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, 2018
March 31, 2019
OR
| | |
| o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period from to
Commission File Number: 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
Securities registered pursuant to Section 12(b) of the Act:
| | | | |
Title of Each Class
| | Trading Symbol | | Name of Each Exchange on Which Registered |
| Common Stock, par value $0.001 per share | | MIC | | New York Stock Exchange |
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 85,640,11886,044,799 shares of common stock, with $0.001 par value, outstanding at OctoberApril 30, 2018.2019.
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MACQUARIE INFRASTRUCTURE CORPORATION
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| | Page |
PART I. FINANCIAL INFORMATION
| |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations | | | 1 | |
| Quantitative and Qualitative Disclosures About Market Risk | | | 3224 | |
| Controls and Procedures | | | 3324 | |
Consolidated Condensed Balance Sheets as of September 30, 2018March 31, 2019 (Unaudited) and December 31, 20172018 | | | 3426 | |
Consolidated Condensed Statements of Operations for the Quarters Ended March 31, 2019 and Nine Months Ended September 30, 2018 and 2017 (Unaudited) | | | 3628 | |
Consolidated Condensed Statements of Comprehensive Income for the Quarters Ended March 31, 2019 and Nine Months Ended September 30, 2018 and 2017 (Unaudited) | | | 3729 | |
| Consolidated Condensed Statements of Stockholders’ Equity for the Quarters Ended March 31, 2019 and 2018 (Unaudited) | | | 30 | |
Consolidated Condensed Statements of Cash Flows for the Nine MonthsQuarters Ended September 30,March 31, 2019 and 2018 and 2017 (Unaudited) | | | 3831 | |
| Notes to Consolidated Condensed Financial Statements (Unaudited) | | | 4033 | |
PART II. OTHER INFORMATION
| |
Item 1. Legal Proceedings | | | 6555 | |
Item 1A. Risk Factors | | | 6555 | |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | | | 6655 | |
Item 3. Defaults Upon Senior Securities | | | 6655 | |
Item 4. Mine Safety Disclosures | | | 6656 | |
Item 5. Other Information | | | 6656 | |
Item 6. Exhibits | | | 6656 | |
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, 2017,2018, 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.Board. The majority of the members of our Board, of Directors, and each member of all Board Committees,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 Securities Exchange.
We currently own and operate a diversified portfolio of infrastructure and infrastructure-like businesses that provide services to other businesses,corporate, government agencies and individualsindividual customers primarily in the U.S. TheOur businesses we own and operate are organized into four segments:
| • | International-Matex Tank Terminals (IMTT):: a business providing bulk liquid terminalling to third parties at 17 terminals in the U.S. and two in Canada; |
| • | Atlantic Aviation: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:MIC Hawaii comprising 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 in Hawaii.Hawaii; and |
| • | Corporate and Other: comprised of MIC Corporate (holding company), a shared services center and other smaller businesses. |
ThroughEffective October 12,1, 2018, the Bayonne Energy Center (BEC) and substantially all of our portfolio of solar and wind power generation businesses were classified as discontinued operations and our Contracted Power segment was eliminated. Effective January 1, 2019, our interest in our renewable power development business was also includedclassified as discontinued operations. A remaining relationship with a gas-fired facility.third party developer of renewable power facilities has been reported as a component of Corporate and Other and is expected to conclude during 2019 pursuant to the agreement. All prior comparable periods have been restated to reflect this change. We did not restate the prior period related to the commencement of the sale process involving our majority interest in a renewable power development business as the disposition is insignificant. See “Recent Developments” below for further information.
Our businesses generally operate in sectors with barriers to entry including high initial development and construction costs, contracted revenues or the requirement to obtain government approvals and a lack of immediate cost-effective alternatives to the services provided. Collectively, they tend to generate sustainable, stable and growing cash flows over the 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 and Free Cash Flow and certain proportionately combined financial metrics. Proportionately combined financial metrics reflect our proportionate interest in our wind and solar facilities.Flow.
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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.
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 and Free Cash Flow and Proportionately Combined Metrics” for further information on our calculation of EBITDA excluding non-cash items and Free Cash Flow and our proportionately combined metrics and for reconciliations of these non-GAAP measures to the most comparable GAAP measures.
