UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 | | |
| (Mark One) |
| x | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 20172018
OR
| | |
| o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period from to
Commission File Number: 001-32384
MACQUARIE INFRASTRUCTURE CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
| | |
| Delaware | | 43-2052503 |
(State or Other Jurisdiction of
Incorporation or Organization) | | (IRS Employer
Identification No.) |
125 West 55th Street
New York, New York 10019
(Address of Principal Executive Offices) (Zip Code)
(212) 231-1000
(Registrant’s Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year if Changed Since Last Report):N/A
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.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. Yesx Noo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | |
| Large Accelerated Filerx | | Accelerated Filero | | |
| Non-accelerated Filero | | Smaller Reporting Companyo | | Emerging Growth Companyo |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes. Yeso Nox
There were 84,564,05185,640,118 shares of common stock, with $0.001 par value, outstanding at October 31, 2017.30, 2018.
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MACQUARIE INFRASTRUCTURE CORPORATION
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Macquarie Infrastructure Corporation 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 Corporation.
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Cautionary Note Regarding Forward-Looking Statements
In addition to historical information, this quarterly report on Form 10-Q (Quarterly Report) contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act and Section 21E of the Exchange Act. Forward-looking statements may appear throughout this Quarterly Report, including without limitation, the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section. We use words such as “believe”, “intend”, “expect”, “anticipate”, “plan”, “may”, “will”, “should”, “estimate”, “potential”, “project” and similar expressions to identify forward-looking statements. Such statements include, among others, those concerning our expected financial performance and strategic and operational plans, as well as all assumptions, expectations, predictions, intentions or beliefs about future events. You are cautioned that any such forward-looking statements are not guarantees of future performance and that a number of risks and uncertainties could cause actual results to differ materially from those anticipated in the forward-looking statements. Such risks and uncertainties include, but are not limited to, the risks identified in our Annual Report on the Form 10-K for the year ended December 31, 2016,2017, and in other reports we file from time to time with the Securities and Exchange Commission (SEC).
Given the risks and uncertainties surrounding forward-looking statements, you should not place undue reliance on these statements. Many of these factors are beyond our ability to control or predict. Our forward-looking statements speak only as of the date of this Quarterly Report. Other than as required by law, we undertake no obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise.
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PART I
FINANCIAL INFORMATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of the financial condition and results of operations of Macquarie Infrastructure Corporation (MIC) should be read in conjunction with the consolidated condensed financial statements and the notes to those statements included elsewhere herein.
MIC is a Delaware corporation formed on May 21, 2015. MIC’s predecessor, Macquarie Infrastructure Company LLC, was formed on April 13, 2004. Except as otherwise specified, all references in this Form 10-Q to “MIC”, “we”, “us”, and “our” refer to Macquarie Infrastructure Corporation and its subsidiaries.
MIC is externally managed by Macquarie Infrastructure Management (USA) Inc. (our Manager), pursuant to the terms of a Management Services Agreement, that is subject to the oversight and supervision of our Board of Directors. The majority of the members of our Board of Directors, haveand each member of all Board Committees, is independent and has no affiliation with Macquarie. Our Manager is a member of the Macquarie Group of companies comprising the Macquarie Group Limited and its subsidiaries and affiliates worldwide. Macquarie Group Limited is headquartered in Australia and is listed on the Australian StockSecurities Exchange.
We currently own and operate a diversified portfolio of businesses that provide services to other businesses, government agencies and individuals primarily in the U.S. The businesses we own and operate are organized into four segments:
| • | International-Matex Tank Terminals (IMTT):: a terminalling business providing bulk liquid storage, handling and other servicesterminalling to third parties at seventeen17 terminals in the U.S. and two in Canada; |
| • | Atlantic AviationAviation:: a provider of fuel, terminal, aircraft hangaring and other services primarily to owners and operators of general aviation (GA) jet aircraft at 70 airports throughout the U.S.; |
| • | Contracted Power (CP)Power:: comprising a gas-fired facility and controlling interests in wind and solar facilities in the U.S.; and |
| • | MIC HawaiiHawaii:: comprising an energy company that processes and distributes gas and provides related services (Hawaii Gas), and several smaller businesses collectively engaged in efforts to reduce the cost and improve the reliability and sustainability of energy all based in Hawaii. |
Through October 12, 2018, our Contracted Power business also included a gas-fired facility. See “Recent Developments” below for further information.
Our businesses generally operate in sectors with barriers to entry including high initial development and construction costs, long-term contractscontracted revenues or the requirement to obtain government approvals and a lack of immediate cost-effective alternatives to the services provided. OverallCollectively, they tend to generate sustainable, stable and growing cash flows over the long term.long-term.
Overview
Use of Non-GAAP measures
In addition to our results under U.S. GAAP, we use certain non-GAAP measures to assess the performance and prospects of our businesses. In particular, we use EBITDA excluding non-cash items, Free Cash Flow and certain proportionately combined financial metrics. Proportionately combined financial metrics reflect our proportionate interest in our wind and solar facilities.
We measure EBITDA excluding non-cash items as it reflects our businesses’ ability to effectively manage the volume of products sold or services provided, the operating margin earned on those transactions and the management of operating expenses independent of the capitalization and tax attributes of those businesses.
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In analyzing the financial performance of our businesses, we focus primarily on cash generation and Free Cash Flow in particular. We believe investors use Free Cash Flow as a measure of our ability to sustain and potentially increase our quarterly cash dividend and to fund a portion of our growth.
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See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Consolidated — Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) excluding non-cash items, Free Cash Flow and Proportionately Combined Metrics” for further information on our calculation of EBITDA excluding non-cash items, Free Cash Flow and our proportionately combined metrics and for reconciliations of non-GAAP measures to the most comparable GAAP measures.
At IMTT, we focus on providing bulk liquid storage, handling and other services to customers who place a premium on ease of access and operational flexibility. The substantial majority of IMTT’s revenue is generated pursuant to “take-or-pay” contracts providing access to storage tank capacity and ancillary services.services over a revenue weighted average remaining contract life of 2.0 years.
At Atlantic Aviation, our focus is on attracting and maintaining relationships with GA aircraft owners and pilots and encouraging them to purchase fuel and other services from our fixed based operations (FBOs). Atlantic Aviation’s gross margin is positively correlated with the number of GA flight movements in the U.S. and the business’ ability to service a portion of the aircraft involved in those operations.
The businesses that comprise our CPContracted Power segment generate revenue by producing and selling electric power pursuant primarily to long-dated power purchase agreements (PPAs) or tolling agreements all with creditworthy off-takers..
MIC Hawaii comprises Hawaii Gas and several smaller businesses collectively engaged in efforts to reduce the cost and improve the reliability and sustainability of energy in Hawaii. The businesses of MIC Hawaii generate revenue primarily from the provision of gas services to commercial, residential and governmental customers,customers; the generation of power and the design and construction of building mechanical systems.
Dividends
Since January 1, 2016,2017, MIC has paid or declared the following dividends:
 | | | | | | | | |
Declared | | Period Covered | | $per Share | | Record Date | | Payable Date |
October 30, 2017
| | | Third quarter 2017 | | | $ | 1.42 | | | | November 13, 2017 | | | | November 16, 2017 | |
August 1, 2017
| | | Second quarter 2017 | | | | 1.38 | | | | August 14, 2017 | | | | August 17, 2017 | |
May 2, 2017
| | | First quarter 2017 | | | | 1.32 | | | | May 15, 2017 | | | | May 18, 2017 | |
February 17, 2017
| | | Fourth quarter 2016 | | | | 1.31 | | | | March 3, 2017 | | | | March 8, 2017 | |
October 27, 2016
| | | Third quarter 2016 | | | | 1.29 | | | | November 10, 2016 | | | | November 15, 2016 | |
July 28, 2016
| | | Second quarter 2016 | | | | 1.25 | | | | August 11, 2016 | | | | August 16, 2016 | |
April 28, 2016
| | | First quarter 2016 | | | | 1.20 | | | | May 12, 2016 | | | | May 17, 2016 | |
February 18, 2016
| | | Fourth quarter 2015 | | | | 1.15 | | | | March 3, 2016 | | | | March 8, 2016 | |
| | | | | | | | |
Declared
| | Period Covered | | $ per Share | | Record Date | | Payable Date |
October 30, 2018
| | | Third quarter 2018 | | | $ | 1.00 | | | | November 12, 2018 | | | | November 15, 2018 | |
July 31, 2018
| | | Second quarter 2018 | | | | 1.00 | | | | August 13, 2018 | | | | August 16, 2018 | |
May 1, 2018
| | | First quarter 2018 | | | | 1.00 | | | | May 14, 2018 | | | | May 17, 2018 | |
February 19, 2018
| | | Fourth quarter 2017 | | | | 1.44 | | | | March 5, 2018 | | | | March 8, 2018 | |
October 30, 2017
| | | Third quarter 2017 | | | | 1.42 | | | | November 13, 2017 | | | | November 16, 2017 | |
August 1, 2017
| | | Second quarter 2017 | | | | 1.38 | | | | August 14, 2017 | | | | August 17, 2017 | |
May 2, 2017
| | | First quarter 2017 | | | | 1.32 | | | | May 15, 2017 | | | | May 18, 2017 | |
February 17, 2017
| | | Fourth quarter 2016 | | | | 1.31 | | | | March 3, 2017 | | | | March 8, 2017 | |
We currently intend to maintain, and where possible, increase our quarterly cash dividend to our shareholders. The MIC Board has authorized a quarterly cash dividend of $1.42$1.00 per share for the quarter ended September 30, 2017, or2018. MIC has been structured to provide investors with an opportunity to generate an attractive “total return” and we intend to distribute the majority of the cash generated from operations by our businesses as a 10.1% increase over thequarterly dividend.
Our board of directors regularly reviews our dividend for the quarter ended September 30, 2016.policy and payout ratio. In determining whether to adjust the amount of our quarterly dividend, our Boardboard will take into account such matters as the state of the capital markets and general business and economic conditions, the Company’s financial condition, results of operations, indebtedness levels, capital requirements, capital opportunities and any contractual, legal and regulatory restrictions on the payment of dividends by the Company to its stockholders or by its subsidiaries to the Company, and any other factors that it deems relevant, subject to maintaining a prudent level of reserves and without creating undue volatility in the amount of such dividends where possible. Moreover, the Company’s senior secured credit facility and the debt commitments at our businesses contain restrictions that may limit the Company’s ability to pay dividends. Although historically we have declared cash dividends on our shares, any or all of these or other factors could result in the modification of our dividend policy, or the reduction, modification or elimination of our dividend in the future.
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Recent Developments
BEC Sale
On September 11, 2017,July 27, 2018, we announced that James Hooke, our Chief Executive Officer, intendsentered into an agreement to step downsell 100% of Bayonne Energy Center (BEC) to NHIP II Bayonne Holdings LLC. On October 12, 2018, we concluded the sale of BEC and received cash of $657.4 million, net of the assumption of the outstanding debt balance of $243.5 million by the buyer and subject to post-closing working capital adjustments resulting in early 2018. On September 8, 2017, the MIC boarda preliminary pre-tax gain of directors was expanded from six to seven members and Mr. Hooke was elected to fill the vacancy.
Christopher Frost has been appointed President and Chief Operating Officer of MIC, effective October 26, 2017. Mr. Frost has been employed by Macquarie Group for the past 20 years. We anticipate Mr. Frost will be appointedapproximately $5.0 million. Any such adjustments could result in an adjustment to the positionexpected gain. Any adjustment is not expected to be significant. We incurred approximately $10.0 million in professional fees in relation to this transaction of CEO when Mr. Hooke stepswhich approximately $3.0 million have been recorded through September 30, 2018. We have guaranteed our subsidiary’s payment and certain post-closing indemnity obligations under the purchase agreement.
During the nine months ended September 30, 2018, BEC contributed approximately $42.0 million of EBITDA excluding non-cash items to the results of the Contracted Power segment. This excludes the warranty settlement from its turbine manufacturer. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Contracted Power” for further discussions.
We have used the proceeds from the sale of BEC and cash on hand to pay down the majority of the outstanding balances on January 1, 2018.our and our businesses’ revolving credit facilities. The repayment of our revolving credit facilities has strengthened our balance sheet and increased our financial flexibility. We may redraw these facilities in the future, other than $150.0 million of debt we repaid at IMTT that we do not expect to redraw, to fund a portion of our planned growth capital deployments. For further discussions on use of BEC proceeds, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resource — Financing Activities”.
Strategic Review
We continue to review strategic options available to us, including with respect to certain other, smaller businesses in our portfolio in an effort to rationalize our portfolio and enhance the infrastructure characteristics of our businesses. Consistent with this, we commenced a sale process for Critchfield Pacific Inc. (CPI), the design build mechanical contractor that comprises part of our MIC Hawaii segment. Subsequent to quarter end, we reached an agreement to sell the business for a nominal sum in a transaction that we expect will close before the end of the year.
On August 8, 2017, IMTT completedPrior to the acquisitionexecution of Epic Midstream LLC (Epic),the sales agreement, we wrote-down the value of our investment in CPI to reflect its underperformance. During the nine months ended September 30, 2018, CPI had made negative contributions to EBITDA excluding non-cash items. This write-down of approximately $30.0 million consists of fixed asset and intangible assets of approximately $9.0 million, as well as a reserve for certain contract related amounts in other current liabilities and other expenses.
In October 2018, we commenced a sale process involving the majority of the assets in our portfolio of seven bulk liquid terminals comprising approximately 3.1 million barrelswind and solar facilities. We believe a sale of storage capacitythese assets and related handling capability. The acquisition increases IMTT’s system-wide capacity by approximately 7% and extends its operations into both the Portredeployment of Savannah in Georgia and several inland locations.
On September 27, 2017, Atlantic Aviation completed the acquisition of Orion Jet Center (Orion). Orion is a fixed base operator located at Opa Locka-Miami Executive Airport approximately 11 miles north of downtown Miami, Florida. Orion features over 200,000 square feet of newly constructed hangar space and also includes 36,000 square feet of office and maintenance space.
Shared Services Initiative
We have implemented a shared services initiativeproceeds will maximize value relative to consolidate common back-office functions across our businesses, including Accounting, Human Resources, Tax, Information Technology, Procurement and Risk Management support. We have incurred, and expectattempting to continue to incur, implementation costs in 2017, principally in relation to severance and consulting services, and weexpand the portfolio through acquisitions. We expect to realize fullretain two of our solar facilities and to maintain our two existing relationships with developers of renewable power opportunities. The sale process is expected to be concluded in the second quarter of 2019.
Manager Waiver of Base Management Fees
Effective November 1, 2018, our Manager has elected to waive two portions of the base management fee to which it is entitled under the terms of the Managements Services Agreement between us. In effect, this waiver caps the base management fee at 1% of our equity market capitalization and eliminates fees on any debt we have or may incur at our holding company. Although MIMUSA reserves the right to revoke the fee waiver and revert to the prior terms of the agreement subject to providing the Company with not less than a one year savings from this initiativenotice, MIC believes MIMUSA has no current intent to do so. A revocation of the waiver would not trigger a recapture of previously waived fees. The waivers result in 2018. The expected savings will not be spread evenly or proportionally across our businesses.a reduction in the fees paid to the Manager of approximately $10.0 million per year based on the Company’s market value and capital structure at the end of the third quarter.
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New Independent Board Members
On September 5, 2018, we expanded our Board of Directors from seven to nine members and elected two new independent directors, Amanda Brock, the chief operating officer of Solaris Water Midstream, and Maria Jelescu Dreyfus, the chief executive officer of Ardinall Investment Management. In addition, Christopher Frost, our chief executive officer, was elected to the board upon the retirement as a director of our former chief executive officer, James Hooke.
Results of Operations
Consolidated
Key Factors Affecting Operating Results for the Quarter:
growth in contributions from Atlantic Aviation;
contributions from acquisitions in each operating segment; and
an increase in unrealized gains on commodity hedges at Hawaii Gas; partially offset by
cost increases related to the implementation of a shared services initiative and evaluation of various investment and acquisition opportunities; and
a decrease in other income, net.
Our consolidated results reflect a decrease in the contribution from IMTT primarily as a result of operations arethe non-renewal of certain contracts for bulk liquid storage and handling services and the absence of deferred revenue recognized in 2017 in connection with the termination of a construction project. These were partially offset by contributions from an acquisition of a portfolio of storage terminals completed in the third quarter of 2017.
Our consolidated results also reflect increased contributions from our Atlantic Aviation and Contracted Power businesses. Atlantic Aviation benefited from contributions from acquisitions, together with the operational leverage inherent in the business, partially offset by decreases in GA flight activity at certain of the airports on which the business operates. The improved contribution from Contracted Power was the result of the BEC plant expansion coming on line and improved wind and solar resources.
MIC Hawaii’s contribution declined primarily as follows:a result of the underperformance of CPI, and the write-down of our investment in that business, together with cost increases at Hawaii Gas. These were partially offset by incremental revenue and EBITDA excluding non-cash items generated by Hawaii Gas in the third quarter as a result of interim rate relief granted by the Hawaii Public Utilities Commission (HPUC) in a general rate case on behalf of the regulated portion of the business at the end of June. The Final Decision and Order could potentially include an unfavorable rate adjustment which may have a retroactive impact on revenues since the Interim Decision and Order.
| | | | | | | | | | | | | | | | |
| | Quarter Ended
September 30, | | Change
Favorable/
(Unfavorable) | | Nine Months Ended
September 30, | | Change
Favorable/
(Unfavorable) |
| | | 2017 | | 2016 | | $ | | % | | 2017 | | 2016 | | $ | | % |
| | | ($ In Thousands, Except Share and Per Share Data) (Unaudited) |
Revenue
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Service revenue | | $ | 358,220 | | | $ | 323,975 | | | | 34,245 | | | | 10.6 | | | $ | 1,067,069 | | | $ | 942,437 | | | | 124,632 | | | | 13.2 | |
| Product revenue | | | 94,841 | | | | 96,549 | | | | (1,708 | ) | | | (1.8 | ) | | | 276,439 | | | | 272,053 | | | | 4,386 | | | | 1.6 | |
| Total revenue | | | 453,061 | | | | 420,524 | | | | 32,537 | | | | 7.7 | | | | 1,343,508 | | | | 1,214,490 | | | | 129,018 | | | | 10.6 | |
Costs and expenses
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cost of services | | | 153,218 | | | | 134,512 | | | | (18,706 | ) | | | (13.9 | ) | | | 455,038 | | | | 371,832 | | | | (83,206 | ) | | | (22.4 | ) |
| Cost of product sales | | | 35,669 | | | | 39,845 | | | | 4,176 | | | | 10.5 | | | | 123,143 | | | | 107,923 | | | | (15,220 | ) | | | (14.1 | ) |
| Selling, general and administrative | | | 84,898 | | | | 77,468 | | | | (7,430 | ) | | | (9.6 | ) | | | 244,817 | | | | 222,182 | | | | (22,635 | ) | | | (10.2 | ) |
| Fees to Manager – related party | | | 17,954 | | | | 18,382 | | | | 428 | | | | 2.3 | | | | 54,610 | | | | 49,570 | | | | (5,040 | ) | | | (10.2 | ) |
| Depreciation | | | 58,009 | | | | 59,242 | | | | 1,233 | | | | 2.1 | | | | 172,753 | | | | 172,125 | | | | (628 | ) | | | (0.4 | ) |
| Amortization of intangibles | | | 17,329 | | | | 15,417 | | | | (1,912 | ) | | | (12.4 | ) | | | 50,920 | | | | 49,917 | | | | (1,003 | ) | | | (2.0 | ) |
| Total operating expenses | | | 367,077 | | | | 344,866 | | | | (22,211 | ) | | | (6.4 | ) | | | 1,101,281 | | | | 973,549 | | | | (127,732 | ) | | | (13.1 | ) |
| Operating income | | | 85,984 | | | | 75,658 | | | | 10,326 | | | | 13.6 | | | | 242,227 | | | | 240,941 | | | | 1,286 | | | | 0.5 | |
Other income (expense)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest income | | | 54 | | | | 27 | | | | 27 | | | | 100.0 | | | | 129 | | | | 85 | | | | 44 | | | | 51.8 | |
| Interest expense(1) | | | (29,291 | ) | | | (20,871 | ) | | | (8,420 | ) | | | (40.3 | ) | | | (90,129 | ) | | | (117,268 | ) | | | 27,139 | | | | 23.1 | |
| Other income, net | | | 4,973 | | | | 16,689 | | | | (11,716 | ) | | | (70.2 | ) | | | 7,893 | | | | 20,389 | | | | (12,496 | ) | | | (61.3 | ) |
| Net income before income taxes | | | 61,720 | | | | 71,503 | | | | (9,783 | ) | | | (13.7 | ) | | | 160,120 | | | | 144,147 | | | | 15,973 | | | | 11.1 | |
| Provision for income taxes | | | (25,547 | ) | | | (29,022 | ) | | | 3,475 | | | | 12.0 | | | | (65,284 | ) | | | (60,409 | ) | | | (4,875 | ) | | | (8.1 | ) |
| Net income | | $ | 36,173 | | | $ | 42,481 | | | | (6,308 | ) | | | (14.8 | ) | | $ | 94,836 | | | $ | 83,738 | | | | 11,098 | | | | 13.3 | |
| Less: net (loss) income attributable to noncontrolling interests | | | (3,922 | ) | | | 455 | | | | 4,377 | | | | NM | | | | (7,294 | ) | | | 165 | | | | 7,459 | | | | NM | |
| Net income attributable to MIC | | $ | 40,095 | | | $ | 42,026 | | | | (1,931 | ) | | | (4.6 | ) | | $ | 102,130 | | | $ | 83,573 | | | | 18,557 | | | | 22.2 | |
| Basic income per share attributable to MIC | | $ | 0.48 | | | $ | 0.52 | | | | (0.04 | ) | | | (7.7 | ) | | $ | 1.23 | | | $ | 1.04 | | | | 0.19 | | | | 18.3 | |
| Weighted average number of shares outstanding: basic | | | 83,644,806 | | | | 81,220,841 | | | | 2,423,965 | | | | 3.0 | | | | 82,743,285 | | | | 80,570,192 | | | | 2,173,093 | | | | 2.7 | |
NM — Not meaningfulCapital deployed into acquisitions by each of IMTT and Atlantic Aviation in 2017, as well as growth investments generally, contributed to revenue and EBITDA exluding non-cash items to our overall results in the quarter and nine months ended September 30, 2018.
| (1) | Interest expense includes losses on derivative instruments of $162,000 and $6.9 million for the quarter and nine months ended September 30, 2017, respectively. For the quarter and nine months ended September 30, 2016, interest expense includes gains on derivative instruments of $3.7 million and losses on derivative instruments of $43.0 million, respectively. |
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Results of Operations: Consolidated – (continued)
Our consolidated results of operations are as follows:
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| | Quarter Ended
September 30, | | Change
Favorable/
(Unfavorable) | | Nine Months Ended
September 30, | | Change
Favorable/
(Unfavorable) |
| | | 2018 | | 2017 | | $ | | % | | 2018 | | 2017 | | $ | | % |
| | | ($ In Thousands, Except Share and Per Share Data) (Unaudited) |
Revenue
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Service revenue | | $ | 361,031 | | | $ | 358,220 | | | | 2,811 | | | | 0.8 | | | $ | 1,139,637 | | | $ | 1,067,069 | | | | 72,568 | | | | 6.8 | |
| Product revenue | | | 112,249 | | | | 94,841 | | | | 17,408 | | | | 18.4 | | | | 313,279 | | | | 276,439 | | | | 36,840 | | | | 13.3 | |
| Total revenue | | | 473,280 | | | | 453,061 | | | | 20,219 | | | | 4.5 | | | | 1,452,916 | | | | 1,343,508 | | | | 109,408 | | | | 8.1 | |
Costs and expenses
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cost of services | | | 166,694 | | | | 153,218 | | | | (13,476 | ) | | | (8.8 | ) | | | 533,889 | | | | 455,038 | | | | (78,851 | ) | | | (17.3 | ) |
| Cost of product sales | | | 47,823 | | | | 35,669 | | | | (12,154 | ) | | | (34.1 | ) | | | 148,372 | | | | 123,143 | | | | (25,229 | ) | | | (20.5 | ) |
| Selling, general and administrative | | | 86,487 | | | | 84,898 | | | | (1,589 | ) | | | (1.9 | ) | | | 262,371 | | | | 244,817 | | | | (17,554 | ) | | | (7.2 | ) |
| Fees to Manager-related party | | | 12,333 | | | | 17,954 | | | | 5,621 | | | | 31.3 | | | | 36,113 | | | | 54,610 | | | | 18,497 | | | | 33.9 | |
| Goodwill impairment | | | 3,215 | | | | — | | | | (3,215 | ) | | | NM | | | | 3,215 | | | | — | | | | (3,215 | ) | | | NM | |
| Depreciation | | | 56,924 | | | | 58,009 | | | | 1,085 | | | | 1.9 | | | | 179,368 | | | | 172,753 | | | | (6,615 | ) | | | (3.8 | ) |
| Amortization of intangibles | | | 20,030 | | | | 17,329 | | | | (2,701 | ) | | | (15.6 | ) | | | 55,470 | | | | 50,920 | | | | (4,550 | ) | | | (8.9 | ) |
| Total operating expenses | | | 393,506 | | | | 367,077 | | | | (26,429 | ) | | | (7.2 | ) | | | 1,218,798 | | | | 1,101,281 | | | | (117,517 | ) | | | (10.7 | ) |
| Operating income | | | 79,774 | | | | 85,984 | | | | (6,210 | ) | | | (7.2 | ) | | | 234,118 | | | | 242,227 | | | | (8,109 | ) | | | (3.3 | ) |
Other income (expense)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest income | | | 113 | | | | 54 | | | | 59 | | | | 109.3 | | | | 304 | | | | 129 | | | | 175 | | | | 135.7 | |
| Interest expense(1) | | | (32,616 | ) | | | (29,291 | ) | | | (3,325 | ) | | | (11.4 | ) | | | (81,693 | ) | | | (90,129 | ) | | | 8,436 | | | | 9.4 | |
Other (expense) income,
net | | | (18,011 | ) | | | 4,973 | | | | (22,984 | ) | | | NM | | | | (11,721 | ) | | | 7,893 | | | | (19,614 | ) | | | NM | |
| Net income before income taxes | | | 29,260 | | | | 61,720 | | | | (32,460 | ) | | | (52.6 | ) | | | 141,008 | | | | 160,120 | | | | (19,112 | ) | | | (11.9 | ) |
| Provision for income taxes | | | (7,884 | ) | | | (25,547 | ) | | | 17,663 | | | | 69.1 | | | | (36,558 | ) | | | (65,284 | ) | | | 28,726 | | | | 44.0 | |
| Net income | | $ | 21,376 | | | $ | 36,173 | | | | (14,797 | ) | | | (40.9 | ) | | $ | 104,450 | | | $ | 94,836 | | | | 9,614 | �� | | | 10.1 | |
| Less: net loss attributable to noncontrolling interests | | | (328 | ) | | | (3,922 | ) | | | (3,594 | ) | | | (91.6 | ) | | | (32,454 | ) | | | (7,294 | ) | | | 25,160 | | | | NM | |
| Net income attributable to MIC | | $ | 21,704 | | | $ | 40,095 | | | | (18,391 | ) | | | (45.9 | ) | | $ | 136,904 | | | $ | 102,130 | | | | 34,774 | | | | 34.0 | |
| Basic income per share attributable to MIC | | $ | 0.25 | | | $ | 0.48 | | | | (0.23 | ) | | | (47.9 | ) | | $ | 1.61 | | | $ | 1.23 | | | | 0.38 | | | | 30.9 | |
| Weighted average number of shares outstanding: basic | | | 85,378,088 | | | | 83,644,806 | | | | 1,733,282 | | | | 2.1 | | | | 85,095,956 | | | | 82,743,285 | | | | 2,352,671 | | | | 2.8 | |
NM — Not meaningful
| (1) | Interest expense includes gains on derivative instruments of $4.8 million and $25.8 million for the quarter and nine months ended September 30, 2018, respectively. For the quarter and nine months ended September 30, 2017, interest expense includes losses on derivative instruments of $162,000 and $6.9 million, respectively. |
Revenue
Consolidated revenuerevenues increased for the quarter and nine months ended September 30, 20172018 compared with the quarter and nine months ended September 30, 20162017 primarily as a result of, (i) an increase in the wholesale cost of jet fuel andsold at Atlantic Aviation; (ii) an increase in the volume and the wholesale cost of jet fuelpropane and synthetic natural gas sold at Atlantic AviationHawaii Gas; (iii) increased capacity and power production by our Contracted Power businesses; and, (iv) contributions from acquisitions, partially offset by reduced revenue from Bayonne Energy Center (BEC) as a result of lower capacity prices and lower energy margins.acquisitions. The increase in the consolidated revenue for the nine months ended September 30, 2017 also includes a contribution from IMTT from2018 was partially offset by the recognitionabsence of deferred revenue resulting fromrecognized in 2017 in connection with the termination of a construction project by a biodiesel customer.at IMTT.
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Results of Operations: Consolidated – (continued)
Cost of Services and Product Sales
Consolidated cost of services and product sales increased for the quarter and nine months ended September 30, 20172018 compared with the quarter and nine months ended September 30, 20162017 primarily due to, (i) an increase in the wholesale cost of jet fuel andat Atlantic Aviation; (ii) an increase in the wholesale cost of propane and contributions from acquisitions.synthetic natural gas and lower margins at MIC Hawaii; and, (iii) incremental costs associated with various acquisitions and developments. The changes in consolidated cost of services and product sales were also attributable toreflect unrealized gains and losses on commodity hedges, principally propane, at Hawaii Gas (see “Results of Operations — MIC Hawaii” below).
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased for the quarter and nine months ended September 30, 20172018 compared with the quarter and nine months ended September 30, 20162017 primarily due to, (i) incremental costs associated with acquired and developed businesses; and (ii) approximately $3.0 million and $7.9 million, respectively, of costs incurred for advisory services in connection with addressing shareholder matters. The increases in selling, general and administrative expenses were partially offset by the absence of costs incurred during 2017 in connection with the implementation of our shared services center and lower costs during the third quarter of 2018 in connection with the evaluation of various investment and acquisition opportunities; (ii) $1.4 million and $6.8 million, respectively, of costs incurred in connection with the implementation of our shared services initiative; and (iii) incremental costs associated with acquired businesses.acquisition/disposition opportunities.
Fees to Manager
Our Manager is entitled to a monthly base management fee based primarily on our market capitalization and potentially a quarterly performance fee based on total stockholder returns relative to a U.S. utilities index. For the quarter and nine months ended September 30, 2017,2018, we incurred base management fees of $17.9$12.3 million and $54.6$36.1 million, respectively, compared with $18.4$17.9 million and $49.6$54.6 million for the quarter and nine months ended September 30, 2016,2017, respectively. No performance fees were generatedincurred in any of the above periods. The unpaid portion of base management fees and performance fees, if any, at the end of each reporting period is included in the line itemDue to Manager-related party in our consolidated condensed balance sheets.
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Results of Operations: Consolidated – (continued)
In all of the periods shown below, our Manager elected to reinvest any fees to which it was entitled in additional shares. In accordance with the Third Amended and Restated Management ServiceServices Agreement, our Manager has currently elected to reinvest future base management fees and performance fees, if any, in additionalnew primary shares.
| | | | | | | | | | | | |
| Period | | Base
Management
Fee Amount
($ in Thousands) | | Performance
Fee Amount
($ in Thousands) | | Shares
Issued | | Base
Management
Fee Amount
($ in Thousands) | | Performance
Fee Amount
($ in Thousands) | | Shares
Issued |
2018 Activities:
| | | | | | | | | | | | | |
| Third quarter 2018 | | | $ | 12,333 | | | $ | — | | | | 269,286 | (1) |
| Second quarter 2018 | | | | 10,852 | | | | — | | | | 277,053 | |
| First quarter 2018 | | | | 12,928 | | | | — | | | | 265,002 | |
2017 Activities:
| | | | | | | | | | | | | | | | | | | | | | | | |
| Fourth quarter 2017 | | | $ | 16,778 | | | $ | — | | | | 248,162 | |
| Third quarter 2017 | | $ | 17,954 | | | $ | — | | | | 240,674 | (1) | | | 17,954 | | | | — | | | | 240,674 | |
| Second quarter 2017 | | | 18,433 | | | | — | | | | 233,394 | | | | 18,433 | | | | — | | | | 233,394 | |
| First quarter 2017 | | | 18,223 | | | | — | | | | 232,398 | | | | 18,223 | | | | — | | | | 232,398 | |
2016 Activities:
| | | | | | | | | | | | | |
| Fourth quarter 2016 | | $ | 18,916 | | | $ | — | | | | 230,773 | | |
| Third quarter 2016 | | | 18,382 | | | | — | | | | 232,488 | | |
| Second quarter 2016 | | | 16,392 | | | | — | | | | 232,835 | | |
| First quarter 2016 | | | 14,796 | | | | — | | | | 234,179 | | |
| (1) | Our Manager elected to reinvest all of the monthly base management fees for the third quarter of 20172018 in shares. We issued 240,674269,286 shares for the quarter ended September 30, 2017,2018, including 81,74189,542 shares that were issued in October 20172018 for the September 20172018 monthly base management fee. |
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Results of Operations: Consolidated – (continued)
Goodwill Impairment
During the quarter ended September 30, 2018, we wrote-off the goodwill balance related to CPI.
Depreciation
Depreciation expense decreased for the quarter ended September 30, 20172018 compared with the quarter ended September 30, 20162017 primarily due to the write-offfact that BEC’s assets were no longer depreciated once it was classified as held for sale. The decrease was partially offset by the write-down of tanksfixed assets at CPI and docksthe increase in 2016 at IMTT. depreciation expense related to acquisitions and assets placed in service.
Depreciation expense increased for the nine months ended September 30, 20172018 compared with the nine months ended September 30, 20162017 primarily as a resultdue to write-down of fixed assets at CPI and the increase in depreciation expense related to acquisitions and assets placed in service and contributions from acquisitions.service. These increases were partially offset by the decrease in depreciation expense due to the fact that BEC’s assets were no longer depreciated once it was classified as held for sale.
Amortization of Intangibles
Amortization of intangibles increased for the quarter and nine months ended September 30, 20172018 compared with the quarter and nine months ended September 30, 20162017 primarily due to contributions from acquisitions.write-off of intangible assets at CPI. The increase was partially offset by the decrease in amortization of intangibles due to the fact that BEC’s assets were no longer amortized once it was classified as held for sale.
Interest Expense and Gains (Losses) on Derivative Instruments
Interest expense includes gains on derivative instruments of $4.8 million and $25.8 million for the quarter and nine months ended September 30, 2018, respectively, compared with losses on derivative instruments of $162,000 and $6.9 million for the quarter and nine months ended September 30, 2017, respectively, compared with gains on derivative instruments of $3.7 million and losses on derivative instruments of $43.0 million for the quarter and nine months ended September 30, 2016, respectively. Gains and losses on derivatives recorded in interest expense are attributable to the change in fair value of interest rate hedging instruments. For the nine months ended September 30, 2016, interest expense also included the non-cash write-off of deferred financing costs at Hawaii Gas related to the February 2016 refinancing of its $80.0 million term loan debt and its $60.0 million revolving credit facility. Excluding the derivative adjustments, and deferred financing cost write-offs,cash interest expense decreasedwas $32.5 million and $94.1 million for the quarter and nine months ended September 30, 20172018, respectively, compared with the quarter and nine months ended September 30, 2016 primarily due to a reduction in the weighted average interest rate, partially offset by a higher average debt balance. Cash interest expense was $27.1 million and $79.4 million for the quarter and nine months ended September 30, 2017, respectively, compared with $27.4 millionrespectively. The increase in cash interest expense reflects primarily a higher average debt balance and $82.0 million foran increase in the quarter and nine months ended September 30, 2016, respectively.weighted average interest rate. See discussions of interest expense for each of our operating businesses below.
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Results of Operations: Consolidated – (continued)
Other (Expense) Income, net
Other (expense) income, net, decreased forchanged from other income, net, to other expense, net, primarily due to the write-down in our investment in CPI during the quarter ended September 30, 2018. This is partially offset by a warranty settlement from a manufacturer of BEC turbines in the third quarter of 2018 and higher development fees paid to our Contracted Power business by a developer of renewable power projects during the nine months ended September 30, 2017 compared with the quarter and nine months ended September 30, 2016 as 2016 included insurance recoveries associated with damage docks to IMTT’s facilities and escrow proceeds related to the acquisition of BEC. This decrease was partially offset by financing income from a revolving credit facility provided by CP to a third party developer of renewable projects and the associated development profit for the periods in 2017.2018.
Income Taxes
We file a consolidated federal income tax return that includes the financial results forof IMTT, Atlantic Aviation, BEC, MIC Hawaii and our allocable share of the taxable income (loss) from our wind and solar facilities. The wind and solar facilities in which we own less than 100% of the equity interest are held byin limited liability companies and treated as partnerships for tax purposes. Pursuant to a tax sharing agreement, the businesses included in our consolidated federal income tax return pay MIC an amount equal to the federal income tax each would have paid on a standalone basis as if they were not part of the consolidated federal income tax return. In addition, our businesses file income tax returns and may pay taxes in the state and local jurisdictions in which they operate.
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Results of Operations: Consolidated – (continued)
For the year ending December 31, 2017,2018, we expect any consolidatedour current year federal taxable income taxto be approximately $320.0 million, including the expected taxable gain on the sale of BEC. We further expect this liability our businesses may generate to be fully offset by net operating loss (NOL) carryforwards. Our federalinitially reported NOL balance at December 31, 20162017 was $398.1$347.3 million. WeAs a result of the regulations issued by the Internal Revenue Service in August 2018, our federal NOL balance as of December 31, 2017 was revised upward to $373.9 million and we believe that we will be able to fully utilize allthis amount.
We expect to utilize the majority of our federal prior year NOLs in 2018 and together with planned tax strategies,therefore, we do not expectare likely required to make regularmaterial federal income tax payments in 2019. The amount of any earlier than the second half of 2019.
For the year ending December 31, 2017, we expect current year taxablefederal income tax otherwise payable in 2019 is expected to be substantially reduced by tax benefits associated with planned capital deployment of approximately $33.0$300.0 million. The reductionConversely, gains from potential sales of assets concluded in anticipated current year taxable2019 would increase our federal income from the previously disclosed $95.0 million is primarily attributable to additional tax depreciation related to acquisitions and tax strategies. For the year ending December 31, 2017, we expect that our available investment tax credits will offset any Alternative Minimum Tax liability.payable.
For the year ending December 31, 2017,In addition, we expect our businesses collectively to pay statestate/provincial income taxes of approximately $11.5 million.$22.0 million in 2018, including the expected taxes due on the sale of BEC. In calculating our consolidated state income tax provision, we have provided a valuation allowance for certain state income tax NOLs, the use of which is uncertain.
Protecting Americans fromThe Tax HikesCuts and Jobs Act (PATH Act)
On December 22, 2017, the Tax Cuts and Jobs Act was signed into law and includes provisions that will have an impact on our federal taxable income. The PATH Act retroactively extends several tax provisions applicable to corporations, including the extensionmost significant of 50%these are 100% bonus depreciation for eligible property placedon qualifying assets (which is scheduled to decrease ratably to 0% between 2023 and 2027) and a reduction in service in 2015, 2016the federal corporate tax rate from 35% to 21%.
The Tax Cuts and 2017, 40% bonus depreciation for eligible property placed in service in 2018 andJobs Act also limits the deductibility of net interest expense to 30% bonus depreciation for eligible property placed in service in 2019. Other than the extension of the bonus depreciation provision, the Company does“adjusted taxable income”. We do not expect the provisions of the PATH Actthis limitation to have a material effectimpact to our financial results through 2021.
Noncontrolling Interest
The increased loss attributable to noncontrolling interest for the nine months ended September 30, 2018 compared with the nine months ended September 30, 2017 was driven primarily by the change in tax rates imposed on its tax profile.certain entities within the Contracted Power segment by the Tax Cuts and Jobs Act.
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) excluding non-cash items, Free Cash Flow and Proportionately Combined Metrics
In addition to our results under U.S. GAAP, we use certain non-GAAP measures to assess the performance and prospects of our businesses. In particular, we use EBITDA excluding non-cash items, Free Cash Flow and certain proportionately combined financial metrics. Proportionately combined financial metrics reflect our proportionate interest in our wind and solar facilities.
