie Infrastructure Company Inc., or MIC Inc. The Company’s businesses operate predominantly in the United States and consist of the following:
Atlantic Aviation — an airport services business providing products and services, including fuel and aircraft hangaring/parking, to owners and operators of general aviation aircraft at 63 airports and one heliport in the U.S.
The unaudited consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X for interim financial information. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The preparation of consolidated condensed financial statements in conformity with GAAP requires estimates and assumptions. Management evaluates these estimates and assumptions on an ongoing basis. Actual results may differ from the estimates and assumptions used in the financial statements and notes. Operating results for the quarter and six months ended June 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.
The consolidated balance sheet at December 31, 2010 has been derived from audited financial statements but does not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. Certain reclassifications were made to the financial statements for the prior period to conform to current period presentation.
The interim financial information contained herein should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2010 included in the Company’s Annual Report on Form 10-K, as filed with the SEC on February 23, 2011.
Following is a reconciliation of the basic and diluted number of shares used in computing (loss) income per share:
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Quarter Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Weighted average number of shares outstanding: basic | 45,901,486 | 45,467,413 | 45,816,499 | 45,381,413 | ||||||||||||
Dilutive effect of restricted stock unit grants | — | 136,651 | 29,736 | 132,451 | ||||||||||||
Weighted average number of shares outstanding: diluted | 45,901,486 | 45,604,064 | 45,846,235 | 45,513,864 |
The effect of potentially dilutive shares for the six months ended June 30, 2011 is calculated assuming that the 17,925 restricted stock unit grants provided to the independent directors on June 2, 2011 and the 31,989 restricted stock unit grants provided to the independent directors on June 3, 2010 had been fully converted to shares on those grant dates. However, the restricted stock unit grants were anti-dilutive for the quarter ended June 30, 2011, due to the Company’s net loss for that period.
The effect of potentially dilutive shares for the quarter and six months ended June 30, 2010 is calculated assuming that the 31,989 restricted stock unit grants provided to the independent directors on June 3, 2010 and the 128,205 restricted stock unit grants provided to the independent directors on June 4, 2009 had been fully converted to shares on those dates.
On June 2, 2010, the Company 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 the Company’s consolidated condensed balance sheet. 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 the Company. The Company received $602,000 from the PCAA bankruptcy estate for expenses paid on behalf of PCAA during its operations.
As a result of the approval of the sale of PCAA’s assets in bankruptcy and the dissolution of PCAA during 2010, the Company reduced its valuation allowance in 2010 on the realization of a portion of the deferred tax assets attributable to its basis in PCAA and its consolidated federal net operating loss, or NOL. The change in the valuation allowance recorded in discontinued operations was $9.6 million for the year ended December 31, 2010.
The results of operations from this business, for the quarter and six months ended June 30, 2010, are separately reported as discontinued operations in the Company’s consolidated condensed financial statements. This business is no longer a reportable segment.
Summarized financial information for discontinued operations related to PCAA for the quarter and six months ended June 30, 2010 is as follows ($ in thousands, except share and per share data):
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For the Quarter Ended June 30, 2010 | For the Six Months Ended June 30, 2010 | |||||||
Service revenue | $ | 12,319 | $ | 28,826 | ||||
Gain on sale of assets through bankruptcy (pre-tax) | 130,260 | 130,260 | ||||||
Net income from discontinued operations before income taxes and noncontrolling interest | $ | 135,726 | $ | 132,709 | ||||
Provision for income taxes | (50,514 | ) | (51,510 | ) | ||||
Net income from discontinued operations | 85,212 | 81,199 | ||||||
Less: net income attributable to noncontrolling interests | 302 | 136 | ||||||
Net income from discontinued operations attributable to MIC LLC | $ | 84,910 | $ | 81,063 | ||||
Basic income per share from discontinued operations attributable to MIC LLC interest holders | $ | 1.87 | $ | 1.79 | ||||
Weighted average number of shares outstanding at the Company level: basic | 45,467,413 | 45,381,413 | ||||||
Diluted income per share from discontinued operations attributable to MIC LLC interest holders | $ | 1.86 | $ | 1.78 | ||||
Weighted average number of shares outstanding at the Company level: diluted | 45,604,064 | 45,513,864 |
Property, equipment, land and leasehold improvements at June 30, 2011 and December 31, 2010 consist of the following ($ in thousands):
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June 30, 2011 | December 31, 2010 | |||||||
Land | $ | 4,618 | $ | 4,618 | ||||
Easements | 5,624 | 5,624 | ||||||
Buildings | 24,938 | 24,796 | ||||||
Leasehold and land improvements | 314,663 | 320,170 | ||||||
Machinery and equipment | 342,269 | 337,595 | ||||||
Furniture and fixtures | 9,301 | 9,240 | ||||||
Construction in progress | 20,500 | 17,070 | ||||||
Property held for future use | 1,597 | 1,573 | ||||||
723,510 | 720,686 | |||||||
Less: accumulated depreciation | (170,167 | ) | (157,235 | ) | ||||
Property, equipment, land and leasehold improvements, net(1) | $ | 553,343 | $ | 563,451 |
(1) | Includes $136,000 of capitalized interest for the year ended December 31, 2010. |
As a result of a decline in the performance of certain asset groups at Atlantic Aviation during the quarter ended June 30, 2011, the Company evaluated such asset groups for impairment and determined the asset groups were impaired. Accordingly, the Company recognized non-cash impairment charges of $1.4 million primarily relating to leasehold and land improvements; buildings; machinery and equipment; and furniture and
fixtures at Atlantic Aviation, on assets with a carrying value of $1.8 million. The fair value of $405,000 of the impaired asset group was estimated using discounted cash flows. The significant unobservable inputs (“level 3”) used for the fair value measurement included forecasted cash flows of Atlantic Aviation and its asset groups and the discount rate. The forecasted cash flows for this business were developed using actual cash flows from 2011 and forecasted jet fuel volumes based on market dynamics at three small sites. The discount rate was developed using a capital asset pricing model. These charges are recorded in depreciation expense in the consolidated condensed statement of operations.