At IMTT, we focus on providing bulk liquid storage, handling and other services pursuant to “take-or-pay” contracts with a revenue weighted average remaining contract life of 2.0 years 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 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 purchasethe sale of fuel and other services fromto owners and pilots of GA aircraft through our fixed based operations (FBOs). Atlantic Aviation’s resulting in a gross margin that is positively correlated with the number of GA flight movements (take-offs and landings) in the U.S. and the business’ ability to service a portion of the aircraft involved in those operations.
The businesses that comprise our Contracted Power segment generate revenue by producing and selling electric power pursuant primarily to long-dated power purchase agreements (PPAs).
MIC Hawaii comprises Hawaii Gas and several smaller businesses collectively engagedthat generate revenue primarily from the provision of gas services to commercial, residential and governmental customers and the generation of power while engaging 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.
Dividends
Since January 1, 2017,2018, MIC has paid or declared the following dividends:
 | | | | | | | | |
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 | |
| | | | | | | | |
Declared
| | Period Covered | | $ per Share | | Record Date | | Payable Date |
April 29, 2019
| | | First quarter 2019 | | | $ | 1.00 | | | | May 13, 2019 | | | | May 16, 2019 | |
February 14, 2019
| | | Fourth quarter 2018 | | | | 1.00 | | | | March 4, 2019 | | | | March 7, 2019 | |
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 | |
We currently intend to maintain,provide investors with the benefits of access to a portfolio of infrastructure and where possible, increaseinfrastructure-like businesses that we believe will generate growing amounts of cash flow over time as a result of their positive correlation with inflation and provision of basic services to customers. Consistent with this, we intend to distribute the majority of the cash generated from operations of our businesses as a quarterly cash dividend to our shareholders. The MICdividend. Our Board has authorized a quarterly cash dividend of $1.00 per share for the quarter ended September 30, 2018. 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 quarterly dividend.March 31, 2019.
Our board of directorsBoard regularly reviews our dividend policy and payout ratio.the proportion of our Free Cash Flow that the distribution represents (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 stockholdersshareholders 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 SaleBusiness Divestitures
On July 27, 2018, we entered into an agreement to sell 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 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. We incurred approximately $10.0 million in professional fees in relation to this transaction of which 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,fourth quarter of 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 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.
Prior to the execution of 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, weCompany commenced a sale process involving its portfolios of solar and wind facilities within the majorityformer Contracted Power segment. In April 2019, the Company entered into agreements for the sale of these portfolios. Aggregate gross proceeds to the Company from the sales are expected to be approximately $215 million or approximately $160 million net of taxes and transaction related expenses. In addition, upon closing, MIC will deconsolidate $302 million of long-term debt. Under the agreements, the Company will sell its 203 megawatts (MW) (gross) portfolio of wind generation assets to DIF Infrastructure V, a fund managed by Dutch Infrastructure Fund, a global infrastructure fund management company, and its 142 MW portfolio of solar power generation assets to Goldman Sachs Renewable Power LLC. Closing of the assetstransactions is subject to receipt of customary consents for transactions of this type. The sale of the individual businesses comprising the portfolios are expected to close in two or possibly three stages over the balance of 2019.
Discontinued Operations — Presentation
Effective October 1, 2018, BEC and substantially all of our portfolio of solar and wind power generation businesses were classified as discontinued operations and solar facilities. We believeour Contracted Power segment was eliminated. Effective January 1, 2019, our interest in our renewable power development business was also classified as discontinued operations. A remaining relationship with a sale of these assets and the redeployment of the proceeds will maximize value relative to attempting to continue to expand the portfolio through acquisitions. We expect to retain two of our solar facilities and to maintain our two existing relationships with developersthird party developer of renewable power opportunities. The sale processfacilities has been reported as a component of Corporate and Other and is expected to be concluded inconclude during 2019 pursuant to the second quarter of 2019.
Manager Waiver of Base Management Fees
Effective November 1, 2018, our Manager has electedagreement. All prior comparable periods have been restated to waive two portionsreflect this change. We did not restate the prior period related to the commencement 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% ofsale process involving 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 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 resultmajority interest in a reductionrenewable power development business as the disposition is insignificant. For additional information, see Note 3, “Discontinued Operations and Dispositions”, in the fees paidour Notes to the ManagerConsolidated Condensed Financial Statements in Part I 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.this Form 10-Q.