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Results of Operations: Consolidated – (continued)
We measure EBITDA excluding non-cash items as it reflects our businesses’ ability to effectively manage the volume of products sold or services provided, the operating margin earned on those transactions and the management of operating expenses independent of the capitalization and tax attributes of those businesses. We believe investors use EBITDA excluding non-cash items primarily as a measure of the operating performance of MIC’s businesses and to make comparisons with the operating performance of other businesses whose depreciation and amortization expense may vary widely from ours, particularly where acquisitions and other non-operating factors are involved. We define EBITDA excluding non-cash items as net income (loss) or earnings — the most comparable GAAP measure — before interest, taxes, depreciation and amortization and non-cash items including impairments, unrealized derivative gains and losses, adjustments for other non-cash items and pension expense reflected in the statements of operations. EBITDA excluding non-cash items also excludes base management fees and performance fees, if any, whether paid in cash or stock.
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Results of Operations: Consolidated – (continued)
Given our varied ownership levels in our CPContracted Power and MIC Hawaii segments, together with our obligations to report the results of these businesses on a consolidated basis, GAAP measures such as net income (loss) do not fully reflect all of the items we consider in assessing the amount of cash generated based on our proportionate interest in our wind and solar facilities. We note that the proportionately combined metrics used may be calculated in a different manner by other companies and may limit their usefulness as a comparative measure. Therefore, proportionately combined metrics should be used as a supplemental measure and not in lieu of our financial results reported under GAAP.
Our businesses are characteristically owners of high-value, long-lived assets capable of generating substantial Free Cash Flow. We define Free Cash Flow as cash from operating activities — the most comparable GAAP measure — which includes cash paid for interest, taxestax payments and pension contributions, less maintenance capital expenditures, which includes principal repayments on capital lease obligations used to fund maintenance capital expenditures, and excludingexcludes changes in working capital.
We use Free Cash Flow as a measure of our ability to provide investors with an attractive risk-adjusted total return by sustaining and potentially increasing our quarterly cash dividend and funding a portion of our growth. GAAP metrics such as net income (loss) do not provide us with the same level of visibility into the performance and prospects of the business as a result of: (i) the capital intensive nature of our businesses and the generation of non-cash depreciation and amortization; (ii) shares issued to our external Manager under the Management Services Agreement; (iii) our ability to defer all or a portion of current federal income taxes; (iv) non-cash unrealized gains or losses on derivative instruments; (v) amortization of tolling liabilities; (vi) gains (losses) on disposal of assets; and (vii) pension expenses. Pension expenses primarily consist of interest cost, expected return on plan assets and amortization of actuarial and performance gains and losses. Any cash contributions to pension plans are reflected as a reduction to Free Cash Flow.Flow and are not included in pension expense. We believe that external consumers of our financial statements, including investors and research analysts, use Free Cash Flow both to assess MIC’s performance and as an indicator of its success in generating an attractive risk-adjusted total return.
In this Quarterly Report on Form 10-Q, we have disclosed Free Cash Flow on a consolidated basis and for each of our operating segments and MIC Corporate. We believe that both EBITDA excluding non-cash items and Free Cash Flow support a more complete and accurate understanding of the financial and operating performance of our businesses than would otherwise be achieved using GAAP results alone.
Free Cash Flow does not take into consideration required payments on indebtedness and other fixed obligations or other cash items that are excluded from our definition of Free Cash Flow. We note that Free Cash Flow may be calculated differently by other companies thereby limiting its usefulness as a comparative measure. Free Cash Flow should be used as a supplemental measure and not in lieu of our financial results reported under GAAP.
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Results of Operations: Consolidated – (continued)
Classification of Maintenance Capital Expenditures and Growth Capital Expenditures
We categorize capital expenditures as either maintenance capital expenditures or growth capital expenditures. As neither maintenance capital expenditure nor growth capital expenditure is a GAAP term, we have adopted a framework to categorize specific capital expenditures. In broad terms, maintenance capital expenditures primarily maintain our businesses at current levels of operations, capability, profitability or cash flow, while growth capital expenditures primarily provide new or enhanced levels of operations, capability,profitability or cash flow.flows. We consider a number of factors in determining whether a specific capital expenditure will be classified as maintenance or growth.
In some cases, specific capital expenditures contain characteristics of both maintenance and growth capital expenditures. We do not bifurcate specific capital expenditures into maintenance and growth components. Each discrete capital expenditure is considered within the above framework and the entire capital expenditure is classified as either maintenance or growth.
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Results of Operations: Consolidated – (continued)
A reconciliation of net income to EBITDA excluding non-cash items and a reconciliation from cash provided by operating activities to Free Cash Flow, on a consolidated basis, is provided below. Similar reconciliations for each of our operating businesses and MIC Corporate follow.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended
September 30, | | Change
Favorable/
(Unfavorable) | | Nine Months Ended
September 30, | | Change
Favorable/
(Unfavorable) | | Quarter Ended
September 30, | | Change
Favorable/
(Unfavorable) | | Nine Months Ended
September 30, | | Change
Favorable/
(Unfavorable) |
| | | 2017 | | 2016 | | $ | | % | | 2017 | | 2016 | | $ | | % | | 2018 | | 2017 | | $ | | % | | 2018 | | 2017 | | $ | | % |
| | | ($ In Thousands) (Unaudited) | | ($ In Thousands) (Unaudited) |
| Net income | | $ | 36,173 | | | $ | 42,481 | | | | | | | | | | | $ | 94,836 | | | $ | 83,738 | | | | | | | | | | | $ | 21,376 | | | $ | 36,173 | | | | | | | | | | | $ | 104,450 | | | $ | 94,836 | | | | | | | | | |
| Interest expense, net(1) | | | 29,237 | | | | 20,844 | | | | | | | | | | | | 90,000 | | | | 117,183 | | | | | | | | | | | | 32,503 | | | | 29,237 | | | | | | | | | | | | 81,389 | | | | 90,000 | | | | | | | | | |
| Provision for income taxes | | | 25,547 | | | | 29,022 | | | | | | | | | | | | 65,284 | | | | 60,409 | | | | | | | | | | | | 7,884 | | | | 25,547 | | | | | | | | | | | | 36,558 | | | | 65,284 | | | | | | | | | |
| Goodwill impairment | | | | 3,215 | | | | — | | | | | | | | | | | | 3,215 | | | | — | | | | | | | | | |
| Depreciation | | | 58,009 | | | | 59,242 | | | | | | | | | | | | 172,753 | | | | 172,125 | | | | | | | | | | | | 56,924 | | | | 58,009 | | | | | | | | | | | | 179,368 | | | | 172,753 | | | | | | | | | |
| Amortization of intangibles | | | 17,329 | | | | 15,417 | | | | | | | | | | | | 50,920 | | | | 49,917 | | | | | | | | | | | | 20,030 | | | | 17,329 | | | | | | | | | | | | 55,470 | | | | 50,920 | | | | | | | | | |
| Fees to Manager-related party | | | 17,954 | | | | 18,382 | | | | | | | | | | | | 54,610 | | | | 49,570 | | | | | | | | | | | | 12,333 | | | | 17,954 | | | | | | | | | | | | 36,113 | | | | 54,610 | | | | | | | | | |
| Pension expense(2) | | | 2,160 | | | | 2,117 | | | | | | | | | | | | 6,481 | | | | 6,512 | | | | | | | | | | | | 2,094 | | | | 2,160 | | | | | | | | | | | | 6,284 | | | | 6,481 | | | | | | | | | |
| Other non-cash income, net(3) | | | (3,725 | ) | | | (682 | ) | | | | | | | | | | | (961 | ) | | | (9,872 | ) | | | | | | | | | |
| EBITDA excluding non-cash items(4) | | $ | 182,684 | | | $ | 186,823 | | | | (4,139 | ) | | | (2.2 | ) | | $ | 533,923 | | | $ | 529,582 | | | | 4,341 | | | | 0.8 | | |
| EBITDA excluding non-cash items(4) | | $ | 182,684 | | | $ | 186,823 | | | | | | | | | | | $ | 533,923 | | | $ | 529,582 | | | | | | | | | | |
| Other non-cash expense (income), net(3) | | | | 3,437 | | | | (3,725 | ) | | | | | | | | | | | 6,803 | | | | (961 | ) | | | | | | | | |
EBITDA excluding non-cash
items | | | $ | 159,796 | | | $ | 182,684 | | | | (22,888 | ) | | | (12.5 | ) | | $ | 509,650 | | | $ | 533,923 | | | | (24,273 | ) | | | (4.5 | ) |
EBITDA excluding non-cash
items | | | $ | 159,796 | | | $ | 182,684 | | | | | | | | | | | $ | 509,650 | | | $ | 533,923 | | | | | | | | | |
| Interest expense, net(1) | | | (29,237 | ) | | | (20,844 | ) | | | | | | | | | | | (90,000 | ) | | | (117,183 | ) | | | | | | | | | | | (32,503 | ) | | | (29,237 | ) | | | | | | | | | | | (81,389 | ) | | | (90,000 | ) | | | | | | | | |
| Adjustments to derivative instruments recorded in interest expense(1) | | | (959 | ) | | | (8,832 | ) | | | | | | | | | | | 1,724 | | | | 27,639 | | | | | | | | | | | | (3,054 | ) | | | (959 | ) | | | | | | | | | | | (22,809 | ) | | | 1,724 | | | | | | | | | |
| Amortization of debt financing costs(1) | | | 2,163 | | | | 2,287 | | | | | | | | | | | | 6,464 | | | | 7,536 | | | | | | | | | | | | 2,191 | | | | 2,163 | | | | | | | | | | | | 7,430 | | | | 6,464 | | | | | | | | | |
| Amortization of debt discount(1) | | | 882 | | | | — | | | | | | | | | | | | 2,377 | | | | — | | | | | | | | | | | | 910 | | | | 882 | | | | | | | | | | | | 2,710 | | | | 2,377 | | | | | | | | | |
| Provision for income taxes, net of changes in deferred taxes | | | (2,154 | ) | | | (1,115 | ) | | | | | | | | | | | (8,493 | ) | | | (5,283 | ) | | | | | | | | | |
| Changes in working capital | | | (4,914 | ) | | | 751 | | | | | | | | | | | | (48,326 | ) | | | (5,303 | ) | | | | | | | | | |
Provision for current income
taxes | | | | (3,076 | ) | | | (2,154 | ) | | | | | | | | | | | (10,659 | ) | | | (8,493 | ) | | | | | | | | |
| Changes in working capital(4) | | | | 22,787 | | | | (3,656 | ) | | | | | | | | | | | 8,120 | | | | (47,635 | ) | | | | | | | | |
| Cash provided by operating activities | | | 148,465 | | | | 159,070 | | | | | | | | | | | | 397,669 | | | | 436,988 | | | | | | | | | | | | 147,051 | | | | 149,723 | | | | | | | | | | | | 413,053 | | | | 398,360 | | | | | | | | | |
| Changes in working capital | | | 4,914 | | | | (751 | ) | | | | | | | | | | | 48,326 | | | | 5,303 | | | | | | | | | | |
Maintenance capital
expenditures(5) | | | (12,106 | ) | | | (24,472 | ) | | | | | | | | | | | (23,062 | ) | | | (44,725 | ) | | | | | | | | | |
| Changes in working capital(4) | | | | (22,787 | ) | | | 3,656 | | | | | | | | | | | | (8,120 | ) | | | 47,635 | | | | | | | | | |
Maintenance capital
expenditures | | | | (13,372 | ) | | | (12,106 | ) | | | | | | | | | | | (32,724 | ) | | | (23,062 | ) | | | | | | | | |
| Free cash flow | | $ | 141,273 | | | $ | 133,847 | | | | 7,426 | | | | 5.5 | | | $ | 422,933 | | | $ | 397,566 | | | | 25,367 | | | | 6.4 | | | $ | 110,892 | | | $ | 141,273 | | | | (30,381 | ) | | | (21.5 | ) | | $ | 372,209 | | | $ | 422,933 | | | | (50,724 | ) | | | (12.0 | ) |
| (1) | Interest expense, net, includes adjustments to derivative instruments, non-cash amortization of deferred financing fees and non-cash amortization of debt discount related to the 2.00% Convertible Senior Notes due October 2023. For the nine months ended September 30, 2016, interest expense also included a non-cash write-off of deferred financing fees related to the February 2016 refinancing at Hawaii Gas. |
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Results of Operations: Consolidated – (continued)
| (2) | Pension expense primarily consists of interest cost, expected return on plan assets and amortization of actuarial and performance gains and losses. |
| (3) | Other non-cash income,expense (income), net, primarily includes non-cash amortization of tolling liabilities, unrealized gains (losses) on commodity hedges and non-cash gains (losses) related to the disposal of assets. Other non-cash expense (income), net, also includes the write-down of our investment in CPI for the quarter and nine months ended September 30, 2018. See ““Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) excluding non-cash items, Free Cash Flow and Proportionately Combined Metrics”Metrics” above for further discussion. |
| (4) | ForConformed to current period presentation for the quarter and nine months ended September 30, 2016, EBITDA excluding non-cash items included $13.0 million and $15.5 million, respectively,adoption of insurance recoveries relatedASU No. 2016-18,Statement of Cash Flows (Topic 230): Restricted Cash. See Note 2, “Basis of Presentation”, in our Notes to damaged docks at IMTT.Consolidated Condensed Financial Statements in Part I of this Form 10-Q for recently issued accounting standards. |
| (5) | For the quarter and nine months ended September 30, 2016, maintenance capital expenditures included $13.9 million associated with the rebuilding of damaged docks, the majority of which were insured losses, at IMTT. |
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Results of Operations: Consolidated – (continued)
Reconciliation from Consolidated Free Cash Flow to Proportionately Combined Free Cash Flow
See “Results of Operations — Consolidated” above for a reconciliation of Free Cash Flow — Consolidated basis to cash provided by operating activities, the most comparable GAAP measure. The following table is a reconciliation from Free Cash Flow on a consolidated basis to Free Cash Flow on a proportionately combined basis (our proportionate interest in our wind and solar facilities). See “Results of Operations” below for a reconciliation of Free Cash Flow for each of our segments to cash provided by (used in) operating activities for such segment.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended September 30, | | Change
Favorable/
(Unfavorable) | | Nine Months Ended September 30, | | Change
Favorable/
(Unfavorable) | | Quarter Ended
September 30, | | Change Favorable/
(Unfavorable) | | Nine Months Ended
September 30, | | Change
Favorable/
(Unfavorable) |
| | | 2017 | | 2016 | | $ | | % | | 2017 | | 2016 | | $ | | % | | 2018 | | 2017 | | $ | | % | | 2018 | | 2017 | | $ | | % |
| | | ($ In Thousands) (Unaudited) | | ($ In Thousands) (Unaudited) |
| Free Cash Flow – Consolidated basis | | $ | 141,273 | | | $ | 133,847 | | | | 7,426 | | | | 5.5 | | | $ | 422,933 | | | $ | 397,566 | | | | 25,367 | | | | 6.4 | | | $ | 110,892 | | | $ | 141,273 | | | | (30,381 | ) | | | (21.5 | ) | | $ | 372,209 | | | $ | 422,933 | | | | (50,724 | ) | | | (12.0 | ) |
| 100% of CP Free Cash Flow included in consolidated Free Cash Flow | | | (25,970 | ) | | | (26,718 | ) | | | | | | | | | | | (56,513 | ) | | | (56,532 | ) | | | | | | | | | |
| MIC’s share of CP Free Cash Flow | | | 24,667 | | | | 24,773 | | | | | | | | | | | | 51,300 | | | | 50,580 | | | | | | | | | | |
| 100% of Contracted Power Free Cash Flow included in consolidated Free Cash Flow | | | | (30,865 | ) | | | (25,970 | ) | | | | | | | | | | | (71,365 | ) | | | (56,513 | ) | | | | |
| MIC’s share of Contracted Power Free Cash Flow | | | | 28,474 | | | | 24,667 | | | | | | | | | | | | 64,600 | | | | 51,300 | | | | | | | | | |
| 100% of MIC Hawaii Free Cash Flow included in consolidated Free Cash Flow | | | (8,137 | ) | | | (8,696 | ) | | | | | | | | | | | (32,368 | ) | | | (30,432 | ) | | | | | | | | | | | 11,342 | | | | (8,137 | ) | | | | | | | | | | | (6,634 | ) | | | (32,368 | ) | | | | |
| MIC’s share of MIC Hawaii Free Cash Flow | | | 8,132 | | | | 8,694 | | | | | | | | | | | | 32,358 | | | | 30,430 | | | | | | | | | | | | (11,345 | ) | | | 8,132 | | | | | | | | | | | | 6,626 | | | | 32,358 | | | | | | | | | |
| Free Cash Flow – Proportionately Combined basis | | $ | 139,965 | | | $ | 131,900 | | | | 8,065 | | | | 6.1 | | | $ | 417,710 | | | $ | 391,612 | | | | 26,098 | | | | 6.7 | | | $ | 108,498 | | | $ | 139,965 | | | | (31,467 | ) | | | (22.5 | ) | | $ | 365,436 | | | $ | 417,710 | | | | (52,274 | ) | | | (12.5 | ) |
Results of Operations: IMTT
The financial performance of IMTT is in large part a function of the amount of bulk liquid storage capacity under lease and the storage rates achieved on those leases. IMTT recorded financial results for the quarter and nine months ended September 30, 2018 that reflect a previously forecast decline in storage capacity utilization and lower average storage rates, partially offset by contributions from an acquisition in 2017.
The portion of IMTT’s storage capacity under lease declined to an average of 82.1% for the quarter ended September 30, 2018 compared with 92.7% in the prior comparable quarter and 86.1% in the quarter ended June 30, 2018. Average storage rates declined primarily as a result of lower rates achieved on renewal of gasoline and distillates contracts in New York Harbor. IMTT expects the lower storage rates for gasoline and distillates in New York Harbor to continue to impact its financial results through 2019, although this impact is expected to be partially offset by increases in storage utilization and an increase in demand for storage related to the implementation of the International Maritime Organization’s IMO Marpol Annex VI (IMO 2020) regulations limiting the sulphur content of bunker fuel beginning January 1, 2020.
IMTT is currently both involved in and evaluating a number of initiatives related to repurposing existing storage capacity and repositioning the overall business:
Repurposing
IMTT anticipates cleaning and modifying tanks on the Lower Mississippi River totaling up to approximately 3.0 million barrels of capacity, along with related infrastructure, from heavy and residual oil storage to storage of products with potentially better growth prospects such as clean petroleum, chemical and agricultural oils. Approximately 1.3 million barrels of storage capacity is being repurposed currently and approximately 600,000 of these barrels are expected to be returned to service by year end. Through the third quarter, approximately 900,000 of the 1.3 million barrels had been re-contracted (including contracts with future start dates) with the remainder expected to be re-contracted in November 2018.
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Results of Operations:IMTT – (continued)
The cost of repurposing the 1.3 million barrels of storage capacity is estimated at approximately $12.0 million in 2018, of which approximately $7.0 million will be characterized as maintenance capital expenditures. Through the end of the third quarter of 2018, IMTT had deployed $6.9 million of the $12.0 million. The repurposing of additional barrels is expected to be completed by the end of 2020.
Key Factors Affecting Operating Repositioning
Repositioning includes projects designed to leverage IMTT’s existing geographic footprint through increases in capacity or capability designed to meet customer demand and/or further diversify the mix of products handled. For example, in the second quarter of 2018, IMTT announced that it had entered into an agreement to construct an additional 200,000 barrels of capacity for a chemicals manufacturer.
Other repositioning projects under consideration or in process include enhancing terminal connectivity by investing in truck, pipeline, marine and rail infrastructure. In the third quarter, IMTT commenced the development of an automated, multi-product, six bay truck rack to improve its intermodal distribution capabilities in the New York Harbor market and is expected to be in service in late 2019.
In the fourth quarter, IMTT completed negotiations on an agreement with Methanex that will see the business construct 714,000 barrels of chemical storage capacity and associated infrastructure at its Geismar Chemical Logistics facility. The project is subject to a final investment decision by Methanex on the construction of a third methanol manufacturing plant in Geismar (Geismar 3) alongside its two existing facilities. A final investment decision is expected in mid-2019.
IMTT also entered into agreements to construct an additional dock at its Geismar facility that will support the existing business, the Methanex project and future expansion opportunities. The dock is expected to be operational by the end of 2019.
IMTT’s aggregate investment in the three new projects is estimated to be $80.0 million.
The successful implementation of the repurposing and repositioning initiatives is, over time, expected to, (i) improve utilization and rates, (ii) increase exposure to products with better growth prospects, (iii) generate a larger proportion of IMTT’s revenue from longer-dated contracts and, (iv) reduce exposure to heavy and residual oil storage demand.
TABLE OF CONTENTS
Results for the Quarter:
an increase in revenue primarily resulting from an acquisition; and
a decrease in costs, primarily due to healthcare savings; partially offset by
the absence of insurance recoveries in 2017;
a decline in spill response activity; and
a decrease in utilization.
Operations:IMTT – (continued) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended
September 30, | | Change
Favorable/
(Unfavorable) | | Nine Months Ended
September 30, | | Change
Favorable/
(Unfavorable) | | Quarter Ended
September 30, | | Change Favorable/
(Unfavorable) | | Nine Months Ended
September 30, | | Change
Favorable/
(Unfavorable) |
| | | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
| | | $ | | $ | | $ | | % | | $ | | $ | | $ | | % | | $ | | $ | | $ | | % | | $ | | $ | | $ | | % |
| | | ($ In Thousands) (Unaudited) | | ($ In Thousands) (Unaudited) |
| Revenue | | | 134,167 | | | | 133,143 | | | | 1,024 | | | | 0.8 | | | | 410,128 | | | | 396,786 | | | | 13,342 | | | | 3.4 | | | | 118,229 | | | | 134,167 | | | | (15,938 | ) | | | (11.9 | ) | | | 386,981 | | | | 410,128 | | | | (23,147 | ) | | | (5.6 | ) |
| Cost of services | | | 48,982 | | | | 53,085 | | | | 4,103 | | | | 7.7 | | | | 148,052 | | | | 149,845 | | | | 1,793 | | | | 1.2 | | | | 43,864 | | | | 48,982 | | | | 5,118 | | | | 10.4 | | | | 148,005 | | | | 148,052 | | | | 47 | | | | 0.0 | |
| Selling, general and administrative expenses | | | 9,104 | | | | 8,358 | | | | (746 | ) | | | (8.9 | ) | | | 25,627 | | | | 24,322 | | | | (1,305 | ) | | | (5.4 | ) | | | 7,565 | | | | 9,104 | | | | 1,539 | | | | 16.9 | | | | 24,685 | | | | 25,627 | | | | 942 | | | | 3.7 | |
| Depreciation and amortization | | | 31,511 | | | | 35,709 | | | | 4,198 | | | | 11.8 | | | | 93,826 | | | | 103,612 | | | | 9,786 | | | | 9.4 | | | | 32,683 | | | | 31,511 | | | | (1,172 | ) | | | (3.7 | ) | | | 98,702 | | | | 93,826 | | | | (4,876 | ) | | | (5.2 | ) |
| Operating income | | | 44,570 | | | | 35,991 | | | | 8,579 | | | | 23.8 | | | | 142,623 | | | | 119,007 | | | | 23,616 | | | | 19.8 | | | | 34,117 | | | | 44,570 | | | | (10,453 | ) | | | (23.5 | ) | | | 115,589 | | | | 142,623 | | | | (27,034 | ) | | | (19.0 | ) |
| Interest expense, net(1) | | | (10,187 | ) | | | (7,827 | ) | | | (2,360 | ) | | | (30.2 | ) | | | (30,707 | ) | | | (41,462 | ) | | | 10,755 | | | | 25.9 | | | | (11,677 | ) | | | (10,187 | ) | | | (1,490 | ) | | | (14.6 | ) | | | (30,349 | ) | | | (30,707 | ) | | | 358 | | | | 1.2 | |
| Other income, net | | | 794 | | | | 13,495 | | | | (12,701 | ) | | | (94.1 | ) | | | 1,954 | | | | 16,947 | | | | (14,993 | ) | | | (88.5 | ) | | | 414 | | | | 794 | | | | (380 | ) | | | (47.9 | ) | | | 864 | | | | 1,954 | | | | (1,090 | ) | | | (55.8 | ) |
| Provision for income taxes | | | (14,422 | ) | | | (17,079 | ) | | | 2,657 | | | | 15.6 | | | | (46,686 | ) | | | (38,717 | ) | | | (7,969 | ) | | | (20.6 | ) | | | (6,422 | ) | | | (14,422 | ) | | | 8,000 | | | | 55.5 | | | | (24,195 | ) | | | (46,686 | ) | | | 22,491 | | | | 48.2 | |
| Net income | | | 20,755 | | | | 24,580 | | | | (3,825 | ) | | | (15.6 | ) | | | 67,184 | | | | 55,775 | | | | 11,409 | | | | 20.5 | | | | 16,432 | | | | 20,755 | | | | (4,323 | ) | | | (20.8 | ) | | | 61,909 | | | | 67,184 | | | | (5,275 | ) | | | (7.9 | ) |
| Less: net income attributable to noncontrolling interests | | | — | | | | — | | | | — | | | | — | | | | — | | | | 59 | | | | 59 | | | | 100.0 | | |
| Net income attributable to MIC | | | 20,755 | | | | 24,580 | | | | (3,825 | ) | | | (15.6 | ) | | | 67,184 | | | | 55,716 | | | | 11,468 | | | | 20.6 | | |
Reconciliation of net income to EBITDA excluding non-cash items and a reconciliation of cash provided by operating activities to Free Cash Flow:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | 20,755 | | | | 24,580 | | | | | | | | | | | | 67,184 | | | | 55,775 | | | | | | | | | | | | 16,432 | | | | 20,755 | | | | | | | | | | | | 61,909 | | | | 67,184 | | | | | | | | | |
| Interest expense, net(1) | | | 10,187 | | | | 7,827 | | | | | | | | | | | | 30,707 | | | | 41,462 | | | | | | | | | | | | 11,677 | | | | 10,187 | | | | | | | | | | | | 30,349 | | | | 30,707 | | | | | | | | | |
| Provision for income taxes | | | 14,422 | | | | 17,079 | | | | | | | | | | | | 46,686 | | | | 38,717 | | | | | | | | | | | | 6,422 | | | | 14,422 | | | | | | | | | | | | 24,195 | | | | 46,686 | | | | | | | | | |
| Depreciation and amortization | | | 31,511 | | | | 35,709 | | | | | | | | | | | | 93,826 | | | | 103,612 | | | | | | | | | | | | 32,683 | | | | 31,511 | | | | | | | | | | | | 98,702 | | | | 93,826 | | | | | | | | | |
| Pension expense(2) | | | 1,883 | | | | 1,752 | | | | | | | | | | | | 5,649 | | | | 5,414 | | | | | | | | | | | | 1,914 | | | | 1,883 | | | | | | | | | | | | 5,737 | | | | 5,649 | | | | | | | | | |
| Other non-cash expense, net | | | 178 | | | | 73 | | | | | | | | | | | | 315 | | | | 631 | | | | | | | | | | | | 207 | | | | 178 | | | | | | | | | | | | 611 | | | | 315 | | | | | | | | | |
| EBITDA excluding non-cash items(3) | | | 78,936 | | | | 87,020 | | | | (8,084 | ) | | | (9.3 | ) | | | 244,367 | | | | 245,611 | | | | (1,244 | ) | | | (0.5 | ) | |
| EBITDA excluding non-cash items(3) | | | 78,936 | | | | 87,020 | | | | | | | | | | | | 244,367 | | | | 245,611 | | | | | | | | | | |
EBITDA excluding non-cash
items | | | | 69,335 | | | | 78,936 | | | | (9,601 | ) | | | (12.2 | ) | | | 221,503 | | | | 244,367 | | | | (22,864 | ) | | | (9.4 | ) |
EBITDA excluding non-cash
items | | | | 69,335 | | | | 78,936 | | | | | | | | | | | | 221,503 | | | | 244,367 | | | | | | | | | |
| Interest expense, net(1) | | | (10,187 | ) | | | (7,827 | ) | | | | | | | | | | | (30,707 | ) | | | (41,462 | ) | | | | | | | | | | | (11,677 | ) | | | (10,187 | ) | | | | | | | | | | | (30,349 | ) | | | (30,707 | ) | | | | | | | | |
| Adjustments to derivative instruments recorded in interest expense(1) | | | (524 | ) | | | (2,433 | ) | | | | | | | | | | | (257 | ) | | | 10,723 | | | | | | | | | | | | (870 | ) | | | (524 | ) | | | | | | | | | | | (6,263 | ) | | | (257 | ) | | | | | | | | |
| Amortization of debt financing costs(1) | | | 413 | | | | 411 | | | | | | | | | | | | 1,236 | | | | 1,242 | | | | | | | | | | | | 411 | | | | 413 | | | | | | | | | | | | 1,234 | | | | 1,236 | | | | | | | | | |
| Provision for income taxes, net of changes in deferred taxes | | | 344 | | | | (904 | ) | | | | | | | | | | | (3,069 | ) | | | (3,071 | ) | | | | | | | | | |
| Benefit (provision) for current income taxes | | | | 2,593 | | | | 344 | | | | | | | | | | | | (6,059 | ) | | | (3,069 | ) | | | | | | | | |
| Changes in working capital | | | 3,732 | | | | (1,243 | ) | | | | | | | | | | | (12,413 | ) | | | (11,726 | ) | | | | | | | | | | | (721 | ) | | | 3,732 | | | | | | | | | | | | 9,913 | | | | (12,413 | ) | | | | | | | | |
| Cash provided by operating activities | | | 72,714 | | | | 75,024 | | | | | | | | | | | | 199,157 | | | | 201,317 | | | | | | | | | | | | 59,071 | | | | 72,714 | | | | | | | | | | | | 189,979 | | | | 199,157 | | | | | | | | | |
| Changes in working capital | | | (3,732 | ) | | | 1,243 | | | | | | | | | | | | 12,413 | | | | 11,726 | | | | | | | | | | | | 721 | | | | (3,732 | ) | | | | | | | | | | | (9,913 | ) | | | 12,413 | | | | | | | | | |
| Maintenance capital expenditures(4) | | | (8,116 | ) | | | (19,860 | ) | | | | | | | | | | | (13,563 | ) | | | (33,099 | ) | | | | | | | | | |
Maintenance capital
expenditures | | | | (8,863 | ) | | | (8,116 | ) | | | | | | | | | | | (21,335 | ) | | | (13,563 | ) | | | | | | | | |
| Free cash flow | | | 60,866 | | | | 56,407 | | | | 4,459 | | | | 7.9 | | | | 198,007 | | | | 179,944 | | | | 18,063 | | | | 10.0 | | | | 50,929 | | | | 60,866 | | | | (9,937 | ) | | | (16.3 | ) | | | 158,731 | | | | 198,007 | | | | (39,276 | ) | | | (19.8 | ) |
| (1) | Interest expense, net, includes adjustments to derivative instruments and non-cash amortization of deferred financing fees. |
| (2) | Pension expense primarily consists of interest cost, expected return on plan assets and amortization of actuarial and performance gains and losses. |
TABLE OF CONTENTS
Results of Operations:IMTT – (continued)
| (3) | For the quarter and nine months ended September 30, 2016, EBITDA excluding non-cash items included $13.0 million and $15.5 million, respectively, of insurance recoveries related to damaged docks. These insurance recoveries were used to repair damaged docks and recorded inOther Income, net. The cost of those repairs were recorded inMaintenance Capital Expenditures. Excluding insurance proceeds, EBITDA excluding non-cash items would have been $74.0 million and $230.1 million for the quarter and nine months ended September 30, 2016, respectively. On that basis, EBITDA excluding non-cash items would have increased by $4.9 million, or 6.6%, for the quarter ended September 30, 2017, and increased by $14.2 million, or 6.2%, for the nine months ended September 30, 2017, compared with the prior comparable periods. |
| (4) | For the quarter and nine months ended September 30, 2016, maintenance capital expenditures included $13.9 million associated with the rebuilding of damaged docks, the majority of which were insured losses. Excluding these costs, maintenance capital expenditures would have been $6.0 million and $19.2 million for the quarter and nine months ended September 30, 2016, respectively. On that basis, maintenance capital expenditures would have increased by $2.1 million, or 35.2%, for the quarter ended September 30, 2017, and decreased by $5.7 million, or 29.5%, for the nine months ended September 30, 2017, compared with the prior comparable periods. |
Revenue
IMTT generates the majority of its revenue from contracts typically comprising a fixed monthly charge (that escalates annually with inflation) for access to or use of its infrastructure.a specified amount of capacity, infrastructure or land. The monthly charge typically increases annually with inflation. We refer to revenue generated from such contracts or fixed charges as firm commitments. Firm commitments are generally of medium term duration and atAt September 30, 2017,2018, firm commitments had a revenue weighted average remaining contract life of 2.1 years.2.0 years, although some customers storing certain petroleum products are renewing contracts for shorter durations. Revenue from firm commitments comprised 82.6%84.8% and 80.4%80.3% of total revenue for the quarter ended September 30, 2017 and the trailing twelve months ended September 30, 2017,2018, respectively.
For the quarter and nine months ended September 30, 2017,2018, total revenue increased by $1.0 million and $13.3 million, respectively,decreased compared with the quarter and nine months ended September 30, 2016. The increase in revenue for the quarter ended September 30, 2017 compared with the quarter ended September 30, 2016 was primarily due to an acquisition, partially offset by lower revenue from spill response activitythe decline in utilization and lower utilization. Foraverage storage rates on contract renewals, reduced environmental response revenue as a result of the nine months ended September 30, 2017, revenue also increased due to the recognitionsale of IMTT’s subsidiary OMI Environmental Solutions (OMI) in April 2018 and lower deferred revenue resulting fromrecognized in connection with the termination of a construction project by a biodiesel customer.
Capacity utilization was 92.7% and 94.3% for the quarter and nine months ended September 30, 2017, respectively, compared with 96.7% and 96.4% for the quarter and nine months ended September 30, 2016, respectively.in 2017. The decrease in utilization primarily reflectsrevenue was partially offset by contributions from an acquisition of a portfolio of terminals completed in the transitionthird quarter of customers and tanks coming out of service for repairs and inspections. We expect utilization levels to be approximately 94% over the long term, as they have been historically.2017.
CostsCost of Services and Selling, General and Administrative Expenses
Cost of services and selling, general and administrative expenses combined decreased for the quarter and nine months ended September 30, 20172018 compared with the quarter and nine months ended September 30, 2016.2017 primarily due to the absence of costs related to OMI. The decrease was primarily the result of lower labor, healthcare and repair and maintenance expenses,cost decreases were partially offset by incremental costs fromrelated to the terminals acquired in 2017.
Cost of services is expected to increase during the fourth quarter of 2018, and subsequently, as a result of an acquisition and higher franchise taxes.expected increase in property taxes assessed on the terminal at St. Rose.
Depreciation and Amortization
Depreciation and amortization expense decreasedincreased for the quarter and nine months ended September 30, 20172018 compared with the quarter and nine months ended September 30, 20162017 primarily due to the write-offan acquisition of tanks and docksterminals in 2016.2017.
Interest Expense, Net
Interest expense includes gains on derivative instruments of $1.2 million and $6.8 million for the quarter and nine months ended September 30, 2018, respectively, compared with gains on derivative instruments of $124,000 and losses on derivative instruments of $1.5 million for the quarter and nine months ended September 30, 2017, respectively, compared with gains onrespectively. Excluding the derivative instruments of $1.4adjustments, cash interest expense was $12.2 million and losses on derivative instruments of $14.0$35.4 million for the quarter and nine months ended September 30, 2016, respectively.
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Results of Operations:IMTT – (continued)
Excluding the derivative adjustments, interest expense increased for the quarter ended September 30, 20172018, respectively, compared with the quarter ended September 30, 2016 primarily due to increased debt balances. Interest expense for the nine months ended September 30, 2017 compared with the nine months ended September 30, 2016 remained flat. Cash interest expense was $10.3 million and $29.7 million for the quarter and nine months ended September 30, 2017, respectively, compared with $9.9 millionrespectively. The increase in cash interest expense reflects a higher average debt balance and $29.5 million fora higher weighted average interest rate.
The interest rate on IMTT’s tax-exempt Gulf Opportunity Zone Bonds (GO Zone Bonds) increased by 0.7% in 2018 as a result of the quarterreduction in the corporate tax rate from 35% to 21% under the Tax Cuts and nine months ended September 30, 2016, respectively.
Other Income, net
Other income, net, decreased for the quarter and nine months ended September 30, 2017 compared with the quarter and nine months ended September 30, 2016. The business incurred insured losses in connection with damage done to various docks in Bayonne and Gretna for which insurance recoveries of approximately $13.0 million and $15.5 million were recorded during the quarter and nine months ended September 30, 2016, respectively.Jobs Act.
Income Taxes
The taxable income generated by IMTT is reported on our consolidated federal income tax return. The business files statestandalone state/provincial income tax returns in the statesjurisdictions in which it operates. For the year ending December 31, 2017,2018, the business expects to pay statestate/provincial income taxes of approximately $4.0$5.0 million. TheProvision Benefit (provision) for current income taxes, net of changes in deferred taxes of $3.1$6.1 million for the nine months ended September 30, 20172018 in the above table includes $2.4$4.9 million of statestate/provincial income tax expense and $626,000$1.2 million of federal income tax expense. Any current federal income tax payable is expected to be offset in consolidation with the application of NOLs at the MIC holding company level.level NOLs.
TABLE OF CONTENTS
Results of Operations:IMTT – (continued)
The majority of the difference between IMTT’s book and federal taxable income relates to depreciation of terminal fixed assets. For book purposes, these fixed assets are depreciated primarily over 5 to 30 years using the straight-line method of depreciation. For federal income tax purposes, these same fixed assets are depreciated primarily over 5 to 15 years using accelerated methods. In addition, most terminal fixed assets placed in service between 2012 through 2017 qualify for the federal 50% bonus tax depreciation. A significant portion of Louisiana terminal fixed assets in Louisiana that were constructed in the period after Hurricane Katrina in 2005 were financed with Gulf OpportunityGO Zone Bonds (GO Zone Bonds).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 50% bonus tax depreciation. However, Louisiana allows the use of 50% bonus depreciation except for assets financed with GO Zone Bonds.
EBITDA Excluding Non-Cash Items
For the quarter and nine months ended September 30, 2016, EBITDA excluding non-cash items included $13.0 million and $15.5 million, respectively, of insurance recoveries for damaged docks. These insurance recoveries were used to repair damaged docks and recorded inOther Income, net. The cost of those repairs were recorded inMaintenance Capital Expenditures. Excluding insurance proceeds, EBITDA excluding non-cash items would have been $74.0 million and $230.1 million for the quarter and nine months ended September 30, 2016, respectively. On that basis, EBITDA excluding non-cash items would have increased by $4.9 million, or 6.6%, for the quarter ended September 30, 2017, and increased by $14.2 million, or 6.2%, for
During the nine months ended September 30, 2017, compared with the prior comparable periods.
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Results of Operations:IMTT – (continued)
Maintenance Capital Expenditures
For the nine months ended September 30, 2017,2018, IMTT incurred maintenance capital expenditures of $13.6$21.3 million and $16.4 million on both an accrual basis and cash basis, respectively, compared with $33.1$13.6 million and $34.5$16.4 million on an accrual basis and cash basis, respectively, for the nine months ended September 30, 2016. For2017. The increase in 2018 compared with 2017 was primarily a result of expenditures related to the quarterrepurposing of storage capacity and nine months ended September 30, 2016, maintenancethe timing of tank and dock inspections and repairs.
Maintenance capital expenditures included $13.9 million associated with the rebuilding of damaged docks at IMTT’s Gretna and Bayonne terminals. The property insurance recoveries are recorded inOther Income, net in the above statement of operations. Excluding these costs, maintenance capital expenditures would have been $6.0 million and $19.2 million for the quarter and nine months ended September 30, 2016, respectively. On that basis, maintenance capital expenditures would have increased by $2.1 million, or 35.2%, for the quarter ended September 30, 2017, and decreased by $5.7 million, or 29.5%, for the nine months ended September 30, 2017,2018 includes $4.0 million associated with repurposing existing tanks. For the full year, IMTT anticipates spending approximately $12.0 million on repurposing existing tanks with approximately $7.0 million of that being characterized as maintenance capital expenditures. The expenditures related to repurposing will be in addition to a forecast of approximately $25.0 million of recurring maintenance capital expenditures.
Results of Operations: Atlantic Aviation
The fundamental driver of the performance of Atlantic Aviation is the number of GA flight movements (take-offs and landings) in a given period. Based on data reported by the FAA, industry-wide domestic GA flight movements increased by 1.1% and 1.9% for the two month period including July and August and the eight months ended August 31, 2018, respectively, compared with the prior comparable periods.same periods in 2017. The decrease fornumber of GA flight movements tends to be correlated with general economic activity over the ninelong-term. Factors that could impact GA flight movements either positively or negatively in the short-term include traffic constraints due to repairs and maintenance of runways, weather conditions or events, the timing of public and religious holidays and events, including major sporting events.