Intangible assets at June 30, 2011 and December 31, 2010 consist of the following ($ in thousands):
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Weighted Average Life (Years) | June 30, 2011 | December 31, 2010 | ||||||||||
Contractual arrangements | 30.4 | $ | 742,015 | $ | 762,595 | |||||||
Non-compete agreements | 2.5 | 9,515 | 9,515 | |||||||||
Customer relationships | 10.6 | 77,765 | 77,842 | |||||||||
Leasehold rights | 12.5 | 3,330 | 3,330 | |||||||||
Trade names | Indefinite | 15,401 | 15,401 | |||||||||
Technology | 5.0 | 460 | 460 | |||||||||
848,486 | 869,143 | |||||||||||
Less: accumulated amortization | (177,728 | ) | (163,281 | ) | ||||||||
Intangible assets, net | $ | 670,758 | $ | 705,862 |
As a result of a decline in the performance of certain asset groups at Atlantic Aviation during the quarter ended June 30, 2011, the Company evaluated such asset groups for impairment and determined the asset groups were impaired. Accordingly, the Company recognized non-cash impairment charges of $7.3 million relating to contractual arrangements at Atlantic Aviation, on assets with a carrying value of $7.5 million. The fair value of $233,000 of the impaired asset group was estimated using discounted cash flows. The significant unobservable inputs (“level 3”) used for the fair value measurement included forecasted cash flows of Atlantic Aviation and its asset groups and the discount rate. The forecasted cash flows for this business were developed using actual cash flows from 2011 and forecasted jet fuel volumes based on market dynamics at three small sites. The discount rate was developed using a capital asset pricing model. These charges are recorded in amortization of intangibles in the consolidated condensed statement of operations.
The goodwill balance as of June 30, 2011 is comprised of the following ($ in thousands):
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Goodwill acquired in business combinations, net of disposals | $ | 639,382 | ||
Less: accumulated impairment charges | (123,200 | ) | ||
Less: write off of goodwill with disposal of assets | (5,029 | ) | ||
Balance at June 30, 2011 | $ | 511,153 |
During the quarter ended June 30, 2011, the Company wrote-off $3.1 million of goodwill associated with the sale of FBOs at Hayward Executive Airport in California and Burlington International Airport in Vermont. Proceeds of $16.9 million were received and a $365,000 loss on disposal of assets was recorded in the consolidated condensed statement of operations upon the completion of the sale.
The Company tests for goodwill impairment at the reporting unit level on an annual basis and between annual tests if a triggering event indicates impairment. Annual goodwill impairment testing conducted routinely on October 1st of each year.
At June 30, 2011 and December 31, 2010, the Company’s consolidated long-term debt consisted of the following ($ in thousands):
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June 30, 2011 | December 31, 2010 | |||||||
The Gas Company | $ | 160,000 | $ | 160,000 | ||||
District Energy | 170,000 | 170,000 | ||||||
Atlantic Aviation | 791,302 | 808,884 | ||||||
Total | 1,121,302 | 1,138,884 | ||||||
Less: current portion | (48,622 | ) | (49,325 | ) | ||||
Long-term portion | $ | 1,072,680 | $ | 1,089,559 |
On February 25, 2009, Atlantic Aviation amended its credit facility to provide the business additional financial flexibility over the near and medium term. Under the amended terms, the business must apply all excess cash flow from the business to prepay additional debt whenever the leverage ratio (debt to adjusted EBITDA) is equal to or greater than 6.0x to 1.0 for the trailing twelve months and must use 50% of excess cash flow to prepay debt whenever the leverage ratio is equal to or greater than 5.5x to 1.0 and below 6.0x to 1.0. For the quarter and six months ended June 30, 2011, Atlantic Aviation used $10.6 million and $26.2 million, respectively, of excess cash flow to prepay $10.0 million and $24.5 million, respectively, of the outstanding principal balance of the term loan debt under the facility and $627,000 and $1.7 million, respectively, in interest rate swap breakage fees. The Company has classified $48.3 million relating to Atlantic Aviation’s term loan debt in current portion of long-term debt in the consolidated condensed balance sheet at June 30, 2011, as it expects to repay this amount within one year.
The Company and its businesses have in place variable-rate debt. Management believes that it is prudent to limit the variability of a portion of the business’ interest payments. To meet this objective, the Company enters into interest rate swap agreements to manage fluctuations in cash flows resulting from interest rate risk on a majority of its debt with a variable-rate component.
At June 30, 2011, the Company had $1.1 billion of current and long-term debt, $1.0 billion of which was economically hedged with interest rate swaps and $72.5 million of which was unhedged.
As discussed in Note 7, “Long-Term Debt”, Atlantic Aviation applies its excess cash flow to prepay debt. As a result, $1.5 million of accumulated other comprehensive loss in the consolidated condensed balance sheet related to Atlantic Aviation’s derivative instruments was reclassified to interest expense in the consolidated condensed statement of operations for the six months ended June 30, 2010. Atlantic Aviation will record additional reclassifications from accumulated other comprehensive loss to interest expense as the business continues to pay down its debt more quickly than anticipated.