Results of Operations
Consolidated
Our consolidated results reflect a decrease infor the contribution from IMTT primarily as a result ofquarter ended March 31, 2019 compared with the non-renewal of certain contracts for bulk liquid storage and handling services and the absence of deferred revenue recognized in 2017 in connection withquarter ended March 31, 2018 reflect: (i) proceeds received related to the termination of a construction project. These were partially offset by contributions from an acquisitionagreement with the owner of a portfolio of storage terminals completedrefinery at IMTT’s terminal in St. Rose, LA (the refinery termination payment); (ii) increases in the third quartervolume of 2017.
Our consolidated results also reflect increased contributions from ourfuel sold, hangar rentals and ancillary fees at Atlantic Aviation and Contracted Power businesses. Atlantic Aviation benefited from contributions from acquisitions, together withAviation; (iii) the operational leverage inherent in the business, partially offset by decreases in GA flight activity at certainpositive impact of the airports on which the business operates. The improved contribution from Contracted Power was the result of the BEC plant expansion coming on linerate case and improved wind and solar resources.
MIC Hawaii’s contribution declined primarily as a result of the underperformance of CPI,lower propane costs at Hawaii Gas and the write-downdivestment 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 thedesign-build mechanical contractor business at the endMIC Hawaii; and (iv) fee income from a third party developer of June. The Final Decisionrenewable power projects in Corporate and Order could potentially include an unfavorable rate adjustment which may have a retroactive impact on revenues since the Interim Decision and Order.
Results for the third quarter of 2018 also reflect the absence of implementation costs incurred in 2017 related to our shared services facility, but reflects the associated benefit of reductions in procurement costs in 2018. The absence of these expenses wasOther. These increases are partially offset by the cost of advisoryexpected lower storage utilization levels and other services in connection with addressing shareholder matters in 2018.
Capital deployed into acquisitions by each ofstorage rates at IMTT and Atlantic Aviationoverall higher professional fees.
Contributions from discontinued operations decreased primarily due to the impact of change in 2017, as well as growth investments generally, contributed to revenuetax rates from the Tax Cuts and EBITDA exluding non-cash items to our overall results inJobs Act during the quarter ended March 31, 2018 and nine months ended September 30,sale of BEC in October 2018.
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Results of Operations: Consolidated – (continued)
Our consolidated results of operations are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended
September 30, | | Change
Favorable/
(Unfavorable) | | Nine Months Ended
September 30, | | Change
Favorable/
(Unfavorable) | | Quarter Ended March 31, | | Change
Favorable/(Unfavorable) |
| | | 2018 | | 2017 | | $ | | % | | 2018 | | 2017 | | $ | | % | | 2019 | | 2018 | | $ | | % |
| | | ($ In Thousands, Except Share and Per Share Data) (Unaudited) | | ($ In Millions, 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 | | | $ | 418 | | | $ | 403 | | | | 15 | | | | 4 | |
| Product revenue | | | 112,249 | | | | 94,841 | | | | 17,408 | | | | 18.4 | | | | 313,279 | | | | 276,439 | | | | 36,840 | | | | 13.3 | | | | 64 | | | | 64 | | | | — | | | | — | |
| Total revenue | | | 473,280 | | | | 453,061 | | | | 20,219 | | | | 4.5 | | | | 1,452,916 | | | | 1,343,508 | | | | 109,408 | | | | 8.1 | | | | 482 | | | | 467 | | | | 15 | | | | 3 | |
Costs and expenses
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cost of services | | | 166,694 | | | | 153,218 | | | | (13,476 | ) | | | (8.8 | ) | | | 533,889 | | | | 455,038 | | | | (78,851 | ) | | | (17.3 | ) | | | 168 | | | | 187 | | | | 19 | | | | 10 | |
| Cost of product sales | | | 47,823 | | | | 35,669 | | | | (12,154 | ) | | | (34.1 | ) | | | 148,372 | | | | 123,143 | | | | (25,229 | ) | | | (20.5 | ) | | | 40 | | | | 48 | | | | 8 | | | | 17 | |
| Selling, general and administrative | | | 86,487 | | | | 84,898 | | | | (1,589 | ) | | | (1.9 | ) | | | 262,371 | | | | 244,817 | | | | (17,554 | ) | | | (7.2 | ) | | | 80 | | | | 80 | | | | — | | | | — | |
| Fees to Manager-related party | | | 12,333 | | | | 17,954 | | | | 5,621 | | | | 31.3 | | | | 36,113 | | | | 54,610 | | | | 18,497 | | | | 33.9 | | | | 8 | | | | 13 | | | | 5 | | | | 38 | |