The total number of GA flight movements at airports on which Atlantic Aviation operates decreased by 2.0% and 0.1% during the two month period including July and August and the eight months ended September 30, 2017August 31, 2018, respectively, compared with the nine months ended September 30, 2016 is primarilysame periods in 2017. The decrease was the result of a number of the aforementioned short-term factors, several of which had a positive impact on the prior comparable periods, together with decreased traffic at Santa Monica Municipal Airport in Santa Monica, CA as a result of the timingshortening of planned maintenancethe runway. Atlantic Aviation believes that growth in GA flight movements will continue to be positively correlated with growth in economic activity and GDP. Flight movements at airports on which Atlantic Aviation operates, other than Santa Monica, decreased by 0.7% for the year. IMTT expectstwo month period including July and August and increased 1.1% the eight months ended August 31, 2018.
Atlantic Aviation seeks to incur between $20.0 million and $25.0 millionextend FBO leases prior to their maturity in order to maintain visibility into the cash generating capacity of maintenance capital expendituresthese assets over the long-term. Atlantic Aviation calculates a weighted average remaining lease life based on EBITDA excluding non-cash items in the prior calendar year adjusted for the impact of acquisitions/dispositions. The weighted average remaining lease life was 19.9 years at September 30, 2018 compared with 20.7 years at September 30, 2017.
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Results of Operations:Atlantic Aviation – (continued)
| | | | | | | | | | | | | | | | |
| | Quarter Ended
September 30, | | Change
Favorable/
(Unfavorable) | | Nine Months Ended
September 30, | | Change
Favorable/
(Unfavorable) |
| | | 2018 | | 2017 | | 2018 | | 2017 |
| | | $ | | $ | | $ | | % | | $ | | $ | | $ | | % |
| | | ($ In Thousands) (Unaudited) |
| Revenue | | | 234,908 | | | | 211,457 | | | | 23,451 | | | | 11.1 | | | | 715,041 | | | | 621,149 | | | | 93,892 | | | | 15.1 | |
| Cost of services (exclusive of depreciation and amortization shown separately below) | | | 113,077 | | | | 92,106 | | | | (20,971 | ) | | | (22.8 | ) | | | 345,764 | | | | 272,985 | | | | (72,779 | ) | | | (26.7 | ) |
| Gross margin | | | 121,831 | | | | 119,351 | | | | 2,480 | | | | 2.1 | | | | 369,277 | | | | 348,164 | | | | 21,113 | | | | 6.1 | |
| Selling, general and administrative expenses | | | 57,146 | | | | 57,026 | | | | (120 | ) | | | (0.2 | ) | | | 173,802 | | | | 163,512 | | | | (10,290 | ) | | | (6.3 | ) |
| Depreciation and amortization | | | 25,582 | | | | 25,286 | | | | (296 | ) | | | (1.2 | ) | | | 78,020 | | | | 73,894 | | | | (4,126 | ) | | | (5.6 | ) |
| Operating income | | | 39,103 | | | | 37,039 | | | | 2,064 | | | | 5.6 | | | | 117,455 | | | | 110,758 | | | | 6,697 | | | | 6.0 | |
| Interest expense, net(1) | | | (5,290 | ) | | | (4,295 | ) | | | (995 | ) | | | (23.2 | ) | | | (9,601 | ) | | | (13,648 | ) | | | 4,047 | | | | 29.7 | |
| Other expense, net | | | (20 | ) | | | (14 | ) | | | (6 | ) | | | (42.9 | ) | | | (519 | ) | | | (119 | ) | | | (400 | ) | | | NM | |
| Provision for income taxes | | | (9,058 | ) | | | (11,139 | ) | | | 2,081 | | | | 18.7 | | | | (28,769 | ) | | | (36,766 | ) | | | 7,997 | | | | 21.8 | |
| Net income | | | 24,735 | | | | 21,591 | | | | 3,144 | | | | 14.6 | | | | 78,566 | | | | 60,225 | | | | 18,341 | | | | 30.5 | |
Reconciliation of net income to EBITDA excluding non-cash items and a reconciliation of cash provided by operating activities to Free Cash Flow:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | 24,735 | | | | 21,591 | | | | | | | | | | | | 78,566 | | | | 60,225 | | | | | | | | | |
| Interest expense, net(1) | | | 5,290 | | | | 4,295 | | | | | | | | | | | | 9,601 | | | | 13,648 | | | | | | | | | |
| Provision for income taxes | | | 9,058 | | | | 11,139 | | | | | | | | | | | | 28,769 | | | | 36,766 | | | | | | | | | |
| Depreciation and amortization | | | 25,582 | | | | 25,286 | | | | | | | | | | | | 78,020 | | | | 73,894 | | | | | | | | | |
| Pension expense(2) | | | 5 | | | | 5 | | | | | | | | | | | | 16 | | | | 15 | | | | | | | | | |
| Other non-cash expense, net | | | 323 | | | | 1,212 | | | | | | | | | | | | 1,232 | | | | 1,252 | | | | | | | | | |
EBITDA excluding non-cash
items | | | 64,993 | | | | 63,528 | | | | 1,465 | | | | 2.3 | | | | 196,204 | | | | 185,800 | | | | 10,404 | | | | 5.6 | |
EBITDA excluding non-cash
items | | | 64,993 | | | | 63,528 | | | | | | | | | | | | 196,204 | | | | 185,800 | | | | | | | | | |
| Interest expense, net(1) | | | (5,290 | ) | | | (4,295 | ) | | | | | | | | | | | (9,601 | ) | | | (13,648 | ) | | | | | | | | |
| Convertible senior notes interest(3) | | | (2,013 | ) | | | (2,012 | ) | | | | | | | | | | | (6,038 | ) | | | (5,769 | ) | | | | | | | | |
| Adjustments to derivative instruments recorded in interest expense(1) | | | (354 | ) | | | 464 | | | | | | | | | | | | (5,798 | ) | | | 3,150 | | | | | | | | | |
| Amortization of debt financing costs(1) | | | 280 | | | | 284 | | | | | | | | | | | | 842 | | | | 819 | | | | | | | | | |
Provision for current income
taxes | | | (5,729 | ) | | | (1,208 | ) | | | | | | | | | | | (19,469 | ) | | | (5,810 | ) | | | | | | | | |
| Changes in working capital | | | 6,313 | | | | (1,335 | ) | | | | | | | | | | | 16,904 | | | | (6,667 | ) | | | | | | | | |
| Cash provided by operating activities | | | 58,200 | | | | 55,426 | | | | | | | | | | | | 173,044 | | | | 157,875 | | | | | | | | | |
| Changes in working capital | | | (6,313 | ) | | | 1,335 | | | | | | | | | | | | (16,904 | ) | | | 6,667 | | | | | | | | | |
| Maintenance capital expenditures | | | (2,191 | ) | | | (2,165 | ) | | | | | | | | | | | (5,300 | ) | | | (5,071 | ) | | | | | | | | |
| Free cash flow | | | 49,696 | | | | 54,596 | | | | (4,900 | ) | | | (9.0 | ) | | | 150,840 | | | | 159,471 | | | | (8,631 | ) | | | (5.4 | ) |
NM — Not meaningful
| (1) | Interest expense, net, includes adjustments to derivative instruments and non-cash amortization of deferred financing fees. |
| (2) | Pension expense primarily consists of interest cost, expected return on plan assets and amortization of actuarial and performance gains and losses. |
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Results of Operations: Atlantic Aviation – (continued)
| (3) | Represents the cash interest expense reclassified from MIC Corporate related to the 2.00% Convertible Senior Notes due October 2023, proceeds of which were used to pay down a portion of Atlantic Aviation’s credit facility in October 2016. |
Atlantic Aviation generates a significant portionthe majority of its revenue from sales of jet fuel. Increases and decreases in the cost of jet fuel are generally passed through to consumers. Accordingly, revenue canwill fluctuate based on the cost of jet fuel to Atlantic Aviation and reported revenue may not reflect the business’ ability to effectively manage volume and price.gross margin. For example, an increase in revenue may be attributable to an increase in the cost of the jet fuel and not an increase in the volume sold or pricemargin per gallon to the customer. Conversely, a decline in revenue may be attributable to a decrease in the cost of jet fuel and not a reduction in the volume sold or price.margin per gallon.
Gross margin, which we define as revenue less cost of services, excluding depreciation and amortization, is the effective “top line” for Atlantic Aviation as it is reflective of the business’ ability to drive growth in the volume of products and services sold and the margins earned on those sales over time. We believe that our investors view gross margin as reflective of our ability to manage volume and price throughout the commodity cycle. Gross margin can be reconciled to operating income — the most comparable GAAP measure — by subtracting selling, general and administrative expenses and depreciation and amortization in the table below.above.
Key Factors Affecting Operating Results for the Quarter:
an increase in gross margin on a same store basis, together with contributions from acquisitions; partially offset by
an increase in selling, general and administrative expenses.
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Results of Operations:Atlantic Aviation – (continued)
| | | | | | | | | | | | | | | | |
| | Quarter Ended
September 30, | | Change
Favorable/
(Unfavorable) | | Nine Months Ended
September 30, | | Change
Favorable/
(Unfavorable) |
| | | 2017 | | 2016 | | 2017 | | 2016 |
| | | $ | | $ | | $ | | % | | $ | | $ | | $ | | % |
| | | ($ In Thousands) (Unaudited) |
| Revenue | | | 211,457 | | | | 186,823 | | | | 24,634 | | | | 13.2 | | | | 621,149 | | | | 544,029 | | | | 77,120 | | | | 14.2 | |
| Cost of services (exclusive of depreciation and amortization shown separately below) | | | 92,106 | | | | 77,524 | | | | (14,582 | ) | | | (18.8 | ) | | | 272,985 | | | | 218,126 | | | | (54,859 | ) | | | (25.2 | ) |
| Gross margin | | | 119,351 | | | | 109,299 | | | | 10,052 | | | | 9.2 | | | | 348,164 | | | | 325,903 | | | | 22,261 | | | | 6.8 | |
| Selling, general and administrative expenses | | | 57,026 | | | | 53,027 | | | | (3,999 | ) | | | (7.5 | ) | | | 163,512 | | | | 157,019 | | | | (6,493 | ) | | | (4.1 | ) |
| Depreciation and amortization | | | 25,286 | | | | 22,148 | | | | (3,138 | ) | | | (14.2 | ) | | | 73,894 | | | | 69,041 | | | | (4,853 | ) | | | (7.0 | ) |
| Operating income | | | 37,039 | | | | 34,124 | | | | 2,915 | | | | 8.5 | | | | 110,758 | | | | 99,843 | | | | 10,915 | | | | 10.9 | |
| Interest expense, net(1) | | | (4,295 | ) | | | (5,199 | ) | | | 904 | | | | 17.4 | | | | (13,648 | ) | | | (27,437 | ) | | | 13,789 | | | | 50.3 | |
| Other (expense) income, net | | | (14 | ) | | | (150 | ) | | | 136 | | | | 90.7 | | | | (119 | ) | | | 191 | | | | (310 | ) | | | (162.3 | ) |
| Provision for income taxes | | | (11,139 | ) | | | (11,543 | ) | | | 404 | | | | 3.5 | | | | (36,766 | ) | | | (29,258 | ) | | | (7,508 | ) | | | (25.7 | ) |
| Net income | | | 21,591 | | | | 17,232 | | | | 4,359 | | | | 25.3 | | | | 60,225 | | | | 43,339 | | | | 16,886 | | | | 39.0 | |
Reconciliation of net income to EBITDA excluding non-cash items and a reconciliation of cash provided by operating activities to Free Cash Flow:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | 21,591 | | | | 17,232 | | | | | | | | | | | | 60,225 | | | | 43,339 | | | | | | | | | |
| Interest expense, net(1) | | | 4,295 | | | | 5,199 | | | | | | | | | | | | 13,648 | | | | 27,437 | | | | | | | | | |
| Provision for income taxes | | | 11,139 | | | | 11,543 | | | | | | | | | | | | 36,766 | | | | 29,258 | | | | | | | | | |
| Depreciation and amortization | | | 25,286 | | | | 22,148 | | | | | | | | | | | | 73,894 | | | | 69,041 | | | | | | | | | |
| Pension expense(2) | | | 5 | | | | 16 | | | | | | | | | | | | 15 | | | | 50 | | | | | | | | | |
| Other non-cash expense, net | | | 1,212 | | | | 200 | | | | | | | | | | | | 1,252 | | | | 448 | | | | | | | | | |
EBITDA excluding non-cash
items | | | 63,528 | | | | 56,338 | | | | 7,190 | | | | 12.8 | | | | 185,800 | | | | 169,573 | | | | 16,227 | | | | 9.6 | |
EBITDA excluding non-cash
items | | | 63,528 | | | | 56,338 | | | | | | | | | | | | 185,800 | | | | 169,573 | | | | | | | | | |
| Interest expense, net(1) | | | (4,295 | ) | | | (5,199 | ) | | | | | | | | | | | (13,648 | ) | | | (27,437 | ) | | | | | | | | |
| Convertible senior notes interest(3) | | | (2,012 | ) | | | — | | | | | | | | | | | | (5,769 | ) | | | — | | | | | | | | | |
| Adjustments to derivative instruments recorded in interest expense(1) | | | 464 | | | | (2,371 | ) | | | | | | | | | | | 3,150 | | | | 4,416 | | | | | | | | | |
| Amortization of debt financing costs(1) | | | 284 | | | | 791 | | | | | | | | | | | | 819 | | | | 2,496 | | | | | | | | | |
| Provision for income taxes, net of changes in deferred taxes | | | (1,208 | ) | | | (159 | ) | | | | | | | | | | | (5,810 | ) | | | (2,521 | ) | | | | | | | | |
| Changes in working capital | | | (1,335 | ) | | | 5,142 | | | | | | | | | | | | (6,667 | ) | | | 11,412 | | | | | | | | | |
| Cash provided by operating activities | | | 55,426 | | | | 54,542 | | | | | | | | | | | | 157,875 | | | | 157,939 | | | | | | | | | |
| Changes in working capital | | | 1,335 | | | | (5,142 | ) | | | | | | | | | | | 6,667 | | | | (11,412 | ) | | | | | | | | |
| Maintenance capital expenditures | | | (2,165 | ) | | | (2,075 | ) | | | | | | | | | | | (5,071 | ) | | | (5,816 | ) | | | | | | | | |
| Free cash flow | | | 54,596 | | | | 47,325 | | | | 7,271 | | | | 15.4 | | | | 159,471 | | | | 140,711 | | | | 18,760 | | | | 13.3 | |
| (1) | Interest expense, net, includes adjustments to derivative instruments and non-cash amortization of deferred financing fees. |
| (2) | Pension expense primarily consists of interest cost, expected return on plan assets and amortization of actuarial and performance gains and losses. |
| (3) | Represents the cash interest expense reclassified from MIC Corporate related to the 2.00% Convertible Senior Notes due October 2023, proceeds of which were used to pay down a portion of Atlantic Aviation’s credit facility in October 2016. |
TABLE OF CONTENTS
Results of Operations:Atlantic Aviation – (continued)
Revenue and Gross Margin
The majority of the revenue generated and gross margin earned by Atlantic Aviation is generated throughthe result of fueling GA aircraft at facilities located onat the 70 U.S. airports aton which the business operates. Atlantic Aviation pursues a strategy of maintainingseeks to maintain and, where appropriate, increasingincrease dollar-based margins on fuel sales. Generally, fluctuations in the cost of jet fuel are passed through to the customer.
Revenue and gross margin are driven, in part, by the volume of fuel sold and the dollar-based margin/fee per gallon on those sales. Revenue increased 13.2% and 14.2% for the quarter and nine months ended September 30, 2017, respectively,2018 compared with the quarter and nine months ended September 30, 20162017 as a result of higherincreases in the wholesale cost of fuel an increase in the volume of fuel sold and contributions from acquisitions. The higherincreased wholesale cost of fuel was largely offset by a corresponding increase in cost of services, resulting incontributing to an increase in gross margin of 9.2% and 6.8% for the quarter and nine months ended September 30, 2017,2018 compared with the quarter and nine months ended September 30, 2017. The improvement in gross margin primarily reflects an increased contribution from hangar rentals and ancillary fees, in addition to acquisitions.
Our discussion of same store results in the current and prior comparable periods reflects contributions from FBOs that have been in operation for the same full months in each period, and excludes the costs of acquiring, integrating or disposing of FBOs. On a same store basis, gross margin increased by 0.1% and 2.7% in the quarter and nine months ended September 30, 2018, respectively, compared with the quarter and nine months ended September 30, 2016.
Atlantic Aviation seeks to extend FBO leases prior to their maturity to improve our visibility into the cash generating capacity of these assets. Atlantic Aviation calculates a weighted average remaining lease life based on EBITDA excluding non-cash items in the prior calendar year adjusted for the impact of acquisitions/dispositions. The weighted average remaining lease life was 20.7 years at September 30, 2017 compared with 19.5 years at September 30, 2016. Notwithstanding the passage of one year, the length of the remaining lease lifedriven by an increased as a result of acquisitionscontribution from hangar rentals and successful extensions of certain leaseholds.ancillary fees.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increasedwere flat for the quarter andended September 30, 2018 compared with the quarter ended September 30, 2017. For the nine months ended September 30, 2018 compared with the nine months ended September 30, 2017, compared with the quarterselling general and nine months ended September 30, 2016administrative expenses increased primarily dueas a result of rent increases and higher labor costs, including those related to higher salaries and benefit costs and incremental costs associated with acquisitions.
Depreciation and Amortization
Depreciation and amortization expense increased for the quarter and nine months ended September 30, 20172018 compared with the quarter and nine months ended September 30, 20162017 primarily as a result of contributions from acquisitions and assets placed in service and contributions from acquisitions.service.
Operating Income
Operating income increased for the quarter and nine months ended September 30, 20172018 compared with the quarter and nine months ended September 30, 20162017 due to the increase in gross margin, partially offset by the increase in selling, general and administrative expenses and the increase in depreciation and amortization expense.amortization.
TABLE OF CONTENTS
Results of Operations: Atlantic Aviation – (continued)
Interest Expense, Net
Interest expense includes gains on derivative instruments of $1.5 million and $8.5 million for the quarter and nine months ended September 30, 2018, respectively, compared with losses on derivative instruments of $219,000 and $2.9 million for the quarter and nine months ended September 30, 2017, respectively, compared with gains onrespectively. Excluding the derivative instruments of $257,000adjustments, cash interest expense was $7.4 million and losses on derivative instruments of $10.7$20.6 million for the quarter and nine months ended September 30, 2016, respectively. Excluding the derivative adjustments, interest expense decreased for the quarter and nine months ended September 30, 20172018, respectively, compared with the quarter and nine months ended September 30, 2016 due to a lower weighted average interest rate resulting from the October 2016 refinancing and a lower average debt balance.
TABLE OF CONTENTS
Results of Operations:Atlantic Aviation – (continued)
Cash interest expense was $5.5 million and $15.4 million for the quarter and nine months ended September 30, 2017, respectively, compared with $6.8 millionrespectively. The increase in cash interest expense reflects a higher average debt balance and $20.5 million for the quarter and nine months ended September 30, 2016, respectively. a higher weighted average interest rate.
Cash interest expense for the quarter and nine months ended September 30, 2018 and 2017 is inclusive ofincludes the cash interest expense related toon the $402.5 million of the MIC Corporate 2.00% Convertible Senior Notes issued in October 2016 and due in October 2023,2023. The proceeds of whichfrom the note issuance were used in partprincipally to reduce the drawn balance of Atlantic Aviation’s revolving credit facility.
Income Taxes
The taxable income generated by Atlantic Aviation is reported onincluded in our consolidated federal income tax return. The business files standalone state income tax returns in the majority of the 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.
For the year ending December 31, 2017, the business2018, Atlantic Aviation expects to pay state income taxes of approximately $6.0$8.0 million. TheProvision for current income taxes, net of changes in deferred taxes of $5.8$19.5 million for the nine months ended September 30, 20172018 in the above table includes $4.3$13.8 million of statefederal income tax expense and $1.5$5.7 million of federalstate income tax expense. Any current federal income tax payable is expected to be offset in consolidation with the application of NOLs at the MIC holding company level.level NOLs.
Maintenance Capital Expenditures
For the nine months ended September 30, 2017,2018, Atlantic Aviation incurred maintenance capital expenditures of $5.1$5.3 million and $5.6$5.5 million on an accrual basis and cash basis, respectively, compared with $5.8$5.1 million and $5.9$5.6 million on an accrual basis and cash basis, respectively, for the nine months ended September 30, 2016.2017.
Results of Operations: Contracted Power
The performance of our Contracted Power segment is broadly a function of the availability of wind and solar resources and, through the third quarter of 2018, the demand for peaking power in New York City. Following the sale of BEC, our thermal power facility serving New York City, on October 12, 2018, Contracted Power comprises solely wind and solar facilities and any contribution that may result from our relationships with two renewable power project developers.
TABLE OF CONTENTS
Results of Operations:Contracted Power – (continued)
Key Factors Affecting Operating Results for the Quarter:
a decrease in revenue from BEC, partially offset by contributions from an acquired solar facility;
a decrease in cost of product sales primarily due to lower gas consumption tied to lower generation at BEC; and
an increase in other income, net.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended
September 30, | | Change
Favorable/
(Unfavorable) | | Nine Months Ended
September 30, | | Change
Favorable/
(Unfavorable) | | Quarter Ended
September 30, | | Change
Favorable/
(Unfavorable) | | Nine Months Ended
September 30, | | Change
Favorable/
(Unfavorable) |
| | | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
| | | $ | | $ | | $ | | % | | $ | | $ | | $ | | % | | $ | | $ | | $ | | % | | $ | | $ | | $ | | % |
| | | ($ In Thousands) (Unaudited) | | ($ In Thousands) (Unaudited) |
| Product revenue | | | 42,445 | | | | 45,538 | | | | (3,093 | ) | | | (6.8 | ) | | | 110,681 | | | | 114,017 | | | | (3,336 | ) | | | (2.9 | ) | | | 52,450 | | | | 42,445 | | | | 10,005 | | | | 23.6 | | | | 129,140 | | | | 110,681 | | | | 18,459 | | | | 16.7 | |
| Cost of product sales | | | 5,171 | | | | 7,344 | | | | 2,173 | | | | 29.6 | | | | 15,528 | | | | 17,495 | | | | 1,967 | | | | 11.2 | | | | 8,744 | | | | 5,171 | | | | (3,573 | ) | | | (69.1 | ) | | | 20,443 | | | | 15,528 | | | | (4,915 | ) | | | (31.7 | ) |
| Selling, general and administrative expenses | | | 6,909 | | | | 6,824 | | | | (85 | ) | | | (1.2 | ) | | | 18,318 | | | | 19,331 | | | | 1,013 | | | | 5.2 | | | | 8,204 | | | | 6,909 | | | | (1,295 | ) | | | (18.7 | ) | | | 23,226 | | | | 18,318 | | | | (4,908 | ) | | | (26.8 | ) |
| Depreciation and amortization | | | 14,830 | | | | 14,000 | | | | (830 | ) | | | (5.9 | ) | | | 45,031 | | | | 41,693 | | | | (3,338 | ) | | | (8.0 | ) | | | 8,026 | | | | 14,830 | | | | 6,804 | | | | 45.9 | | | | 38,072 | | | | 45,031 | | | | 6,959 | | | | 15.5 | |
| Operating income | | | 15,535 | | | | 17,370 | | | | (1,835 | ) | | | (10.6 | ) | | | 31,804 | | | | 35,498 | | | | (3,694 | ) | | | (10.4 | ) | | | 27,476 | | | | 15,535 | | | | 11,941 | | | | 76.9 | | | | 47,399 | | | | 31,804 | | | | 15,595 | | | | 49.0 | |
| Interest expense, net(1) | | | (6,281 | ) | | | (2,764 | ) | | | (3,517 | ) | | | (127.2 | ) | | | (20,431 | ) | | | (31,614 | ) | | | 11,183 | | | | 35.4 | | | | (4,944 | ) | | | (6,281 | ) | | | 1,337 | | | | 21.3 | | | | (10,661 | ) | | | (20,431 | ) | | | 9,770 | | | | 47.8 | |
| Other income, net | | | 4,334 | | | | 3,531 | | | | 803 | | | | 22.7 | | | | 6,440 | | | | 3,839 | | | | 2,601 | | | | 67.8 | | | | 3,448 | | | | 4,334 | | | | (886 | ) | | | (20.4 | ) | | | 11,174 | | | | 6,440 | | | | 4,734 | | | | 73.5 | |
| Provision for income taxes | | | (6,337 | ) | | | (8,013 | ) | | | 1,676 | | | | 20.9 | | | | (8,209 | ) | | | (7,626 | ) | | | (583 | ) | | | (7.6 | ) | | | (7,852 | ) | | | (6,337 | ) | | | (1,515 | ) | | | (23.9 | ) | | | (12,456 | ) | | | (8,209 | ) | | | (4,247 | ) | | | (51.7 | ) |
| Net income | | | 7,251 | | | | 10,124 | | | | (2,873 | ) | | | (28.4 | ) | | | 9,604 | | | | 97 | | | | 9,507 | | | | NM | | | | 18,128 | | | | 7,251 | | | | 10,877 | | | | 150.0 | | | | 35,456 | | | | 9,604 | | | | 25,852 | | | | NM | |
| Less: net (loss) income attributable to noncontrolling interest | | | (3,890 | ) | | | 566 | | | | 4,456 | | | | NM | | | | (7,223 | ) | | | 217 | | | | 7,440 | | | | NM | | |
| Net income (loss) attributable to MIC | | | 11,141 | | | | 9,558 | | | | 1,583 | | | | 16.6 | | | | 16,827 | | | | (120 | ) | | | 16,947 | | | | NM | | |
| Less: net loss attributable to noncontrolling interest | | | | (260 | ) | | | (3,890 | ) | | | (3,630 | ) | | | (93.3 | ) | | | (32,319 | ) | | | (7,223 | ) | | | 25,096 | | | | NM | |
| Net income attributable to MIC | | | | 18,388 | | | | 11,141 | | | | 7,247 | | | | 65.0 | | | | 67,775 | | | | 16,827 | | | | 50,948 | | | | NM | |
Reconciliation of net income to EBITDA excluding non-cash items and a reconciliation of cash provided by operating activities to Free Cash Flow:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | 7,251 | | | | 10,124 | | | | | | | | | | | | 9,604 | | | | 97 | | | | | | | | | | | | 18,128 | | | | 7,251 | | | | | | | | | | | | 35,456 | | | | 9,604 | | | | | | | | | |
| Interest expense, net(1) | | | 6,281 | | | | 2,764 | | | | | | | | | | | | 20,431 | | | | 31,614 | | | | | | | | | | | | 4,944 | | | | 6,281 | | | | | | | | | | | | 10,661 | | | | 20,431 | | | | | | | | | |
| Provision for income taxes | | | 6,337 | | | | 8,013 | | | | | | | | | | | | 8,209 | | | | 7,626 | | | | | | | | | | | | 7,852 | | | | 6,337 | | | | | | | | | | | | 12,456 | | | | 8,209 | | | | | | | | | |
| Depreciation and amortization | | | 14,830 | | | | 14,000 | | | | | | | | | | | | 45,031 | | | | 41,693 | | | | | | | | | | | | 8,026 | | | | 14,830 | | | | | | | | | | | | 38,072 | | | | 45,031 | | | | | | | | | |
| Other non-cash income, net(2) | | | (1,914 | ) | | | (1,459 | ) | | | | | | | | | | | (6,170 | ) | | | (5,424 | ) | | | | | | | | | | | (1,574 | ) | | | (1,914 | ) | | | | | | | | | | | (5,152 | ) | | | (6,170 | ) | | | | | | | | |
| EBITDA excluding non-cash items | | | 32,785 | | | | 33,442 | | | | (657 | ) | | | (2.0 | ) | | | 77,105 | | | | 75,606 | | | | 1,499 | | | | 2.0 | | | | 37,376 | | | | 32,785 | | | | 4,591 | | | | 14.0 | | | | 91,493 | | | | 77,105 | | | | 14,388 | | | | 18.7 | |
| EBITDA excluding non-cash items | | | 32,785 | | | | 33,442 | | | | | | | | | | | | 77,105 | | | | 75,606 | | | | | | | | | | | | 37,376 | | | | 32,785 | | | | | | | | | | | | 91,493 | | | | 77,105 | | | | | | | | | |
| Interest expense, net(1) | | | (6,281 | ) | | | (2,764 | ) | | | | | | | | | | | (20,431 | ) | | | (31,614 | ) | | | | | | | | | | | (4,944 | ) | | | (6,281 | ) | | | | | | | | | | | (10,661 | ) | | | (20,431 | ) | | | | | | | | |
| Adjustments to derivative instruments recorded in interest expense(1) | | | (922 | ) | | | (3,778 | ) | | | | | | | | | | | (1,282 | ) | | | 11,994 | | | | | | | | | | | | (1,863 | ) | | | (922 | ) | | | | | | | | | | | (10,011 | ) | | | (1,282 | ) | | | | | | | | |
| Amortization of debt financing costs(1) | | | 379 | | | | 376 | | | | | | | | | | | | 1,137 | | | | 1,113 | | | | | | | | | | | | 380 | | | | 379 | | | | | | | | | | | | 1,138 | | | | 1,137 | | | | | | | | | |
| Provision for income taxes, net of changes in deferred taxes | | | 9 | | | | 1 | | | | | | | | | | | | 6 | | | | (8 | ) | | | | | | | | | |
| (Provision) benefit for current income taxes | | | | (84 | ) | | | 9 | | | | | | | | | | | | (154 | ) | | | 6 | | | | | | | | | |
Changes in working capital | | | (1,842 | ) | | | 949 | | | | | | | | | | | | (9,703 | ) | | | (1,909 | ) | | | | | | | | | | | (5,615 | ) | | | (565 | ) | | | | | | | | | | | (17,390 | ) | | | (8,771 | ) | | | | | | | | |
| Cash provided by operating activities | | | 24,128 | | | | 28,226 | | | | | | | | | | | | 46,832 | | | | 55,182 | | | | | | | | | | | | 25,250 | | | | 25,405 | | | | | | | | | | | | 54,415 | | | | 47,764 | | | | | | | | | |
Changes in working capital | | | 1,842 | | | | (949 | ) | | | | | | | | | | | 9,703 | | | | 1,909 | | | | | | | | | | | | 5,615 | | | | 565 | | | | | | | | | | | | 17,390 | | | | 8,771 | | | | | | | | | |
| Maintenance capital expenditures | | | — | | | | (559 | ) | | | | | | | | | | | (22 | ) | | | (559 | ) | | | | | | | | | | | — | | | | — | | | | | | | | | | | | (440 | ) | | | (22 | ) | | | | | | | | |
| Free cash flow | | | 25,970 | | | | 26,718 | | | | (748 | ) | | | (2.8 | ) | | | 56,513 | | | | 56,532 | | | | (19 | ) | | | (0.0 | ) | | | 30,865 | | | | 25,970 | | | | 4,895 | | | | 18.8 | | | | 71,365 | | | | 56,513 | | | | 14,852 | | | | 26.3 | |
NM — Not meaningful
| (1) | Interest expense, net, includes adjustments to derivative instruments and non-cash amortization of deferred financing fees. |
| (2) | Other non-cash income, net, primarily includes amortization of tolling liabilities. See“Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) excluding non-cash items, Free Cash Flow and Proportionately Combined Metrics” above for further discussion. |
| (3) | Conformed to current period presentation for the adoption of ASU No. 2016-18,Statement of Cash Flows (Topic 230): Restricted Cash. See Note 2, ���Basis of Presentation”, in our Notes to Consolidated Condensed Financial Statements in Part I of this Form 10-Q for recently issued accounting standards. |
TABLE OF CONTENTS
Results of Operations:Contracted Power – (continued)
Revenue
Revenue decreased $3.1 million and $3.3 millionincreased for the quarter and nine months ended September 30, 20172018 compared with the quarter and nine months ended September 30, 2016, respectively. The decrease at2017 due to the contribution from the BEC plant expansion and better wind and solar facilities was primarily attributable to lower resources compared with the prior comparable periods, partially offset by revenue contributed from acquired solar facilities.resources.
At BEC, the 37.5% of the business that operates on a merchant basis drove a reduction in revenue as a result of lower capacity prices from updated capacity requirements and lower energy margins. Energy margins decreased primarily due to milder weather during the quarter ended September 30, 2017 compared with the quarter ended September 30, 2016. The aggregate decrease in revenue from BEC was partially offset by new tariff revenue for additional services provided to the grid operator. The remaining 62.5% of BEC’s capacity generates revenue pursuant to a fixed price tolling agreement.
Cost of Product Sales
Cost of product sales decreasedincreased for the quarter and nine months ended September 30, 20172018 compared with the quarter and nine months ended September 30, 2016 primarily2017 due to a reductionthe completion of the BEC plant expansion in gas consumed at BEC as a result of reduced generation and lower natural gas costs from the recently completed gas lateral connecting the facility to a lower cost source of gas. The decreases in both periods were partially offset by incremental costs associated with an acquisition of a solar facility completed in December 2016.May 2018.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased for the nine months ended September 30, 2017 compared with the nine months ended September 30, 2016 primarily due to lower property taxes, lower costs related to leased engines and insurance savings at BEC. These decreases were partially offset by incremental costs from acquisitions.
Depreciation and Amortization
Depreciation and amortization expense increased for the quarter and nine months ended September 30, 20172018 compared with the quarter and nine months ended September 30, 20162017 primarily due to incremental expenses associated with an acquisition completed in December 2016.the BEC plant expansion and higher development-related expenses. These increases were partially offset by lower insurance costs at BEC.
Other Income, netDepreciation and Amortization
Other income, net, increasedDepreciation and amortization expense decreased for the quarter and nine months ended September 30, 20172018 compared with the quarter and nine ended September 30, 2017 primarily due to the fact that BEC’s assets were no longer depreciated or amortized once it was classified as held for sale.
Other Income, Net
Other income, net, decreased for the quarter ended September 30, 2018 compared with the quarter ended September 30, 2017 primarily due to development fees paid to the Contracted Power business by a developer of renewable power projects in 2017, partially offset by a warranty settlement from a manufacturer of BEC turbines in 2018.
Other income, net, increased for the nine months ended September 30, 2018 compared with the nine months ended September 30, 2017 primarily due to higher development fees paid to the Contracted Power business by a developer of renewable power projects and a warranty settlement from a manufacturer of BEC turbines in 2018.
Interest Expense, Net
Interest expense includes gains on derivative instruments of $1.8 million and $9.2 million for the quarter and nine months ended September 30, 2016 primarily due to financing income from a revolving credit facility provided by CP to a third party developer of renewable projects and the associated development profit. The increase was partially offset by escrow proceeds related to the BEC acquisition received during the quarter ended September 30, 2016.
Interest Expense, Net
Interest expense includes2018, respectively, compared with losses on derivative instruments of $82,000 and $2.4 million for the quarter and nine months ended September 30, 2017, respectively, compared with gains onrespectively. Excluding the derivative instruments of $1.9adjustments, cash interest expense was $6.4 million and losses on derivative instruments of $17.6$19.5 million for the quarter and nine months ended September 30, 2016, respectively. Excluding the derivative adjustments, interest expense increased for the quarter and nine months ended September 30, 20172018, respectively, compared with the quarter and nine months ended September 30, 2016 primarily due to debt assumed in an acquisition completed in December 2016, partially offset by lower average debt balances on all other facilities. Cash interest expense was $6.8 million and $20.6 million for the quarter and nine months ended September 30, 2017, respectively, compared with $6.2 million and $18.5 million for the quarter and nine months ended September 30, 2016, respectively. The decrease in cash interest expense reflects primarily a lower average debt balance related to scheduled amortization on all facilities.
TABLE OF CONTENTS
Results of Operations:Contracted Power – (continued)
Income Taxes
Our wind and solar facilities are held in limited liability companies that are treated as partnershipspass through entities for tax purposes. As such, these entities do not pay federal or state income taxes on a standalone basis, but each partnerowner pays federal and state income taxes based on their allocatedits allocable share of taxable income. For the year ending December 31, 2017,2018, MIC expects its allocated share of the federal taxable income from these facilities to be a loss of approximately $10.5$1.0 million. For 2016,2017, MIC’s allocated share of the federal taxable income from these facilities was a loss of approximately $23.0$13.0 million.
TABLE OF CONTENTS
Results of Operations:Contracted Power – (continued)
The taxable income generated by BECBEC’s operations is reported onincluded in our consolidated federal income tax return and is subject to New York state income tax as part of a combined return. For the year ending December 31, 2017,2018, with the closing of the sale of BEC, the business does not expectexpects to have a federal or a state income tax liability. Future current federal taxable incomeliability in New Jersey and New York totaling approximately $8.0 million.
Noncontrolling Interest
The increase in loss attributable to BEC may be offset in consolidationnoncontrolling interest for the nine months ended September 30, 2018 compared with the application of NOLs atnine months ended September 30, 2017 was driven primarily by the MIC holding company level.
Other Matters
CP relieschange in tax rates imposed on a small number of suppliers to provide long term operationscertain entities by the Tax Cuts and maintenance (O&M) and other services for its facilities. One of those O&M providers, SunEdison, Inc. (SunEdison), filed for bankruptcy in April 2016. SunEdison’s contract was terminated in May 2017 and a new service provider has taken over the O&M and other services for these facilities effective August 1, 2017.Jobs Act.
Results of Operations:MIC Hawaii
The decreased contribution from our MIC Hawaii businesses for the quarter and nine months ended September 30, 2018 reflects primarily continued poor performance at CPI and the related write-down of our investment as discussed in “Recent Developments” above. The decrease is partially offset by improved performance in the utility portion of our Hawaii Gas business. In October 2018, consistent with initiatives that will focus MIC on its core lines of business, we decided to sell CPI and expect to complete the sale before the end of 2018.
In August 2017, Hawaii Gas filed a general rate case with the HPUC. On June 27, 2018, the HPUC issued an Interim Decision and Order providing the regulated utility operations of Hawaii Gas with interim rate relief. New rates reflecting the decision went into effect on July 1, 2018 and are expected to result in an increase in regulated revenue over present rates of $8.9 million, or 8.4%, annually. The HPUC is expected to issue a Final Decision and Order subject to, among other things, the completion by Hawaii Gas of the Honouliuli Waste Water Treatment Plant Biogas Project. The project is currently estimated to be completed in the fourth quarter of 2018.