In March 2009, Atlantic Aviation, The Gas Company and District Energy entered into interest rate basis swap contracts that expired on March 31, 2010. These contracts effectively changed the interest rate index on each business’ existing swap contracts from the 90-day LIBOR rate to the 30-day LIBOR rate plus a margin of 19.50 basis points for Atlantic Aviation and 24.75 basis points for The Gas Company and District Energy. This transaction, adjusted for the prepayments of outstanding principal on the term loan debt at Atlantic Aviation, resulted in $580,000 lower interest expense for these businesses for the quarter ended March 31, 2010.
Effective February 25, 2009 for Atlantic Aviation and effective April 1, 2009 for the Company’s other businesses, the Company elected to discontinue hedge accounting. In prior periods, when the Company applied hedge accounting, changes in the fair value of derivatives that effectively offset the variability of cash flows on the Company’s debt interest obligations were recorded in other comprehensive income or loss. From the dates that hedge accounting was discontinued, all movements in the fair value of the interest rate swaps are recorded directly through earnings. As interest payments are made, a portion of the other comprehensive loss recorded under hedge accounting is also reclassified into earnings. The Company will reclassify into earnings $24.5 million of net derivative losses, included in accumulated other comprehensive loss as of June 30, 2011 over the remaining life of the existing interest rate swaps, of which approximately $16.9 million will be reclassified over the next 12 months.
The Company measures derivative instruments at fair value using the income approach which discounts the future net cash settlements expected under the derivative contracts to a present value. These valuations utilize primarily observable (“level 2”) inputs, including contractual terms, interest rates and yield curves observable at commonly quoted intervals.
The Company’s fair value measurements of its derivative instruments and the related location of the liabilities associated with the hedging instruments within the consolidated condensed balance sheets at June 30, 2011 and December 31, 2010 were as follows ($ in thousands):
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Liabilities at Fair Value(1) | ||||||||
Interest Rate Swap Contracts Not Designated as Hedging Instruments | ||||||||
Balance Sheet Location | June 30, 2011 | December 31, 2010 | ||||||
Fair value of derivative instruments – current liabilities | $ | (44,820 | ) | $ | (43,496 | ) | ||
Fair value of derivative instruments – non-current liabilities | (33,348 | ) | (51,729 | ) | ||||
Total interest rate swap derivative contracts | $ | (78,168 | ) | $ | (95,225 | ) |
(1) | Fair value measurements at reporting date were made using significant other observable inputs (“level 2”). |
The Company’s hedging activities for the quarter and six months ended June 30, 2011 and 2010 and the related location within the consolidated condensed financial statements were as follows ($ in thousands):
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Derivatives Not Designated as Hedging Instruments(1) | ||||||||||||||||
Amount of Gain/Loss Recognized in Interest Expense for the Quarter Ended June 30, | Amount of Gain/Loss Recognized in Interest Expense for the Six Months Ended June 30, | |||||||||||||||
Financial Statement Account | 2011(2) | 2010(3) | 2011(2) | 2010(3) | ||||||||||||
Interest expense | $ | (15,198 | ) | $ | (36,008 | ) | $ | (25,033 | ) | $ | (63,142 | ) | ||||
Total | $ | (15,198 | ) | $ | (36,008 | ) | $ | (25,033 | ) | $ | (63,142 | ) |
(1) | All derivatives are interest rate swap contracts. |
(2) | Net loss recognized in interest expense for the quarter and six months ended June 30, 2011 includes $14.0 million and $28.2 million, respectively, in interest rate swap payments and unrealized derivative losses of $1.2 million and unrealized derivative gains of $3.2 million, respectively, arising from: |
(3) | Loss recognized in interest expense for the quarter and six months ended June 30, 2010 includes $21.3 million and $34.9 million, respectively, in unrealized derivative losses and $14.7 million and $28.2 million, respectively, in interest rate swap payment. |
All of the Company’s derivative instruments are collateralized by all of the assets of the respective businesses.
Other comprehensive income includes primarily the change in fair value of derivative instruments which qualified for hedge accounting until the dates that hedge accounting was discontinued, as discussed in Note 8, “Derivative Instruments and Hedging Activities”.
The difference between net (loss) income and comprehensive income for the quarter and six months ended June 30, 2011 and 2010 was as follows ($ in thousands):
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Quarter Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net (loss) income attributable to MIC LLC | $ | (2,490 | ) | $ | 85,850 | $ | 8,675 | $ | 77,485 | |||||||
Reclassification of net realized losses into earnings, net of taxes | 3,257 | 4,390 | 1,198 | 9,738 | ||||||||||||
Comprehensive income | $ | 767 | $ | 90,240 | $ | 9,873 | $ | 87,223 |
For further discussion on derivative instruments and hedging activities, see Note 8, “Derivative Instruments and Hedging Activities”.
The Company is authorized to issue 500,000,000 LLC interests. Each outstanding LLC interest of the Company is entitled to one vote on any matter with respect to which holders of LLC interests are entitled to vote.