| 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 | ) | | | 48 | | | | 47 | | | | (1 | ) | | | (2 | ) |
| Amortization of intangibles | | | 20,030 | | | | 17,329 | | | | (2,701 | ) | | | (15.6 | ) | | | 55,470 | | | | 50,920 | | | | (4,550 | ) | | | (8.9 | ) | | | 15 | | | | 16 | | | | 1 | | | | 6 | |
| Total operating expenses | | | 393,506 | | | | 367,077 | | | | (26,429 | ) | | | (7.2 | ) | | | 1,218,798 | | | | 1,101,281 | | | | (117,517 | ) | | | (10.7 | ) | | | 359 | | | | 391 | | | | 32 | | | | 8 | |
| Operating income | | | 79,774 | | | | 85,984 | | | | (6,210 | ) | | | (7.2 | ) | | | 234,118 | | | | 242,227 | | | | (8,109 | ) | | | (3.3 | ) | | | 123 | | | | 76 | | | | 47 | | | | 62 | |
Other income (expense)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest income | | | 113 | | | | 54 | | | | 59 | | | | 109.3 | | | | 304 | | | | 129 | | | | 175 | | | | 135.7 | | | | 3 | | | | — | | | | 3 | | | | NM | |
| Interest expense(1) | | | (32,616 | ) | | | (29,291 | ) | | | (3,325 | ) | | | (11.4 | ) | | | (81,693 | ) | | | (90,129 | ) | | | 8,436 | | | | 9.4 | | | | (42 | ) | | | (18 | ) | | | (24 | ) | | | (133 | ) |
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 | ) | |
| Other income, net | | | | 4 | | | | — | | | | 4 | | | | NM | |
| Net income from continuing operations before income taxes | | | | 88 | | | | 58 | | | | 30 | | | | 52 | |
| Provision for income taxes | | | (7,884 | ) | | | (25,547 | ) | | | 17,663 | | | | 69.1 | | | | (36,558 | ) | | | (65,284 | ) | | | 28,726 | | | | 44.0 | | | | (24 | ) | | | (18 | ) | | | (6 | ) | | | (33 | ) |
| Net income from continuing operations | | | $ | 64 | | | $ | 40 | | | | 24 | | | | 60 | |
Discontinued Operations
| | | | | | | | | | | | | | | | | |
| Net income from discontinued operations before income taxes | | | $ | 3 | | | $ | 6 | | | | (3 | ) | | | (50 | ) |
| Benefit for income taxes | | | | 2 | | | | 1 | | | | 1 | | | | 100 | |
| Net income from discontinued operations | | | $ | 5 | | | $ | 7 | | | | (2 | ) | | | (29 | ) |
| Net income | | $ | 21,376 | | | $ | 36,173 | | | | (14,797 | ) | | | (40.9 | ) | | $ | 104,450 | | | $ | 94,836 | | | | 9,614 | �� | | | 10.1 | | | $ | 69 | | | $ | 47 | | | | 22 | | | | 47 | |
| Net income from continuing operations | | | $ | 64 | | | $ | 40 | | | | 24 | | | | 60 | |
| Net income from continuing operations attributable to MIC | | | $ | 64 | | | $ | 40 | | | | 24 | | | | 60 | |
| Net income from discontinued operations | | | $ | 5 | | | $ | 7 | | | | (2 | ) | | | (29 | ) |
| Less: net loss attributable to noncontrolling interests | | | (328 | ) | | | (3,922 | ) | | | (3,594 | ) | | | (91.6 | ) | | | (32,454 | ) | | | (7,294 | ) | | | 25,160 | | | | NM | | | | (1 | ) | | | (30 | ) | | | (29 | ) | | | (97 | ) |
| Net income from discontinued operations attributable to MIC | | | $ | 6 | | | $ | 37 | | | | (31 | ) | | | (84 | ) |
| Net income attributable to MIC | | $ | 21,704 | | | $ | 40,095 | | | | (18,391 | ) | | | (45.9 | ) | | $ | 136,904 | | | $ | 102,130 | | | | 34,774 | | | | 34.0 | | | $ | 70 | | | $ | 77 | | | | (7 | ) | | | (9 | ) |
| Basic income per share from continuing operations attributable to MIC | | | $ | 0.75 | | | $ | 0.47 | | | | 0.28 | | | | 60 | |
| Basic income per share from discontinued operations attributable to MIC | | | | 0.07 | | | | 0.44 | | | | (0.37 | ) | | | (84 | ) |
| Basic income per share attributable to MIC | | $ | 0.25 | | | $ | 0.48 | | | | (0.23 | ) | | | (47.9 | ) | | $ | 1.61 | | | $ | 1.23 | | | | 0.38 | | | | 30.9 | | | $ | 0.82 | | | $ | 0.91 | | | | (0.09 | ) | | | (10 | ) |
| 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 | | | | 85,872,132 | | | | 84,821,453 | | | | 1,050,679 | | | | 1 | |
NM — Not meaningful
| (1) | Interest expense includes losses on derivative instruments of $4 million and gains on derivative instruments of $4.8 million and $25.8$10 million for the quarterquarters ended March 31, 2019 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 revenues increased for the quarter and nine months ended September 30, 2018 compared with the quarter and nine months ended September 30, 2017 primarily as a result of, (i) an increase in the wholesale cost of jet fuel sold at Atlantic Aviation; (ii) an increase in the volume and the wholesale cost of propane and synthetic natural gas sold at Hawaii Gas; (iii) increased capacity and power production by our Contracted Power businesses; and, (iv) contributions from acquisitions. The increase in revenue for the nine months ended September 30, 2018 was partially offset by the absence of deferred revenue recognized in 2017 in connection with the termination of a construction project at IMTT.