TABLE OF CONTENTS
Results of Operations: MIC Hawaii – (continued)
| | | | | | | | | | | | | | | | |
| | Quarter Ended
September 30, | | Change
Favorable/
(Unfavorable) | | Nine Months Ended
September 30, | | Change
Favorable/
(Unfavorable) |
| | | 2018 | | 2017 | | 2018 | | 2017 |
| | | $ | | $ | | $ | | % | | $ | | $ | | $ | | % |
| | | ($ In Thousands) (Unaudited) |
| Product revenue | | | 59,799 | | | | 52,396 | | | | 7,403 | | | | 14.1 | | | | 184,139 | | | | 165,758 | | | | 18,381 | | | | 11.1 | |
| Service revenue | | | 9,122 | | | | 13,826 | | | | (4,704 | ) | | | (34.0 | ) | | | 41,306 | | | | 39,476 | | | | 1,830 | | | | 4.6 | |
| Total revenue | | | 68,921 | | | | 66,222 | | | | 2,699 | | | | 4.1 | | | | 225,445 | | | | 205,234 | | | | 20,211 | | | | 9.8 | |
| Cost of product sales (exclusive of depreciation and amortization shown separately below) | | | 39,079 | | | | 30,498 | | | | (8,581 | ) | | | (28.1 | ) | | | 127,929 | | | | 107,615 | | | | (20,314 | ) | | | (18.9 | ) |
| Cost of services (exclusive of depreciation and amortization shown separately below) | | | 9,753 | | | | 12,131 | | | | 2,378 | | | | 19.6 | | | | 40,120 | | | | 34,015 | | | | (6,105 | ) | | | (17.9 | ) |
| Cost of revenue – total | | | 48,832 | | | | 42,629 | | | | (6,203 | ) | | | (14.6 | ) | | | 168,049 | | | | 141,630 | | | | (26,419 | ) | | | (18.7 | ) |
| Gross margin | | | 20,089 | | | | 23,593 | | | | (3,504 | ) | | | (14.9 | ) | | | 57,396 | | | | 63,604 | | | | (6,208 | ) | | | (9.8 | ) |
| Selling, general and administrative expenses | | | 7,650 | | | | 6,874 | | | | (776 | ) | | | (11.3 | ) | | | 22,853 | | | | 19,729 | | | | (3,124 | ) | | | (15.8 | ) |
| Goodwill impairment | | | 3,215 | | | | — | | | | (3,215 | ) | | | NM | | | | 3,215 | | | | — | | | | (3,215 | ) | | | NM | |
| Depreciation and amortization | | | 10,489 | | | | 3,711 | | | | (6,778 | ) | | | (182.6 | ) | | | 19,540 | | | | 10,922 | | | | (8,618 | ) | | | (78.9 | ) |
| Operating (loss) income | | | (1,265 | ) | | | 13,008 | | | | (14,273 | ) | | | (109.7 | ) | | | 11,788 | | | | 32,953 | | | | (21,165 | ) | | | (64.2 | ) |
| Interest expense, net(1) | | | (2,069 | ) | | | (1,877 | ) | | | (192 | ) | | | (10.2 | ) | | | (5,246 | ) | | | (5,795 | ) | | | 549 | | | | 9.5 | |
| Other expense, net | | | (21,923 | ) | | | (141 | ) | | | (21,782 | ) | | | NM | | | | (23,236 | ) | | | (382 | ) | | | (22,854 | ) | | | NM | |
| Benefit (provision) for income taxes | | | 7,299 | | | | (4,830 | ) | | | 12,129 | | | | NM | | | | 4,350 | | | | (10,772 | ) | | | 15,122 | | | | 140.4 | |
| Net (loss) income | | | (17,958 | ) | | | 6,160 | | | | (24,118 | ) | | | NM | | | | (12,344 | ) | | | 16,004 | | | | (28,348 | ) | | | (177.1 | ) |
| Less: net loss attributable to noncontrolling interests | | | (68 | ) | | | (32 | ) | | | 36 | | | | 112.5 | | | | (135 | ) | | | (71 | ) | | | 64 | | | | 90.1 | |
| Net (loss) income attributable to MIC | | | (17,890 | ) | | | 6,192 | | | | (24,082 | ) | | | NM | | | | (12,209 | ) | | | 16,075 | | | | (28,284 | ) | | | (176.0 | ) |
Reconciliation of net (loss) income to EBITDA excluding non-cash items and a reconciliation of cash provided by operating activities to Free Cash Flow:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net (loss) income | | | (17,958 | ) | | | 6,160 | | | | | | | | | | | | (12,344 | ) | | | 16,004 | | | | | | | | | |
| Interest expense, net(1) | | | 2,069 | | | | 1,877 | | | | | | | | | | | | 5,246 | | | | 5,795 | | | | | | | | | |
| (Benefit) provision for income taxes | | | (7,299 | ) | | | 4,830 | | | | | | | | | | | | (4,350 | ) | | | 10,772 | | | | | | | | | |
| Goodwill impairment | | | 3,215 | | | | — | | | | | | | | | | | | 3,215 | | | | — | | | | | | | | | |
| Depreciation and amortization | | | 10,489 | | | | 3,711 | | | | | | | | | | | | 19,540 | | | | 10,922 | | | | | | | | | |
| Pension expense(2) | | | 128 | | | | 272 | | | | | | | | | | | | 383 | | | | 817 | | | | | | | | | |
| Other non-cash expense (income), net(3) | | | 4,303 | | | | (3,360 | ) | | | | | | | | | | | 9,548 | | | | 3,108 | | | | | | | | | |
| EBITDA excluding non-cash items | | | (5,053 | ) | | | 13,490 | | | | (18,543 | ) | | | (137.5 | ) | | | 21,238 | | | | 47,418 | | | | (26,180 | ) | | | (55.2 | ) |
| EBITDA excluding non-cash items | | | (5,053 | ) | | | 13,490 | | | | | | | | | | | | 21,238 | | | | 47,418 | | | | | | | | | |
| Interest expense, net(1) | | | (2,069 | ) | | | (1,877 | ) | | | | | | | | | | | (5,246 | ) | | | (5,795 | ) | | | | | | | | |
| Adjustments to derivative instruments recorded in interest expense(1) | | | 33 | | | | 23 | | | | | | | | | | | | (737 | ) | | | 113 | | | | | | | | | |
| Amortization of debt financing costs(1) | | | 97 | | | | 99 | | | | | | | | | | | | 289 | | | | 303 | | | | | | | | | |
| Provision for current income taxes | | | (2,032 | ) | | | (1,773 | ) | | | | | | | | | | | (3,261 | ) | | | (5,265 | ) | | | | | | | | |
| Changes in working capital(4) | | | 22,570 | | | | (2,554 | ) | | | | | | | | | | | 16,420 | | | | (13,093 | ) | | | | | | | | |
| Cash provided by operating activities | | | 13,546 | | | | 7,408 | | | | | | | | | | | | 28,703 | | | | 23,681 | | | | | | | | | |
| Changes in working capital(4) | | | (22,570 | ) | | | 2,554 | | | | | | | | | | | | (16,420 | ) | | | 13,093 | | | | | | | | | |
| Maintenance capital expenditures | | | (2,318 | ) | | | (1,825 | ) | | | | | | | | | | | (5,649 | ) | | | (4,406 | ) | | | | | | | | |
| Free cash flow | | | (11,342 | ) | | | 8,137 | | | | (19,479 | ) | | | NM | | | | 6,634 | | | | 32,368 | | | | (25,734 | ) | | | (79.5 | ) |
NM — Not meaningful
| (1) | Interest expense, net, includes adjustments to derivative instruments related to interest rate swaps and non-cash amortization of deferred financing fees. |
TABLE OF CONTENTS
Results of Operations: MIC Hawaii – (continued)
| (2) | Pension expense primarily consists of interest cost, expected return on plan assets and amortization of actuarial and performance gains and losses. |
| (3) | Other non-cash expense (income), net, primarily includes non-cash adjustments related to unrealized gains (losses) on commodity hedges and non-cash gains (losses) related to the disposal of assets. Other non-cash expense (income), net, also includes the write-down of our investment in CPI for the quarter and nine months ended September 30, 2018. See “Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) excluding non-cash items, Free Cash Flow and Proportionately Combined Metrics” above for further discussion. |
| (4) | Conformed to current period presentation for the adoption of ASU No. 2016-18,Statement of Cash Flows (Topic 230): Restricted Cash. See Note 2, “Basis of Presentation”, in our Notes to Consolidated Condensed Financial Statements in Part I of this Form 10-Q for recently issued accounting standards. |
MIC Hawaii comprises Hawaii Gas and several smaller businesses collectively engaged in efforts to reduce the cost and improve the reliability and sustainability of energy in Hawaii. The businesses of MIC Hawaii generate revenue primarily from the provision of gas services to commercial, residential and governmental customers, the generation of power and the design and construction of building mechanical systems.
Hawaii Gas generates a significant portion of its revenue from the sale of gas. Accordingly, revenue can fluctuate based on the wholesale cost of the commoditygas to Hawaii Gas and may not reflect the business’ ability to effectively manage volume and price.gross margin. For example, an increase in revenue may be attributable to an increase in the wholesale cost of gas and not an increase in the volume sold or pricemargin per therm. Conversely, a decline in revenue may be attributable to a decrease in the wholesale cost of gas and not a reduction in volume sold or pricemargin per therm.
Gross margin, which we define as revenue less cost of product sales and services, excluding depreciation and amortization, is the effective “top line” for Hawaii Gas as it is reflective of the business’ ability to drive growth in the volume of products and services and the margins earned on those sales over time. We believe that investors utilize gross margin as it is reflective of our performance in managing volume and price throughout the commodity cycle. Gross margin is reconciled to operating income — the most comparable GAAP measure — by subtracting selling, general and administrative expenses and depreciation and amortization in the table below.above.
Key Factors Affecting Operating Results for the Quarter:
an increase in unrealized gains from commodity hedges; and
contributions from acquisitions; partially offset by
an increase in selling, general and administrative costs.
TABLE OF CONTENTS
Results of Operations:MIC Hawaii – (continued)
| | | | | | | | | | | | | | | | |
| | Quarter Ended
September 30, | | Change
Favorable/
(Unfavorable) | | Nine Months Ended
September 30, | | Change
Favorable/
(Unfavorable) |
| | | 2017 | | 2016 | | 2017 | | 2016 |
| | | $ | | $ | | $ | | % | | $ | | $ | | $ | | % |
| | | ($ In Thousands) (Unaudited) |
| Product revenue | | | 52,396 | | | | 51,011 | | | | 1,385 | | | | 2.7 | | | | 165,758 | | | | 158,036 | | | | 7,722 | | | | 4.9 | |
| Service revenue | | | 13,826 | | | | 5,258 | | | | 8,568 | | | | 163.0 | | | | 39,476 | | | | 5,258 | | | | 34,218 | | | | NM | |
| Total revenue | | | 66,222 | | | | 56,269 | | | | 9,953 | | | | 17.7 | | | | 205,234 | | | | 163,294 | | | | 41,940 | | | | 25.7 | |
| Cost of product sales (exclusive of depreciation and amortization shown separately below) | | | 30,498 | | | | 32,501 | | | | 2,003 | | | | 6.2 | | | | 107,615 | | | | 90,428 | | | | (17,187 | ) | | | (19.0 | ) |
| Cost of services (exclusive of depreciation and amortization shown separately below) | | | 12,131 | | | | 3,946 | | | | (8,185 | ) | | | NM | | | | 34,015 | | | | 3,946 | | | | (30,069 | ) | | | NM | |
| Cost of revenue – total | | | 42,629 | | | | 36,447 | | | | (6,182 | ) | | | (17.0 | ) | | | 141,630 | | | | 94,374 | | | | (47,256 | ) | | | (50.1 | ) |
| Gross margin | | | 23,593 | | | | 19,822 | | | | 3,771 | | | | 19.0 | | | | 63,604 | | | | 68,920 | | | | (5,316 | ) | | | (7.7 | ) |
| Selling, general and administrative expenses | | | 6,874 | | | | 6,540 | | | | (334 | ) | | | (5.1 | ) | | | 19,729 | | | | 16,230 | | | | (3,499 | ) | | | (21.6 | ) |
| Depreciation and amortization | | | 3,711 | | | | 2,802 | | | | (909 | ) | | | (32.4 | ) | | | 10,922 | | | | 7,696 | | | | (3,226 | ) | | | (41.9 | ) |
| Operating income | | | 13,008 | | | | 10,480 | | | | 2,528 | | | | 24.1 | | | | 32,953 | | | | 44,994 | | | | (12,041 | ) | | | (26.8 | ) |
| Interest expense, net(1) | | | (1,877 | ) | | | (1,571 | ) | | | (306 | ) | | | (19.5 | ) | | | (5,795 | ) | | | (6,224 | ) | | | 429 | | | | 6.9 | |
| Other expense, net | | | (141 | ) | | | (187 | ) | | | 46 | | | | 24.6 | | | | (382 | ) | | | (588 | ) | | | 206 | | | | 35.0 | |
| Provision for income taxes | | | (4,830 | ) | | | (3,246 | ) | | | (1,584 | ) | | | (48.8 | ) | | | (10,772 | ) | | | (14,863 | ) | | | 4,091 | | | | 27.5 | |
| Net income | | | 6,160 | | | | 5,476 | | | | 684 | | | | 12.5 | | | | 16,004 | | | | 23,319 | | | | (7,315 | ) | | | (31.4 | ) |
| Less: net loss attributable to noncontrolling interests | | | (32 | ) | | | (111 | ) | | | (79 | ) | | | (71.2 | ) | | | (71 | ) | | | (111 | ) | | | (40 | ) | | | (36.0 | ) |
| Net income attributable to MIC | | | 6,192 | | | | 5,587 | | | | 605 | | | | 10.8 | | | | 16,075 | | | | 23,430 | | | | (7,355 | ) | | | (31.4 | ) |
Reconciliation of net income to EBITDA excluding non-cash items and a reconciliation of cash provided by operating activities to Free Cash Flow:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | 6,160 | | | | 5,476 | | | | | | | | | | | | 16,004 | | | | 23,319 | | | | | | | | | |
| Interest expense, net(1) | | | 1,877 | | | | 1,571 | | | | | | | | | | | | 5,795 | | | | 6,224 | | | | | | | | | |
| Provision for income taxes | | | 4,830 | | | | 3,246 | | | | | | | | | | | | 10,772 | | | | 14,863 | | | | | | | | | |
| Depreciation and amortization | | | 3,711 | | | | 2,802 | | | | | | | | | | | | 10,922 | | | | 7,696 | | | | | | | | | |
| Pension expense(2) | | | 272 | | | | 349 | | | | | | | | | | | | 817 | | | | 1,048 | | | | | | | | | |
Other non-cash (income) expense,
net(3) | | | (3,360 | ) | | | 316 | | | | | | | | | | | | 3,108 | | | | (6,090 | ) | | | | | | | | |
| EBITDA excluding non-cash items | | | 13,490 | | | | 13,760 | | | | (270 | ) | | | (2.0 | ) | | | 47,418 | | | | 47,060 | | | | 358 | | | | 0.8 | |
| EBITDA excluding non-cash items | | | 13,490 | | | | 13,760 | | | | | | | | | | | | 47,418 | | | | 47,060 | | | | | | | | | |
| Interest expense, net(1) | | | (1,877 | ) | | | (1,571 | ) | | | | | | | | | | | (5,795 | ) | | | (6,224 | ) | | | | | | | | |
| Adjustments to derivative instruments recorded in interest expense(1) | | | 23 | | | | (250 | ) | | | | | | | | | | | 113 | | | | 506 | | | | | | | | | |
Amortization of debt financing
costs(1) | | | 99 | | | | 96 | | | | | | | | | | | | 303 | | | | 848 | | | | | | | | | |
| Provision for income taxes, net of changes in deferred taxes | | | (1,773 | ) | | | (1,361 | ) | | | | | | | | | | | (5,265 | ) | | | (6,507 | ) | | | | | | | | |
| Changes in working capital | | | (2,535 | ) | | | (1,394 | ) | | | | | | | | | | | (12,852 | ) | | | 5,554 | | | | | | | | | |
| Cash provided by operating activities | | | 7,427 | | | | 9,280 | | | | | | | | | | | | 23,922 | | | | 41,237 | | | | | | | | | |
| Changes in working capital | | | 2,535 | | | | 1,394 | | | | | | | | | | | | 12,852 | | | | (5,554 | ) | | | | | | | | |
| Maintenance capital expenditures | | | (1,825 | ) | | | (1,978 | ) | | | | | | | | | | | (4,406 | ) | | | (5,251 | ) | | | | | | | | |
| Free cash flow | | | 8,137 | | | | 8,696 | | | | (559 | ) | | | (6.4 | ) | | | 32,368 | | | | 30,432 | | | | 1,936 | | | | 6.4 | |
NM — Not meaningful
TABLE OF CONTENTS
Results of Operations:MIC Hawaii – (continued)
| (1) | Interest expense, net, includes adjustments to derivative instruments related to interest rate swaps and non-cash amortization of deferred financing fees. For the nine months ended September 30, 2016, interest expense also included a non-cash write-off of deferred financing fees related to the February 2016 refinancing at Hawaii Gas. |
| (2) | Pension expense primarily consists of interest cost, expected return on plan assets and amortization of actuarial and performance gains and losses. |
| (3) | Other non-cash (income) expense, net, primarily includes non-cash adjustments related to unrealized gains (losses) on commodity hedges. See “Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) excluding non-cash items, Free Cash Flow and Proportionately Combined Metrics” above for further discussion. |
Revenue and Gross Margin
Revenue increased by $10.0 million and $41.9 million for the quarter and nine months ended September 30, 20172018 compared with the quarter and nine months ended September 30, 2016, respectively.2017. The increase iswas primarily attributable to contributions from acquisitions, an increase in the wholesale cost of gas and an increase of 0.1% and 1.7%increases in the volume of utility and nonutility gas sold and a higher average price per therm of utility gas sold by Hawaii Gas for the quarter and nine months ended September 30, 2017, respectively.together with higher revenue from distributed generation assets, partially offset by lower revenue from CPI. On an underlying basis, adjusting for changes in customer inventory, the volume of gas sold increased by 2.5%1.8% and 1.8%4.8% in the quarter and nine months ended September 30, 2017,2018, respectively, compared with the quarter and nine months ended September 30, 2016.2017.
Gross margin increaseddecreased by $3.8$3.5 million and $6.2 million for the quarter and nine months ended September 30, 20172018, respectively, compared with the quarter and nine months ended September 30, 20162017. The decline was partially attributable to unfavorable movements in commodity hedges. The business recorded unrealized gains of $305,000 and decreased by $5.3unrealized losses of $3.0 million for the quarter and nine months ended September 30, 2018, respectively, compared with unrealized gains of $4.0 million and unrealized losses of $1.7 million for the quarter and nine months ended September 30, 2017, compared withrespectively, on the nine months ended September 30, 2016. The increase for the quarter ended September 30, 2017 is primarily attributable to unrealized gains on commodity hedges of $4.0 million, compared with unrealized gains on commodity hedges of $174,000 for the quarter ended September 30, 2016. The decrease for the nine months ended September 30, 2017 is primarily attributable to unrealized losses on commodity hedges of $1.7 million compared with unrealized gains on commodity hedges of $7.6 million for the nine months ended September 30, 2016.hedges.
Gross margin, excludingExcluding the impact of unrealized gains and losses on commodity hedges, remainedgross margin was flat for the quarter ended September 30, 20172018 compared with the quarter ended September 30, 20162017, and increased by $4.0decreased $4.9 million, or 6.5%7.5%, for the nine months ended September 30, 20172018 compared with the nine months ended September 30, 2016.2017. The decline for the nine months ended was September 30, 2018 attributable primarily to (i) lower margins at CPI due to increased costs on fixed revenue contracts attributable to higher labor costs, project delays and general construction cost escalation in Hawaii; and (ii) lower margins at Hawaii Gas’ non-utility business. Gross margin at Hawaii Gas for the quarter ended September 30, 2018 reflects the increase was primarily as a resultin interim rates for the utility business.
TABLE OF CONTENTS
Results of contributions from acquisitions.Operations: MIC Hawaii – (continued)
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased for the quarter and nine months ended September 30, 20172018 compared with the quarter and nine months ended September 30, 20162017 primarily duedriven by higher salaries and benefit costs.
Goodwill Impairment
During the quarter ended September 30, 2018, MIC Hawaii wrote-off the goodwill balance related to incremental costs from acquisitions.CPI.
Depreciation and Amortization
Depreciation and amortization expense increased for the quarter and nine months ended September 30, 20172018 compared with the quarter and nine months ended September 30, 20162017 primarily due to incremental expenses associated with acquisitions.the write-offs of the intangible assets and fixed assets balances at CPI.
Operating (Loss) Income
Operating (loss) income increaseddecreased for the quarter and nine months ended September 30, 20172018 compared with the quarter and nine months ended September 30, 20162017 due to the increase in gross margin, partially offset by an increase in depreciation and amortization expenseexpenses, the decrease in gross margin, goodwill impairment and an increase in selling, general and administrative expenses. Operating income decreased for the nine months ended September 30, 2017 compared with the nine months ended September 30, 2016 due to the decrease in gross margin, an increase in selling, general and administrative expenses and an increase in depreciation and amortization expense.
TABLE OF CONTENTS
Results of Operations:MIC Hawaii – (continued)
Interest Expense, Net
Interest expense includes gains on derivative instruments of $222,000 and $1.3 million for the quarter and nine months ended September 30, 2018, respectively, compared with gains on derivative instruments of $15,000 and losses on derivative instruments of $158,000 for the quarter and nine months ended September 30, 2017, respectively, compared with gains onrespectively. Excluding the derivative instruments of $152,000adjustments, cash interest expense was $1.9 million and losses on derivative instruments of $691,000$5.7 million for the quarter and nine months ended September 30, 2016, respectively. For the nine months ended September 30, 2016, interest expense also included the non-cash write-off of deferred financing costs at Hawaii Gas related to the refinancing of its $80.0 million term loan and its $60.0 million revolving credit facility. Excluding the derivative adjustments and the write-off of the deferred financing costs, interest expense increased for the quarter and nine months ended September 30, 20172018, respectively, compared with the quarter and nine months ended September 30, 2016 primarily due to debt assumed from an acquisition and the financing of solar facilities constructed in the past year. Cash interest expense was $1.8 million and $5.4 million for the quarter and nine months ended September 30, 2017, respectively, compared with $1.8 million and $4.9 millionrespectively. The increase in cash interest expense reflect primarily a higher average debt balance outstanding.
Other Expenses, Net
Other expense, net, increased for the quarter and nine months ended September 30, 2016, respectively.2018 compared with the quarter and nine months ended September 30, 2017 primarily due to the write-down of our investment in CPI during the quarter ended September 30, 2018.
Income Taxes
The taxable income generated by the MIC Hawaii businesses is reported on our consolidated federal income tax return and is subject to Hawaii state income tax on a stand-alone basis. The tax expense in the table above includes both state tax and the portion of the consolidated federal tax liability attributable to the businesses. For the year ending December 31, 2017,2018, the business expects to pay state income taxes of approximately $1.2 million.$500,000. TheProvision for current income taxes, net of changes in deferred taxes of $5.3$3.3 million for the nine months ended September 30, 20172018 in the above table includes $3.9$3.2 million of federal income tax expense and $1.4 million$87,000 of state income tax expense. Any current federal income tax payable is expected to be offset in consolidation with the application of NOLs at the MIC holding company level.level NOLs.
Maintenance Capital Expenditures
For the nine months ended September 30, 2017,2018, MIC Hawaii incurred maintenance capital expenditures of $4.4$5.6 million and $4.7$5.7 million on an accrual basis and cash basis, respectively, compared with $5.3$4.4 million and $6.0$4.7 million on an accrual basis and cash basis, respectively, for the nine months ended September 30, 2016.
Other Matters
Hawaii Gas’ utility gas rates are regulated by the Hawaii Public Utilities Commission (HPUC). On August 1, 2017, Hawaii Gas filed a general rate case application with the HPUC requesting an annual increase in regulated revenues of $15.0 million. To the extent that new rates are approved by regulators, we expect that interim rate increases, if any, could take effect in mid-2018.
In August 2016, the City and County of Honolulu awarded the Honouliuli Wastewater Treatment Plant Biogas contract to Hawaii Gas. Under the terms of the agreement, Hawaii Gas will purchase approximately 800,000 therms of biogas per year at a fixed rate through December 31, 2024. On September 12, 2017, the agreement was approved by the HPUC. Operations are expected to commence in 2018.
Hawaii Gas currently sources naphtha feedstock for its SNG plant from Par Hawaii Refining, LLC. A new feedstock supply agreement to receive feedstock through December 31, 2020 from Par Hawaii Refining, LLC was approved on September 7, 2017 by the HPUC.2017.
TABLE OF CONTENTS
Results of Operations:Corporate and Other
Corporate and Other includes expenses paid by the holding company, including base management fees and performance fees, if any, professional fees and costs associated with being a public company.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended September 30, | | Change
Favorable/
(Unfavorable) | | Nine Months Ended September 30, | | Change
Favorable/
(Unfavorable) | | Quarter Ended
September 30, | | Change
Favorable/
(Unfavorable) | | Nine Months Ended September 30, | | Change
Favorable/
(Unfavorable) |
| | | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
| | | $ | | $ | | $ | | % | | $ | | $ | | $ | | % | | $ | | $ | | $ | | % | | $ | | $ | | $ | | % |
| | | ($ In Thousands) (Unaudited) | | ($ In Thousands) (Unaudited) |
| Fees to Manager-related party | | | 17,954 | | | | 18,382 | | | | 428 | | | | 2.3 | | | | 54,610 | | | | 49,570 | | | | (5,040 | ) | | | (10.2 | ) | | | 12,333 | | | | 17,954 | | | | 5,621 | | | | 31.3 | | | | 36,113 | | | | 54,610 | | | | 18,497 | | | | 33.9 | |
| Selling, general and administrative expenses(1) | | | 6,214 | | | | 3,925 | | | | (2,289 | ) | | | (58.3 | ) | | | 21,301 | | | | 8,831 | | | | (12,470 | ) | | | (141.2 | ) | | | 7,150 | | | | 6,214 | | | | (936 | ) | | | (15.1 | ) | | | 21,496 | | | | 21,301 | | | | (195 | ) | | | (0.9 | ) |
| Depreciation | | | | 174 | | | | — | | | | (174 | ) | | | NM | | | | 504 | | | | — | | | | (504 | ) | | | NM | |
| Operating loss | | | (24,168 | ) | | | (22,307 | ) | | | (1,861 | ) | | | (8.3 | ) | | | (75,911 | ) | | | (58,401 | ) | | | (17,510 | ) | | | (30.0 | ) | | | (19,657 | ) | | | (24,168 | ) | | | 4,511 | | | | 18.7 | | | | (58,113 | ) | | | (75,911 | ) | | | 17,798 | | | | 23.4 | |
| Interest expense, net(2) | | | (6,597 | ) | | | (3,483 | ) | | | (3,114 | ) | | | (89.4 | ) | | | (19,419 | ) | | | (10,446 | ) | | | (8,973 | ) | | | (85.9 | ) | | | (8,523 | ) | | | (6,597 | ) | | | (1,926 | ) | | | (29.2 | ) | | | (25,532 | ) | | | (19,419 | ) | | | (6,113 | ) | | | (31.5 | ) |
| Other income (expense), net | | | | 70 | | | | — | | | | 70 | | | | NM | | | | (4 | ) | | | — | | | | (4 | ) | | | NM | |
| Benefit for income taxes | | | 11,181 | | | | 10,859 | | | | 322 | | | | 3.0 | | | | 37,149 | | | | 30,055 | | | | 7,094 | | | | 23.6 | | | | 8,149 | | | | 11,181 | | | | (3,032 | ) | | | (27.1 | ) | | | 24,512 | | | | 37,149 | | | | (12,637 | ) | | | (34.0 | ) |
| Net loss | | | (19,584 | ) | | | (14,931 | ) | | | (4,653 | ) | | | (31.2 | ) | | | (58,181 | ) | | | (38,792 | ) | | | (19,389 | ) | | | (50.0 | ) | | | (19,961 | ) | | | (19,584 | ) | | | (377 | ) | | | (1.9 | ) | | | (59,137 | ) | | | (58,181 | ) | | | (956 | ) | | | (1.6 | ) |
Reconciliation of net loss to EBITDA excluding non-cash items and a reconciliation of cash used in operating activities to Free Cash Flow:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | (19,584 | ) | | | (14,931 | ) | | | | | | | | | | | (58,181 | ) | | | (38,792 | ) | | | | | | | | | | | (19,961 | ) | | | (19,584 | ) | | | | | | | | | | | (59,137 | ) | | | (58,181 | ) | | | | | | | | |
| Interest expense, net(2) | | | 6,597 | | | | 3,483 | | | | | | | | | | | | 19,419 | | | | 10,446 | | | | | | | | | | | | 8,523 | | | | 6,597 | | | | | | | | | | | | 25,532 | | | | 19,419 | | | | | | | | | |
| Benefit for income taxes | | | (11,181 | ) | | | (10,859 | ) | | | | | | | | | | | (37,149 | ) | | | (30,055 | ) | | | | | | | | | | | (8,149 | ) | | | (11,181 | ) | | | | | | | | | | | (24,512 | ) | | | (37,149 | ) | | | | | | | | |
| Depreciation | | | | 174 | | | | — | | | | | | | | | | | | 504 | | | | — | | | | | | | | | |
| Fees to Manager-related party | | | 17,954 | | | | 18,382 | | | | | | | | | | | | 54,610 | | | | 49,570 | | | | | | | | | | | | 12,333 | | | | 17,954 | | | | | | | | | | | | 36,113 | | | | 54,610 | | | | | | | | | |
| Other non-cash expense | | | 159 | | | | 188 | | | | | | | | | | | | 534 | | | | 563 | | | | | | | | | | |
| Pension expense(3) | | | | 47 | | | | — | | | | | | | | | | | | 148 | | | | — | | | | | | | | | |
| Other non-cash expense, net | | | | 178 | | | | 159 | | | | | | | | | | | | 564 | | | | 534 | | | | | | | | | |
| EBITDA excluding non-cash items | | | (6,055 | ) | | | (3,737 | ) | | | (2,318 | ) | | | (62.0 | ) | | | (20,767 | ) | | | (8,268 | ) | | | (12,499 | ) | | | (151.2 | ) | | | (6,855 | ) | | | (6,055 | ) | | | (800 | ) | | | (13.2 | ) | | | (20,788 | ) | | | (20,767 | ) | | | (21 | ) | | | (0.1 | ) |
| EBITDA excluding non-cash items | | | (6,055 | ) | | | (3,737 | ) | | | | | | | | | | | (20,767 | ) | | | (8,268 | ) | | | | | | | | | | | (6,855 | ) | | | (6,055 | ) | | | | | | | | | | | (20,788 | ) | | | (20,767 | ) | | | | | | | | |
| Interest expense, net(2) | | | (6,597 | ) | | | (3,483 | ) | | | | | | | | | | | (19,419 | ) | | | (10,446 | ) | | | | | | | | | | | (8,523 | ) | | | (6,597 | ) | | | | | | | | | | | (25,532 | ) | | | (19,419 | ) | | | | | | | | |
| Convertible senior notes interest(3) | | | 2,012 | | | | — | | | | | | | | | | | | 5,769 | | | | — | | | | | | | | | | |
| Convertible senior notes interest(4) | | | | 2,013 | | | | 2,012 | | | | | | | | | | | | 6,038 | | | | 5,769 | | | | | | | | | |
| Amortization of debt financing costs(2) | | | 988 | | | | 613 | | | | | | | | | | | | 2,969 | | | | 1,837 | | | | | | | | | | | | 1,023 | | | | 988 | | | | | | | | | | | | 3,927 | | | | 2,969 | | | | | | | | | |
| Amortization of debt discount(2) | | | 882 | | | | — | | | | | | | | | | | | 2,377 | | | | — | | | | | | | | | | | | 910 | | | | 882 | | | | | | | | | | | | 2,710 | | | | 2,377 | | | | | | | | | |
| Benefit for income taxes, net of changes in deferred taxes | | | 474 | | | | 1,308 | | | | | | | | | | | | 5,645 | | | | 6,824 | | | | | | | | | | |
| Benefit for current income taxes | | | | 2,176 | | | | 474 | | | | | | | | | | | | 18,284 | | | | 5,645 | | | | | | | | | |
| Changes in working capital | | | (2,934 | ) | | | (2,703 | ) | | | | | | | | | | | (6,691 | ) | | | (8,634 | ) | | | | | | | | | | | 240 | | | | (2,934 | ) | | | | | | | | | | | (17,727 | ) | | | (6,691 | ) | | | | | | | | |
| Cash used in operating activities | | | (11,230 | ) | | | (8,002 | ) | | | | | | | | | | | (30,117 | ) | | | (18,687 | ) | | | | | | | | | | | (9,016 | ) | | | (11,230 | ) | | | | | | | | | | | (33,088 | ) | | | (30,117 | ) | | | | | | | | |
| Changes in working capital | | | 2,934 | | | | 2,703 | | | | | | | | | | | | 6,691 | | | | 8,634 | | | | | | | | | | | | (240 | ) | | | 2,934 | | | | | | | | | | | | 17,727 | | | | 6,691 | | | | | | | | | |
| Free cash flow | | | (8,296 | ) | | | (5,299 | ) | | | (2,997 | ) | | | (56.6 | ) | | | (23,426 | ) | | | (10,053 | ) | | | (13,373 | ) | | | (133.0 | ) | | | (9,256 | ) | | | (8,296 | ) | | | (960 | ) | | | (11.6 | ) | | | (15,361 | ) | | | (23,426 | ) | | | 8,065 | | | | 34.4 | |
NM — Not meaningful
| (1) | For the quarter and nine months ended September 30, 2018, selling, general and administrative expenses included $1.9 million and $7.5 million, respectively, of costs incurred in connection with the evaluation of various investment and acquisition/disposition opportunities, compared with $3.0 million and $7.9 million, respectively, for the quarter and nine months ended September 30, 2017. For the quarter and nine months ended September 30, 2017, selling, general and administrative expenses also included $1.4 million and $6.8 million, respectively, of costs related to the implementation of a shared service initiative. Selling, general and administrative expenses for the quarter and nine months ended September 30, 2017 also includes $3.0 million and $7.9 million, respectively, of costs incurred in connection with the evaluation of various investment and acquisition opportunities.center. |
| (2) | Interest expense, net, included non-cash amortization of deferred financing fees and non-cash amortization of debt discount related to the 2.00% Convertible Senior Notes due October 2023. |
| (3) | Pension expense primarily consists of interest cost, expected return on plan assets and amortization of actuarial and performance gains and losses. |
TABLE OF CONTENTS
Results of Operations: Corporate and Other – (continued)
| (4) | Represents the cash interest expense reclassified to Atlantic Aviation related to the 2.00% Convertible Senior Notes due October 2023, proceeds of which were used to pay down a portion of Atlantic Aviation’s credit facility in October 2016. |
TABLE OF CONTENTS
Liquidity and Capital Resources
General
Our primary cash requirements include normal operating expenses, debt service, debt principal payments, payments of dividends and capital expenditures. Our primary source of cash is operating activities, although we may draw on credit facilities for capital expenditures, issue new equity or debt or sell assets to generate cash.
We may from time to time seek to purchase or retire our outstanding debt in open market purchases, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on market conditions, our liquidity needs and other factors.
At September 30, 2017,2018, including BEC debt classified as held for sale in our consolidated condensed balance sheet, our consolidated debt outstanding totaled $3,533.5$3,690.7 million (excluding adjustments for unamortized debt discounts), our consolidated cash balance totaled $35.7$50.2 million and consolidated available capacity under our revolving credit facilities totaled $971.0$955.5 million, excluding letters of credit outstanding of $48.4 million.
Following the quarter end, we have used the proceeds from the sale of BEC and cash on hand to pay down the majority of the outstanding balances on our and our businesses’ revolving credit facilities. The repayment of our revolving credit facilities has strengthened our balance sheet and increased our financial flexibility. We may redraw these facilities in the future, other than $150.0 million of debt we repaid at IMTT that we do not expect to redraw, to fund a portion of our planned growth capital deployments.
In July 2018, we included our 2.875% Convertible Senior Notes due July 2019 in the current portion of the long-term debt on our consolidated condensed balance sheet. We expect to refinance this debt prior to its maturity in July 2019.
The following table shows MIC’s proportionate debt obligations at October 31, 201730, 2018 ($in thousands):
| | | | | | | | | | | | | | | | |
| Business | | Debt | | Weighted
Average Remaining Life (in years) | | Balance
Outstanding(1) | | Weighted Average Rate(2) | | Debt | | Weighted Average Remaining Life
(in years) | | Balance Outstanding(1) | | Weighted Average Rate(2) |
| MIC Corporate | | | Revolving Facility | | | | 1.7 | | | $ | 145,000 | | | | 2.99 | % | | | Revolving Facility | | | | 3.2 | | | $ | 26,500 | | | | 4.05 | % |
| | | | Convertible Senior Notes | | | | 4.0 | | | | 752,454 | | | | 2.41 | % | | | Convertible Senior Notes | | | | 3.0 | | | | 752,445 | | | | 2.41 | % |
| IMTT | | | Senior Notes | | | | 8.5 | | | | 600,000 | | | | 3.97 | % | | | Senior Notes | | | | 7.5 | | | | 600,000 | | | | 3.97 | % |
| | | | Tax-Exempt Bonds | | | | 4.6 | | | | 508,975 | | | | 2.70 | % | | | Tax-Exempt Bonds(3)
| | | | 3.6 | | | | 508,975 | | | | 3.37 | % |
| | | | Revolving Facility | | | | 2.6 | | | | 257,000 | | | | 2.74 | % | |
| Atlantic Aviation(3) | | | Term Loan | | | | 3.9 | | | | 392,500 | | | | 2.75 | % | |
| | | | Revolving Facility | | | | 3.9 | | | | 82,000 | | | | 2.99 | % | |
| CP | | | Renewables – Project Finance | | | | 14.6 | | | | 265,356 | | | | 4.81 | % | |
| | | | BEC – Term Loan | | | | 4.8 | | | | 253,500 | | | | 3.91 | % | |
| Atlantic Aviation | | | | Term Loan | | | | 2.9 | | | | 375,000 | | | | 2.75 | % |
| Contracted Power | | | | Renewables – Project Finance | | | | 13.6 | | | | 242,343 | | | | 4.83 | % |
| MIC Hawaii(4) | | | Term Loan | | | | 5.0 | | | | 96,734 | | | | 2.85 | % | | | Term Loan | | | | 4.8 | | | | 95,821 | | | | 2.85 | % |
| | | | Senior Notes | | | | 4.8 | | | | 100,000 | | | | 4.22 | % | | | Senior Notes | | | | 3.8 | | | | 100,000 | | | | 4.22 | % |
| Total | | | | | | | 5.6 | | | $ | 3,453,519 | | | | 3.18 | % | | | | | | | 5.1 | | | $ | 2,701,084 | | | | 3.30 | % |
| (1) | Proportionate to MIC’s ownership interest. |
| (2) | Reflects annualized interest rate on all facilities including interest rate hedges. |
| (3) | Excludes $1.5 millionInterest rate reflect the impact of stand-alone debt facility used to fund construction of a certain FBO.the Tax Cuts and Jobs Act |
| (4) | Excludes $2.7$2.2 million of equipment loans at the MIC Hawaii business. |
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Liquidity and Capital Resources – (continued)
The following table profiles each revolving credit facility at our businesses and at MIC Corporate as of October 31, 201730, 2018 ($in thousands):
| | | | | | | | | | | | | | | | |
| Business | | Debt | | Weighted Average Remaining Life (in years) | | Undrawn Amount | | Interest Rate(1) | | Debt | | Weighted
Average
Remaining Life
(in years) | | Undrawn
Amount | | Interest Rate(1) |
MIC Corporate | | | Revolving Facility | | | | 1.7 | | | $ | 265,000 | | | | LIBOR + 1.750% | | | | Revolving Facility | | | | 3.2 | | | $ | 573,500 | | | | LIBOR + 1.750% | |
| IMTT | | | USD Revolving Facility | | | | 2.6 | | | | 293,000 | | | | LIBOR + 1.500% | | | | USD Revolving Facility | | | | 1.6 | | | | 550,000 | | | | LIBOR + 1.500% | |
| | | | CAD Revolving Facility | | | | 2.6 | | | | 50,000 | | | | Bankers’ Acceptance Rate + 1.500% | | | | CAD Revolving Facility | | | | 1.6 | | | | 50,000 | | | | Bankers’ Acceptance Rate + 1.500% | |
| Atlantic Aviation | | | Revolving Facility | | | | 3.9 | | | | 268,000 | | | | LIBOR + 1.750% | | | | Revolving Facility | | | | 2.9 | | | | 350,000 | | | | LIBOR + 1.750% | |
| CP – BEC | | | Revolving Facility | | | | 4.8 | | | | 25,000 | | | | LIBOR + 2.125% | | |
| CP – Renewables | | | Revolving Facility | | | | 2.1 | | | | 19,980 | | | | LIBOR + 2.000% | | |
| MIC Hawaii | | | Revolving Facility | | | | 4.3 | | | | 60,000 | | | | LIBOR + 1.250% | | |
| Total | | | | | | | 2.9 | | | $ | 980,980 | | | | | | |
| Contracted Power – Renewables | | | | Revolving Facility | | | | 1.1 | | | | 19,980 | | | | LIBOR + 2.000% | |
| MIC Hawaii(3) | | | | Revolving Facility | | | | 4.3 | | | | 60,000 | | | | LIBOR + 1.250% | |
| Total(4) | | | | | | | | 2.6 | | | $ | 1,603,480 | | | | | |
| (1) | Excludes commitment fees. |
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Liquidity and Capital Resources – (continued)
| (2) | On January 3, 2018, the Company completed the refinancing and upsizing of its senior secured revolving credit facility and extended its maturity to January 2022. |
| (3) | On February 12, 2018, Hawaii Gas completed the refinancing of its existing $60.0 million revolving credit facility and extended its maturity to February 2023. |
| (4) | Excludes letters of credit outstanding of $37.8 million. |
We will, in general, apply available cash to the repayment of revolving credit facility balances as a means of minimizing interest expense and draw on those facilities to fund growth projects and for general corporate purposes.
We use revolving credit facilities at each of our operating companies and the holding company as a meanssource of maintaining access to sufficient liquidity to meet future requirements, managingmanage interest expense and fundingfund growth projects. We base our assessment of the sufficiency of our liquidity and capital resources on the assumptions that:
our businesses overall generate, and are expected to continue to generate, significant operating cash flow;
the ongoing capital expenditures associated with our businesses are readily funded from their respective operating cash flow or available debt facilities; and
we will be able to refinance, extend and/or repay the principal amount of maturing long-term debt on terms that can be supported by our businesses.