The Company’s operations are broadly classified into the energy-related businesses and an aviation-related business, Atlantic Aviation. The energy-related businesses consist of two reportable segments: The Gas Company and District Energy. The energy-related businesses also include a 50% investment in IMTT, which is accounted for under the equity method. Financial information for IMTT’s business as a whole is presented below ($ in thousands) (unaudited):
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As of, and for the Quarter Ended June 30, | As of, and for the Six Month Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenue | $ | 106,950 | $ | 158,235 | $ | 217,781 | $ | 265,273 | ||||||||
Net income | $ | 8,933 | $ | 14,222 | $ | 28,023 | $ | 27,465 | ||||||||
Interest expense, net | 16,311 | 25,774 | 20,994 | 37,899 | ||||||||||||
Provision for income taxes | 5,903 | 10,750 | 19,447 | 20,356 | ||||||||||||
Depreciation and amortization | 16,360 | 14,916 | 32,035 | 29,534 | ||||||||||||
Other non-cash (income) expenses | (46 | ) | 12 | (54 | ) | 245 | ||||||||||
EBITDA excluding non-cash items(1) | $ | 47,461 | $ | 65,674 | $ | 100,445 | $ | 115,499 | ||||||||
Capital expenditures paid | $ | 21,427 | $ | 17,741 | $ | 54,724 | $ | 37,171 | ||||||||
Property, equipment, land and leasehold improvements, net | 1,060,646 | 993,427 | 1,060,646 | 993,427 | ||||||||||||
Total assets balance | 1,215,380 | 1,127,169 | 1,215,380 | 1,127,169 |
(1) | EBITDA consists of earnings before interest, taxes, depreciation and amortization. Non-cash items that are excluded consist of impairments, derivative gains and losses and all other non-cash income and expense items. |
All of the business segments are managed separately and management has chosen to organize the Company around the distinct products and services offered.
IMTT provides bulk liquid storage and handling services in North America through ten terminals located on the East, West and Gulf Coasts, the Great Lakes region of the United States and partially owned terminals in Quebec and Newfoundland, Canada. IMTT derives the majority of its revenue from storage and handling of petroleum products, various chemicals, renewable fuels, and vegetable and animal oils. Based on storage capacity, IMTT operates one of the largest third-party bulk liquid storage terminal businesses in the United States.
The revenue from The Gas Company segment is included in revenue from product sales. Revenue is generated from the distribution and sales of synthetic natural gas, or SNG, and liquefied petroleum gas, or LPG. Revenue is primarily a function of the volume of SNG and LPG consumed by customers and the price per thermal unit or gallon charged to customers. Because both SNG and LPG are derived from petroleum, revenue levels, without organic growth, will generally track global oil prices. The utility revenue of The Gas Company reflects fuel adjustment charges, or FACs, through which changes in fuel costs are passed through to customers.
The revenue from the District Energy segment is included in service revenue and financing and equipment lease income. Included in service revenue is capacity revenue, which relates to monthly fixed contract charges, and consumption revenue, which relates to contractual rates applied to actual usage. Financing and equipment lease income relates to direct financing lease transactions and equipment leases to the business’ various customers. Finance lease revenue, recorded on the consolidated condensed statement of operations, is comprised of the interest portion of lease payments received from equipment leases with various
customers. The principal cash receipts on these equipment leases are recorded in the operating activities of the consolidated condensed statement of cash flows. District Energy provides its services to buildings primarily in the downtown Chicago, Illinois area and to a casino and a shopping mall located in Las Vegas, Nevada.
The Atlantic Aviation segment derives the majority of its revenues from fuel sales and from other airport services, including de-icing, aircraft hangarage and other aviation services. All of the revenue of Atlantic Aviation is generated in the United States at 63 airports and one heliport.
Selected information by segment is presented in the following tables. The tables do not include financial data for the Company’s equity investment in IMTT.
Revenue from external customers for the Company’s consolidated reportable segments was as follows ($ in thousands) (unaudited):
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Quarter Ended June 30, 2011 | ||||||||||||||||
Energy-related Businesses | Total Reportable Segments | |||||||||||||||
The Gas Company | District Energy | Atlantic Aviation | ||||||||||||||
Revenue from Product Sales | ||||||||||||||||
Product sales | $ | 26,935 | $ | — | $ | 134,647 | $ | 161,582 | ||||||||
Product sales – utility | 36,421 | — | — | 36,421 | ||||||||||||
63,356 | — | 134,647 | 198,003 | |||||||||||||
Service Revenue | ||||||||||||||||
Other services | — | 903 | 35,668 | 36,571 | ||||||||||||
Cooling capacity revenue | — | 5,428 | — | 5,428 | ||||||||||||
Cooling consumption revenue | — | 5,924 | — | 5,924 | ||||||||||||
— | 12,255 | 35,668 | 47,923 | |||||||||||||
Financing and Lease Income | ||||||||||||||||
Financing and equipment lease | — | 1,261 | — | 1,261 | ||||||||||||
— | 1,261 | — | 1,261 | |||||||||||||
Total Revenue | $ | 63,356 | $ | 13,516 | $ | 170,315 | $ | 247,187 |
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Quarter Ended June 30, 2010 | ||||||||||||||||
Energy-related Businesses | Total Reportable Segments | |||||||||||||||