TABLE OF CONTENTS
Results of Operations: Consolidated – (continued)
Revenue
Consolidated revenues increased for the quarter ended March 31, 2019 compared with the quarter ended March 31, 2018 primarily as a result of, (i) proceeds received from the refinery termination payment at IMTT; and (ii) increases in the volume of fuel sold, hangar rentals and ancillary fees at Atlantic Aviation; partially offset by (iii) the divestment of a design-build mechanical contractor business at MIC Hawaii; and (iv) the absence of revenue as a result of the sale of IMTT’s subsidiary OMI Environmental Solutions (OMI) and the expected lower storage utilization and storage rates at IMTT.
Cost of Services and Product Sales
Consolidated cost of services and product sales increaseddecreased for the quarter and nine months ended September 30, 2018March 31, 2019 compared with the quarter and nine months ended September 30, 2017March 31, 2018 primarily dueas a result of, (i) the absence of costs related to (i) an increasethe divested design-build mechanical contractor business; (ii) the favorable change in the wholesale cost of jet fuel at Atlantic Aviation; (ii) an increase in the wholesale cost of propane and 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 also reflect unrealized gains and losses(losses) on commodity hedges principally propane, at Hawaii Gas (seeGas; and (iii) lower propane costs at Hawaii Gas. See “Results of Operations — MIC Hawaii” below).
Selling, General and Administrative Expenses
Selling, general and administrative expenses increasedwere flat for the quarter and nine months ended September 30, 2018March 31, 2019 compared with the quarter and nine months ended September 30, 2017 primarily dueMarch 31, 2018 reflecting the absence of expenses related to (i) incremental costs associated with acquired and developed businesses; and (ii) approximately $3.0 million ofbusinesses that were sold during 2018, partially offset by higher professional fees, including 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/disposition opportunities.other legal matters.
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 quarterquarters ended March 31, 2019 and nine months ended September 30, 2018, we incurred base management fees of $12.3$8 million and $36.1$13 million, respectively, compared with $17.9 million and $54.6 millionrespectively. Base management fees decreased for the quarter ended March 31, 2019 compared with the quarter ended March 31, 2018 primarily due to the Manager’s waiver of two portions of the base management fee to which it is entitled and nine months ended September 30, 2017, respectively.a reduction in the market capitalization of our Company. In the first quarter of 2019, base management fees were calculated on the equity market capitalization of our Company less cash on hand at the holding company. No performance fees were incurred in anyeither of the above periods.current or prior comparable period. The unpaid portion of base management fees and performance fees, if any, at the end of each reporting period is included in the line itemDue to Manager-related party in our consolidated condensed balance sheets.