We capitalize our businesses in part using floating rate bank debt with medium-term maturities of between five and seven years. In general, we hedge theany floating rate exposure for the majority of the term of these facilities. We also use longer dated private placement debt and other forms of capital including bond or hybrid debt instruments to capitalize our businesses. In general, the debt facilities at our businesses are non-recourse to the holding company and there are no cross-collateralization or cross-guarantee provisions in these facilities.
Our wind and solar facilities are financed primarily with fully amortizing non-recourse project finance style debt with maturities prior to or coterminous with the expiration of the underlying PPAs.
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Liquidity and Capital Resources – (continued)
Analysis of Consolidated Historical Cash Flows
The following section discusses our sources and uses of cash on a consolidated basis. All intercompany activities such as corporate allocations, capital contributions to our businesses and distributions from our businesses have been excluded from the table as these transactions are eliminated inon consolidation.
| | | | | | | | | | | | | | | | |
| | Nine Months Ended
September 30, | | Change
Favorable/
(Unfavorable) | |
| | | 2017 | | 2016 | |
| ($ In Thousands) | | | Nine Months Ended
September 30, | | Change
Favorable/(Unfavorable) |
| | 2018 | | 2017(1) |
| | $ | | $ | | $ | | % | | $ | | $ | | $ | | % |
| Cash provided by operating activities | | | 397,669 | | | | 436,988 | | | | (39,319 | ) | | | (9.0 | ) | | | 413,053 | | | | 398,360 | | | | 14,693 | | | | 3.7 | |
| Cash used in investing activities | | | (461,257 | ) | | | (226,277 | ) | | | (234,980 | ) | | | (103.8 | ) | | | (131,286 | ) | | | (455,102 | ) | | | 323,816 | | | | 71.2 | |
| Cash provided by (used in) financing activities | | | 54,109 | | | | (205,220 | ) | | | 259,329 | | | | 126.4 | | |
| Cash (used in) provided by financing activities | | | | (246,201 | ) | | | 53,582 | | | | (299,783 | ) | | | NM | |
NM — Not meaningful
| (1) | Conformed to current period presentation for the adoption of ASU No. 2016-18,Statement of Cash Flows (Topic 230): Restricted Cash. See Note 2, “Basis of Presentation”, in our Notes to Consolidated Condensed Financial Statements in Part I of this Form 10-Q for recently issued accounting standards. |
Operating Activities
Cash provided by (used in) operating activities is generally comprised of EBITDA excluding non-cash items (as defined by us), less cash interest, tax and pension payments, and changes in working capital. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations” for discussions around the components of EBITDA excluding non-cash items on a consolidated basis and for each of our businesses above.
The decreaseincrease in consolidated cash provided by operating activities for the nine months ended September 30, 20172018 compared with the nine months ended September 30, 20162017 was primarily due to:
timingthe improvement in collection of paymentaccounts receivable on higher balances from the increase in the cost of insurance premiums;jet fuel at Atlantic Aviation and the increase in the cost of propane and synthetic natural gas at MIC Hawaii;
timing of prepaid expenses, primarily related to insurance premiums; and
collection of development fees and increasesinterest receivable from a renewables developer on a revolving credit facility provided by our Contracted Power business; partially offset by
an increase in cost of inventory at MIC Hawaii and Atlantic Aviation;interest expense; and
an increase in current state taxes; partially offset bytaxes.
improved operating results at existing businesses and contributions from acquisitions.
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Liquidity and Capital Resources – (continued)
Investing Activities
Cash provided by investing activities include proceeds from divestitures of businesses and fixed assets. Cash used in investing activities include acquisitions of businesses in new and existing segments and capital expenditures. Acquisitions of businesses are generally funded by raising additional equity and/or drawings on credit facilities.
In general, maintenance capital expenditures are funded by cash from operating activities and growth capital expenditures are funded by drawing on our available credit facilities or with equity capital. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of OperationsOperation” for maintenance capital expenditures for each of our businesses.
The increasedecrease in consolidated cash used in investing activities for the nine months ended September 30, 20172018 compared with the nine months ended September 30, 20162017 was primarily due to:
acquisitions at Atlantic Aviationa larger amount of acquisition and IMTT and investmentsinvestment activities completed in renewable projects at CP and MIC Hawaii during 2017;
an increasea decrease in capital expenditures primarily at BEC related togenerally;
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Liquidity and Capital Resources – (continued)
proceeds from the 130 MW expansion projectsale of businesses during 2017;2018; and
a decrease in net borrowings by a third party renewables developer on a revolving credit facility provided by our CP business;Contracted Power business.
Capital Deployment
Capital deployment includes growth capital expenditures and
“bolt-on” acquisitions, the absencemajority of insurance proceeds received by IMTT during 2016.
Growth Capital Expenditures
We invested $208.1which are expected to generate incremental earnings. For the nine months ended September 30, 2018 and 2017, we deployed $138.6 million and $152.3$541.5 million, respectively, of growth capital in our existing businesses including an on-field consolidation (acquisition) of an FBO for $11.4 million during the nine months ended September 30, 2017 and 2016, respectively.first quarter of 2018.
We continuously evaluate opportunities to prudently deploy capital in bothacquisitions and growth projects, andwhether in acquisitions of additional businesses, whether as part of our existing businesses or in new lines of business. These opportunities can be significant. We are expanding BEC by 130 MW on adjacent landexpect to undertake a number of capital projects related to the repurposing and repositioning of certain assets at IMTT and the improvement in capacity and capabilities of the businesses in our other segments. We expect to deploy approximately $130.0$200.0 million growth capital on the project in 2017. In aggregate, we currently anticipate deploying at least $650.0 million in these types of activities in 2017.
In addition, we maintain a backlog of projects that we expect to complete in subsequent periods. We consider projects to be a part of our backlog when we have committed to the deployment of capital for the underlying project, and have, where relevant, received all requisite approvals/authorizations for the deployment of such capital. The inclusion of a project in our backlog does not guarantee that the project will commence, be completed or ultimately generate revenue.
As of October 31, 2017, our backlog of approved growth capital projects was approximately $215.0 million, and to date we have deployed or committed to deploy approximately $545.0 million into growth projects and smaller“bolt-on” acquisitions by our existing businesses.during the year.
Financing Activities
Cash provided by financing activities primarily includes new equity issuance and debt issuance related to acquisitions and capital expenditures. Cash used in financing activities primarily includes dividends to our stockholders and the repayment of debt principal balances on maturing debt.
The change infrom consolidated cash provided by financing activities for the nine months ended September 30, 2017 compared withto cash used in financing activities for the nine months ended September 30, 20162018 was primarily due to:
highera decrease in net debt borrowings during 2017;used partially to fund capital deployment and
the absence of the purchase of the remaining 33.3% interest in IMTT’s Quebec terminal that it did not previously own in March 2016; general corporate purposes; partially offset by
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Liquidity and Capital Resources – (continued)
an increasea decrease in dividends paid to stockholders during 2017; and
a decrease in contributions received from noncontrolling interests during 2017.2018.
IMTT
During the nine months ended September 30, 2017,2018, IMTT borrowed $271.0$17.0 million primarily for general corporate purposes and repaid $46.0$10.0 million on its revolving credit facility primarily for general corporate purposes.facility. At September 30, 2017,2018, IMTT had $1.4$1.3 billion of total debt outstanding consisting of $600.0 million of senior notes, $509.0 million of tax-exempt bonds and $257.0$217.0 million drawn on its revolving credit facility. IMTT has access to $600.0 million of revolving credit facilities, of which $343.0$383.0 million remained undrawn at September 30, 2017. 2018.
In October 2018, using the proceeds from the sale of BEC and cash on hand, we repaid in full the outstanding balance of $217.0 million on the IMTT revolving credit facility.
Cash interest expense was $29.7$35.4 million and $29.5$29.7 million for the nine months ended September 30, 20172018 and 2016,2017, respectively. At September 30, 2017,2018, IMTT was in compliance with its financial covenants.
Atlantic Aviation
During the nine months ended September 30, 2018, Atlantic Aviation borrowed $33.0 million on its revolving credit facility primarily to fund an on-field consolidation of an FBO and for general corporate purposes. At September 30, 2017,2018, Atlantic Aviation had total debt outstanding of $476.0$666.0 million comprising $392.5comprised of a $375.0 million senior secured, first lien term loan facility $82.0and a $291.0 million balance outstanding on its senior secured, first lien revolving credit facility and a $1.5 million stand-alone debt facility used to fund construction at a certain FBO.facility. Atlantic Aviation has access to a $350.0 million revolving credit facility, of which $268.0$59.0 million remained undrawn at September 30, 2017.2018.
In October 2018, using the proceeds from the sale of BEC and cash on hand, we repaid in full the outstanding balance of $291.0 million on the Atlantic Aviation revolving credit facility.
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Liquidity and Capital Resources – (continued)
Cash interest expense was $15.4$20.6 million and $20.5$15.4 million for the nine months ended September 30, 20172018 and 2016,2017, respectively. Cash interest expense for the nine months ended September 30, 2018 and 2017 is inclusive ofincludes the cash interest expense related toon the $402.5 million of the MIC Corporate 2.00% Convertible Senior Notes issued in October 2016 and due in October 2023,2023. The proceeds from the proceeds of whichnote issuance were used in partprincipally to reduce the drawn balance of Atlantic Aviation’s revolving credit facility. At September 30, 2017,2018, Atlantic Aviation was in compliance with its financial covenants.
CPContracted Power
At September 30, 2017,2018, the CPbusinesses within our Contracted Power segment had $584.4$556.7 million in term loans outstanding.outstanding, of which $243.5 million related to BEC and was classified as held for sale in the consolidated condensed balance sheet. Cash interest expense paid by these businesses was $20.6$19.5 million and $18.5$20.6 million for the nine months ended September 30, 2018 and 2017, and 2016, respectively.
BEC
At September 30, 2017,2018, BEC also had $253.5 million of an amortizing term loan facility outstanding and access to a revolving credit facility of $25.0 million that was undrawn. Cash interest expense for BEC was $7.9$7.5 million and $8.2$7.9 million for the nine months ended September 30, 20172018 and 2016,2017, respectively. At September 30, 2017,2018, BEC was in compliance with its financial covenants.
Wind On October 12, 2018, we concluded the sale of BEC and Solar Facilities
received cash of $657.4 million, net of the assumption of the outstanding debt balance of $243.5 million by the buyer.At September 30, 2017, the2018, our wind and solar facilities had an aggregate $330.9$313.2 million in term loan debt outstanding. Cash interest expense was $12.7totaled $12.0 million and $10.3$12.7 million for the nine months ended September 30, 20172018 and 2016,2017, respectively. At September 30, 2017,2018, all of the wind and solar facilities were in compliance with their respective financial covenants.
MIC Hawaii
At September 30, 2017,2018, the businesses of MIC Hawaii had total debt outstanding of $199.6$213.2 million comprising $198.2 million in term loans and senior secured note borrowings and access to a$15.0 million outstanding on revolving credit facility of $60.0 million that was undrawn.facilities. Cash interest expense was $5.4totaled $5.7 million and $4.9$5.4 million for the nine months ended September 30, 2018 and 2017, and 2016, respectively.
Hawaii Gas
At September 30, 2017, Hawaii Gas had total debt outstanding of $180.0 million in term loan and senior secured note borrowings and access to a revolving credit facility of $60.0 million that was undrawn. Cash interest paid was $4.8 million and $4.7 million for the nine months ended September 30, 2017 and 2016, respectively. At September 30, 2017, Hawaii Gas was in compliance with its financial covenants.
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Liquidity and Capital Resources – (continued)
In February 2017,2018, Hawaii Gas exercised the firstsecond of two one-year extensions related to its $80.0 million secured term loan facility and its $60.0 million revolving credit facility. Thefacility extending their respective maturities have been extended to February 2022 and no changes were made to any other terms.2023.
Other Businesses
At September 30, 2018, Hawaii Gas had total debt outstanding of $180.0 million in term loan and senior secured note borrowings and $15.0 million outstanding on its revolving credit facility. During the nine months ended September 30, 2018, Hawaii Gas borrowed $20.0 million for general corporate purposes and repaid $5.0 million on its revolving credit facility. Cash interest expense was $5.2 million and $4.8 million for the nine months ended September 30, 2018 and 2017, respectively.
In October 2018, using the proceeds from the sale of BEC and cash on hand, we repaid in full the outstanding balance of $15.0 million on the Hawaii Gas revolving credit facility.
During the quarters ended March 31, 2018 and June 30, 2018, Hawaii Gas was not in compliance with certain credit agreement provisions. In the quarter ended September 30, 2018, the business received waivers from its syndicate of lenders relating to the non-compliance. At September 30, 2018, Hawaii Gas was again in compliance with its credit agreement having received waivers from its lenders.
At September 30, 2018, the other businesses within MIC Hawaii had $19.6$18.2 million inof debt outstanding, debt, consisting primarily of $16.9$16.0 million term loan debt related to our solar facilities. At September 30, 2017,2018, these businesses were in compliance with their financial covenants.
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Liquidity and Capital Resources – (continued)
MIC Corporate
At September 30, 2017,2018, MIC had $350.0 million of 2.875% Convertible Senior Notes due July 2019 and $402.5 million in convertible senior notes outstanding that bear interest at 2.875% andof 2.00%, respectively. Convertible Senior Notes due October 2023 outstanding. At September 30, 2017, the2018, MIC also had an outstanding balance on thea $600.0 million senior secured revolving credit facility was $155.0 million resulting in an undrawn balance of $255.0$176.5 million.
In October 2017, MIC2018, using the proceeds from the sale of BEC and cash on hand, we repaid $10.0$150.0 million on the outstanding balance on itsour revolving credit facility.
Cash interest expense was $8.3$12.9 million and $8.6$8.3 million for the nine months ended September 30, 20172018 and 2016,2017, respectively. Cash interest expense for the nine months ended September 30, 2017in both periods excludes the cash interest expense related to the $402.5 million of 2.00% Convertible Senior Notes issued in October 2016 and due in October 2023,2023. The proceeds of whichfrom the note issuance were used in partprincipally to reduce the drawn balance of Atlantic Aviation’s revolving credit facility. SeeAtlantic Aviation above. At September 30, 2017,2018, MIC Corporate was in compliance with its financial covenants.
For a description of the material terms and debt covenants of MIC and its businesses, see Note 7, “Long-Term Debt”, in Part II, Item 8, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.2017.
Commitments and Contingencies
Except as noted above, at September 30, 2017,2018, there were no material changes in our commitments and contingencies compared with our commitments and contingenciesthose at December 31, 2016.2017. At September 30, 2017,2018, we did not have any 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, 2016,2017, filed with the SEC on February 21, 2017.2018.
At September 30, 2017,2018, we did not have any material reserves for contingencies. We have other contingencies occurring in the normal course of business, including pending legal and administrative proceedings that are not reflected at this time as they are not ascertainable.
Our sources of cash to meet these obligations include:
cash generated from our operations (see “Operating Activities” in “Liquidity and Capital Resources”);
issuance of shares or debt securities (see “Financing Activities” in “Liquidity and Capital Resources”);
refinancing of our current credit facilities at or before maturity (see “Financing Activities” in “Liquidity and Capital Resources”);
cash available from our undrawn credit facilities (see “Financing Activities” in “Liquidity and Capital Resources”); and
| �� | undrawn balances on credit facilities (see “Financing Activities” in “Liquidity and Capital Resources”); and |
if advantageous, sale of all or part of any of our businesses (see “Investing Activities” in “Liquidity and Capital Resources”).
As described above under “Recent Developments”, on July 27, 2018, our intermediate holding company within the Contracted Power segment entered into an agreement to sell 100% of BEC. On October 12, 2018, we concluded the sale of BEC and received cash of $657.4 million, net of the assumption of the outstanding debt balance of $243.5 million by the buyer and subject to post-closing working capital adjustments. Any such adjustments are not expected to be significant. The buyer and seller have agreed to indemnify each other for breaches of representations, warranties and covenants in the purchase agreement, subject to certain exceptions and limitations. We have guaranteed our subsidiary’s payment and certain post-closing indemnity obligations under the purchase agreement.
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Critical Accounting Policies and Estimates
For critical accounting policies and estimates, see “Critical Accounting Policies and Estimates” in Part II, Item 7 and Note 2 “Summary of Significant Accounting Policies” in Part II, Item 8 of our Annual Report on Form 10-K for the fiscal year ended December 31, 20162017 and see Note 2, “Basis of Presentation”, in our Notes to Consolidated Condensed Financial Statements in Part I of this Form 10-Q for recently issued accounting standards. Our critical accounting policies and estimates have not changed materially from the description contained in our Annual Report.
Business Combinations
Our acquisitions of businesses that we control are accounted for under the purchase method of accounting. The amounts assigned to the identifiable assets acquired and liabilities assumed in connection with acquisitions are based on estimated fair values as of the date of the acquisition, with the remainder, if any, recorded as goodwill. The fair values are determined by our management, taking into consideration information supplied by the management of acquired entities and other relevant information. Such information includes valuations supplied by independent appraisal experts for significant business combinations. The valuations are generally based upon future cash flow projections for the acquired assets, discounted to present value. The determination of fair values require significant judgment both by management and outside experts engaged to assist in this process.
Goodwill, Intangible Assets and Property, Plant and Equipment
Significant assets acquired in connection with our acquisition of businesses include contractual arrangements, customer relationships, non-compete agreements, trademarks, property and equipment and goodwill.
Trademarks are generally considered to be indefinite life intangibles. Trademarks and goodwill are not amortized in most circumstances although it may be appropriate to amortize some trademarks. We are required to perform annual impairment reviews (or more frequently in certain circumstances) for unamortized intangible assets.
ASU No. 2011-08,Intangibles — Goodwill and Other (Topic 350):Testing Goodwill for Impairment, permits an entity to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test, as discussed below. If an entity concludes it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it need not perform the two-step impairment test.
If an entity concludes that it is more likely than not that the fair value of reporting unit is less than its carrying amount, it needs to perform the two-step impairment test. This 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 includes 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 with its corresponding carrying value. IMTT, Atlantic Aviation, CP and the MIC Hawaii businesses are separate reporting units for purposes of this analysis. The impairment test for trademarks, which are not amortized, requires the determination of the fair value of such assets. If the fair value of the trademarks is 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.
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Critical Accounting Policies and Estimates – (continued)
Property and equipment is initially stated at cost. Depreciation of 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 contractual arrangements, 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 contractual arrangements at Atlantic Aviation, the useful lives will generally match the remaining lease terms plus extensions under the business’ control.
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 it is appropriate to do so.
We test for goodwill and indefinite-lived intangible assets annually as of October 1st or when there is an indicator of impairment.
Quantitative and Qualitative Disclosures About Market Risk
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, 2016.2017. Our exposure to market risk has not changed materially since February 21, 2017,2018, the filing date for our Annual Report on Form 10-K.
Interim Goodwill Review
We test for goodwill impairment at the reporting unit level on an annual basis on October 1st of each year and between annual tests if a triggering event indicates impairment. We continuously monitor events which could trigger an interim impairment analysis, such as changing business conditions and industry and other economic factors. During the year, we experienced a sustained decline in market capitalization since February 2018, and during the third quarter of 2018, we concluded a sustained decline in our market capitalization had occurred, leading to the determination that a triggering event had occurred for all of our reporting units.
We performed an interim impairment analysis using financial information through September 30, 2018 and forecasts for cash flows developed using our strategic plan. The impairment analysis was performed using both the market and income approaches and weighting them based on their application to the reporting units. The interim impairment review was performed across all of our reporting units. As a result of this evaluation, the fair value of each of our reporting units exceeded the carrying value and no impairment was recorded.
At September 30, 2018, the fair value exceeded book value by $2.2 billion, or approximately 36.0%, primarily from Atlantic Aviation, by approximately $2.0 billion, and Hawaii Gas, by approximately $250.0 million. IMTT’s fair value at September 30, 2018 exceeded the book value by approximately $20.0 million. The fair value of IMTT was impacted by the recent decline in short-term earnings related to the non-renewal of certain contracts for heavy and residual oil. The non-renewal of these contracts, or the renewal at lower rates, is partially attributable to changes in trade flows.
Unfavorable fluctuations in the discount rate or declines in forecasted storage revenues and margins could result in an impairment on IMTT. A 0.25% increase to the discount rate would change the valuation of IMTT by approximately $80.0 million. Any increase in discount rate, in conjunction with any decrease to the long-term projections in cash flows for IMTT will negatively affect the current valuations. Due to the inherent uncertainties involved in making the estimates and assumptions used in the fair value analysis, actual results may differ, which could alter the fair value of the reporting units, and possibly result in impairment charges in future periods. We will continue to evaluate the fair value of goodwill through the fourth quarter of fiscal year 2018 for any potential impairment.
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Controls and Procedures
Evaluation of Disclosure Controls and Procedures
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) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this report. The purpose of disclosure controls is to ensure that information required to be disclosed in our reports filed with or submitted to the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls are also designed to ensure that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2017.2018.
Changes in Internal Control Over Financial Reporting
There have nothas been any changesno change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the quarter ended September 30, 20172018 that havehas materially affected, or areis reasonably likely to materially affect, our internal control over financial reporting.
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MACQUARIE INFRASTRUCTURE CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
($ in Thousands, Except Share Data)
| | | | | | | | |
| | September 30,
2017 | | December 31,
2016 | | September 30,
2018 | | December 31,
2017 |
| | | (Unaudited) | | (Unaudited) | | |
ASSETS
| | | | | | | | | | | | | | | | |
Current assets:
| | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 35,737 | | | $ | 44,767 | | | $ | 50,162 | | | $ | 47,121 | |
| Restricted cash | | | 22,809 | | | | 16,420 | | | | 41,238 | | | | 24,963 | |
| Accounts receivable, less allowance for doubtful accounts of $1,037 and $1,434, respectively | | | 145,506 | | | | 124,846 | | |
| Accounts receivable, less allowance for doubtful accounts of $1,114 and $895, respectively | | | | 130,777 | | | | 158,152 | |
| Inventories | | | 35,960 | | | | 31,461 | | | | 30,807 | | | | 36,955 | |
| Prepaid expenses | | | 13,799 | | | | 14,561 | | | | 9,329 | | | | 14,685 | |
| Fair value of derivative instruments | | | 8,675 | | | | 5,514 | | | | 17,510 | | | | 11,965 | |
| Other current assets | | | 16,742 | | | | 7,099 | | | | 13,040 | | | | 13,804 | |
| Assets held for sale(1) | | | | 971,934 | | | | — | |
| Total current assets | | | 279,228 | | | | 244,668 | | | | 1,264,797 | | | | 307,645 | |
| Property, equipment, land and leasehold improvements, net | | | 4,611,633 | | | | 4,346,536 | | | | 3,753,291 | | | | 4,659,614 | |
| Investment in unconsolidated business | | | 9,526 | | | | 8,835 | | | | 9,296 | | | | 9,526 | |
| Goodwill | | | 2,075,965 | | | | 2,024,409 | | | | 2,043,800 | | | | 2,068,668 | |
| Intangible assets, net | | | 931,433 | | | | 888,971 | | | | 813,348 | | | | 914,098 | |
| Fair value of derivative instruments | | | 18,743 | | | | 30,781 | | | | 26,958 | | | | 24,455 | |
| Other noncurrent assets | | | 28,835 | | | | 15,053 | | | | 26,980 | | | | 24,945 | |
| Total assets | | $ | 7,955,363 | | | $ | 7,559,253 | | | $ | 7,938,470 | | | $ | 8,008,951 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY
| | | | | | | | | | | | | | | | |
Current liabilities:
| | | | | | | | | | | | | | | | |
| Due to Manager-related party | | $ | 6,098 | | | $ | 6,594 | | | $ | 4,474 | | | $ | 5,577 | |
| Accounts payable | | | 59,078 | | | | 69,566 | | | | 54,628 | | | | 60,585 | |
| Accrued expenses | | | 101,766 | | | | 83,734 | | | | 83,424 | | | | 89,496 | |
| Current portion of long-term debt | | | 48,335 | | | | 40,016 | | | | 392,903 | | | | 50,835 | |
| Fair value of derivative instruments | | | 3,992 | | | | 9,297 | | | | 534 | | | | 1,710 | |
| Other current liabilities | | | 40,932 | | | | 41,802 | | | | 52,089 | | | | 47,762 | |
| Liabilities held for sale(1) | | | | 299,659 | | | | — | |
| Total current liabilities | | | 260,201 | | | | 251,009 | | | | 887,711 | | | | 255,965 | |
| Long-term debt, net of current portion | | | 3,424,776 | | | | 3,039,966 | | | | 3,009,008 | | | | 3,530,311 | |
| Deferred income taxes | | | 955,542 | | | | 896,116 | | | | 656,708 | | | | 632,070 | |
| Fair value of derivative instruments | | | 5,807 | | | | 5,966 | | | | 1,174 | | | | 4,668 | |
| Tolling agreements – noncurrent | | | 54,540 | | | | 60,373 | | | | — | | | | 52,595 | |
| Other noncurrent liabilities | | | 158,308 | | | | 158,289 | | | | 187,957 | | | | 182,639 | |
| Total liabilities | | | 4,859,174 | | | | 4,411,719 | | | | 4,742,558 | | | | 4,658,248 | |
| Commitments and contingencies | | | — | | | | — | | | | — | | | | — | |
See accompanying notes to the consolidated condensed financial statements.
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MACQUARIE INFRASTRUCTURE CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS – (continued)
($ in Thousands, Except Share Data)
| | | | | | | | |
| | September 30,
2017 | | December 31,
2016 | | September 30,
2018 | | December 31,
2017 |
| | | (Unaudited) | | (Unaudited) | | |
Stockholders’ equity(1):
| | | | | | | | | |
| Common stock ($0.001 par value; 500,000,000 authorized; 84,481,865 shares issued and outstanding at September 30, 2017 and 82,047,526 shares issued and outstanding at December 31, 2016) | | $ | 84 | | | $ | 82 | | |
Stockholders’ equity(2):
| | | | | | | | | |
| Common stock ($0.001 par value; 500,000,000 authorized; 85,550,576 shares issued and outstanding at September 30, 2018 and 84,733,957 shares issued and outstanding at December 31, 2017) | | | $ | 86 | | | $ | 85 | |
| Additional paid in capital | | | 1,942,417 | | | | 2,089,407 | | | | 1,585,328 | | | | 1,840,033 | |
| Accumulated other comprehensive loss | | | (26,222 | ) | | | (28,960 | ) | | | (32,085 | ) | | | (29,993 | ) |
| Retained earnings | | | 994,495 | | | | 892,365 | | | | 1,480,471 | | | | 1,343,567 | |
| Total stockholders’ equity | | | 2,910,774 | | | | 2,952,894 | | | | 3,033,800 | | | | 3,153,692 | |
| Noncontrolling interests | | | 185,415 | | | | 194,640 | | | | 162,112 | | | | 197,011 | |
| Total equity | | | 3,096,189 | | | | 3,147,534 | | | | 3,195,912 | | | | 3,350,703 | |
| Total liabilities and equity | | $ | 7,955,363 | | | $ | 7,559,253 | | | $ | 7,938,470 | | | $ | 8,008,951 | |
| (1) | See Note 2, “Basis of Presentation”, for further discussion on assets and liabilities held for sale. |
| (2) | The Company is authorized to issue 100,000,000 shares of preferred stock, par value $0.001 per share. At September 30, 20172018 and December 31, 2016,2017, no preferred stock were issued or outstanding. The Company hashad 100 shares of special stock issued and outstanding to its Manager at September 30, 20172018 and December 31, 2016.2017. |
See accompanying notes to the consolidated condensed financial statements.
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MACQUARIE INFRASTRUCTURE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
($ in Thousands, Except Share and Per Share Data)
| | | | | | | | | | | | | | | | |
| | Quarter Ended September 30, | | Nine Months Ended September 30, | | Quarter Ended
September 30, | | Nine Months Ended
September 30, |
| | | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
Revenue
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Service revenue | | $ | 358,220 | | | $ | 323,975 | | | $ | 1,067,069 | | | $ | 942,437 | | | $ | 361,031 | | | $ | 358,220 | | | $ | 1,139,637 | | | $ | 1,067,069 | |
| Product revenue | | | 94,841 | | | | 96,549 | | | | 276,439 | | | | 272,053 | | | | 112,249 | | | | 94,841 | | | | 313,279 | | | | 276,439 | |
| Total revenue | | | 453,061 | | | | 420,524 | | | | 1,343,508 | | | | 1,214,490 | | | | 473,280 | | | | 453,061 | | | | 1,452,916 | | | | 1,343,508 | |
Costs and expenses
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cost of services | | | 153,218 | | | | 134,512 | | | | 455,038 | | | | 371,832 | | | | 166,694 | | | | 153,218 | | | | 533,889 | | | | 455,038 | |
| Cost of product sales | | | 35,669 | | | | 39,845 | | | | 123,143 | | | | 107,923 | | | | 47,823 | | | | 35,669 | | | | 148,372 | | | | 123,143 | |
| Selling, general and administrative | | | 84,898 | | | | 77,468 | | | | 244,817 | | | | 222,182 | | | | 86,487 | | | | 84,898 | | | | 262,371 | | | | 244,817 | |
| Fees to Manager – related party | | | 17,954 | | | | 18,382 | | | | 54,610 | | | | 49,570 | | |
| Fees to Manager-related party | | | | 12,333 | | | | 17,954 | | | | 36,113 | | | | 54,610 | |
| Goodwill impairment | | | | 3,215 | | | | — | | | | 3,215 | | | | — | |
| Depreciation | | | 58,009 | | | | 59,242 | | | | 172,753 | | | | 172,125 | | | | 56,924 | | | | 58,009 | | | | 179,368 | | | | 172,753 | |
| Amortization of intangibles | | | 17,329 | | | | 15,417 | | | | 50,920 | | | | 49,917 | | | | 20,030 | | | | 17,329 | | | | 55,470 | | | | 50,920 | |
| Total operating expenses | | | 367,077 | | | | 344,866 | | | | 1,101,281 | | | | 973,549 | | | | 393,506 | | | | 367,077 | | | | 1,218,798 | | | | 1,101,281 | |
| Operating income | | | 85,984 | | | | 75,658 | | | | 242,227 | | | | 240,941 | | | | 79,774 | | | | 85,984 | | | | 234,118 | | | | 242,227 | |
Other income (expense)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest income | | | 54 | | | | 27 | | | | 129 | | | | 85 | | | | 113 | | | | 54 | | | | 304 | | | | 129 | |
| Interest expense(1) | | | (29,291 | ) | | | (20,871 | ) | | | (90,129 | ) | | | (117,268 | ) | | | (32,616 | ) | | | (29,291 | ) | | | (81,693 | ) | | | (90,129 | ) |
| Other income, net | | | 4,973 | | | | 16,689 | | | | 7,893 | | | | 20,389 | | |
| Other (expense) income, net | | | | (18,011 | ) | | | 4,973 | | | | (11,721 | ) | | | 7,893 | |
| Net income before income taxes | | | 61,720 | | | | 71,503 | | | | 160,120 | | | | 144,147 | | | | 29,260 | | | | 61,720 | | | | 141,008 | | | | 160,120 | |
| Provision for income taxes | | | (25,547 | ) | | | (29,022 | ) | | | (65,284 | ) | | | (60,409 | ) | | | (7,884 | ) | | | (25,547 | ) | | | (36,558 | ) | | | (65,284 | ) |
| Net income | | $ | 36,173 | | | $ | 42,481 | | | $ | 94,836 | | | $ | 83,738 | | | $ | 21,376 | | | $ | 36,173 | | | $ | 104,450 | | | $ | 94,836 | |
| Less: net (loss) income attributable to noncontrolling interests | | | (3,922 | ) | | | 455 | | | | (7,294 | ) | | | 165 | | |
| Less: net loss attributable to noncontrolling interests | | | | (328 | ) | | | (3,922 | ) | | | (32,454 | ) | | | (7,294 | ) |
| Net income attributable to MIC | | $ | 40,095 | | | $ | 42,026 | | | $ | 102,130 | | | $ | 83,573 | | | $ | 21,704 | | | $ | 40,095 | | | $ | 136,904 | | | $ | 102,130 | |
| Basic income per share attributable to MIC | | $ | 0.48 | | | $ | 0.52 | | | $ | 1.23 | | | $ | 1.04 | | | $ | 0.25 | | | $ | 0.48 | | | $ | 1.61 | | | $ | 1.23 | |
Weighted average number of shares
outstanding: basic | | | 83,644,806 | | | | 81,220,841 | | | | 82,743,285 | | | | 80,570,192 | | | | 85,378,088 | | | | 83,644,806 | | | | 85,095,956 | | | | 82,743,285 | |
| Diluted income per share attributable to MIC | | $ | 0.48 | | | $ | 0.51 | | | $ | 1.23 | | | $ | 1.03 | | | $ | 0.25 | | | $ | 0.48 | | | $ | 1.61 | | | $ | 1.23 | |
Weighted average number of shares
outstanding: diluted | | | 87,916,538 | | | | 85,750,096 | | | | 82,752,800 | | | | 81,313,767 | | | | 85,398,566 | | | | 87,916,538 | | | | 85,109,213 | | | | 82,752,800 | |
| Cash dividends declared per share | | $ | 1.42 | | | $ | 1.29 | | | $ | 4.12 | | | $ | 3.74 | | | $ | 1.00 | | | $ | 1.42 | | | $ | 3.00 | | | $ | 4.12 | |
| (1) | Interest expense includes gains on derivative instruments of $4.8 million and $25.8 million for the quarter and nine months ended September 30, 2018, respectively. For the quarter and nine months ended September 30, 2017, interest expense includes losses on derivative instruments of $162,000 and $6.9 million for the quarter and nine months ended September 30, 2017, respectively. For the quarter and nine months ended September 30, 2016, interest expense includes gains on derivative instruments of $3.7 million and losses on derivative instruments of $43.0 million, respectively. |
See accompanying notes to the consolidated condensed financial statements.
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MACQUARIE INFRASTRUCTURE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
($ in Thousands)
| | | | | | | | |
| | Quarter Ended September 30, | | Nine Months Ended September 30, |
| | | 2017 | | 2016 | | 2017 | | 2016 |
| Net income | | $ | 36,173 | | | $ | 42,481 | | | $ | 94,836 | | | $ | 83,738 | |
Other comprehensive income, net of taxes:
| | | | | | | | | | | | | | | | |
| Translation adjustment(1)(2) | | | 1,641 | | | | 14 | | | | 2,738 | | | | 3,575 | |
| Other comprehensive income | | | 1,641 | | | | 14 | | | | 2,738 | | | | 3,575 | |
| Comprehensive income | | $ | 37,814 | | | $ | 42,495 | | | $ | 97,574 | | | $ | 87,313 | |
| Less: comprehensive (loss) income attributable to noncontrolling interests(2) | | | (3,922 | ) | | | 455 | | | | (7,294 | ) | | | 1,599 | |
| Comprehensive income attributable to MIC | | $ | 41,736 | | | $ | 42,040 | | | $ | 104,868 | | | $ | 85,714 | |
| | | | | | | | |
| | Quarter Ended
September 30, | | Nine Months Ended
September 30, |
| | | 2018 | | 2017 | | 2018 | | 2017 |
| Net income | | $ | 21,376 | | | $ | 36,173 | | | $ | 104,450 | | | $ | 94,836 | |
Other comprehensive income (loss), net of taxes:
| | | | | | | | | | | | | | | | |
| Translation adjustment(1) | | | 1,381 | | | | 1,641 | | | | (2,092 | ) | | | 2,738 | |
| Other comprehensive income (loss) | | | 1,381 | | | | 1,641 | | | | (2,092 | ) | | | 2,738 | |
| Comprehensive income | | $ | 22,757 | | | $ | 37,814 | | | $ | 102,358 | | | $ | 97,574 | |
| Less: comprehensive loss attributable to noncontrolling interests | | | (328 | ) | | | (3,922 | ) | | | (32,454 | ) | | | (7,294 | ) |
| Comprehensive income attributable to MIC | | $ | 23,085 | | | $ | 41,736 | | | $ | 134,812 | | | $ | 104,868 | |
| (1) | Translation adjustment is presented net of tax expense of $1.1 million$515,000 and $1.9 milliontax benefit of $802,000 for the quarter and nine months ended September 30, 2017,2018, respectively. For the quarter and nine months ended September 30, 2016,2017, translation adjustment is presented net of tax expense of $9,000$1.1 million and $1.5$1.9 million, respectively. |
| (2) | On March 31, 2016, IMTT acquired the remaining 33.3% interest in its Quebec terminal that it did not previously own. As part of this transaction, the translation adjustment of $4.6 million, net of taxes, was reclassified from noncontrolling interests to accumulated other comprehensive loss. See Note 8, “Stockholders’ Equity”, for disclosures on accumulated other comprehensive loss. |
See accompanying notes to the consolidated condensed financial statements.
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MACQUARIE INFRASTRUCTURE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
($ in Thousands)
| | | | | | | | |
| | Nine Months Ended September 30, | | Nine Months Ended
September 30, |
| | | 2017 | | 2016 | | 2018 | | 2017(1) |
Operating activities
| | | | | | | | | | | | | | | | |
| Net income | | $ | 94,836 | | | $ | 83,738 | | | $ | 104,450 | | | $ | 94,836 | |
Adjustments to reconcile net income to net cash provided by operating activities:
| | | | | | | | | | | | | | | | |
| Non-cash goodwill impairment | | | | 3,215 | | | | — | |
| Depreciation and amortization of property and equipment | | | 172,753 | | | | 172,125 | | | | 179,368 | | | | 172,753 | |
| Amortization of intangible assets | | | 50,920 | | | | 49,917 | | | | 55,470 | | | | 50,920 | |
| Amortization of debt financing costs | | | 6,464 | | | | 7,536 | | | | 7,430 | | | | 6,464 | |
| Amortization of debt discount | | | 2,377 | | | | — | | | | 2,710 | | | | 2,377 | |
| Adjustments to derivative instruments | | | 3,414 | | | | 20,022 | | | | (19,782 | ) | | | 3,414 | |
| Fees to Manager- related party | | | 54,610 | | | | 49,570 | | |
| Fees to Manager-related party | | | | 36,113 | | | | 54,610 | |
| Deferred taxes | | | 56,791 | | | | 55,126 | | | | 25,899 | | | | 56,791 | |
| Pension expense | | | 6,481 | | | | 6,512 | | | | 6,284 | | | | 6,481 | |
| Other non-cash income, net | | | (2,651 | ) | | | (2,255 | ) | |
Changes in other assets and liabilities, net of acquisitions:
| | | | | | | | | |
| Restricted cash | | | (691 | ) | | | 727 | | |
| Other non-cash expense (income), net(2) | | | | 14,359 | | | | (2,651 | ) |
Changes in other assets and liabilities, net of acquisitions/dispositions:
| | | | | | | | | |
| Accounts receivable | | | (18,938 | ) | | | (10,094 | ) | | | 6,200 | | | | (18,938 | ) |
| Inventories | | | (4,563 | ) | | | (1,047 | ) | | | (2,003 | ) | | | (4,563 | ) |
| Prepaid expenses and other current assets | | | (7,040 | ) | | | 5,967 | | | | 2,605 | | | | (7,040 | ) |
| Due to Manager-related party | | | (178 | ) | | | 21 | | | | 155 | | | | (178 | ) |
| Accounts payable and accrued expenses | | | (4,444 | ) | | | (3,365 | ) | | | 4,896 | | | | (4,444 | ) |
| Income taxes payable | | | (1,223 | ) | | | 3,848 | | | | 654 | | | | (1,223 | ) |
| Other, net | | | (11,249 | ) | | | (1,360 | ) | | | (14,970 | ) | | | (11,249 | ) |
| Net cash provided by operating activities | | | 397,669 | | | | 436,988 | | | | 413,053 | | | | 398,360 | |
Investing activities
| | | | | | | | | | | | | | | | |
| Acquisitions of businesses and investments, net of cash acquired | | | (208,377 | ) | | | (38,989 | ) | | | (12,515 | ) | | | (208,377 | ) |
| Purchases of property and equipment | | | (234,833 | ) | | | (198,151 | ) | | | (159,037 | ) | | | (234,833 | ) |
| Proceeds from insurance claim | | | — | | | | 10,002 | | |
| Loan to project developer | | | (18,675 | ) | | | — | | | | (17,800 | ) | | | (18,675 | ) |
| Loan repayment from project developer | | | 6,604 | | | | — | | | | 16,561 | | | | 6,604 | |
| Change in restricted cash | | | (6,154 | ) | | | — | | |
| Proceeds from sale of business, net of cash divested | | | | 41,038 | | | | — | |
| Other, net | | | 178 | | | | 861 | | | | 467 | | | | 179 | |
| Net cash used in investing activities | | | (461,257 | ) | | | (226,277 | ) | | | (131,286 | ) | | | (455,102 | ) |
See accompanying notes to the consolidated condensed financial statements.