The Gas Company | District Energy | Atlantic Aviation | ||||||||||||||
Revenue from Product Sales | ||||||||||||||||
Product sales | $ | 24,236 | $ | — | $ | 100,941 | $ | 125,177 | ||||||||
Product sales – utility | 28,450 | — | — | 28,450 | ||||||||||||
52,686 | — | 100,941 | 153,627 | |||||||||||||
Service Revenue | ||||||||||||||||
Other services | — | 803 | 36,552 | 37,355 | ||||||||||||
Cooling capacity revenue | — | 5,295 | — | 5,295 | ||||||||||||
Cooling consumption revenue | — | 7,144 | — | 7,144 | ||||||||||||
— | 13,242 | 36,552 | 49,794 | |||||||||||||
Financing and Lease Income | ||||||||||||||||
Financing and equipment lease | — | 1,271 | — | 1,271 | ||||||||||||
— | 1,271 | — | 1,271 | |||||||||||||
Total Revenue | $ | 52,686 | $ | 14,513 | $ | 137,493 | $ | 204,692 |
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Six Months Ended June 30, 2011 | ||||||||||||||||
Energy-related Businesses | Total Reportable Segments | |||||||||||||||
The Gas Company | District Energy | Atlantic Aviation | ||||||||||||||
Revenue from Product Sales | ||||||||||||||||
Product sales | $ | 54,286 | $ | — | $ | 260,360 | $ | 314,646 | ||||||||
Product sales – utility | 70,694 | — | — | 70,694 | ||||||||||||
124,980 | — | 260,360 | 385,340 | |||||||||||||
Service Revenue | ||||||||||||||||
Other services | — | 1,593 | 78,464 | 80,057 | ||||||||||||
Cooling capacity revenue | — | 10,759 | — | 10,759 | ||||||||||||
Cooling consumption revenue | — | 8,354 | — | 8,354 | ||||||||||||
— | 20,706 | 78,464 | 99,170 | |||||||||||||
Financing and Lease Income | ||||||||||||||||
Financing and equipment lease | — | 2,548 | — | 2,548 | ||||||||||||
— | 2,548 | — | 2,548 | |||||||||||||
Total Revenue | $ | 124,980 | $ | 23,254 | $ | 338,824 | $ | 487,058 |
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Six Months Ended June 30, 2010 | ||||||||||||||||
Energy-related Businesses | Total Reportable Segments | |||||||||||||||
The Gas Company | District Energy | Atlantic Aviation | ||||||||||||||
Revenue from Product Sales | ||||||||||||||||
Product sales | $ | 49,546 | $ | — | $ | 195,649 | $ | 245,195 | ||||||||
Product sales – utility | 55,285 | — | — | 55,285 | ||||||||||||
104,831 | — | 195,649 | 300,480 | |||||||||||||
Service Revenue | ||||||||||||||||
Other services | — | 1,667 | 81,893 | 83,560 | ||||||||||||
Cooling capacity revenue | — | 10,533 | — | 10,533 | ||||||||||||
Cooling consumption revenue | — | 8,907 | — | 8,907 | ||||||||||||
— | 21,107 | 81,893 | 103,000 | |||||||||||||
Financing and Lease Income | ||||||||||||||||
Financing and equipment lease | — | 2,516 | — | 2,516 | ||||||||||||
— | 2,516 | — | 2,516 | |||||||||||||
Total Revenue | $ | 104,831 | $ | 23,623 | $ | 277,542 | $ | 405,996 |
In accordance with FASB ASC 280Segment Reporting, the Company has disclosed earnings before interest, taxes, depreciation and amortization (EBITDA) excluding non-cash items as a key performance metric relied on by management in the evaluation of the Company’s performance. Non-cash items include impairments, derivative gains and losses and adjustments for other non-cash items reflected in the statements of operations. The Company believes EBITDA excluding non-cash items provides additional insight into the performance of the 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. EBITDA excluding non-cash items is reconciled to net income or loss.
EBITDA excluding non-cash items for the Company’s consolidated reportable segments is shown in the tables below ($ in thousands) (unaudited). Allocation of corporate expense, intercompany fees and the tax effects have been excluded as they are eliminated on consolidation.
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Quarter Ended June 30, 2011 | ||||||||||||||||
Energy-related Businesses | Total Reportable Segments | |||||||||||||||
The Gas Company | District Energy | Atlantic Aviation(1) | ||||||||||||||
Net income (loss) | $ | 3,273 | $ | (926 | ) | $ | (3,497 | ) | $ | (1,150 | ) | |||||
Interest expense, net | 3,483 | 4,925 | 11,361 | 19,769 | ||||||||||||
Provision (benefit) for income taxes | 2,310 | (650 | ) | (2,335 | ) | (675 | ) | |||||||||
Depreciation | 1,596 | 1,658 | 7,027 | 10,281 | ||||||||||||
Amortization of intangibles | 206 | 341 | 15,497 | 16,044 | ||||||||||||
Loss on disposal of assets | — | — | 1,153 | 1,153 | ||||||||||||
Other non-cash expense (income) | 512 | 300 | (43 | ) | 769 | |||||||||||
EBITDA excluding non-cash items | $ | 11,380 | $ | 5,648 | $ | 29,163 | $ | 46,191 |
(1) | Includes non-cash impairment charges of $8.7 million recorded during the quarter ended June 30, 2011, consisting of $7.3 million related to intangible assets (in amortization of intangibles) and $1.4 million related to property, equipment, land and leasehold improvements (in depreciation). |
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Quarter Ended June 30, 2010 | ||||||||||||||||
Energy-related Businesses | Total Reportable Segments | |||||||||||||||
The Gas Company | District Energy | Atlantic Aviation | ||||||||||||||
Net income (loss) | $ | 1,212 | $ | (2,705 | ) | $ | (8,538 | ) | $ | (10,031 | ) | |||||
Interest expense, net | 5,926 | 7,976 | 26,688 | 40,590 | ||||||||||||
Provision (benefit) for income taxes | 780 | (1,767 | ) | (5,764 | ) | (6,751 | ) | |||||||||
Depreciation | 1,511 | 1,636 | 5,691 | 8,838 | ||||||||||||
Amortization of intangibles | 205 | 341 | 8,194 | 8,740 | ||||||||||||
Other non-cash expense | 531 | 232 | 558 | 1,321 | ||||||||||||
EBITDA excluding non-cash items | $ | 10,165 | $ | 5,713 | $ | 26,829 | $ | 42,707 |
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Six Months Ended June 30, 2011 | ||||||||||||||||