In all of the periods shown below, our Manager elected to reinvest any fees to which it was entitled in additional shares. In accordance with the Third Amended and Restated Management Services Agreement, our Manager has currently elected to reinvest future base management fees and performance fees, if any, in new primary shares.
| | | | | | | | | | | | |
| Period | | Base
Management
Fee Amount
($ in Thousands) | | Performance
Fee Amount
($ in Thousands) | | Shares
Issued | | Base Management
Fee Amount
($ in millions) | | Performance
Fee Amount
($ in millions) | | Shares
Issued |
2019 Activities:
| | | | | | | | | | | | | |
| First quarter 2019 | | | $ | 8 | | | $ | — | | | | 184,448 | (1) |
2018 Activities:
| | | | | | | | | | | | | | | | | | | | | | | | |
| Fourth quarter 2018 | | | $ | 9 | | | $ | — | | | | 220,208 | |
| Third quarter 2018 | | $ | 12,333 | | | $ | — | | | | 269,286 | (1) | | | 12 | | | | — | | | | 269,286 | |
| Second quarter 2018 | | | 10,852 | | | | — | | | | 277,053 | | | | 11 | | | | — | | | | 277,053 | |
| First quarter 2018 | | | 12,928 | | | | — | | | | 265,002 | | | | 13 | | | | — | | | | 265,002 | |
2017 Activities:
| | | | | | | | | | | | | |
| Fourth quarter 2017 | | $ | 16,778 | | | $ | — | | | | 248,162 | | |
| Third quarter 2017 | | | 17,954 | | | | — | | | | 240,674 | | |
| Second quarter 2017 | | | 18,433 | | | | — | | | | 233,394 | | |
| First quarter 2017 | | | 18,223 | | | | — | | | | 232,398 | | |
| (1) | Our Manager elected to reinvest all of the monthly base management fees for the thirdfirst quarter of 20182019 in shares. We issued 269,286184,448 shares for the quarter ended September 30, 2018,March 31, 2019, including 89,54262,467 shares that were issued in October 2018April 2019 for the September 2018March 2019 monthly base management fee. |
TABLE OF CONTENTS
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 decreasedincreased for the quarter ended September 30, 2018March 31, 2019 compared with the quarter ended September 30, 2017March 31, 2018 primarily due to the fact that BEC’s assets were no longer depreciated once it was classified as held for sale. The decrease was partially offset by the write-downa result of fixed assets at CPI and the increase in depreciation expense related to acquisitions and assets placed in service.
Depreciation expense increased for the nine months ended September 30, 2018 compared with the nine months ended September 30, 2017 primarily due to write-down of fixed assets at CPI and the increase in depreciation expense related to acquisitions and assets placed in 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 increaseddecreased for the quarter and nine months ended September 30, 2018March 31, 2019 compared with the quarter and nine months ended September 30, 2017March 31, 2018 primarily due to write-offsales of intangible assets at CPI. The increase was partially offset by the decreasecertain non-core businesses in amortization of intangibles due to the fact that BEC’s assets were no longer amortized once it was classified as held for sale.2018.
Interest Expense and Gains (Losses) on Derivative Instruments
Interest expense includes losses on derivative instruments of $4 million and gains on derivative instruments of $4.8 million and $25.8$10 million for the quarterquarters ended March 31, 2019 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. Gains and losses(losses) on derivatives recorded in interest expense are attributable to the change in fair value of interest rate hedging instruments. Excluding the derivative adjustments, cash interest expense was $32.5$28 million and $94.1$23 million for the quarterquarters ended March 31, 2019 and nine months ended September 30, 2018, respectively, compared with $27.1 million and $79.4 million for the quarter and nine months ended September 30, 2017, respectively. The increase in cash interest expense reflects primarily a higher average debt balance and an increase in the weighted average interest rate. See discussions of interest expense for each of our operating businesses below.
Other (Expense) Income, net
Other (expense) income, net, changed from other income, net, to other expense, net,increased primarily due to the write-down in our investment in CPIfee income from a third party developer of renewable power facilities 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, 2018.March 31, 2019.
Income Taxes
We file a consolidated federal income tax return that includes the financial results of IMTT, Atlantic Aviation, BEC, MIC Hawaii and our allocable share of the taxable income (loss) from ourthe solar and wind facilities in discontinued operations. The solar and solar facilities. The wind and solar facilities in which we own less than 100% of the equity interest are held in 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, 2018, weWe expect our current year federal taxable income from continuing operations for the year ending December 31, 2019 to be approximately $320.0$145 million including the expected taxable gain on the sale of BEC. We further expect this liabilityand current year state income taxes to be fully offset by net operating loss (NOL) carryforwards. Our initially reported NOL balance at December 31, 2017 was $347.3 million. As 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 $373.9approximately $16 million and we believe we will be able to fully utilize this amount.