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MACQUARIE INFRASTRUCTURE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS – (continued)
(Unaudited)
($ in Thousands)
| | | | | | | | |
| | Nine Months Ended
September 30, | | Nine Months Ended
September 30, |
| | | 2017 | | 2016 | | 2018 | | 2017(1) |
Financing activities
| | | | | | | | | | | | | | | | |
| Proceeds from long-term debt | | $ | 585,500 | | | $ | 370,000 | | | $ | 275,500 | | | $ | 585,500 | |
| Payment of long-term debt | | | (200,722 | ) | | | (295,950 | ) | | | (223,529 | ) | | | (200,722 | ) |
| Proceeds from the issuance of shares | | | 5,699 | | | | 7,651 | | | | — | | | | 5,699 | |
| Dividends paid to common stockholders | | | (332,867 | ) | | | (290,527 | ) | | | (292,715 | ) | | | (332,867 | ) |
| Contributions received from noncontrolling interests | | | 102 | | | | 15,431 | | | | 567 | | | | 102 | |
| Purchase of noncontrolling interest | | | — | | | | (9,909 | ) | |
| Distributions paid to noncontrolling interests | | | (2,962 | ) | | | (3,682 | ) | | | (3,028 | ) | | | (2,962 | ) |
| Offering and equity raise costs paid | | | (355 | ) | | | (678 | ) | | | (35 | ) | | | (355 | ) |
| Debt financing costs paid | | | (447 | ) | | | (1,784 | ) | | | (2,874 | ) | | | (447 | ) |
| Change in restricted cash | | | 527 | | | | 5,379 | | |
| Payment of capital lease obligations | | | (366 | ) | | | (1,151 | ) | | | (87 | ) | | | (366 | ) |
| Net cash provided by (used in) financing activities | | | 54,109 | | | | (205,220 | ) | |
| Net cash (used in) provided by financing activities | | | | (246,201 | ) | | | 53,582 | |
| Effect of exchange rate changes on cash and cash equivalents | | | 449 | | | | 494 | | | | (442 | ) | | | 449 | |
| Net change in cash and cash equivalents | | | (9,030 | ) | | | 5,985 | | |
| Cash and cash equivalents, beginning of period | | | 44,767 | | | | 22,394 | | |
| Cash and cash equivalents, end of period | | $ | 35,737 | | | $ | 28,379 | | |
| Net change in cash, cash equivalents and restricted cash | | | | 35,124 | | | | (2,711 | ) |
| Cash, cash equivalents and restricted cash, beginning of period | | | | 72,084 | | | | 61,257 | |
| Cash, cash equivalents and restricted cash, end of period | | | $ | 107,208 | | | $ | 58,546 | |
Supplemental disclosures of cash flow information
| | | | | | | | | | | | | | | | |
Non-cash investing and financing activities:
| | | | | | | | | | | | | | | | |
| Accrued equity offering costs | | $ | 97 | | | $ | 90 | | | $ | 83 | | | $ | 97 | |
| Accrued financing costs | | $ | 21 | | | $ | 548 | | | $ | — | | | $ | 21 | |
| Accrued purchases of property and equipment | | $ | 33,184 | | | $ | 31,728 | | | $ | 23,801 | | | $ | 33,184 | |
| Issuance of shares to Manager | | $ | 54,927 | | | $ | 116,373 | | | $ | 37,372 | | | $ | 54,927 | |
| Issuance of shares to independent directors | | $ | 681 | | | $ | 750 | | | $ | 750 | | | $ | 681 | |
| Issuance of shares for acquisition of business | | $ | 125,000 | | | $ | — | | | $ | — | | | $ | 125,000 | |
| Conversion of convertible senior notes to shares | | $ | 17 | | | $ | 4 | | | $ | 6 | | | $ | 17 | |
| Distributions payable to noncontrolling interests | | $ | 32 | | | $ | 10 | | | $ | 5 | | | $ | 32 | |
| Taxes paid, net | | $ | 9,810 | | | $ | 1,426 | | | $ | 10,991 | | | $ | 9,810 | |
| Interest paid | | $ | 82,108 | | | $ | 81,998 | | | $ | 91,200 | | | $ | 82,108 | |
| (1) | Conformed to current period presentation. See Note 2, “Basis of Presentation”, for Recently Issued Accounting Standards adopted during the nine months ended September 30, 2018. |
| (2) | Other non-cash expense (income), net, includes the write-down of the Company’s investment in the design-build mechanical contractor business for the nine months ended September 30, 2018. |
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated condensed balance sheets that sum to the total of the same amounts presented in the consolidated condensed statements of cash flows:
| | | | |
| | As of September 30, |
| | | 2018 | | 2017 |
| Cash and cash equivalents | | $ | 50,162 | | | $ | 35,737 | |
| Restricted cash – current | | | 41,238 | | | | 22,809 | |
| Restricted cash held for sale(3) | | | 15,808 | | | | — | |
| Total of cash, cash equivalents and restricted cash shown in the consolidated condensed statement of cash flows | | $ | 107,208 | | | $ | 58,546 | |
| (3) | Represents restricted cash related to BEC, which were classified as held for sale at September 30, 2018. See Note 2, “Basis of Presentation”, for further discussion. |
See accompanying notes to the consolidated condensed financial statements.
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MACQUARIE INFRASTRUCTURE CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Organization and Description of Business
Macquarie Infrastructure Corporation (MIC) is a Delaware corporation formed on May 21, 2015. MIC’s predecessor, Macquarie Infrastructure Company LLC, was formed on April 13, 2004. Macquarie Infrastructure Corporation, both on an individual entity basis and together with its consolidated subsidiaries, is referred to in these financial statements as the “Company” or “MIC”.
MIC is externally managed by Macquarie Infrastructure Management (USA) Inc. (the Manager), pursuant to the terms of a Management Services Agreement, that is subject to the oversight and supervision of the Boardboard of Directors.directors. The majority of the members of the Board of Directors, haveand each member of all Board Committees, is independent and has no affiliation with Macquarie. The Manager is a member of the Macquarie Group of companies comprising the Macquarie Group Limited and its subsidiaries and affiliates worldwide. Macquarie Group Limited is headquartered in Australia and is listed on the Australian StockSecurities Exchange.
The Company owns its businesses through its direct wholly-owned subsidiary MIC Ohana Corporation, the successor to Macquarie Infrastructure Company Inc. The Company owns and operates a diversified portfolio of businesses that provide services to other businesses, government agencies and individuals primarily in the U.S. The businesses it owns and operates are organized into four segments:
| • | International-Matex Tank Terminals (IMTT): a terminalling business providing bulk liquid storage, handling and other servicesterminalling to third parties at seventeen17 terminals in the U.S. and two in Canada; |
| • | Atlantic Aviation: a provider of fuel, terminal, aircraft hangaring and other services primarily to owners and operators of general aviation (GA) jet aircraft at 70 airports throughout the U.S.; |
| • | Contracted Power (CP):Power: comprising a gas-fired facility and controlling interests in wind and solar facilities in the U.S.; and |
| • | MIC Hawaii: comprising an energy company that processes and distributes gas and provides related services (Hawaii Gas), and several smaller businesses collectively engaged in efforts to reduce the cost and improve the reliability and sustainability of energy all based in Hawaii. |
Through October 12, 2018, the Company’s Contracted Power business also included a gas-fired facility. See Note 2, “Basis of Presentation”, for further information.
2. Basis of Presentation
The unaudited consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X for interim financial information. Certain information or footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for interim financial reporting. Accordingly, they do not include all of the information and notes required by GAAP 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 consolidated balance sheet at December 31, 20162017 has been derived from audited financial statements but does not include all of the information and notes required by GAAP 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, 20162017 included in the Company’s Annual Report on Form 10-K, as filed with the SEC on February 21, 2017.2018. Operating results for the quarter and nine months ended September 30, 20172018 are not necessarily indicative of the results that may be expected for the year ending December 31, 20172018 or for any future interim periods.
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MACQUARIE INFRASTRUCTURE CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
2. Basis of Presentation – (continued)
Use of Estimates
The preparation of unaudited consolidated condensed financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures related thereto at the date of the unaudited consolidated condensed financial statements and the reported amounts of revenue and expenses during the reporting period. Management evaluates these estimates and assumptions on an ongoing basis.
Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the unaudited interim consolidated condensed financial statements, which management considered in formulating its estimate, could change in the near term due to one or more future confirming events. Accordingly, the actual results could differ significantly from estimates.
Financial Instruments
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 competitive interest rates assigned to these financial instruments.
Assets and Liabilities Held for Sale — Bayonne Energy Center (BEC)
During the quarter ended March 31, 2018, the Company announced that it was exploring the potential sale of a portion or all of Bayonne Energy Center (BEC), a business within the Contracted Power segment. On July 27, 2018, the Company entered into an agreement to sell 100% of BEC to NHIP II Bayonne Holdings LLC.
At September 30, 2018, the Company classified $971.9 million as assets held for sale, of which approximately $845.0 million related to property, equipment, land and leasehold improvements, approximately $50.0 million related to intangible assets and approximately $20.0 million in goodwill, and $299.7 million as liabilities held for sale, of which $243.5 million related to total debt, on the consolidated condensed balance sheet. The sale of BEC will not qualify for discontinued operation presentation under ASC 205-20, Presentation of Financial Statements — Discontinued Operations.
On October 12, 2018, the Company concluded the sale of BEC and received cash of $657.4 million, net of the assumption of the outstanding debt balance of $243.5 million by the buyer and subject to post-closing working capital adjustments resulting in a preliminary pre-tax gain of approximately $5.0 million. Any such adjustments could result in an adjustment to the expected gain. Any adjustment is not expected to be significant. The Company incurred approximately $10.0 million in professional fees in relation to this transaction of which approximately $3.0 million has been recorded through September 30, 2018. The Company has guaranteed its subsidiary’s payment and certain post-closing indemnity obligations under the purchase agreement.
Investment Write-Down — Critchfield Pacific, Inc. (CPI)
The Company continues to review its strategic options available, including with respect to certain other, smaller businesses in its portfolio. Consistent with this, and in light of the ongoing underperformance of the design-build mechanical contractor, Critchfield Pacific, Inc. (CPI) within the MIC Hawaii segment, the Company wrote-down its investment in the business in the third quarter of 2018. In total, the Company wrote-down approximately $30.0 million, which includes fixed assets and intangible assets of approximately $9.0 million, as well as reserving for certain contract related amounts recorded in other current liabilities and other expenses. Following the quarter end, the Company commenced a sale process for CPI and have reached an agreement to sell the business for a nominal sum in a transaction that is expected to close before the end of the year.
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MACQUARIE INFRASTRUCTURE CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
2. Basis of Presentation – (continued)
Recently Issued Accounting Standards
In August 2018, the FASB issued ASU No. 2018-14,Compensation — Retirement Benefits — Defined Benefit Plans — General (Subtopic 715-20): Disclosure Framework — Changes to the Disclosure Requirements for Defined Benefit Plans. The amendments in ASU 2018-14 update disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The amendments in this update are effective for fiscal years ending after December 15, 2020. Early adoption is permitted. The Company will include appropriate disclosures related to defined benefit plans in accordance with the standard when it adopts the provisions of this ASU.
In August 2018, the FASB issued ASU No. 2018-13,Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in ASU 2018-13 update the disclosure requirements on fair value measurements, including the consideration of costs and benefits. The disclosure modifications focused on Level 3 fair value measurements, and also eliminate theat a minimum disclosure requirements. The amendments in this update are effective for annual periods beginning after December 15, 2019, and interim periods within those fiscal years. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted upon issuance of this Update. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this Update and delay adoption of the additional disclosures until their effective date. The Company is currently evaluating the impact of the adoption of this ASU.
In February 2018, the FASB issued ASU No. 2018-02, Income Statement — Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (AOCI). The amendments in ASU 2018-02 allow entities to reclassify from AOCI to retained earnings “stranded” tax effects resulting from passage of the Act. An entity that elects to reclassify these amounts must reclassify stranded tax effects related to the change in federal tax rate for all items accounted for in other comprehensive income (i.e. employee benefits, cumulative translation adjustments). Entities may also elect to reclassify other stranded tax effects that relate to the Act but do not directly relate to the change in the federal tax rate (i.e. state taxes). However, because the amendments only relate to the reclassification of the income tax effects of the Act, the underlying guidance requiring the effect of a change in tax laws or rates to be included in income from operations is not affected. Upon adoption of ASU 2018-02, entities are required to disclose their policy for releasing the income tax effects from AOCI. ASU 2018-02 is effective for annual periods beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The amendments in 2018-02 may be applied retrospectively to each period in which the effect of the Act is recognized or an entity may elect to apply the amendments in the period of adoption. The Company is currently evaluating the impact of the adoption of this ASU.
On January 26, 2017, the FASB issued ASU No. 2017-04,Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies the measurement of goodwill subsequent to a business combination, and no longer requires an entity to perform a hypothetical purchase price allocation when computing implied fair value to measure goodwill impairment. Instead, impairment will be assessed by quantifying the difference between the fair value of a reporting unit and its carrying amount. An impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value, on condition that the charge doesn’t exceed the total amount of goodwill allocated to that reporting unit. The guidance in the ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 for public issuers and shall be applied prospectively. Early adoption is permitted. The Company will evaluateadopted this ASU prospectively as parton January 1, 2018.
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MACQUARIE INFRASTRUCTURE CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
2. Basis of its goodwill impairment testing when it adopts the provisions of this ASU.Presentation – (continued)
On January 5, 2017, the FASB issued ASU No. 2017-01,Business Combinations (Topic 805): Clarifying the Definition of a Business, which provides a restrictive framework for determining whether business transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Determining whether a Companycompany acquires a set of assets or a business will impact the initial measurement, the accounting treatment of direct acquisition related costs, contingent considerations and the bargain purchase price. The guidance in the ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017 for public issuers and shall be applied prospectively. Early adoption is permitted. The Company adopted this ASU on January 1, 2018 and will evaluateapply this ASU prospectively onfor asset acquisitions and business combinations when it adopts the provisions of this ASU.combinations.
On November 17, 2016, the FASB issued ASU No. 2016-18,Statement of Cash Flows (Topic 230): Restricted Cash, which requires companies to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. This reconciliation can be presented either on the face of the statement of cash flows or in the notes to the financial statements. The guidance will be applied retrospectively and is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those years. Early adoption is permitted. The Company will include appropriate disclosures related to restricted cash in accordance withadopted this ASU on January 1, 2018 and included the standard when it adopts the provisionsretrospective application of this ASU.ASU in the accompanying consolidated condensed statement of cash flows.
On February 25, 2016, FASB issued ASU No. 2016-02,Leases (Topic 842), which requires a lessee to recognize assets and liabilities for leases with lease terms of more than 12 months. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP, which requires only capital leases to be recognized on the balance sheet, ASU 2016-02 will require all leases with an initial term greater than one year to be recognized on the balance sheet as a right-of-use asset and a lease liability.
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MACQUARIE INFRASTRUCTURE CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
2. Basis of Presentation – (continued)
The Company also serves as a lessor primarily through operating leases. The accounting for lessors is not expected to fundamentally change except for changes to conform and align existing guidance to the lessee guidance under ASU 2016-02, as well as to the new revenue recognition guidance in ASU 2014-09. ASU 2016-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is allowed. The standard is to be applied using a modified retrospective approach. approach, which includes a number of optional practical expedients. In July 2018, the FASB issued ASU 2018-11,Leases (Topic 842) Targeted Improvements, which allows lessees and lessors to recognize and measure leases at the beginning of the period of adoption without modifying the comparative period financial statements.
The Company has begun evaluatingis in the process of completing its assessment of the overall impact and is currently planning for the adoption and implementation of ASU 2016-02, including assessing the overall impact.2016-02. ASU 2016-02 will have a material impact on the Company’s consolidated balance sheets; however, the fullCompany does not expect a material impact on its consolidated statements of operations. Further, the Company does not expect the standard to the overall financial statements has not yet been determined. Thehave a material impact on the Company’s resultsaccounting and reporting requirements for existing operating leases where the Company is the lessor as it expects to elect the practical expedient whereby the Company will not separate a qualifying contract into its lease and non-lease components. While the Company is continuing to assess potential impacts of operationsthe standard, it currently expects the most significant impact will be the recognition of ROU assets and lease liabilities for operating leases with original terms of over one year where the Company is being evaluated.the lessee. The Company will adopt ASU 2016-02 as of January 1, 2019 using the modified retrospective method as of the period of adoption rather than the earliest period presented. The Company is currently in the process of executing its implementation plan by installing a lease accounting technology system, gathering lease contracts and abstracting key financial data, and finalizing design of revisions needed to its processes and internal controls. The Company is also continuing to evaluate accounting policy options under the standard, including the use of the optional practical expedients, and evaluating the impact of implementing this guidance on its consolidated financial statements.
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MACQUARIE INFRASTRUCTURE CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
3. Implementation of ASU 2014-09
The Company recognizes revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. The Company has revenue that is derived from long-term contracts and leases that can span several years. The Company accounts for revenue in accordance with ASC Topic 606, Revenue, or ASC Topic 840, Leases, depending upon the terms of the agreements. See Note 11, “Long-Term Contracted Revenue”, for further discussions and disclosures.
In May 2014, the FASB issued ASU 2014-09,Revenue from Contracts with Customers (Topic 606). The newThis guidance sets forth a five-step revenue recognition model whichthat replaces the currentprior revenue recognition guidance in its entirety andentirety. It is intended to eliminate numerous industry-specific pieces of revenue recognition guidance and requires more detailed disclosures. This ASU includes identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. To further assist with adoption and implementation of ASU 2014-09, the FASB issued and the Company considered the following ASUs:
| • | ASU 2015-14 (Issued August 2015) — Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date; |
| • | ASU 2016-08 (Issued March 2016) — Principal versus Agent Consideration (Reporting Revenue Gross versus Net); |
| • | ASU 2016-10 (Issued April 2016) — Identifying Performance Obligations and Licensing; |
| • | ASU 2016-12 (Issued May 2016) — Narrow-Scope Improvements and Practical Expedients; and |
| • | ASU 2016-20 (Issued December 2016) — Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. |
The new standard is effective forCompany adopted ASU 2014-09 during the Company on January 1, 2018.
There are two adoption methods available for implementationfirst quarter of the standard related to the recognition of revenue from contracts with customers. Under one method, the new guidance is applied retrospectively to contracts for each reporting period presented, subject to allowable practical expedients. Under the other method, referred to as2018 using the modified retrospective method, the new guidance is applied only to the most current period presented, recognizing the cumulative effect of the change to prior period amounts as anmethod. There was no adjustment to the beginning balance of retained earnings and also requires additional disclosures comparing the resultsadoption of this ASU did not have a significant impact to the previous guidance. The Company will adopt this standard using the modified retrospective method and is currently evaluating the impact that this standard will have on the Company’s consolidated financial statements andother than the changes to its systems, processes and internal controls to meet the reporting and disclosure requirements.
The Company believes key changes in the standard that impact the Company’s revenue recognition relate to the allocation of contract revenue between various services and equipment, and the timing of when those revenues are recognized. The Company is still in the process of evaluating the magnitude of these impacts and other areas of the standard and the effect on the Company’s financial statements and related disclosures. In addition, the Company currently includes sales, excise and value-added taxes related to sales transactions within revenue on the consolidated statements of operations. Upon adoption of ASU 2014-09, the Company will exclude sales-based taxes collected on behalf of third parties from service and product revenue and include these amounts in cost of services and product sales. The result will be a reclassification on the consolidated statements of operations.
ASU 2014-09 also introduces newadditional required qualitative and quantitative disclosure requirements aboutdisclosures. As part of the adoption, the Company has not elected to apply any practical expedients available under ASC Topic 606.
IMTT
Revenue from IMTT is generated from the following sources and recorded in service revenue.
Lease. These are contracts with customers includingpredominantly non-cancelable terms for access to and the use of storage capacity at the various terminals owned and operated by the business. At September 30, 2018, these contracts had a revenue weighted average remaining contract life of 2.0 years. These contracts generally require payments in exchange for the provision of storage capacity and product movement (thruput) throughout their term based on a fixed rate per barrel of capacity leased. A majority of the contracts include terms that adjust the fixed rate annually for inflation. These contracts are accounted for as operating leases and the related lease income is recognized in service revenue over the term of the contract based upon the rate specified. Revenue is recognized in accordance with ASC 840, Leases.
Other terminal services. Revenue from the provision of ancillary services includes activities such as heating, mixing, and blending, and is recognized as the related services are performed based on contract rates. Revenue from other terminal services is recognized at a point in time as services are performed. Other terminal services also include payments received prior to the related services being performed or as a reimbursement for specific fixed asset additions or improvements related to a customer’s contract and are recorded as deferred revenue and impairmentsratably recognized disaggregation of revenue and informationas revenues over the contract term.
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MACQUARIE INFRASTRUCTURE CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
2. Basis3. Implementation of PresentationASU 2014-09 – (continued)
about contract balanceOther. Other revenue is comprised primarily of environmental response service activities through the date of sale and performance obligations. Informationrailroad operations. These revenues are generally recognized at a point in time as services are performed.
Atlantic Aviation
Revenue from Atlantic Aviation is required about significant judgmentsrecorded in service revenue. Services provided by Atlantic Aviation include:
Fuel. Fuel services are recognized when fuel has been delivered to the customer, collection of the resulting receivable is probable, persuasive evidence of an arrangement exists and changesthe fee is fixed or determinable. Fuel services are recorded net of volume discounts and rebates. Revenue from fuel sales are recognized at a point in judgmentstime as services are performed.
Hangar. Hangar rentals includes both month-to-month rentals and rentals from longer term contracts. Hangar rental revenue excludes transient customer overnight hangar usage (seeOther FBO services below).
Other FBO services. Other FBO services consisting principally of de-icing services, landing, concession, transient overnight hangar usage, terminal use and fuel distribution fees that are recognized as sales of services. Revenue from these transactions is recorded based on the service fee earned and does not include the cost of fuel.
Contracted Power
BEC revenue is derived from contracts that are accounted for as operating leases that do not have minimum lease payments. This revenue is recorded within product revenue as electricity is delivered.
With respect to BEC’s contracted capacity, revenue is recognized as energy, capacity and ancillary services are sold to the off-taker under the third-party tolling agreements. The agreements are based on a fixed rate per megawatt (MW) of capacity and not subject to dispatch or utilization. A portion of the revenues under the tolling agreements are subject to annual price increases. Revenue under the tolling agreements is subject to availability of capacity (subject to a historical rolling average forced outage factor). Variable operating and major maintenance revenue under the tolling agreements is a function of net plant output and a negotiated rate, which is adjusted annually based on historical plant experience.
With respect to BEC’s residual capacity, revenue is recognized as energy, capacity and ancillary services are sold into the New York Independent System Operator (NYISO) energy market. Revenue for such services is based on prevailing market rates at the time such services are sold. Volumes of energy and ancillary services sold are subject to BEC’s market based dispatch from NYISO.
Owners of the wind and solar facilities sell substantially all of the electricity generated at a fixed price to primarily electric utility customers pursuant to long-term (typically 20 – 25 years) power purchase agreements (PPAs). Substantially all of the PPAs are accounted for as operating leases and have no minimum lease payments and all of the lease income under these leases is recorded within product revenue when the electricity is delivered.
MIC Hawaii
Revenue from Hawaii Gas is recorded in determiningproduct revenue. Hawaii Gas recognizes revenue when products are delivered. Sales of gas to customers are billed on a monthly-cycle basis. Earned but unbilled revenue is accrued and included in accounts receivable and revenue based on the timingamount of satisfactiongas that has been delivered but not billed to customers from the latest meter reading or billed delivery date to the end of performance obligations.an accounting period. The Companyrelated costs are charged to expense.
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MACQUARIE INFRASTRUCTURE CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
3. Implementation of ASU 2014-09 – (continued)
The other businesses within MIC Hawaii consist of primarily a design-build mechanical contractor focused on designing and constructing energy efficient building infrastructure and controlling interests in renewable and distributed power facilities including two facilities on Oahu. Revenue generated by the design-build mechanical contractor business is in process of evaluating what additional information will be disclosed, but expectsrecognized from long-term construction contracts (commonly referred to as the overall level of disclosures related to revenue recognition to increase.
The Company continues to evaluate its individual contracts by identifying the performance obligations included within its revenue arrangements with customerspercentage-of-completion method) and is also evaluating its method of estimatingrecorded in service revenue. PPAs at the amountrenewable facilities are accounted for as operating leases and timing of variable consideration. In addition, the Company awaitsrelated lease income is recorded in product revenues when the final resolution of certain industry-specific implementation issues in order to determine the impact, if any, this standards update will have on its consolidated financial statements. While the impact remains subject to continued review, the Company does not believe the adoption of this ASU will have a material impact on its financial condition, results of operations and cash flows.
On July 22, 2015, the FASB issued ASU No. 2015-11,Inventory (Topic 330): Simplifying the Measurement of Inventory, which changes the measurement principle for inventory from the lower of cost or market to lower of cost and net realizable value. The ASU defines net realizable value as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation”. The ASU will not apply to inventories that are measured by using either the last-in, first-out (LIFO) method or the retail inventory method. The guidance in the ASUelectricity is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The Company has adopted this ASU and it had an immaterial impact to the Company’s financial condition, results of operations and cash flows.delivered.
3.4. Income per Share
Following is a reconciliation of the basic and diluted income per share computations ($ in thousands, except share and per share data):
| | | | | | | | | | | | | | | | |
| | Quarter Ended
September 30, | | Nine Months Ended
September 30, | | Quarter Ended
September 30, | | Nine Months Ended
September 30, |
| | | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
Numerator:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income attributable to MIC | | $ | 40,095 | | | $ | 42,026 | | | $ | 102,130 | | | $ | 83,573 | | | $ | 21,704 | | | $ | 40,095 | | | $ | 136,904 | | | $ | 102,130 | |
| Interest expense attributable to 2.875% Convertible senior notes due July 2019, net of taxes | | | 1,941 | | | | 1,635 | | | | — | | | | — | | |
| Interest expense attributable to 2.875% Convertible Senior Notes due July 2019, net of taxes | | | | — | | | | 1,941 | | | | — | | | | — | |
| Diluted net income attributable to MIC | | $ | 42,036 | | | $ | 43,661 | | | $ | 102,130 | | | $ | 83,573 | | | $ | 21,704 | | | $ | 42,036 | | | $ | 136,904 | | | $ | 102,130 | |
Denominator:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Weighted average number of shares outstanding: basic | | | 83,644,806 | | | | 81,220,841 | | | | 82,743,285 | | | | 80,570,192 | | | | 85,378,088 | | | | 83,644,806 | | | | 85,095,956 | | | | 82,743,285 | |
| Dilutive effect of restricted stock unit grants | | | 9,435 | | | | 10,755 | | | | 9,515 | | | | 9,700 | | | | 20,478 | | | | 9,435 | | | | 13,257 | | | | 9,515 | |
| Dilutive effect of fees to Manager-related party | | | — | | | | 318,102 | | | | — | | | | 733,875 | | |
| Dilutive effect of 2.875% Convertible senior notes due July 2019 | | | 4,262,297 | | | | 4,200,398 | | | | — | | | | — | | |
| Dilutive effect of 2.875% Convertible Senior Notes due July 2019 | | | | — | | | | 4,262,297 | | | | — | | | | — | |
| Weighted average number of shares outstanding: diluted | | | 87,916,538 | | | | 85,750,096 | | | | 82,752,800 | | | | 81,313,767 | | | | 85,398,566 | | | | 87,916,538 | | | | 85,109,213 | | | | 82,752,800 | |
Income per share:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Basic income per share attributable to MIC | | $ | 0.48 | | | $ | 0.52 | | | $ | 1.23 | | | $ | 1.04 | | | $ | 0.25 | | | $ | 0.48 | | | $ | 1.61 | | | $ | 1.23 | |
| Diluted income per share attributable to MIC | | $ | 0.48 | | | $ | 0.51 | | | $ | 1.23 | | | $ | 1.03 | | | $ | 0.25 | | | $ | 0.48 | | | $ | 1.61 | | | $ | 1.23 | |
The effect of potentially dilutive shares for the quarter ended September 30, 2018 is calculated assuming that the 4,416 restricted stock unit grants provided to the two newly appointed independent directors on September 5, 2018 and the 19,230 restricted stock unit grants provided to the independent directors on June 7, 2018, which all will vest during the second quarter of 2019, had been fully converted into shares on those grant dates. The 2.875% Convertible Senior Notes due July 2019 and the 2.00% Convertible Senior Notes due October 2023 were anti-dilutive for the quarter ended September 30, 2018.
The effect of potentially dilutive shares for the nine months ended September 30, 2018 is calculated assuming that (i) the restricted stock unit grants totaling 4,416 restricted stock unit grants provided to the two newly appointed independent directors on September 5, 2018 and the 19,230 restricted stock unit grants provided to the independent directors on June 7, 2018, which all will vest during the second quarter of 2019, had been fully converted to shares on those grant dates; and (ii) the 9,435 restricted stock unit grants provided to the independent directors on May 17, 2017, which vested during the second quarter of 2018, had been fully converted to shares on the grant date. The 2.875% Convertible Senior Notes due July 2019 and 2.00% Convertible Senior Notes due October 2023 were anti-dilutive for the nine months ended September 30, 2018.
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
3.4. Income per Share – (continued)
The effect of potentially dilutive shares for the quarter ended September 30, 2017 is calculated assuming that (i) the restricted stock unit grants totaling 9,435 provided to the independent directors on May 17, 2017, which will vestvested during the second quarter of 2018, had been fully converted to shares on the grant date; and (ii) the 2.875% Convertible Senior Notes due July 2019 had been fully converted into shares on the date of issuance. The 2.00% Convertible Senior Notes due October 2023 were anti-dilutive for the quarter ended September 30, 2017.
The effect of potentially dilutive shares for the nine months ended September 30, 2017 is calculated assuming that (i) the restricted stock unit grants totaling 9,435 provided to the independent directors on May 17, 2017, which will vestvested during the second quarter of 2018, had been fully converted into shares on the grant date; and (ii) the 8,604 restricted stock unit grants (net of 2,151 restricted stock unit grants forfeited on September 30, 2016) provided to the independent directors on May 18, 2016 and restricted stock units grants of 991 provided to a new independent director on November 1, 2016, which vested during the second quarter of 2017, had been fully converted to shares on those grant dates. The 2.00% Convertible Senior Notes due October 2023 and the 2.875% Convertible Senior Notes due July 2019 were anti-dilutive for the nine months ended September 30, 2017.
The effect of potentially dilutive shares for the quarter ended September 30, 2016 is calculated assuming that (i) the restricted stock units grants totaling 10,755 provided to the independent directors on May 18, 2016 (of which 2,151 restricted stock unit grants were subsequently forfeited on September 30, 2016), which vested during the second quarter of 2017, had been fully converted to shares on the grant date; (ii) the $67.8 million of performance fee for the quarter ended June 30, 2015, which was reinvested in shares by the Manager on August 1, 2016, had been reinvested in shares by the Manager in July 2015; and (iii) the 2.875% Convertible Senior Notes due July 2019 had been fully converted into shares on that date of issuance.
The effect of potentially dilutive shares for the nine months ended September 30, 2016 is calculated assuming that (i) the restricted stock units grants totaling 10,755 provided to the independent directors on May 18, 2016 (of which 2,151 restricted stock unit grants were subsequently forfeited on September 30, 2016), which vested during the second quarter of 2017, had been fully converted to shares on the grant date; (ii) the 8,660 restricted stock unit grants provided to the independent directors on June 18, 2015, which vested during the second quarter of 2016, had been fully converted to shares on the grant date; and (iii) the $67.8 million of performance fee for the quarter ended June 30, 2015, which was reinvested in shares by the Manager on August 1, 2016, had been reinvested in shares by the Manager in July 2015. The 2.875% Convertible Senior Notes due July 2019 were anti-dilutive for the nine months ended September 30, 2016.
The following represents the weighted average potential dilutive shares of common stock that were excluded from the diluted income per share calculation:
| | | | | | | | |
| | Quarter Ended
September 30, | | Nine Months Ended
September 30, |
| | | 2017 | | 2016 | | 2017 | | 2016 |
| 2.875% Convertible senior notes due July 2019 | | | — | | | | — | | | | 4,237,753 | | | | 4,168,454 | |
| 2.00% Convertible senior notes due October 2023 | | | 3,608,218 | | | | — | | | | 3,603,742 | | | | — | |
| Total | | | 3,608,218 | | | | — | | | | 7,841,495 | | | | 4,168,454 | |
| | | | | | | | |
| | Quarter Ended
September 30, | | Nine Months Ended
September 30, |
| | | 2018 | | 2017 | | 2018 | | 2017 |
| 2.875% Convertible Senior Notes due July 2019 | | | 4,381,499 | | | | — | | | | 4,363,806 | | | | 4,237,753 | |
| 2.00% Convertible Senior Notes due October 2023 | | | 3,634,173 | | | | 3,608,218 | | | | 3,631,068 | | | | 3,603,742 | |
| Total | | | 8,015,672 | | | | 3,608,218 | | | | 7,994,874 | | | | 7,841,495 | |
5. Property, Equipment, Land and Leasehold Improvements
Property, equipment, land and leasehold improvements at September 30, 2018 and December 31, 2017 consisted of the following ($ in thousands):
| | | | |
| | September 30,
2018(1) | | December 31,
2017 |
| Land | | $ | 319,266 | | | $ | 339,148 | |
| Easements | | | 131 | | | | 131 | |
| Buildings | | | 39,933 | | | | 41,776 | |
| Leasehold and land improvements | | | 748,593 | | | | 834,241 | |
| Machinery and equipment | | | 3,486,263 | | | | 4,092,624 | |
| Furniture and fixtures | | | 41,956 | | | | 39,386 | |
| Construction in progress | | | 136,514 | | | | 246,422 | |
| | | | 4,772,656 | | | | 5,593,728 | |
| Less: accumulated depreciation | | | (1,019,365 | ) | | | (934,114 | ) |
| Property, equipment, land and leasehold improvements, net | | $ | 3,753,291 | | | $ | 4,659,614 | |
| (1) | Property, equipment, land and leasehold improvements excludes assets related to BEC, which were classified as held for sale at September 30, 2018. See Note 2, “Basis of Presentation”, for further discussion. |
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
4. Property, Equipment, Land6. Intangible Assets and Leasehold ImprovementsGoodwill
Property, equipment, land and leasehold improvementsIntangible assets at September 30, 20172018 and December 31, 20162017 consisted of the following ($ in thousands):
| | | | |
| | September 30,
2017 | | December 31,
2016 |
| Land | | $ | 315,025 | | | $ | 304,240 | |
| Easements | | | 131 | | | | 131 | |
| Buildings | | | 43,670 | | | | 41,711 | |
| Leasehold and land improvements | | | 811,245 | | | | 673,122 | |
| Machinery and equipment | | | 3,945,737 | | | | 3,764,553 | |
| Furniture and fixtures | | | 38,654 | | | | 35,454 | |
| Construction in progress | | | 333,028 | | | | 233,184 | |
| | | | 5,487,490 | | | | 5,052,395 | |
| Less: accumulated depreciation | | | (875,857 | ) | | | (705,859 | ) |
| Property, equipment, land and leasehold improvements, net | | $ | 4,611,633 | | | $ | 4,346,536 | |
2017 Acquisitions
During the nine months ended September 30, 2017, the Company invested approximately $335.0 million in acquisitions primarily consisting of seven bulk liquid storage terminals, two fixed based operations (FBOs) and construction in progress solar facilities. The Company treated these as business combinations and substantially all of the purchase price was preliminarily allocated to property, equipment, land and leasehold improvements of approximately $195.0 million, intangible assets of approximately $90.0 million and goodwill of approximately $50.0 million, all of which are tax deductible. The purchase price allocation for these acquisitions is preliminary and will be finalized within twelve months of the respective acquisition dates. The pro forma effects of these acquisitions are not material.
5. Intangible Assets and Goodwill
Intangible assets at September 30, 2017 and December 31, 2016 consisted of the following ($ in thousands):
| | | | | | | | |
| | September 30,
2017 | | December 31, 2016 | | September 30,
2018(1) | | December 31,
2017 |
| Contractual arrangements | | $ | 976,528 | | | $ | 912,728 | | | $ | 932,219 | | | $ | 989,228 | |
| Non-compete agreements | | | 10,014 | | | | 10,014 | | | | 14,014 | | | | 14,014 | |
| Customer relationships | | | 378,323 | | | | 348,678 | | | | 353,520 | | | | 361,623 | |
| Leasehold rights | | | 350 | | | | 350 | | | | 350 | | | | 350 | |
| Trade names | | | 16,091 | | | | 16,091 | | | | 16,091 | | | | 16,091 | |
| Technology | | | 8,760 | | | | 8,760 | | | | 8,760 | | | | 8,760 | |
| | | | 1,390,066 | | | | 1,296,621 | | | | 1,324,954 | | | | 1,390,066 | |
| Less: accumulated amortization | | | (458,633 | ) | | | (407,650 | ) | | | (511,606 | ) | | | (475,968 | ) |
| Intangible assets, net | | $ | 931,433 | | | $ | 888,971 | | | $ | 813,348 | | | $ | 914,098 | |
See Note 4, “Property, Equipment, Land and Leasehold Improvements”, for discussion on intangible assets and goodwill acquired during the nine months ended September 30, 2017.
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
5. Intangible Assets and Goodwill – (continued)
| (1) | Intangible assets excludes assets related to BEC, which were classified as held for sale at September 30, 2018. See Note 2, “Basis of Presentation”, for further discussion. |
The goodwill balance as of September 30, 20172018 is comprised of the following ($ in thousands):
| | |
| Goodwill acquired in business combinations, net of disposals, at December 31, 2016 | | $ | 2,149,894 | |
| Accumulated impairment charges | | | (123,200 | ) |
| Other | | | (2,285 | ) |
| Balance at December 31, 2016 | | | 2,024,409 | |
| Goodwill related to 2017 acquisitions | | | 50,881 | |
| Other | | | 675 | |
| Balance at September 30, 2017 | | $ | 2,075,965 | |
| | |
| Goodwill acquired in business combinations, net of disposals, at December 31, 2017 | | $ | 2,193,478 | |
| Accumulated impairment charges | | | (123,200 | ) |
| Other | | | (1,610 | ) |
| Balance at December 31, 2017 | | | 2,068,668 | |
| Goodwill impairment | | | (3,215 | ) |
| Other | | | (25 | ) |
| Reclassification to assets held for sale(1) | | | (21,628 | ) |
| Balance at September 30, 2018 | | $ | 2,043,800 | |
| (1) | Goodwill classified as held for sale related to BEC. See Note 2, “Basis of Presentation” for further discussion. |
The Company tests for goodwill impairment at the reporting unit level on an annual basis on October 1st of each year and between annual tests if a triggering event indicates impairment. There were noThe Company continuously monitors events which could trigger an interim impairment analysis, such as changing business conditions and industry and other economic factors. The Company experienced a sustained decline in market capitalization since February 2018, and during the third quarter of 2018, the Company concluded a sustained decline in its market capitalization had occurred, leading to the determination that a triggering events indicatingevent had occurred for all reporting units.
The Company performed an interim impairment for the nine months endedanalysis using financial information through September 30, 2017.2018 and forecasts for cash flows developed using the Company's strategic plan. The impairment analysis was performed using both the market and income approaches and weighting them based on their application to the reporting units. The interim impairment review was performed across all reporting units. As a result of this evaluation, the fair value of each of the Company’s reporting units exceeded the carrying value and no impairment was recorded.
At September 30, 2018, the fair value exceeded book value by $2.2 billion, or approximately 36.0%, primarily from Atlantic Aviation, by approximately $2.0 billion, and Hawaii Gas, by approximately $250.0 million. IMTT’s fair value at September 30, 2018 exceeded the book value by approximately $20.0 million.
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
6. Intangible Assets and Goodwill – (continued)
The fair value of IMTT was impacted by the recent decline in short-term earnings related to the non-renewal of certain contracts for heavy and residual oil. The non-renewal of these contracts, or the renewal at lower rates, is partially attributable to changes in trade flows.
Unfavorable fluctuations in the discount rate or declines in forecasted storage revenues and margins could result in an impairment on IMTT. A 0.25% increase to the discount rate would change the valuation of IMTT by approximately $80.0 million. Any increase in discount rate, in conjunction with any decrease to the long-term projections in cash flows for IMTT will negatively affect the current valuations. Due to the inherent uncertainties involved in making the estimates and assumptions used in the fair value analysis, actual results may differ, which could alter the fair value of the reporting units, and possibly result in impairment charges in future periods. The Company will continue to evaluate the fair value of goodwill through the fourth quarter of fiscal year 2018 for any potential impairment.