Energy-related Businesses | Total Reportable Segments | |||||||||||||||
The Gas Company | District Energy | Atlantic Aviation(1) | ||||||||||||||
Net income (loss) | $ | 7,703 | $ | (1,422 | ) | $ | 1,245 | $ | 7,526 | |||||||
Interest expense, net | 5,497 | 7,184 | 21,554 | 34,235 | ||||||||||||
Provision (benefit) for income taxes | 5,212 | (997 | ) | 840 | 5,055 | |||||||||||
Depreciation | 3,163 | 3,305 | 12,670 | 19,138 | ||||||||||||
Amortization of intangibles | 412 | 678 | 23,673 | 24,763 | ||||||||||||
Loss on disposal of assets | — | — | 1,153 | 1,153 | ||||||||||||
Other non-cash expense | 1,182 | 338 | 103 | 1,623 | ||||||||||||
EBITDA excluding non-cash items | $ | 23,169 | $ | 9,086 | $ | 61,238 | $ | 93,493 |
(1) | Includes non-cash impairment charges of $8.7 million recorded during the six months ended June 30, 2011, consisting of $7.3 million related to intangible assets (in amortization of intangibles) and $1.4 million related to property, equipment, land and leasehold improvements (in depreciation). |
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Six Months Ended June 30, 2010 | ||||||||||||||||
Energy-related Businesses | Total Reportable Segments | |||||||||||||||
The Gas Company | District Energy | Atlantic Aviation | ||||||||||||||
Net income (loss) | $ | 3,466 | $ | (5,336 | ) | $ | (11,927 | ) | $ | (13,797 | ) | |||||
Interest expense, net | 10,733 | 14,004 | 48,674 | 73,411 | ||||||||||||
Provision (benefit) for income taxes | 2,231 | (3,487 | ) | (8,051 | ) | (9,307 | ) | |||||||||
Depreciation | 3,023 | 3,271 | 11,901 | 18,195 | ||||||||||||
Amortization of intangibles | 411 | 678 | 16,322 | 17,411 | ||||||||||||
Other non-cash expense | 1,065 | 387 | 605 | 2,057 | ||||||||||||
EBITDA excluding non-cash items | $ | 20,929 | $ | 9,517 | $ | 57,524 | $ | 87,970 |
Reconciliations of consolidated reportable segments’ EBITDA excluding non-cash items to consolidated net (loss) income from continuing operations before income taxes are as follows ($ in thousands) (unaudited):
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Quarter Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Total reportable segments EBITDA excluding non-cash items | $ | 46,191 | $ | 42,707 | $ | 93,493 | $ | 87,970 | ||||||||
Interest income | 97 | 4 | 101 | 20 | ||||||||||||
Interest expense | (19,866 | ) | (38,974 | ) | (34,335 | ) | (73,661 | ) | ||||||||
Depreciation(1) | (10,281 | ) | (8,838 | ) | (19,138 | ) | (18,195 | ) | ||||||||
Amortization of intangibles(2) | (16,044 | ) | (8,740 | ) | (24,763 | ) | (17,411 | ) | ||||||||
Loss on disposal of assets | (1,153 | ) | — | (1,153 | ) | — | ||||||||||
Selling, general and administrative – corporate | (1,882 | ) | (1,628 | ) | (3,361 | ) | (3,608 | ) | ||||||||
Fees to manager | (4,156 | ) | (2,268 | ) | (7,788 | ) | (4,457 | ) | ||||||||
Equity in earnings and amortization charges of investees | 3,270 | 5,774 | 11,632 | 11,367 | ||||||||||||
Other expense, net | (579 | ) | (1,125 | ) | (1,247 | ) | (1,667 | ) | ||||||||
Total consolidated net (loss) income from continuing operations before income taxes | $ | (4,403 | ) | $ | (13,088 | ) | $ | 13,441 | $ | (19,642 | ) |
(1) | Depreciation includes depreciation expense for District Energy, which is reported in cost of services in the consolidated condensed statement of operations. Depreciation also includes non-cash impairment charge of $1.4 million for the quarter and six months ended June 30, 2011 recorded by Atlantic Aviation. |
(2) | Includes non-cash impairment charges of $7.3 million for contractual arrangements recorded during the quarter and six months ended June 30, 2011 at Atlantic Aviation. |
Capital expenditures for the Company’s reportable segments were as follows ($ in thousands) (unaudited):
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Quarter Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
The Gas Company | $ | 3,665 | $ | 1,555 | $ | 7,812 | $ | 3,886 | ||||||||
District Energy | 413 | 500 | 977 | 846 | ||||||||||||
Atlantic Aviation | 4,347 | 1,247 | 6,798 | 2,583 | ||||||||||||
Total | $ | 8,425 | $ | 3,302 | $ | 15,587 | $ | 7,315 |
Property, equipment, land and leasehold improvements, goodwill and total assets for the Company’s reportable segments as of June 30 were as follows ($ in thousands) (unaudited):
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Property, Equipment, Land and Leasehold Improvements | Goodwill | Total Assets | ||||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||
The Gas Company | $ | 152,749 | $ | 143,641 | $ | 120,193 | $ | 120,193 | $ | 364,581 | $ | 352,623 | ||||||||||||
District Energy | 144,138 | 148,882 | 18,646 | 18,646 | 223,052 | 231,081 | ||||||||||||||||||
Atlantic Aviation | 256,456 | 276,670 | 372,314 | 377,343 | 1,380,508 | 1,452,519 | ||||||||||||||||||
Total | $ | 553,343 | $ | 569,193 | $ | 511,153 | $ | 516,182 | $ | 1,968,141 | $ | 2,036,223 |
Reconciliation of reportable segments’ total assets to consolidated total assets ($ in thousands) (unaudited):
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As of June 30, | ||||||||
2011 | 2010 | |||||||
Total assets of reportable segments | $ | 1,968,141 | $ | 2,036,223 | ||||
Investment in IMTT | 227,122 | 213,858 | ||||||
Corporate and other | (25,290 | ) | (17,905 | ) | ||||
Total consolidated assets | $ | 2,169,973 | $ | 2,232,176 |
As of June 30, 2011, the Manager held 4,078,378 LLC interests of the Company, which were acquired concurrently with the closing of the initial public offering in December 2004 and by reinvesting base management and performance fees in the Company. In addition, the Macquarie Group held LLC interests acquired in open market purchases.