We expect to utilize the majority of our federal prior year NOLs in 2018 and therefore, we are likely required to make material federal income tax payments in 2019. The amount of any federal income tax otherwise payable in 2019 is expected to be substantially reduced byincluding tax benefits associated with planned capital deploymentdeployments of approximately $300.0$275 million to $300 million. Conversely, gains from potential sales of assets concluded in 2019 would increase ourOur federal income tax payable.
In addition, we expect our businesses collectively to pay state/provincial income taxes of approximately $22.0 million inNOL carryforward at December 31, 2018 including the expected taxes due on the sale of BEC.was $152 million. 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.
The Tax Cuts and Jobs Act
On December 22, 2017, These estimates exclude the Tax Cuts and Jobs Act was signed into law and includes provisions that will have an impact onof gains from announced sales of assets expected to concluded in 2019. Such gains, or deployment of less than the planned amounts of growth capital, would increase our federal taxable income. The most significant of these are 100% bonus depreciation on qualifying assets (which is scheduled to decrease 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 limits the deductibility of net interest expense to 30% of “adjusted taxable income”. We do not expect this limitation to have a material impact 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 certain entities within the Contracted Power segment by the Tax Cuts and Jobs Act.state income taxes payable.
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) excluding non-cash items and 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 and Free Cash Flow and certain proportionately combined financial metrics. Proportionately combined financial metrics reflect our proportionate interest in our wind and solar facilities.Flow.
TABLE OF CONTENTS
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.
TABLE OF CONTENTS
Results of Operations: Consolidated – (continued)
Given our varied ownership levels in our Contracted 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 interest, tax payments and pension contributions, less maintenance capital expenditures, which includes principal repayments on capital lease obligations used to fund maintenance capital expenditures, and excludes 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 sustainingsustain and potentially increasingincrease 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 theour 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)(vi) 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 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.Corporate and Other. 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.
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 flows. We consider a number of factors in determining whether a specific capital expenditure will be classified as maintenance or growth.
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.
TABLE OF CONTENTS
Results of Operations: Consolidated – (continued)
A reconciliation of net income from continuing operations to EBITDA excluding non-cash items from continuing operations and a reconciliation from cash provided by operating activities from continuing operations to Free Cash Flow from continuing operations, on a consolidated basis, is provided below. Similar reconciliations for each of our operating businesses and MIC Corporate and Other follow.
| | | | | | | | | | | | | | | | |
| | Quarter Ended
September 30, | | Change
Favorable/
(Unfavorable) | | Nine Months Ended
September 30, | | Change
Favorable/
(Unfavorable) |
| | | 2018 | | 2017 | | $ | | % | | 2018 | | 2017 | | $ | | % |
| | | ($ In Thousands) (Unaudited) |
| Net income | | $ | 21,376 | | | $ | 36,173 | | | | | | | | | | | $ | 104,450 | | | $ | 94,836 | | | | | | | | | |
| Interest expense, net(1) | | | 32,503 | | | | 29,237 | | | | | | | | | | | | 81,389 | | | | 90,000 | | | | | | | | | |
| Provision for income taxes | | | 7,884 | | | | 25,547 | | | | | | | | | | | | 36,558 | | | | 65,284 | | | | | | | | | |
| Goodwill impairment | | | 3,215 | | | | — | | | | | | | | | | | | 3,215 | | | | — | | | | | | | | | |
| Depreciation | | | 56,924 | | | | 58,009 | | | | | | | | | | | | 179,368 | | | | 172,753 | | | | | | | | | |
| Amortization of intangibles | | | 20,030 | | | | 17,329 | | | | | | | | | | | | 55,470 | | | | 50,920 | | | | | | | | | |
Fees to Manager-related
party | | | 12,333 | | | | 17,954 | | | | | | | | | | | | 36,113 | | | | 54,610 | | | | | | | | | |