6.7. Long-Term Debt
At September 30, 20172018 and December 31, 2016,2017, the Company’s consolidated long-term debt balance comprised of the following ($ in thousands):
| | | | | | | | |
| | September 30,
2017 | | December 31,
2016 | | September 30,
2018(1) | | December 31,
2017 |
| IMTT | | $ | 1,365,975 | | | $ | 1,140,975 | | | $ | 1,325,975 | | | $ | 1,318,975 | |
| Atlantic Aviation | | | 476,004 | | | | 449,691 | | | | 666,000 | | | | 648,000 | |
| CP | | | 584,417 | | | | 604,862 | | |
| Contracted Power | | | | 313,154 | | | | 576,558 | |
| MIC Hawaii | | | 199,649 | | | | 200,744 | | | | 213,160 | | | | 199,282 | |
| MIC Corporate | | | 884,090 | | | | 726,730 | | | | 909,180 | | | | 873,477 | |
| Total | | | 3,510,135 | | | | 3,123,002 | | | | 3,427,469 | | | | 3,616,292 | |
| Current portion | | | (48,335 | ) | | | (40,016 | ) | | | (392,903 | ) | | | (50,835 | ) |
| Long-term portion | | | 3,461,800 | | | | 3,082,986 | | | | 3,034,566 | | | | 3,565,457 | |
Unamortized deferred financing costs(1)(2) | | | (37,024 | ) | | | (43,020 | ) | | | (25,558 | ) | | | (35,146 | ) |
| Long-term portion less unamortized debt discount and deferred financing costs | | $ | 3,424,776 | | | $ | 3,039,966 | | | $ | 3,009,008 | | | $ | 3,530,311 | |
| (1) | Excludes the current and long-term portion of debt related to BEC, which were classified as held for sale at September 30, 2018. See Note 2, “Basis of Presentation”, for further discussion. |
| (2) | The weighted average remaining life of the deferred financing costs at September 30, 20172018 was 5.75.3 years. |
TheAt September 30, 2018, the total undrawn capacity on the revolving credit facilities was $971.0$930.5 million at September 30, 2017.excluding letters of credit outstanding of $37.8 million.
MIC Corporate
Senior Secured Revolving Credit Facility
In September 2017,On January 3, 2018, the Company drew down $155.0completed the refinancing and upsizing of its senior secured revolving credit facility to $600.0 million and extended the maturity through January 3, 2022.
At September 30, 2018 and December 31, 2017, MIC had $176.5 million and $143.5 million, respectively, outstanding on its senior secured revolving credit facility. During the nine months ended September 30, 2018, MIC borrowed $205.5 million for general corporate purposes resulting in an undrawn capacity of $255.0 million. The $155.0and repaid $172.5 million remained outstanding aton its revolving credit facility. At September 30, 2017. There were no amounts outstanding2018, the undrawn balance on the senior secured revolving credit facility at December 31, 2016.was $423.5 million. In October 2017,2018, using the proceeds from the BEC sale, the Company repaid $10.0$150.0 million on the outstanding balance on its revolving credit facility.
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
6.7. Long-Term Debt – (continued)
2.875% Convertible Senior Notes due July 2019
At September 30, 20172018 and December 31, 2016,2017, the Company had $350.0 million aggregate principal outstanding on its five-year, 2.875% convertible senior notes due July 2019. On July 15, 2018, the Company reclassified these notes due July 2019 to current portion of long-term debt. At September 30, 2017,2018, the fair value of these convertible senior notes was approximately $372.2$348.0 million. These convertible senior notes fall within Level 1 of the fair value hierarchy.
On July 15, 2017,2018, the Company increased the conversion rate to 12.294612.5258 shares of common stock per $1,000 principal amount. The adjustment was made, in accordance with the indenture governing the senior notes, on the anniversary of the convertible senior notes issuance and reflects the impact of dividends paid by the Company.
2.00% Convertible Senior Notes due October 2023
At September 30, 20172018 and December 31, 2016,2017, the Company had $379.1$375.2 million and $376.8$371.4 million, respectively, outstanding on its seven year, 2.00% convertible senior notes due October 2023. At September 30, 2017,2018, the fair value of the liability component of these convertible senior notes was approximately $368.1$345.0 million. These convertible senior notes fall within Level 1 of the fair value hierarchy.
On October 13, 2017,2018, the Company increased the conversion rate to 8.97139.0290 shares of common stock per $1,000 principal amount. The adjustment was made, in accordance with the indenture governing the senior notes, on the anniversary of the convertible senior notes issuance and reflects the impact of dividends paid by the Company.
The 2.00% Convertible Senior Notes due October 2023 consisted of the following ($ in thousands):
| | | | | | | | |
| | September 30,
2017 | | December 31,
2016 | | September 30,
2018 | | December 31,
2017 |
Liability Component:
| | | | | | | | | | | | | | | | |
| Principal | | $ | 402,500 | | | $ | 402,500 | | | $ | 402,500 | | | $ | 402,500 | |
| Unamortized debt discount | | | (23,364 | ) | | | (25,741 | ) | | | (19,765 | ) | | | (22,475 | ) |
| Long-term debt, net of unamortized debt discount | | | 379,136 | | | | 376,759 | | | | 382,735 | | | | 380,025 | |
| Unamortized deferred financing costs | | | (9,019 | ) | | | (9,934 | ) | | | (7,515 | ) | | | (8,643 | ) |
| Net carrying amount | | $ | 370,117 | | | $ | 366,825 | | | $ | 375,220 | | | $ | 371,382 | |
| Equity Component | | $ | 26,748 | | | $ | 26,748 | | | $ | 26,748 | | | $ | 26,748 | |
For the quarterquarters and nine months ended September 30, 2018 and 2017, total interest expense recognized related to the 2.00% Convertible Senior Notes due October 2023 consisted of the following ($ in thousands):
| | | | | | | | | |
| | | | | | Quarter Ended
September 30, | | Nine Months Ended
September 30, |
| | Quarter
Ended
September 30,
2017 | | Nine Months
Ended
September 30,
2017 | | 2018 | | 2017 | | 2018 | | 2017 |
| Contractual interest expense | | $ | 2,012 | | | $ | 5,769 | | | $ | 2,013 | | | $ | 2,012 | | | $ | 6,038 | | | $ | 5,769 | |
| Amortization of debt discount | | | 882 | | | | 2,377 | | | | 910 | | | | 882 | | | | 2,710 | | | | 2,377 | |
| Amortization of deferred financing costs | | | 376 | | | | 1,133 | | | | 376 | | | | 376 | | | | 1,128 | | | | 1,133 | |
| Total interest expense | | $ | 3,270 | | | $ | 9,279 | | | $ | 3,299 | | | $ | 3,270 | | | $ | 9,876 | | | $ | 9,279 | |
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
7. Long-Term Debt – (continued)
IMTT
At September 30, 20172018 and December 31, 2016,2017, IMTT had $257.0$217.0 million and $32.0$210.0 million outstanding on its revolving credit facilities, respectively. During the nine months ended September 30, 2017,2018, IMTT drew down $271.0borrowed $17.0 million primarily for general corporate purposes and repaid $46.0$10.0 million on its USD revolving credit facility. At September 30, 2018, the undrawn portion on its USD revolving credit facility and CAD revolving credit facility were $333.0 million and $50.0 million, respectively. In October 2018, using the proceeds from the BEC sale and cash on hand, the Company repaid in full the outstanding balance of $217.0 million on the IMTT revolving credit facility.
At September 30, 2018, IMTT had $600.0 million of fixed rate senior notes outstanding. At September 30, 2018, the fair value of the senior notes was approximately $585.0 million. The senior notes fall within Level 1 of the fair value hierarchy.
Atlantic Aviation
At September 30, 2018 and December 31, 2017, Atlantic Aviation had $291.0 million and $258.0 million outstanding on its revolving credit facility, respectively. During the nine months ended September 30, 2018, Atlantic Aviation borrowed $33.0 million on its revolving credit facility primarily to fund an on-field consolidation of an FBO and for general corporate purposes. At September 30, 2018, the undrawn portion on its revolving credit facility was $59.0 million. In October 2018, using the proceeds from the BEC sale and cash on hand, the Company repaid in full the outstanding balance of $291.0 million on the Atlantic Aviation revolving credit facility.
Contracted Power
At September 30, 2018, Contracted Power had $180.9 million of fixed rate term loans outstanding. At September 30, 2018, the fair value of the term loans was approximately $180.0 million. The term loans fall within Level 2 of the fair value hierarchy.
On September 30, 2018, the current and long-term portion of debt related to BEC was classified as held for sale on the consolidated condensed balance sheet. See Note 2, “Basis of Presentation”, for further discussion. On October 12, 2018, the Company concluded the sale of BEC and received cash of $657.4 million, net of the assumption of the outstanding debt balance of $243.5 million by the buyer and subject to post-closing working capital adjustments.
MIC Hawaii
In February 2018, Hawaii Gas exercised the second of two one-year extensions related to its $80.0 million secured term loan facility and its $60.0 million revolving credit facility extending their respective maturities to February 2023.
At September 30, 2018, Hawaii Gas had $15.0 million outstanding on its revolving credit facility. At December 31, 2017, Hawaii Gas’ revolving credit facility was undrawn. During the nine months ended September 30, 2018, Hawaii Gas borrowed $20.0 million for general corporate purposes and repaid $5.0 million on its revolving credit facility. At September 30, 2018, the undrawn portion on its revolving credit facility was $45.0 million. In October 2018, using the proceeds from the BEC sale and cash on hand, the Company repaid in full the outstanding balance of $15.0 million on the Hawaii Gas revolving credit facility.
At September 30, 2018, Hawaii Gas had $100.0 million of fixed rate senior notes outstanding, which approximates the fair value. The senior notes fall within Level 1 of the fair value hierarchy.
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
6.7. Long-Term Debt – (continued)
corporate purposes.During the quarters ended March 31, 2018 and June 30, 2018, Hawaii Gas was not in compliance with certain credit agreement provisions. During the quarter ended September 30, 2018, the business received waivers from its syndicate of lenders relating to the non-compliance. At September 30, 2017, the undrawn portion on its USD revolving credit facility and CAD revolving credit facility were $293.0 million and $50.0 million, respectively.
Atlantic Aviation
At September 30, 2017 and December 31, 2016, Atlantic Aviation had $82.0 million and $48.0 million outstanding on its revolving credit facility, respectively. During the nine months ended September 30, 2017, Atlantic Aviation drew down $154.5 million and repaid $120.5 million on its revolving credit facility primarily to fund an FBO acquisition and for general corporate purposes. At September 30, 2017, the undrawn portion on its revolving credit facility was $268.0 million.
MIC Hawaii
In February 2017,2018, Hawaii Gas exercised the first of two one-year extensions related towas again in compliance with its $80.0 million secured term loan facility andcredit agreement having received waivers from its $60.0 million revolving credit facility. The maturities have been extended to February 2022 and no changes were made to any other terms.lenders.
7.8. Derivative Instruments and Hedging Activities
Interest Rate Contracts
The Company and certain of 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 agreements, primarily using interest rate swaps and from time to time using interest rate caps, to manage fluctuations in cash flows resulting from interest rate risk on a portion of its debt with a variable-rate component. Interest rate swaps change the variable-rate cash flow exposure on the debt obligations to fixed cash flows. Under the terms of the interest rate swaps, the Company receives variable interest rate payments and makes fixed interest rate payments, thereby creating the equivalent of fixed-rate debt for the portion of the debt that is swapped.
At September 30, 2017,2018, the Company had $3.5$3.4 billion of current and long-term debt, of which $1.4$1.1 billion was economically hedged with interest rate contracts, $1.6 billion was fixed rate debt and $493.9$758.7 million was unhedged. The Company does not use hedge accounting. All movements in the fair value of the interest rate derivatives are recorded directly through earnings.
Commodity Price Hedges
The risks associated with fluctuations in the prices that Hawaii Gas, a business within the MIC Hawaii reportable segment, pays for propane is principally a result of market forces reflecting changes in supply and demand for propane and other energy commodities. Hawaii Gas’ gross margin (revenue less cost of product sales excluding depreciation and amortization) is sensitive to changes in propane supply costs and Hawaii Gas may not always be able to pass through product cost increases fully or on a timely basis, particularly when product costs rise rapidly. In order to reduce the volatility of the business’ propane market price risk, Hawaii Gas has used and expects to continue to use over-the-counter commodity derivative instruments including price swaps. Hawaii Gas does not use commodity derivative instruments for speculative or trading purposes. Over-the-counter derivative commodity instruments used by Hawaii Gas to hedge forecasted purchases of propane are generally settled at expiration of the contract.
TABLE OF CONTENTS
MACQUARIE INFRASTRUCTURE CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
7. Derivative Instruments and Hedging Activities – (continued)
Financial Statement Location Disclosure for Derivative Instruments
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 utilizeuse primarily observable (level 2) inputs, including contractual terms, interest rates and yield curves observable at commonly quoted intervals.
TABLE OF CONTENTS
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
8. Derivative Instruments and Hedging Activities – (continued)
The Company’s fair value measurements of its derivative instruments and the related location of the assets and liabilities within the consolidated condensed balance sheets at September 30, 20172018 and December 31, 20162017 were ($ in thousands):
| | | | | | | | |
| | Assets (Liabilities) at Fair Value | |
| Balance Sheet Location | | | Assets (Liabilities) at Fair Value |
| | September 30,
2017 | | December 31,
2016 | | September 30,
2018(1) | | December 31,
2017 |
| Fair value of derivative instruments – current assets | | $ | 8,675 | | | $ | 5,514 | | | $ | 17,510 | | | $ | 11,965 | |
| Fair value of derivative instruments – noncurrent assets | | | 18,743 | | | | 30,781 | | | | 26,958 | | | | 24,455 | |
| Total derivative contracts – assets | | $ | 27,418 | | | $ | 36,295 | | | $ | 44,468 | | | $ | 36,420 | |
| Fair value of derivative instruments – current liabilities | | $ | (3,992 | ) | | $ | (9,297 | ) | | $ | (534 | ) | | $ | (1,710 | ) |
| Fair value of derivative instruments – noncurrent liabilities | | | (5,807 | ) | | | (5,966 | ) | | | (1,174 | ) | | | (4,668 | ) |
| Total derivative contracts – liabilities | | $ | (9,799 | ) | | $ | (15,263 | ) | | $ | (1,708 | ) | | $ | (6,378 | ) |
| (1) | Fair value of derivative instruments excludes assets related to BEC, which were classified as held for sale at September 30, 2018. See Note 2, “Basis of Presentation”, for further discussion. |
The Company’s hedging activities for the quarters and nine months ended September 30, 20172018 and 20162017 and the related location within the consolidated condensed statements of operations were ($ in thousands):
| | | | | | | | | | | | | | | | |
| | Amount of (Loss) Gain Recognized in Consolidated
Condensed Statements of Operations | | Amount of Gain (Loss) Recognized in Consolidated
Condensed Statements of Operations |
| | | Quarter Ended
September 30, | | Nine Months Ended
September 30, | | Quarter ended
September 30, | | Nine Months Ended
September 30, |
| Financial Statement Account | | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
| Interest expense – interest rate caps | | $ | (219 | ) | | $ | — | | | $ | (2,888 | ) | | $ | — | | | $ | 1,469 | | | $ | (219 | ) | | $ | 8,470 | | | $ | (2,888 | ) |
| Interest expense – interest rate swaps | | | 57 | | | | 3,736 | | | | (4,051 | ) | | | (42,992 | ) | | | 3,260 | | | | 57 | | | | 17,294 | | | | (4,051 | ) |
| Cost of product sales – commodity swaps | | | 5,769 | | | | (114 | ) | | | 2,154 | | | | 6,139 | | | | 2,695 | | | | 5,769 | | | | 3,497 | | | | 2,154 | |
| Total | | $ | 5,607 | | | $ | 3,622 | | | $ | (4,785 | ) | | $ | (36,853 | ) | | $ | 7,424 | | | $ | 5,607 | | | $ | 29,261 | | | $ | (4,785 | ) |
All of the Company’s derivative instruments are collateralized by the assets of the respective businesses.
8.9. Stockholders’ Equity
2016 Omnibus Employee Incentive Plan
On May 18, 2016, the Company adopted the 2016 Omnibus Employee Incentive Plan (Plan). The Plan provides for the issuance of equity awards covering up to 500,000 shares of common stock to attract, retain, and motivate employees, consultants and others who perform services for the Company and its subsidiaries. Under the Plan, the Compensation Committee determines the persons who will receive awards, the time at which they are granted and the terms of the awards. Type of awards include stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalent rights, cash-based awards and other stock-based awards. At September 30, 2017,2018, there were no awards outstanding under this Plan.
Shelf Registration Statement Renewal
On April 5, 2016, the Company filed an automatic shelf registration statement on Form S-3 (shelf) with the SEC to issue and sell an indeterminate amount of its common stock, preferred stock and debt securities in one or more future offerings.
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
8.9. Stockholders’ Equity – (continued)
At the Market (ATM) Program
On June 24, 2015, the Company entered into an equity distribution agreement providing for the sale by the Company, from time to time, of shares of its common stock having an aggregate gross offering price of up to $400.0 million. Sales of shares may be made in privately negotiated transactions and/or any other method permitted by law, including sales deemed to be an “at the market” offering, which includes sales made directly on the New York Stock Exchange or sales made to or through a market maker other than on an exchange. Under the terms of the equity distribution agreement, the Company may also sell shares to any sales agent as principal for its own account. The Company is under no obligation to sell shares under the ATM Program. From inception, the Company has sold 188,592 shares of common stock pursuant to the agreement for net proceeds of $15.4 million (net of commissions and fees).
MIC Direct
The Company maintains a dividend reinvestment/direct stock purchase program, named “MIC Direct”, that allows for the issuance of up to 1.0 million additional shares of common stock to participants in this program. At September 30, 2017, 897,205 shares remained unissued under MIC Direct. The Company may also choose to fill requests for reinvestment of dividends or share purchases through MIC Direct via open market purchases.
Accumulated Other Comprehensive Loss
The following represents the changes and balances to the components of accumulated other comprehensive loss for the nine months ended September 30, 20172018 and 20162017 ($ in thousands):
| | | | | | | | | | | | | | | | |
| | Post-Retirement
Benefit Plans,
net of taxes | | Translation
Adjustment,
net of taxes(1) | | Total
Accumulated
Other
Comprehensive
Loss,
net of taxes | | Noncontrolling
Interests | | Total
Stockholders’
Accumulated
Other
Comprehensive
Loss,
net of taxes | | Post-Retirement
Benefit Plans, net
of taxes | | Translation
Adjustment, net
of taxes(1) | | Total Stockholders’
Accumulated Other
Comprehensive
Loss, net of taxes |
| Balance at December 31, 2015 | | $ | (14,788 | ) | | $ | (14,530 | ) | | $ | (29,318 | ) | | $ | 6,023 | | | $ | (23,295 | ) | |
| Translation adjustment | | | — | | | | 3,575 | | | | 3,575 | | | | (1,434 | ) | | | 2,141 | | |
| Purchase of noncontrolling interest(2) | | | — | | | | — | | | | — | | | | (4,589 | ) | | | (4,589 | ) | |
| Balance at September 30, 2016 | | $ | (14,788 | ) | | $ | (10,955 | ) | | $ | (25,743 | ) | | $ | — | | | $ | (25,743 | ) | |
| Balance at December 31, 2016 | | $ | (16,805 | ) | | $ | (12,155 | ) | | $ | (28,960 | ) | | $ | — | | | $ | (28,960 | ) | | $ | (16,805 | ) | | $ | (12,155 | ) | | $ | (28,960 | ) |
| Translation adjustment | | | — | | | | 2,738 | | | | 2,738 | | | | — | | | | 2,738 | | | | — | | | | 2,738 | | | | 2,738 | |
| Balance at September 30, 2017 | | $ | (16,805 | ) | | $ | (9,417 | ) | | $ | (26,222 | ) | | $ | — | | | $ | (26,222 | ) | | $ | (16,805 | ) | | $ | (9,417 | ) | | $ | (26,222 | ) |
| Balance at December 31, 2017 | | | $ | (20,456 | ) | | $ | (9,537 | ) | | $ | (29,993 | ) |
| Translation adjustment | | | | — | | | | (2,092 | ) | | | (2,092 | ) |
| Balance at September 30, 2018 | | | $ | (20,456 | ) | | $ | (11,629 | ) | | $ | (32,085 | ) |
| (1) | Translation adjustment is presented net of tax benefit of $802,000 and net of tax expense of $1.9 million and $1.5 million for the nine months ended September 30, 20172018 and 2016,2017, respectively. |
| (2) | On March 31, 2016, IMTT acquired the remaining 33.3% interest in its Quebec terminal that it did not previously own. As part of this transaction, the translation adjustment of $4.6 million, net of taxes, was reclassified from noncontrolling interests to accumulated other comprehensive loss. |
9.10. Reportable Segments
At September 30, 2017,2018, the Company’s businesses consisted of four reportable segments: IMTT, Atlantic Aviation, CPContracted Power and MIC Hawaii.
IMTT
IMTT provides bulk liquid storage, handling and other services in North America through seventeen terminals located in the United States, one terminal in Quebec, Canada and one partially owned terminal in
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MACQUARIE INFRASTRUCTURE CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
9. Reportable Segments – (continued)
Newfoundland, Canada. IMTT derives the majority of its revenue from storage and handling of petroleum products, various chemicals, renewable fuels, and vegetable and animaltropical oils. Based on storage capacity, IMTT operates one of the largest third-party bulk liquid terminals businesses in the United States. Revenue from IMTT is included in service revenue.
Atlantic Aviation
Atlantic Aviation derives the majority of its revenue from fuel delivery services and from other airport services, including de-icing and aircraft hangar rental. All of the revenue of Atlantic Aviation is generated at airports in the U.S. The business currently operates at 70 airports. Revenue from Atlantic Aviation is included in service revenue.
CPContracted Power
At September 30, 2017,2018, the CPContracted Power business segment has controlling interests in seven utility-scale solar photovoltaic facilities, two wind facilities and 100% ownership of a gas-fired facility that are in operations in the United States. Revenue from the wind, solar and gas-fired power facilities are included in product revenue.
The wind and solar facilities that are operational at September 30, 20172018 have an aggregate generating capacity of 345 megawatt (MW) of wholesale electricity to utilities. TheseRevenue from the wind, solar and gas-fired power facilities sell substantially all of the electricity generated, subject to agreed upon pricing formulas, to electric utilities pursuant to long-term (typically 20 – 25 years) power purchase agreements (PPAs). All of the PPAs are accounted for as operating leases, have no minimum lease payments and all of the rental income under these leases are recorded withinincluded in product revenue when the electricity is delivered at rates stipulated in the respective PPAs.revenue.
These projects are held in LLCs, and are treated as partnerships for income tax purposes, with co-investors. The acquisition price on these projects can vary depending on, among other things, factors such as the size of the project, PPA terms, eligibility for tax incentives, debt package, operating cost structure and development stage. A completed project takes out all of the construction risk, testing and costs associated with construction contracts.
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
10. Reportable Segments – (continued)
The Company has certain rights to make decisions over the management and operations of these wind and solar facilities. The Company has determined that it is appropriate to consolidate these projects, with the co-investors’ interest reflected asnoncontrollingNoncontrolling interests in the consolidated condensed financial statements.
TheThrough October 12, 2018, the Company ownsowned 100% of Bayonne Energy Center (BEC),BEC, a 512644 MW gas-fired facility located in Bayonne, New Jersey, adjacent to IMTT’s Bayonne facility. Power produced by BEC has tolling agreements with a creditworthy off-taker for 62.5% of its power generating capacity and power produced iswas delivered to New York City via a dedicated transmission cable under New York Harbor. BEC had tolling agreements with a creditworthy off-taker for approximately 50% of its power generating capacity. The tolling agreements generategenerated revenue whether or not the facility iswas in use for power production. In addition to revenue related tofrom the tolling agreementagreements and capacity payments from the grid operator, BEC generatesgenerated an energy margin when the facility iswas dispatched. Revenue fromproduced by BEC iswas accounted for as an operating lease that doesdid not have minimum lease payments. All of the rentallease income under the lease iswere recorded within product revenue when natural gas transportation services arewere performed.
At September 30, 2018, the assets and liabilities of BEC were classified as held for sale on the consolidated condensed balance sheet. On October 12, 2018, the Company concluded the sale of BEC and received cash of $657.4 million, net of the assumption of the outstanding debt balance of $243.5 million by the buyer and subject to post-closing working capital adjustments. See Note 2, “Basis of Presentation”, for further discussions.
MIC Hawaii
MIC Hawaii comprises: Hawaii Gas, Hawaii’s only government-franchised gas utility and an unregulated liquefied petroleum gas distribution business providing gas and related services to commercial, residential and governmental customers; a design-build mechanical contractor focused on designing and constructing energy efficient and related building infrastructure; and controlling interests in two solar facilities on Oahu. Revenue from Hawaii Gas and the solar facilities are recorded in product revenue (see above in CPContracted Power for further discussion on revenue from PPAs). Revenue from the design-build mechanical contractor business is recorded in service revenue.
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MACQUARIE INFRASTRUCTURE CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
9. Reportable Segments – (continued)
Revenue from the Hawaii Gas business is generated from the distribution and sales of synthetic natural gas (SNG), liquefied petroleum gas (LPG) and liquefied natural gas (LNG). Revenue is primarily a function of the volume of SNG, LPG and LNG consumed by customers and the price per thermal unitBritish Thermal Unit or gallon charged to customers. Revenue levels, without organic growth, will generally track global commodity prices, namely petroleum and natural gas, as its products are derived from these commodities.
All of the MIC business segments are managed separately and management has chosen to organize the Company around the distinct products and services offered. Selected information by segment is presented in the following tables.
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MACQUARIE INFRASTRUCTURE CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
10. Reportable Segments – (continued)
Revenue from external customers for the Company’s consolidated reportable segments were ($ in thousands):
| | | | | | | | | | | | |
| | Quarter Ended September 30, 2017 |
| | | IMTT | | Atlantic
Aviation | | Contracted
Power | | MIC
Hawaii | | Intersegment
Revenue | | Total
Reportable
Segments |
| Service revenue | | $ | 134,167 | | | $ | 211,457 | | | $ | — | | | $ | 13,826 | | | $ | (1,230 | ) | | $ | 358,220 | |
| Product revenue | | | — | | | | — | | | | 42,445 | | | | 52,396 | | | | — | | | | 94,841 | |
| Total revenue | | $ | 134,167 | | | $ | 211,457 | | | $ | 42,445 | | | $ | 66,222 | | | $ | (1,230 | ) | | $ | 453,061 | |
| | | | | | | | | | | | |
| | Quarter Ended September 30, 2018 |
| | | IMTT | | Atlantic
Aviation | | Contracted
Power | | MIC
Hawaii | | Intersegment
Revenue | | Total
Reportable
Segments |
Service Revenue
| | | | | | | | | | | | | | | | | | | | | | | | |
| Terminal Services | | $ | 19,385 | | | $ | — | | | $ | — | | | $ | — | | | $ | (22 | ) | | $ | 19,363 | |
| Lease | | | 97,720 | | | | — | | | | — | | | | — | | | | (1,206 | ) | | | 96,514 | |
| Fuel | | | — | | | | 172,513 | | | | — | | | | — | | | | — | | | | 172,513 | |
| Hangar | | | — | | | | 21,958 | | | | — | | | | — | | | | — | | | | 21,958 | |
| Construction | | | — | | | | — | | | | — | | | | 8,271 | | | | — | | | | 8,271 | |
| Other(1) | | | 1,124 | | | | 40,437 | | | | — | | | | 851 | | | | — | | | | 42,412 | |
| Total Service Revenue | | $ | 118,229 | | | $ | 234,908 | | | $ | — | | | $ | 9,122 | | | $ | (1,228 | ) | | $ | 361,031 | |
Product Revenue
| | | | | | | | | | | | | | | | | | | | | | | | |
| Lease | | $ | — | | | $ | — | | | $ | 48,570 | | | $ | 1,311 | | | $ | — | | | $ | 49,881 | |
| Gas | | | — | | | | — | | | | — | | | | 55,499 | | | | — | | | | 55,499 | |
| Other | | | — | | | | — | | | | 3,880 | | | | 2,989 | | | | — | | | | 6,869 | |
| Total Product Revenue | | $ | — | | | $ | — | | | $ | 52,450 | | | $ | 59,799 | | | $ | — | | | $ | 112,249 | |
| Total Revenue | | $ | 118,229 | | | $ | 234,908 | | | $ | 52,450 | | | $ | 68,921 | | | $ | (1,228 | ) | | $ | 473,280 | |
| | | | | | | | | | | | |
| | Quarter Ended September 30, 2016 |
| | | IMTT | | Atlantic
Aviation | | Contracted
Power | | MIC
Hawaii | | Intersegment
Revenue | | Total
Reportable
Segments |
| Service revenue | | $ | 133,143 | | | $ | 186,823 | | | $ | — | | | $ | 5,258 | | | $ | (1,249 | ) | | $ | 323,975 | |
| Product revenue | | | — | | | | — | | | | 45,538 | | | | 51,011 | | | | — | | | | 96,549 | |
| Total revenue | | $ | 133,143 | | | $ | 186,823 | | | $ | 45,538 | | | $ | 56,269 | | | $ | (1,249 | ) | | $ | 420,524 | |
| | | | | | | | | | | | |
| | Quarter Ended September 30, 2017 |
| | | IMTT | | Atlantic
Aviation | | Contracted
Power | | MIC
Hawaii | | Intersegment
Revenue | | Total
Reportable
Segments |
Service Revenue
| | | | | | | | | | | | | | | | | | | | | | | | |
| Terminal Services | | $ | 18,786 | | | $ | — | | | $ | — | | | $ | — | | | $ | (21 | ) | | $ | 18,765 | |
| Lease | | | 106,096 | | | | — | | | | — | | | | — | | | | (1,209 | ) | | | 104,887 | |
| Fuel | | | — | | | | 152,620 | | | | — | | | | — | | | | — | | | | 152,620 | |
| Hangar | | | — | | | | 19,820 | | | | — | | | | — | | | | — | | | | 19,820 | |
| Construction | | | — | | | | — | | | | — | | | | 13,526 | | | | — | | | | 13,526 | |
| Other(1) | | | 9,285 | | | | 39,017 | | | | — | | | | 300 | | | | — | | | | 48,602 | |
| Total Service Revenue | | $ | 134,167 | | | $ | 211,457 | | | $ | — | | | $ | 13,826 | | | $ | (1,230 | ) | | $ | 358,220 | |
Product Revenue
| | | | | | | | | | | | | | | | | | | | | | | | |
| Lease | | $ | — | | | $ | — | | | $ | 38,822 | | | $ | 741 | | | $ | — | | | $ | 39,563 | |
| Gas | | | — | | | | — | | | | — | | | | 48,877 | | | | — | | | | 48,877 | |
| Other | | | — | | | | — | | | | 3,623 | | | | 2,778 | | | | — | | | | 6,401 | |
| Total Product Revenue | | $ | — | | | $ | — | | | $ | 42,445 | | | $ | 52,396 | | | $ | — | | | $ | 94,841 | |
| Total Revenue | | $ | 134,167 | | | $ | 211,457 | | | $ | 42,445 | | | $ | 66,222 | | | $ | (1,230 | ) | | $ | 453,061 | |
| (1) | See Note 3, “Implementation of ASU 2014-09”, for revenues disclosed in Other. |
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MACQUARIE INFRASTRUCTURE CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
10. Reportable Segments – (continued)
| | | | | | | | | | | | |
| | Nine Months Ended September 30, 2018 |
| | | IMTT | | Atlantic
Aviation | | Contracted
Power | | MIC
Hawaii | | Intersegment
Revenue | | Total
Reportable Segments |
Service Revenue
| | | | | | | | | | | | | | | | | | | | | | | | |
| Terminal Services | | $ | 66,719 | | | $ | — | | | $ | — | | | $ | — | | | $ | (22 | ) | | $ | 66,697 | |
| Lease | | | 303,633 | | | | — | | | | — | | | | — | | | | (3,669 | ) | | | 299,964 | |
| Fuel | | | — | | | | 523,867 | | | | — | | | | — | | | | — | | | | 523,867 | |
| Hangar | | | — | | | | 65,515 | | | | — | | | | — | | | | — | | | | 65,515 | |
| Construction | | | — | | | | — | | | | — | | | | 38,478 | | | | — | | | | 38,478 | |
| Other(1) | | | 16,629 | | | | 125,659 | | | | — | | | | 2,828 | | | | — | | | | 145,116 | |
| Total Service Revenue | | $ | 386,981 | | | $ | 715,041 | | | $ | — | | | $ | 41,306 | | | $ | (3,691 | ) | | $ | 1,139,637 | |
Product Revenue
| | | | | | | | | | | | | | | | | | | | | | | | |
| Lease | | $ | — | | | $ | — | | | $ | 117,596 | | | $ | 3,410 | | | $ | — | | | $ | 121,006 | |
| Gas | | | — | | | | — | | | | — | | | | 172,206 | | | | — | | | | 172,206 | |
| Other | | | — | | | | — | | | | 11,544 | | | | 8,523 | | | | — | | | | 20,067 | |
| Total Product Revenue | | $ | — | | | $ | — | | | $ | 129,140 | | | $ | 184,139 | | | $ | — | | | $ | 313,279 | |
| Total Revenue | | $ | 386,981 | | | $ | 715,041 | | | $ | 129,140 | | | $ | 225,445 | | | $ | (3,691 | ) | | $ | 1,452,916 | |
| | | | | | | | | | | | |
| | Nine Months Ended September 30, 2017 |
| | | IMTT | | Atlantic
Aviation | | Contracted
Power | | MIC
Hawaii | | Intersegment
Revenue | | Total
Reportable
Segments |
| Service revenue | | $ | 410,128 | | | $ | 621,149 | | | $ | — | | | $ | 39,476 | | | $ | (3,684 | ) | | $ | 1,067,069 | |
| Product revenue | | | — | | | | — | | | | 110,681 | | | | 165,758 | | | | — | | | | 276,439 | |
| Total revenue | | $ | 410,128 | | | $ | 621,149 | | | $ | 110,681 | | | $ | 205,234 | | | $ | (3,684 | ) | | $ | 1,343,508 | |
| | | | | | | | | | | | |
| | Nine Months Ended September 30, 2017 |
| | | IMTT | | Atlantic
Aviation | | Contracted
Power | | MIC
Hawaii | | Intersegment
Revenue | | Total
Reportable
Segments |
Service Revenue
| | | | | | | | | | | | | | | | | | | | | | | | |
| Terminal Services | | $ | 61,791 | | | $ | — | | | $ | — | | | $ | — | | | $ | (21 | ) | | $ | 61,770 | |
| Lease | | | 323,147 | | | | — | | | | — | | | | — | | | | (3,663 | ) | | | 319,484 | |
| Fuel | | | — | | | | 449,486 | | | | — | | | | — | | | | — | | | | 449,486 | |
| Hangar | | | — | | | | 56,672 | | | | — | | | | — | | | | — | | | | 56,672 | |
| Construction | | | — | | | | — | | | | — | | | | 38,546 | | | | — | | | | 38,546 | |
| Other(1) | | | 25,190 | | | | 114,991 | | | | — | | | | 930 | | | | — | | | | 141,111 | |
| Total Service Revenue | | $ | 410,128 | | | $ | 621,149 | | | $ | — | | | $ | 39,476 | | | $ | (3,684 | ) | | $ | 1,067,069 | |
Product Revenue
| | | | | | | | | | | | | | | | | | | | | | | | |
| Lease | | $ | — | | | $ | — | | | $ | 99,849 | | | $ | 2,165 | | | $ | — | | | $ | 102,014 | |
| Gas | | | — | | | | — | | | | — | | | | 155,098 | | | | — | | | | 155,098 | |
| Other | | | — | | | | — | | | | 10,832 | | | | 8,495 | | | | — | | | | 19,327 | |
| Total Product Revenue | | $ | — | | | $ | — | | | $ | 110,681 | | | $ | 165,758 | | | $ | — | | | $ | 276,439 | |
| Total Revenue | | $ | 410,128 | | | $ | 621,149 | | | $ | 110,681 | | | $ | 205,234 | | | $ | (3,684 | ) | | $ | 1,343,508 | |
| | | | | | | | | | | | |
| | Nine Months Ended September 30, 2016 |
| | | IMTT | | Atlantic
Aviation | | Contracted
Power | | MIC
Hawaii | | Intersegment
Revenue | | Total
Reportable
Segments |
| Service revenue | | $ | 396,786 | | | $ | 544,029 | | | $ | — | | | $ | 5,258 | | | $ | (3,636 | ) | | $ | 942,437 | |
| Product revenue | | | — | | | | — | | | | 114,017 | | | | 158,036 | | | | — | | | | 272,053 | |
| Total revenue | | $ | 396,786 | | | $ | 544,029 | | | $ | 114,017 | | | $ | 163,294 | | | $ | (3,636 | ) | | $ | 1,214,490 | |
| (1) | See Note 3, “Implementation of ASU 2014-09”, for revenues disclosed in Other. |
In accordance with FASB ASC 280,Segment Reporting, the Company has disclosed earnings before interest, taxes, depreciation and amortization (EBITDA) excluding non-cash items as a key performance indicator for the businesses. EBITDA excluding non-cash items is reflective of the businesses’ ability to effectively manage the volume of products sold or services provided, the operating margin earned on those transactions and the management of operating expenses independent of the capitalization and tax attributes of its businesses. The Company defines EBITDA excluding non-cash items as net income (loss) or earnings —the most comparable GAAP measure — before interest, taxes, depreciation and amortization and non-cash
TABLE OF CONTENTS
MACQUARIE INFRASTRUCTURE CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
9.10. Reportable Segments – (continued)
non-cash items including impairments, unrealized derivative gains and losses, adjustments for other non-cash items and pension expense reflected in the statements of operations.