The Company entered into a management services agreement, or Management Agreement, with the Manager pursuant to which the Manager manages the Company’s day-to-day operations and oversees the management teams of the Company’s operating businesses. In addition, the Manager has the right to appoint the Chairman of the Board of the Company, and an alternate, subject to minimum equity ownership, and to assign, or second, to the Company, on a permanent and wholly-dedicated basis, employees to assume the role of Chief Executive Officer and Chief Financial Officer and second or make other personnel available as required.
In accordance with the Management Agreement, the Manager is entitled to a quarterly base management fee based primarily on the Company’s market capitalization, and a performance fee, based on the performance of the Company’s stock relative to a U.S. utilities index. For the six months ended June 30, 2011 and 2010, the Manager did not earn a performance fee.
For the six months ended June 30, 2011 and 2010, the Company incurred base management fees of $7.8 million and $4.5 million, respectively. The unpaid portion of the fees at the end of each reporting period is included in due to manager-related party in the consolidated condensed balance sheets. The Manager elected to reinvest the base management fee of $3.2 million for the fourth quarter of 2010 in additional LLC interests and the Company issued 136,079 LLC interests to the Manager during the first quarter of 2011. The Manager elected to reinvest the base management fee of $3.6 million for the first quarter of 2011 in additional LLC interests and the Company issued 144,742 LLC interests to the Manager during the second quarter of 2011. The base management fee for the second quarter of 2011 will be reinvested in additional LLC interests during the third quarter of 2011.
The Manager is not entitled to any other compensation and all costs incurred by the Manager, including compensation of seconded staff, are paid by the Manager out of its base management fee. However, the Company is responsible for other direct costs including, but not limited to, expenses incurred in the administration or management of the Company and its subsidiaries and investments, income taxes, audit and legal fees, acquisitions and dispositions and its compliance with applicable laws and regulations. During the six months ended June 30, 2011 and 2010, the Manager charged the Company $139,000 and $169,000, respectively, for reimbursement of out-of-pocket expenses. The unpaid portion of the out-of-pocket expenses at the end of the reporting period is included in due to manager-related party in the consolidated condensed balance sheet.
The Macquarie Group, and wholly-owned subsidiaries within the Macquarie Group, including Macquarie Bank Limited, or MBL, and Macquarie Capital (USA) Inc., or MCUSA, have provided various advisory and other services and incurred expenses in connection with the Company’s equity raising activities, acquisitions and debt structuring for the Company and its businesses. Underwriting fees are recorded in members’ equity as a direct cost of equity offerings. Advisory fees and out-of-pocket expenses relating to acquisitions are expensed as incurred. Debt arranging fees are deferred and amortized over the term of the credit facility. No amounts were incurred during the six months ended June 30, 2011.
Until March 31, 2010, the Company had a revolving credit facility provided by various financial institutions, including entities within the Macquarie Group. The facility was repaid in full during 2009 and no amounts were outstanding under the revolving credit facility at the facility’s maturity on March 31, 2010.
The Company has derivative instruments in place to fix the interest rate on certain outstanding variable-rate term loan facilities. MBL has provided interest rate swaps for The Gas Company. At June 30, 2011, The Gas Company had $160.0 million of its term loans hedged, of which MBL was providing the interest rate swaps for a notional amount of $48.0 million. The remainder of the swaps are from an unrelated third party. During the six months ended June 30, 2011, The Gas Company made payments to MBL of $1.1 million in relation to these swaps.
In September 2010, The Gas Company purchased casualty insurance coverage from insurance underwriters who pay commission to Macquarie Insurance Facility, or MIF, an indirect subsidiary of Macquarie Group Limited. The Gas Company does not make any payments directly to MIF.
During 2010, Atlantic Aviation entered into a copiers lease agreement with Macquarie Equipment Finance, or MEF, an indirect subsidiary of Macquarie Group Limited. For the six months ended June 30, 2011, Atlantic Aviation incurred $11,000 in lease expense on these copiers. As of June 30, 2011, Atlantic Aviation had prepaid the July 2011 monthly payment to MEF for $2,000, which is included in prepaid expenses in the consolidated condensed balance sheet.
On March 30, 2009, The Gas Company entered into licensing agreements with Utility Service Partners, Inc. and America’s Water Heater Rentals, LLC, both indirect subsidiaries of Macquarie Group Limited, to enable these entities to offer products and services to The Gas Company’s customer base. No payments were made under these arrangements during the six months ended June 30, 2011.