EBITDA excluding non-cash items for the Company’s consolidated reportable segments is shown in the tables below ($ in thousands). Allocations of corporate expenses, intercompany fees and the tax effect have been excluded as they are eliminated in consolidation.
| | | | | | | | | | |
| | Quarter Ended September 30, 2018 |
| | | IMTT | | Atlantic
Aviation | | Contracted
Power | | MIC
Hawaii | | Total
Reportable
Segments |
| Net income (loss) | | $ | 16,432 | | | $ | 24,735 | | | $ | 18,128 | | | $ | (17,958 | ) | | $ | 41,337 | |
| Interest expense, net | | | 11,677 | | | | 5,290 | | | | 4,944 | | | | 2,069 | | | | 23,980 | |
| Provision (benefit) for income taxes | | | 6,422 | | | | 9,058 | | | | 7,852 | | | | (7,299 | ) | | | 16,033 | |
| Goodwill impairment | | | — | | | | — | | | | — | | | | 3,215 | | | | 3,215 | |
| Depreciation | | | 28,804 | | | | 14,400 | | | | 7,848 | | | | 5,698 | | | | 56,750 | |
| Amortization of intangibles | | | 3,879 | | | | 11,182 | | | | 178 | | | | 4,791 | | | | 20,030 | |
| Pension expense | | | 1,914 | | | | 5 | | | | — | | | | 128 | | | | 2,047 | |
| Other non-cash expense (income) | | | 207 | | | | 323 | | | | (1,574 | ) | | | 4,303 | | | | 3,259 | |
| EBITDA excluding non-cash items | | $ | 69,335 | | | $ | 64,993 | | | $ | 37,376 | | | $ | (5,053 | ) | | $ | 166,651 | |
| | | | | | | | | | |
| | Quarter Ended September 30, 2017 |
| | | IMTT | | Atlantic
Aviation | | Contracted
Power | | MIC
Hawaii | | Total
Reportable
Segments |
| Net income | | $ | 20,755 | | | $ | 21,591 | | | $ | 7,251 | | | $ | 6,160 | | | $ | 55,757 | |
| Interest expense, net | | | 10,187 | | | | 4,295 | | | | 6,281 | | | | 1,877 | | | | 22,640 | |
| Provision for income taxes | | | 14,422 | | | | 11,139 | | | | 6,337 | | | | 4,830 | | | | 36,728 | |
| Depreciation | | | 28,001 | | | | 12,954 | | | | 13,724 | | | | 3,330 | | | | 58,009 | |
| Amortization of intangibles | | | 3,510 | | | | 12,332 | | | | 1,106 | | | | 381 | | | | 17,329 | |
| Pension expense | | | 1,883 | | | | 5 | | | | — | | | | 272 | | | | 2,160 | |
| Other non-cash expense (income) | | | 178 | | | | 1,212 | | | | (1,914 | ) | | | (3,360 | ) | | | (3,884 | ) |
| EBITDA excluding non-cash items | | $ | 78,936 | | | $ | 63,528 | | | $ | 32,785 | | | $ | 13,490 | | | $ | 188,739 | |
| | | | | | | | | | |
| | Quarter Ended September 30, 2016 |
| | | IMTT | | Atlantic
Aviation | | Contracted
Power | | MIC
Hawaii | | Total
Reportable
Segments |
| Net income | | $ | 24,580 | | | $ | 17,232 | | | $ | 10,124 | | | $ | 5,476 | | | $ | 57,412 | |
| Interest expense, net | | | 7,827 | | | | 5,199 | | | | 2,764 | | | | 1,571 | | | | 17,361 | |
| Provision for income taxes | | | 17,079 | | | | 11,543 | | | | 8,013 | | | | 3,246 | | | | 39,881 | |
| Depreciation | | | 32,949 | | | | 10,703 | | | | 12,894 | | | | 2,696 | | | | 59,242 | |
| Amortization of intangibles | | | 2,760 | | | | 11,445 | | | | 1,106 | | | | 106 | | | | 15,417 | |
| Pension expense | | | 1,752 | | | | 16 | | | | — | | | | 349 | | | | 2,117 | |
| Other non-cash expense (income) | | | 73 | | | | 200 | | | | (1,459 | ) | | | 316 | | | | (870 | ) |
| EBITDA excluding non-cash items | | $ | 87,020 | | | $ | 56,338 | | | $ | 33,442 | | | $ | 13,760 | | | $ | 190,560 | |
| | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2017 | | Nine Months Ended September 30, 2018 |
| | | IMTT | | Atlantic
Aviation | | Contracted
Power | | MIC
Hawaii | | Total
Reportable
Segments | | IMTT | | Atlantic
Aviation | | Contracted
Power | | MIC
Hawaii | | Total
Reportable
Segments |
| Net income | | $ | 67,184 | | | $ | 60,225 | | | $ | 9,604 | | | $ | 16,004 | | | $ | 153,017 | | |
| Net income (loss) | | | $ | 61,909 | | | $ | 78,566 | | | $ | 35,456 | | | $ | (12,344 | ) | | $ | 163,587 | |
| Interest expense, net | | | 30,707 | | | | 13,648 | | | | 20,431 | | | | 5,795 | | | | 70,581 | | | | 30,349 | | | | 9,601 | | | | 10,661 | | | | 5,246 | | | | 55,857 | |
| Provision for income taxes | | | 46,686 | | | | 36,766 | | | | 8,209 | | | | 10,772 | | | | 102,433 | | |
| Provision (benefit) for income taxes | | | | 24,195 | | | | 28,769 | | | | 12,456 | | | | (4,350 | ) | | | 61,070 | |
| Goodwill impairment | | | | — | | | | — | | | | — | | | | 3,215 | | | | 3,215 | |
| Depreciation | | | 84,797 | | | | 36,468 | | | | 41,711 | | | | 9,777 | | | | 172,753 | | | | 87,066 | | | | 43,143 | | | | 35,680 | | | | 12,975 | | | | 178,864 | |
| Amortization of intangibles | | | 9,029 | | | | 37,426 | | | | 3,320 | | | | 1,145 | | | | 50,920 | | | | 11,636 | | | | 34,877 | | | | 2,392 | | | | 6,565 | | | | 55,470 | |
| Pension expense | | | 5,649 | | | | 15 | | | | — | | | | 817 | | | | 6,481 | | | | 5,737 | | | | 16 | | | | — | | | | 383 | | | | 6,136 | |
| Other non-cash expense (income) | | | 315 | | | | 1,252 | | | | (6,170 | ) | | | 3,108 | | | | (1,495 | ) | | | 611 | | | | 1,232 | | | | (5,152 | ) | | | 9,548 | | | | 6,239 | |
| EBITDA excluding non-cash items | | $ | 244,367 | | | $ | 185,800 | | | $ | 77,105 | | | $ | 47,418 | | | $ | 554,690 | | | $ | 221,503 | | | $ | 196,204 | | | $ | 91,493 | | | $ | 21,238 | | | $ | 530,438 | |
TABLE OF CONTENTS
MACQUARIE INFRASTRUCTURE CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
9.10. Reportable Segments – (continued)
| | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2016 | | Nine Months Ended September 30, 2017 |
| | | IMTT | | Atlantic
Aviation | | Contracted
Power | | MIC
Hawaii | | Total
Reportable
Segments | | IMTT | | Atlantic
Aviation | | Contracted
Power | | MIC
Hawaii | | Total
Reportable
Segments |
| Net income | | $ | 55,775 | | | $ | 43,339 | | | $ | 97 | | | $ | 23,319 | | | $ | 122,530 | | | $ | 67,184 | | | $ | 60,225 | | | $ | 9,604 | | | $ | 16,004 | | | $ | 153,017 | |
| Interest expense, net | | | 41,462 | | | | 27,437 | | | | 31,614 | | | | 6,224 | | | | 106,737 | | | | 30,707 | | | | 13,648 | | | | 20,431 | | | | 5,795 | | | | 70,581 | |
| Provision for income taxes | | | 38,717 | | | | 29,258 | | | | 7,626 | | | | 14,863 | | | | 90,464 | | | | 46,686 | | | | 36,766 | | | | 8,209 | | | | 10,772 | | | | 102,433 | |
| Depreciation | | | 95,333 | | | | 31,042 | | | | 38,373 | | | | 7,377 | | | | 172,125 | | | | 84,797 | | | | 36,468 | | | | 41,711 | | | | 9,777 | | | | 172,753 | |
| Amortization of intangibles | | | 8,279 | | | | 37,999 | | | | 3,320 | | | | 319 | | | | 49,917 | | | | 9,029 | | | | 37,426 | | | | 3,320 | | | | 1,145 | | | | 50,920 | |
| Pension expense | | | 5,414 | | | | 50 | | | | — | | | | 1,048 | | | | 6,512 | | | | 5,649 | | | | 15 | | | | — | | | | 817 | | | | 6,481 | |
| Other non-cash expense (income) | | | 631 | | | | 448 | | | | (5,424 | ) | | | (6,090 | ) | | | (10,435 | ) | | | 315 | | | | 1,252 | | | | (6,170 | ) | | | 3,108 | | | | (1,495 | ) |
| EBITDA excluding non-cash items | | $ | 245,611 | | | $ | 169,573 | | | $ | 75,606 | | | $ | 47,060 | | | $ | 537,850 | | | $ | 244,367 | | | $ | 185,800 | | | $ | 77,105 | | | $ | 47,418 | | | $ | 554,690 | |
Reconciliations of total reportable segments’ EBITDA excluding non-cash items to consolidated net income before income taxes were ($ in thousands):
| | | | | | | | | | | | | | | | |
| | Quarter Ended
September 30, | | Nine Months Ended
September 30, | | Quarter Ended
September 30, | | Nine Months Ended
September 30, |
| | | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
| Total reportable segments EBITDA excluding non-cash items | | $ | 188,739 | | | $ | 190,560 | | | $ | 554,690 | | | $ | 537,850 | | | $ | 166,651 | | | $ | 188,739 | | | $ | 530,438 | | | $ | 554,690 | |
| Interest income | | | 54 | | | | 27 | | | | 129 | | | | 85 | | | | 113 | | | | 54 | | | | 304 | | | | 129 | |
| Interest expense | | | (29,291 | ) | | | (20,871 | ) | | | (90,129 | ) | | | (117,268 | ) | | | (32,616 | ) | | | (29,291 | ) | | | (81,693 | ) | | | (90,129 | ) |
| Goodwill impairment | | | | (3,215 | ) | | | — | | | | (3,215 | ) | | | — | |
| Depreciation | | | (58,009 | ) | | | (59,242 | ) | | | (172,753 | ) | | | (172,125 | ) | | | (56,924 | ) | | | (58,009 | ) | | | (179,368 | ) | | | (172,753 | ) |
| Amortization of intangibles | | | (17,329 | ) | | | (15,417 | ) | | | (50,920 | ) | | | (49,917 | ) | | | (20,030 | ) | | | (17,329 | ) | | | (55,470 | ) | | | (50,920 | ) |
| Selling, general and administrative expenses – Corporate and Other | | | (6,214 | ) | | | (3,925 | ) | | | (21,301 | ) | | | (8,831 | ) | | | (7,150 | ) | | | (6,214 | ) | | | (21,496 | ) | | | (21,301 | ) |
| Fees to Manager - related party | | | (17,954 | ) | | | (18,382 | ) | | | (54,610 | ) | | | (49,570 | ) | |
| Fees to Manager-related party | | | | (12,333 | ) | | | (17,954 | ) | | | (36,113 | ) | | | (54,610 | ) |
| Pension expense | | | (2,160 | ) | | | (2,117 | ) | | | (6,481 | ) | | | (6,512 | ) | | | (2,047 | ) | | | (2,160 | ) | | | (6,136 | ) | | | (6,481 | ) |
| Other income, net | | | 3,884 | | | | 870 | | | | 1,495 | | | | 10,435 | | |
| Other (expense) income, net | | | | (3,189 | ) | | | 3,884 | | | | (6,243 | ) | | | 1,495 | |
| Total consolidated net income before income taxes | | $ | 61,720 | | | $ | 71,503 | | | $ | 160,120 | | | $ | 144,147 | | | $ | 29,260 | | | $ | 61,720 | | | $ | 141,008 | | | $ | 160,120 | |
Capital expenditures, on a cash basis, for the Company’s reportable segments were ($ in thousands):
| | | | | | | | | | | | | | | | |
| | Quarter Ended
September 30, | | Nine Months Ended
September 30, | | Quarter Ended
September 30, | | Nine Months Ended
September 30, |
| | | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
| IMTT | | $ | 20,232 | | | $ | 31,867 | | | $ | 52,291 | | | $ | 74,032 | | | $ | 17,454 | | | $ | 20,232 | | | $ | 41,786 | | | $ | 52,291 | |
| Atlantic Aviation | | | 23,661 | | | | 20,554 | | | | 57,757 | | | | 62,443 | | | | 15,187 | | | | 23,661 | | | | 51,634 | | | | 57,757 | |
| Contracted Power | | | 50,461 | | | | 22,078 | | | | 99,961 | | | | 39,056 | | | | 8,501 | | | | 50,461 | | | | 42,702 | | | | 99,961 | |
| MIC Hawaii | | | 7,604 | | | | 4,918 | | | | 21,054 | | | | 22,620 | | | | 6,729 | | | | 7,604 | | | | 17,398 | | | | 21,054 | |
| Total capital expenditures of reportable segments | | $ | 101,958 | | | $ | 79,417 | | | $ | 231,063 | | | $ | 198,151 | | | $ | 47,871 | | | $ | 101,958 | | | $ | 153,520 | | | $ | 231,063 | |
| Corporate and other | | | 2,524 | | | | — | | | | 3,770 | | | | — | | | | 1,336 | | | | 2,524 | | | | 5,517 | | | | 3,770 | |
| Total consolidated capital expenditure | | $ | 104,482 | | | $ | 79,417 | | | $ | 234,833 | | | $ | 198,151 | | |
| Total consolidated capital expenditures | | | $ | 49,207 | | | $ | 104,482 | | | $ | 159,037 | | | $ | 234,833 | |
TABLE OF CONTENTS
MACQUARIE INFRASTRUCTURE CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
9.10. Reportable Segments – (continued)
Property, equipment, land and leasehold improvements, net, goodwill and total assets for the Company’s reportable segments and its reconciliation to consolidated total assets were ($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Property, Equipment,
Land and Leasehold
Improvements, net | | Goodwill | | Total Assets | | Property, Equipment,
Land and Leasehold
Improvements, net | | Goodwill | | Total Assets |
| | | September 30,
2017 | | December 31,
2016 | | September 30,
2017 | | December 31,
2016 | | September 30,
2017 | | December 31,
2016 | | September 30,
2018 | | December 31,
2017 | | September 30,
2018 | | December 31,
2017 | | September 30,
2018 | | December 31,
2017 |
| IMTT | | $ | 2,303,710 | | | $ | 2,218,256 | | | $ | 1,435,388 | | | $ | 1,411,029 | | | $ | 4,108,196 | | | $ | 3,978,379 | | | $ | 2,254,203 | | | $ | 2,305,440 | | | $ | 1,427,588 | | | $ | 1,427,863 | | | $ | 4,027,790 | | | $ | 4,109,448 | |
| Atlantic Aviation | | | 549,359 | | | | 465,096 | | | | 495,541 | | | | 468,419 | | | | 1,707,056 | | | | 1,564,668 | | | | 568,741 | | | | 559,597 | | | | 496,019 | | | | 495,769 | | | | 1,694,075 | | | | 1,710,535 | |
| Contracted Power | | | 1,460,739 | | | | 1,383,289 | | | | 21,628 | | | | 21,628 | | | | 1,618,639 | | | | 1,516,602 | | | | 625,412 | | | | 1,466,139 | | | | — | | | | 21,628 | | | | 704,429 | | | | 1,617,658 | |
| MIC Hawaii | | | 294,091 | | | | 279,863 | | | | 123,408 | | | | 123,333 | | | | 517,323 | | | | 501,713 | | | | 298,861 | | | | 302,220 | | | | 120,193 | | | | 123,408 | | | | 529,285 | | | | 532,144 | |
| Total assets of reportable segments | | $ | 4,607,899 | | | $ | 4,346,504 | | | $ | 2,075,965 | | | $ | 2,024,409 | | | $ | 7,951,214 | | | $ | 7,561,362 | | | $ | 3,747,217 | | | $ | 4,633,396 | | | $ | 2,043,800 | | | $ | 2,068,668 | | | $ | 6,955,579 | | | $ | 7,969,785 | |
| Corporate and other | | | 3,734 | | | | 32 | | | | — | | | | — | | | | 4,149 | | | | (2,109 | ) | | | 6,074 | | | | 26,218 | | | | — | | | | — | | | | 10,957 | | | | 39,166 | |
| Assets held for sale(1) | | | | — | | | | — | | | | — | | | | — | | | | 971,934 | | | | — | |
| Total consolidated assets | | $ | 4,611,633 | | | $ | 4,346,536 | | | $ | 2,075,965 | | | $ | 2,024,409 | | | $ | 7,955,363 | | | $ | 7,559,253 | | | $ | 3,753,291 | | | $ | 4,659,614 | | | $ | 2,043,800 | | | $ | 2,068,668 | | | $ | 7,938,470 | | | $ | 8,008,951 | |
| (1) | At September 30, 2018, Property, Equipment, Land and Leasehold Improvements, net, and Goodwill excludes balances related to BEC, which were classified as held for sale. See Note 2, “Basis of Presentation”, for further discussion. |
10.11. Long-Term Contracted Revenue
Long-term contracted revenue consists of revenue from future minimum lease revenue accounted in accordance with ASC 840, Leases, and estimated revenue to be recognized in the future related to performance conditions that are unsatisfied or partially unsatisfied accounted in accordance with ASC 606, Revenue. The recognition pattern for contracts that are considered leases is generally consistent with the recognition pattern that would apply if such contracts were not accounted for as leases and were instead accounted for under ASC Topic 606. Accordingly, the Company has combined the required lessor disclosures for future lease income with the disclosures for contracted revenue in the table below. The following long-term contracted revenue were in existence at September 30, 2018 ($ in thousands):
| | | | | | |
| | Lease
Revenue
(ASC 840) | | Contract
Revenue
(ASC 606) | | Total
Long-Term
Revenue |
| 2018 remaining | | $ | 87,187 | | | $ | 21,102 | | | $ | 108,289 | |
| 2019 | | | 236,685 | | | | 49,066 | | | | 285,751 | |
| 2020 | | | 126,915 | | | | 33,459 | | | | 160,374 | |
| 2021 | | | 65,912 | | | | 27,176 | | | | 93,088 | |
| 2022 | | | 44,422 | | | | 23,016 | | | | 67,438 | |
| 2023 | | | 29,196 | | | | 15,718 | | | | 44,914 | |
| Thereafter | | | 51,356 | | | | 16,058 | | | | 67,414 | |
| Total | | $ | 641,673 | | | $ | 185,595 | | | $ | 827,268 | |
The above table does not include the future minimum lease revenue from the Company’s Contracted Power and the renewable businesses within the MIC Hawaii reportable segments. The payments from these leases are considered variable as they are based on the output of the underlying assets (i.e. energy generated).
TABLE OF CONTENTS
MACQUARIE INFRASTRUCTURE CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
12. Related Party Transactions
Management Services
At September 30, 20172018 and December 31, 2016,2017, the Manager held 5,188,93412,227,736 shares and 4,510,7955,435,442 shares, respectively, of the Company. Pursuant to the terms of the Third Amended and Restated Management Services Agreement (Management Agreement), the Manager may sell these shares at any time. Under the Management Agreement, the Manager, at its option, may reinvest base management fees and performance fees, if any, in shares of the Company. From May 2018 through September 30, 2018, the Manager bought 5,987,100 shares in the open market and increased its holdings to 14.29% at September 30, 2018.
Since January 1, 2016,2017, the Company paid the Manager cash dividends on shares held for the following periods:
| | | | | | | | | | | | | | | | | | | | |
| Declared | | Period Covered | | $ per Share | | Record Date | | Payable Date | | Cash Paid to Manager
(in thousands) | | Period Covered | | $ per Share | | Record Date | | Payable Date | | Cash Paid to
Manager
(in thousands) |
| October 30, 2018 | | | | Third quarter 2018 | | | $ | 1.00 | | | | November 12, 2018 | | | | November 15, 2018 | | | | (1) | |
| July 31, 2018 | | | | Second quarter 2018 | | | | 1.00 | | | | August 13, 2018 | | | | August 16, 2018 | | | $ | 10,711 | |
| May 1, 2018 | | | | First quarter 2018 | | | | 1.00 | | | | May 14, 2018 | | | | May 17, 2018 | | | | 6,213 | |
| February 19, 2018 | | | | Fourth quarter 2017 | | | | 1.44 | | | | March 5, 2018 | | | | March 8, 2018 | | | | 8,067 | |
| October 30, 2017 | | | Third quarter 2017 | | | $ | 1.42 | | | | November 13, 2017 | | | | November 16, 2017 | | | | (1) | | | | Third quarter 2017 | | | | 1.42 | | | | November 13, 2017 | | | | November 16, 2017 | | | | 7,484 | |
| August 1, 2017 | | | Second quarter 2017 | | | | 1.38 | | | | August 14, 2017 | | | | August 17, 2017 | | | $ | 6,941 | | | | Second quarter 2017 | | | | 1.38 | | | | August 14, 2017 | | | | August 17, 2017 | | | | 6,941 | |
| May 2, 2017 | | | First quarter 2017 | | | | 1.32 | | | | May 15, 2017 | | | | May 18, 2017 | | | | 6,332 | | | | First quarter 2017 | | | | 1.32 | | | | May 15, 2017 | | | | May 18, 2017 | | | | 6,332 | |
| February 17, 2017 | | | Fourth quarter 2016 | | | | 1.31 | | | | March 3, 2017 | | | | March 8, 2017 | | | | 6,080 | | | | Fourth quarter 2016 | | | | 1.31 | | | | March 3, 2017 | | | | March 8, 2017 | | | | 6,080 | |
| October 27, 2016 | | | Third quarter 2016 | | | | 1.29 | | | | November 10, 2016 | | | | November 15, 2016 | | | | 5,620 | | |
| July 28, 2016 | | | Second quarter 2016 | | | | 1.25 | | | | August 11, 2016 | | | | August 16, 2016 | | | | 8,743 | | |
| April 28, 2016 | | | First quarter 2016 | | | | 1.20 | | | | May 12, 2016 | | | | May 17, 2016 | | | | 6,981 | | |
| February 18, 2016 | | | Fourth quarter 2015 | | | | 1.15 | | | | March 3, 2016 | | | | March 8, 2016 | | | | 6,510 | | |
| (1) | The amount of dividendsdividend payable to the Manager for the third quarter of 20172018 will be determined on November 13, 2017,12, 2018, the record date. |
Under the Management Agreement, subject to the oversight and supervision of the Company’s Boardboard of Directors,directors, the Manager is responsible for and oversees the management of the Company’s operating businesses. In addition, the Manager has the right to appointelect the Chairman of the Board of the Company, subject to minimum equity ownership, and to assign, or second, to the Company, two of its employees to serve as chief executive officer and chief financial officer of the Company and seconds or makes other personnel available as required.
TABLE OF CONTENTS
MACQUARIE INFRASTRUCTURE CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
10. Related Party Transactions – (continued)
In accordance with the Management Agreement, the Manager is entitled to a monthly base management fee based primarily on the Company’s market capitalization, and potentially a quarterly performance fee based on total shareholder returns relative to a U.S. utilities index. Currently, the Manager has elected to reinvest the future base management fees and performance fees, if any, in additionalnew primary shares. For the quarter and nine months ended September 30, 2017,2018, the Company incurred base management fees of $12.3 million and $36.1 million, respectively, compared with $17.9 million and $54.6 million respectively. Forfor the quarter and nine months ended September 30, 2016, the2017, respectively. The Company incurred base management fees of $18.4 million and $49.6 million, respectively. Nodid not incur any performance fees were generated in any of the above periods.
Forfor the quarter and nine months ended JuneSeptember 30, 2015, the Company incurred a performance fee of $135.6 million. In July 2015, the Board requested,2018 and the Manager agreed, that $67.8 million of the performance fee be settled in cash in July 2015 to minimize dilution. The remaining $67.8 million obligation was settled and reinvested in 944,046 shares by the Manager on August 1, 2016. In all of the periods shown below, our Manager elected to reinvest any fees to which it was entitled in additional shares.2017.
TABLE OF CONTENTS
MACQUARIE INFRASTRUCTURE CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
12. Related Party Transactions – (continued)
The unpaid portion of the base management fees and performance fees, if any, at the end of each reporting period is included in the line itemDue to Manager-related party in the consolidated condensed balance sheets.
| | | | | | | | | | | | |
| Period | | Base Management
Fee Amount
($ in Thousands) | | Performance
Fee Amount
($ in Thousands) | | Shares
Issued | | Base Management
Fee Amount
($ in Thousands) | | Performance
Fee Amount
($ in Thousands) | | Shares
Issued |
2018 Activities:
| | | | | | | | | | | | | |
| Third quarter 2018 | | | $ | 12,333 | | | $ | — | | | | 269,286 | (1) |
| Second quarter 2018 | | | | 10,852 | | | | — | | | | 277,053 | |
| First quarter 2018 | | | | 12,928 | | | | — | | | | 265,002 | |
2017 Activities:
| | | | | | | | | | | | | | | | | | | | | | | | |
| Fourth quarter 2017 | | | $ | 16,778 | | | $ | — | | | | 248,162 | |
| Third quarter 2017 | | $ | 17,954 | | | $ | — | | | | 240,674 | (1) | | | 17,954 | | | | — | | | | 240,674 | |
| Second quarter 2017 | | | 18,433 | | | | — | | | | 233,394 | | | | 18,433 | | | | — | | | | 233,394 | |
| First quarter 2017 | | | 18,223 | | | | — | | | | 232,398 | | | | 18,223 | | | | — | | | | 232,398 | |
2016 Activities:
| | | | | | | | | | | | | |
| Fourth quarter 2016 | | $ | 18,916 | | | $ | — | | | | 230,773 | | |
| Third quarter 2016 | | | 18,382 | | | | — | | | | 232,488 | | |
| Second quarter 2016 | | | 16,392 | | | | — | | | | 232,835 | | |
| First quarter 2016 | | | 14,796 | | | | — | | | | 234,179 | | |
| (1) | The Manager elected to reinvest all of the monthly base management fees for the third quarter of 20172018 in shares. The Company issued 240,674269,286 shares for the quarter ended September 30, 2017,2018, including 81,74189,542 shares that were issued in October 20172018 for the September 20172018 monthly base management fee. |
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, income taxes, audit and legal fees, acquisitions and dispositions and its compliance with applicable laws and regulations. During the quarter and nine months ended September 30, 2017,2018, the Manager charged the Company $284,000$296,000 and $729,000,$705,000, respectively, for reimbursement of out-of-pocket expenses compared with $132,000$284,000 and $436,000$729,000, respectively, for the quarter and nine months ended September 30, 2016, respectively.2017. The unpaid portion of the out-of-pocket expenses at the end of the reporting period is included inDue to Manager-related party in the consolidated condensed balance sheets.
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MACQUARIE INFRASTRUCTURE CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
10. Related Party Transactions – (continued)
Other Services
The Company uses the resources of the Macquarie Group with respect to a range of advisory, procurement, insurance, hedging, lending and other services. Engagements involving members of the Macquarie Group are reviewed and approved by the Audit Committee of the Company’s Boardboard of Directors.directors. Macquarie Group affiliates are engaged on an arm’s length basis and frequently as a member of a syndicate of providers whose other members establish the terms of the interaction.
Advisory Services
The Macquarie Group, and wholly-owned subsidiaries within the Macquarie Group, including Macquarie Bank Limited (MBL) and Macquarie Capital (USA) Inc. (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 stockholders’ 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.
In October 2016, the Company completed an underwritten public offering of $402.5 million of aggregate principal amount of convertible senior notes. MCUSA served as an underwriter in this offering and received $403,000 from the Company for such services.
On June 24, 2015, the Company commencedentered into an equity distribution agreement with sales agents, including MCUSA, providing for the ATM program where the Company may offer and sellsale of shares of its common stock, par value $0.001 per share, from time to time having an aggregate gross offering price of up to $400.0 million. These sales, if any, will be made pursuant to the terms of anThe equity distribution agreement entered into between the Company and thealso
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MACQUARIE INFRASTRUCTURE CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
12. Related Party Transactions – (continued)
provides for sales agents, with MCUSA being one of the sales agents. Under the terms of the equity distribution agreement, the Company may also sell shares to any sales agent as principal for its own account at a price agreed upon at the time of the sale. For the nine months ended September 30, 20172018 and 2016,2017, the Company did not engage MCUSA for such activities.
Long-Term Debt
Atlantic Aviation’s $70.0 millionIn January 2018, the Company completed the refinancing and upsizing of its senior secured revolving credit facility to $600.0 million from $410.0 million and extended the maturity through January 3, 2022. As part of the refinancing and upsizing, MIHI LLC’s $50.0 million commitment was providedreplaced by various financial institutions, including MBL which provided $15.7 million. Fora $40.0 million commitment from Macquarie Capital Funding LLC. As part of the quarter and nine months ended September 30, 2016, Atlantic Aviationclosing, the Company paid Macquarie Capital Funding LLC $80,000 in closing fees.
Prior to the refinancing in January 2018, the Company incurred and paid $30,000 and $88,000, respectively,$4,000 in interest expense related to MBL’sMIHI LLC’s portion of the revolving credit facility. In October 2016, the revolving credit facility was terminated in conjunction with the completion of the refinancing of Atlantic Aviation’s new credit facility.
The Company has a $410.0 millionMIC senior secured revolving credit facility at the holding company that is provided by various financial institutions, of which $50.0 million is provided by MIHI LLC.facility. For the quarter and nine months ended September 30, 2017, the Company incurred $47,000 and $116,000, respectively, in interest expense related to MIHI LLC’s portion of the MIC senior secured revolving credit facility, compared with $82,000facility. Subsequent to the refinancing in January 2018, the Company incurred $139,000 and $184,000$376,000, respectively, in interest expense related to Macquarie Capital Funding LLC’s portion of the MIC senior secured revolving credit facility for the quarter and nine months ended September 30, 2016, respectively.2018.
Other Transactions
In May 2018, the Company sold its equity interest in projects involving two properties to Macquarie Infrastructure and Real Assets, Inc. (MIRA Inc.), an affiliate of the Manager, for their cost of approximately $27.1 million. The Company retained the right to 20% of any gain on a subsequent sale by MIRA Inc. to a third party of a more than 50% interest in either or both of the projects.
Macquarie Energy North America Trading, Inc. (MENAT), an indirect subsidiary of Macquarie Group Limited, entered into contracts with IMTT to lease capacity. At March 31, 2017, MENAT leased 200,000 barrels of capacity from IMTT. The contracts expired during the quarter ended June 30, 2017. During the nine months ended September 30, 2017, IMTT recognized $907,000 in revenues from MENAT. At September 30, 2016, MENAT leased 98,000 barrels of capacity and IMTT recognized $448,000 and $3.5 million in revenues forThe contracts expired during the quarter and nine months ended SeptemberJune 30, 2016, respectively.2017.
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
11.13. Income Taxes
The Company expects to incur federal consolidated taxable income for the year ending December 31, 2017,2018, which will be fully offset by the Company’s net operating loss (NOL) carryforwards. The Company believes that it will be able to utilize all of its federal prior year NOLs, which will begin to expire after 20282029 and completely expire after 2035.
On December 22, 2017, the Tax Cuts and Jobs Act was signed into law and includes provisions that may have an impact on the Company’s federal taxable income. The most significant of these are 100% bonus depreciation on qualifying assets (which is scheduled to phase down ratably to 0% between 2023 and 2027) and a reduction in the federal corporate tax rate from 35% to 21%.
The Tax Cuts and Jobs Act also includes a new limitation on the deductibility of net interest expense that generally limits the deduction to 30% of “adjusted taxable income”. For years before 2022, adjusted taxable income is defined as taxable income computed without regard to certain items, including net business interest expense, the amount of any NOL deduction, tax depreciation and tax amortization. The Company does not expect to incur net interest expense that is greater than 30% of adjusted taxable income prior to 2022.
In the third quarter of 2018, the Company completed its data gathering and analysis based on the Tax Cuts and Jobs Act and guidance issued to date in 2018 as it relates to the remeasurement of existing deferred tax balances. The Company has not identified any material change to the net one-time charge for the year ended December 31, 2017 related to the Tax Cuts and Jobs Act.
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
12.14. Legal Proceedings and Contingencies
The Company and its subsidiaries 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 the eventuality of such actions, and does not believe the outcome of any pending legal proceedings will be material to the Company’s financial position or result of operations.
Shareholder Litigation
On April 23, 2018, a complaint captioned City of Riviera Beach General Employees Retirement System v. Macquarie Infrastructure Corp., et al., Case 1:18-cv-03608 (VSB), was filed in the United States District Court for the Southern District of New York. A substantially identical complaint captioned Daniel Fajardo v. Macquarie Infrastructure Corporation, et al., Case No. 1:18-cv-03744 (VSB) was filed in the same court on April 27, 2018. Both complaints assert claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder on behalf of a putative class consisting of all purchasers of MIC common stock between February 22, 2016 and February 21, 2018. The named defendants in both cases are the Company and four current or former officers of MIC and one of its subsidiaries, IMTT Holdings LLC. The complaints in both actions, which are expected to be consolidated, allege that the Company and the individual defendants knowingly made material misstatements and omitted material facts in its public disclosures concerning the Company’s and IMTT’s business and the sustainability of the Company’s dividend to stockholders. The Company intends to vigorously contest the claims asserted in the City of Riviera Beach and Fajardo complaints, which the Company believes are entirely meritless.
On August 9, 2018, a shareholder derivative complaint captionedPhyllis Wright v. Liam Stewart, et al., Case No. 1:18-cv-07174 (VSB), was filed in the United States District Court for the Southern District of New York. A substantially identical complaint captionedRaymond Greenlee v. James Hooke, et al., Case No. 1:18-cv-09339 (VSB) was filed in the same court on October 12, 2018. Both complaints assert derivative claims on behalf of the Company against certain of its current and former officers and directors arising out of the same subject matter at issue in theCity of Riviera Beach and Fajardo complaints discussed above. The causes of action asserted include violation of Section 14(a) of the Securities Exchange Act of 1934, breach of fiduciary duties, waste of corporate assets, unjust enrichment, and aiding and abetting breach of fiduciary duty. The plaintiffs in theWright case have agreed to stay the matter pending resolution of an anticipated motion to dismiss the securities class actions described above. The Company expects that the named defendants will vigorously contest the claims asserted in theWrightandGreenleecomplaints.
13.15. Subsequent Events
Dividend
On October 30, 2017,2018, the Boardboard of Directorsdirectors declared a dividend of $1.42$1.00 per share for the quarter ended September 30, 2017,2018, which is expected to be paid on November 16, 201715, 2018 to holders of record on November 13, 2017.12, 2018.
Manager Waiver of Base Management Fees
Effective November 1, 2018, the Manager has elected to waive two portions of the base management fee to which it is entitled under the terms of the Managements Services Agreement between the Company. In effect, this waiver caps the base management fee at 1% of the Company’s equity market capitalization and eliminates fees on any debt it have or may incur at the holding company. Although MIMUSA reserves the right to revoke the fee waiver and revert to the prior terms of the agreement subject to providing the Company with not less than a one year notice, MIC believes MIMUSA has no current intent to do so. A revocation of the waiver would not trigger a recapture of previously waived fees. The waivers result in a reduction in the fees paid to the Manager of approximately $10.0 million per year based on the Company’s market value and capital structure at the end of the third quarter.
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PART II
OTHER INFORMATION
Item 1. Legal Proceedings
There have been no changes to legal proceedings set forth under Part I, Item 3 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016,2017, filed with the SEC on February 21, 2017.2018 and under Part II, Item 1 of our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2018 and June 30, 2018, except for the following:
On August 9, 2018, a shareholder derivative complaint captionedPhyllis Wright v. Liam Stewart, et al., Case No. 1:18-cv-07174 (VSB), was filed in the United States District Court for the Southern District of New York. A substantially identical complaint captionedRaymond Greenlee v. James Hooke, et al., Case No. 1:18-cv-09339 (VSB) was filed in the same court on October 12, 2018. Both complaints assert derivative claims on behalf of the Company against certain of its current and former officers and directors arising out of the same subject matter at issue in theCity of Riviera Beach and Fajardo complaints discussed in Note 14, “Legal Proceedings and Contingencies”, in our Notes to Consolidated Condensed Financial Statements in Part I of this Form 10-Q. The causes of action asserted include violation of Section 14(a) of the Securities Exchange Act of 1934, breach of fiduciary duties, waste of corporate assets, unjust enrichment, and aiding and abetting breach of fiduciary duty. The plaintiffs in theWright case have agreed to stay the matter pending resolution of an anticipated motion to dismiss the securities class actions. The Company expects that the named defendants will vigorously contest the claims asserted in theWrightandGreenleecomplaints.
In June 2018, BEC entered into an Administrative Consent Order (ACO) with the New Jersey Department of Environmental Protection (NJDEP) to address ammonia emissions levels that exceeded levels outlined in BEC’s air permit, as identified by tests carried out in February 2018. The ACO prescribes a fine of $119,000 plus $3,000 per month from July 2018 until the terms of the ACO are met. This is expected to be achieved no later than December 2018. BEC was notified that the ACO fine may be increased by $13,600 (one-time payment) to correct an administrative error by the Regulator. This will not impact the scope or timeline of the work to meet the terms of the ACO.
Item 1A. Risk Factors
There 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, 2016,2017, filed with the SEC on February 21, 2017.2018, except for the following:
We could be adversely impacted by actions of activist stockholders, and such activism could impact the value of our securities.
We value constructive input from our stockholders and the investment community. However, there is no assurance that the actions taken by our Board of Directors and management in seeking to maintain constructive engagement with our stockholders will be successful. Certain of our shareholders have expressed views with respect to the operation of our business, our business strategy, corporate governance considerations or other matters. Responding to actions by activist stockholders can be costly and time-consuming, disrupting our operations and diverting the attention of management and our employees. The perceived uncertainties as to our future direction due to activist actions could affect the market price of our securities, result in the loss of potential business opportunities and make it more difficult to attract and retain qualified personnel, board members and business partners.
Our property taxes could increase due to reassessment or property tax rate changes.
We are required to pay real property taxes in respect of our properties and such taxes may increase as our properties are reassessed by taxing authorities or as property tax rates change. An increase in the assessed value of our properties or our property tax rates may not be passed along to our customers and could adversely impact our results of operations, cash flows and financial condition.
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We are currently subject to purported securities class action lawsuits and could become subject to other similar actions in the future, the unfavorable outcome of which could materially adversely impact our business or results of operations.
In April 2018, two purported securities class action lawsuits were filed against us and certain current and former officers of ours and one of our subsidiaries alleging violations of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 thereunder. These lawsuits allege knowing material misstatements and omissions in our public disclosures concerning our business and the sustainability of our dividend to stockholders. While we intend to vigorously defend against these lawsuits, there is no assurance that we will be successful in the defense or that insurance will be available or adequate to fund any settlement or judgment or the litigation costs of the actions. In addition, we are obligated to indemnify and incur legal expenses on behalf of current and former officers under certain circumstances. These lawsuits, and any similar proceedings or claims that may be brought against us in the future, may divert management resources and cause us to incur substantial costs, and any unfavorable outcome could result in payment of damages and could damage our reputation, any or all of which could materially adversely impact our business and results of operations.
Changes to trade regulation, quotas, duties or tariffs, caused by the changing U.S. and geopolitical environments or otherwise, may increase our costs, result in fewer growth capital opportunities or projects, limit the amount of raw materials and products that we can import, decrease demand for certain of our services, or otherwise adversely impact our business.
The current U.S. administration has voiced strong concerns about imports from countries that it perceives as engaging in unfair trade practices, has increased tariffs on certain goods imported into the United States from those countries, including China and other countries from which we import components or raw materials, and has raised the possibility of imposing significant, additional tariff increases. The announcement of unilateral tariffs on imported products by the U.S has triggered retaliatory actions from certain foreign governments, including China, and may trigger retaliatory actions by other foreign governments, potentially resulting in a “trade war”. A “trade war” of this nature or other governmental action related to tariffs or international trade agreements or policies could increase our costs, reduce the demand or opportunity to deploy growth capital in our businesses at attractive rates of return, limit the amount of raw materials, components and other products that we can import, restrict our customers’ ability to deploy growth capital or transport products and therefore decrease demand for certain of our services, and/or adversely affect the U.S. economy or certain sectors thereof and, thus, adversely impact our businesses.
Our recent sale of BEC subjects us to various risks and uncertainties.
In October 2018, we concluded the sale, through a subsidiary, of BEC. Our subsidiary has agreed to indemnify the buyer, subject to the terms and limitations in the purchase and sale agreement, for breaches of representations, warranties and covenants in the purchase and sale agreement, and we will guarantee our subsidiary’s payment and certain post-closing indemnity obligations. In addition, following the sale, our businesses will be less diversified and our exposure to the risks inherent in our remaining businesses will increase.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
None.
Item 6. Exhibits
An exhibit index has been filed as part of this Report on page E-1 and is incorporated herein by reference.
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SIGNATURES
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.
| | |
| | MACQUARIE INFRASTRUCTURE CORPORATION
(Registrant)
|
Dated: November 1, 2017October 31, 2018 | | By: /s/ James HookeChristopher Frost
Name: James HookeChristopher Frost
Title: Chief Executive Officer
|
Dated: November 1, 2017October 31, 2018 | | By: /s/ Liam Stewart
Name: Liam Stewart
Title: Chief Financial Officer |
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EXHIBIT INDEX
| | |
| Number | | Description |
| 2.1*† | | Purchase and Sale Agreement, dated as of July 27, 2018, by and among MIC Thermal Power Holdings, LLC and NHIP II Bayonne Holdings LLC |
| 3.1 | | Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on May 21, 2015). |
| 3.2 | | Amended and Restated Bylaws of the Registrant, dated as of February 18, 2016 (incorporated by reference to Exhibit 3.2 of the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015, filed with the SEC on February 23, 2016). |
4.1 | | Registration Rights Agreement, dated August 8, 2017, by and among Macquarie Infrastructure Corporation, WDE Epic Aggregate LLC, BWE Epic Holdings I-A, L.P. and BWE Epic Holdings I, L.P. (incorporated by reference to Exhibit 4.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on August 14, 2017). |
| 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 Corporation for the quarter ended September 30, 2017,2018, filed on November 1, 2017,October 31, 2018, formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Condensed Balance Sheets as of September 30, 20172018 (Unaudited) and December 31, 2016,2017, (ii) the Consolidated Condensed Statements of Operations for the quarters and nine months ended September 30, 20172018 and 20162017 (Unaudited), (iii) the Consolidated Condensed Statements of Comprehensive Income for the quarters and nine months ended September 30, 20172018 and 20162017 (Unaudited), (iv) the Consolidated Condensed Statements of Cash Flows for the nine months ended September 30, 20172018 and 20162017 (Unaudited) and (v) the Notes to Consolidated Condensed Financial Statements (Unaudited). |
| † | Schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company agrees to furnish supplemental copies of any schedule or exhibit upon request by the SEC. |
E-1