On August 29, 2008, Macquarie Global Opportunities Partners, or MGOP, a private equity fund managed by the Macquarie Group, completed the acquisition of the jet membership, retail charter and fuel management
business units previously owned by Sentient Jet Holdings, LLC. The new company is called Sentient Flight Group (referred to hereafter as “Sentient”). Sentient was an existing customer of Atlantic Aviation. For the six months ended June 30, 2011, Atlantic Aviation recorded $9.9 million in revenue from Sentient. As of June 30, 2011, Atlantic Aviation had $242,000 in receivables from Sentient, which is included in accounts receivable in the consolidated condensed balance sheets.
In addition, the Company and several of its subsidiaries have entered into a licensing agreement with the Macquarie Group related to the use of the Macquarie name and trademark. The Macquarie Group does not charge the Company any fees for this license.
The Company expects to incur federal consolidated taxable income for the year ending December 31, 2011, which will be fully offset by the Company’s federal NOL carryforwards. The Company believes that it will be able to utilize the federal and certain state consolidated prior year NOLs. Accordingly, the Company has not provided a valuation allowance against any deferred tax assets generated in 2011. Two of the Company’s businesses, IMTT and District Energy, are less than 80% owned by the Company, and those businesses file separate federal consolidated income tax returns.
In the first six months of 2010, the Company reduced the valuation allowance against its deferred tax assets by approximately $2.6 million. This decrease was recorded as a benefit in the tax provision for the six months ended June 30, 2010.
The Company and its subsidiaries file separate and combined state income tax returns. 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 income tax expense for the six months ended June 30, 2011 includes a deferred income tax expense of approximately $147,000 to reflect the effects of the rate increase.
At December 31, 2010, the Company and its subsidiaries had a reserve of approximately $368,000 for benefits taken during 2010 and prior tax periods attributable to tax positions for which the probability of recognition is considered to be less than more likely than not. During the quarter ended June 30, 2011, the Company recorded an increase of $134,000 in the reserve and does not expect a material change in the reserve during the six months ended December 31, 2011.
The subsidiaries of MIC Inc. are subject to legal proceedings arising in the ordinary course of business. In management’s opinion, the Company has adequate legal defenses and/or insurance coverage with respect to these actions, and does not believe the outcome of any pending legal proceedings will be material to the Company’s financial position or results of operations.
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 wholly without merit. MIC expects 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 has become 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. MIC expects that this will be resolved through the arbitration.
Except noted above, there are no material legal proceedings other than as disclosed in Part I, Item 3 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010, filed with the SEC on February 23, 2011.
On May 2, 2011, the board of directors declared a dividend of $0.20 per share for the quarter ended March 31, 2011, which was paid on May 18, 2011 to holders of record on May 11, 2011. On August 1, 2011, the board of directors declared a dividend of $0.20 per share for the quarter ended June 30, 2011, which will be paid on August 18, 2011 to holders of record on August 15, 2011.
The Company believes 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. The Company anticipates 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 Service. Any portion that is characterized as a return of capital for tax purposes would 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.
On July 13, 2011, Atlantic Aviation entered into an asset purchase agreement for FBOs at the Portland International and Eugene airports in Oregon. This acquisition will expand the business’ network into the Pacific Northwest and follows the successful sale of smaller FBOs during the quarter and six months ended June 30, 2011. The transaction reflects reinvestment of proceeds from these sales. Subject to the satisfaction of the conditions precedent in the purchase agreement, including consent of the relevant airport authorities, Atlantic Aviation expects to close the transaction in August.
None,Except as described below, there are no material legal proceedings, other than as previously disclosed in Part I, Item 3 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2009,2010, filed with the SEC on February 25, 2010.23, 2011.
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 wholly without merit. MIC expects 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 has become 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. MIC expects that this will be resolved through the arbitration.
SeeThere have been no material changes to the risk factors set forth under Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2009,2010, filed with the SEC on February 25, 2010.23, 2011, except that the information in the risk factor entitled “Risks Related to IMTT — We share ownership and voting control of IMTT with a third party. Our ability to exercise significant influence over the business or level of distributions from IMTT is limited, and we may be negatively impacted by disagreements with our co-investor regarding IMTT's business and operations” has been updated by the disclosure under Item 1 — Legal Proceedings in this report, which is incorporated herein by reference.
None.
None.
None.
An exhibit index has been filed as part of this Report on page E-1.E-1.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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MACQUARIE INFRASTRUCTURE COMPANY LLC | ||
Dated: August | By: /s/ James Hooke | |
Dated: August | By: /s/ Todd Weintraub |
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Exhibit Number | Description | |
| ||
31.1* | Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer | |
31.2* | Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer | |
32.1** | Section 1350 Certification of Chief Executive Officer | |
32.2** | Section 1350 Certification of Chief Financial Officer | |
101.0*** | The following materials from the Quarterly Report on Form 10-Q of Macquarie Infrastructure Company LLC for the quarter ended June 30, 2011, filed on August 3, 2011, formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Condensed Balance Sheets as of June 30, 2011 (Unaudited) and December 31, 2010, (ii) the Consolidated Condensed Statement of Operations for the Quarters and Six Months Ended June 30, 2011 and 2010 (Unaudited), (iii) the Consolidated Condensed Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2010 (Unaudited) and (iv) the Notes to Consolidated Condensed Financial Statements (Unaudited). |
* | Filed herewith. |
** | Furnished herewith. |
*** | Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections. |
E-1