| Pension expense(2) | | | 2,094 | | | | 2,160 | | | | | | | | | | | | 6,284 | | | | 6,481 | | | | | | | | | |
| 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) | | | (32,503 | ) | | | (29,237 | ) | | | | | | | | | | | (81,389 | ) | | | (90,000 | ) | | | | | | | | |
| Adjustments to derivative instruments recorded in interest expense(1) | | | (3,054 | ) | | | (959 | ) | | | | | | | | | | | (22,809 | ) | | | 1,724 | | | | | | | | | |
| Amortization of debt financing costs(1) | | | 2,191 | | | | 2,163 | | | | | | | | | | | | 7,430 | | | | 6,464 | | | | | | | | | |
Amortization of debt
discount(1) | | | 910 | | | | 882 | | | | | | | | | | | | 2,710 | | | | 2,377 | | | | | | | | | |
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 | | | 147,051 | | | | 149,723 | | | | | | | | | | | | 413,053 | | | | 398,360 | | | | | | | | | |
| 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 | | $ | 110,892 | | | $ | 141,273 | | | | (30,381 | ) | | | (21.5 | ) | | $ | 372,209 | | | $ | 422,933 | | | | (50,724 | ) | | | (12.0 | ) |
| | | | | | | | |
| | Quarter Ended March 31, | | Change
Favorable/(Unfavorable) |
| | | 2019 | | 2018 | | $ | | % |
| | | ($ In Millions) (Unaudited) |
| Net income from continuing operations | | $ | 64 | | | $ | 40 | | | | | | | | | |
| Interest expense, net(1) | | | 39 | | | | 18 | | | | | | | | | |
| Provision for income taxes | | | 24 | | | | 18 | | | | | | | | | |
| Depreciation | | | 48 | | | | 47 | | | | | | | | | |
| Amortization of intangibles | | | 15 | | | | 16 | | | | | | | | | |
| Fees to Manager-related party | | | 8 | | | | 13 | | | | | | | | | |
| Other non-cash expense, net(2) | | | 4 | | | | 9 | | | | | | | | | |
| EBITDA excluding non-cash items-continuing operations | | $ | 202 | | | $ | 161 | | | | 41 | | | | 25 | |
| EBITDA excluding non-cash items-continuing operations | | $ | 202 | | | $ | 161 | | | | | | | | | |
| Interest expense, net(1) | | | (39 | ) | | | (18 | ) | | | | | | | | |
| Adjustments to derivative instruments recorded in interest expense(1) | | | 7 | | | | (9 | ) | | | | | | | | |
| Amortization of debt financing costs(1) | | | 3 | | | | 3 | | | | | | | | | |
| Amortization of debt discount(1) | | | 1 | | | | 1 | | | | | | | | | |
| Provision for current income taxes | | | (7 | ) | | | (4 | ) | | | | | | | | |
| Changes in working capital | | | (16 | ) | | | (4 | ) | | | | | | | | |
| Cash provided by operating activities-continuing operations | | | 151 | | | | 130 | | | | | | | | | |
| Changes in working capital | | | 16 | | | | 4 | | | | | | | | | |
| Maintenance capital expenditures | | | (10 | ) | | | (10 | ) | | | | | | | | |
| Free cash flow-continuing operations | | | 157 | | | | 124 | | | | 33 | | | | 27 | |
| Free cash flow-discontinued operations | | | 7 | | | | 13 | | | | (6 | ) | | | (46 | ) |
| Total Free Cash Flow | | $ | 164 | | | $ | 137 | | | | 27 | | | | 20 | |
| (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. |
| (2) | Other non-cash expense, net, primarily includes pension expense of $2 million for the quarters ended March 31, 2019 and 2018, unrealized gains (losses) on commodity hedges and non-cash gains (losses) related to the disposal of assets. 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 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 and Free Cash Flow and Proportionately Combined MetricsFlow”” 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. |
TABLE OF CONTENTS
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) |
| | | 2018 | | 2017 | | $ | | % | | 2018 | | 2017 | | $ | | % |
| | | ($ In Thousands) (Unaudited) |
Free Cash Flow – Consolidated
basis | | $ | 110,892 | | | $ | 141,273 | | | | (30,381 | ) | | | (21.5 | ) | | $ | 372,209 | | | $ | 422,933 | | | | (50,724 | ) | | | (12.0 | ) |
| 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 | | | 11,342 | | | | (8,137 | ) | | | | | | | | | | | (6,634 | ) | | | (32,368 | ) | | | | |
| MIC’s share of MIC Hawaii Free Cash Flow | | | (11,345 | ) | | | 8,132 | | | | | | | | | | | | 6,626 | | | | 32,358 | | | | | | | | | |
| Free Cash Flow – Proportionately Combined basis | | $ | 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 leasecontract 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.
contracts. The portion of IMTT’s storage capacity under lease declined to an average of 82.1%contract (utilization) averaged 82.5% for the quarter ended September 30, 2018March 31, 2019 compared with 92.7% in the prior comparable quarter and 86.1%88.1% in the quarter ended June 30,March 31, 2018 and 82.0% in the quarter ended December 31, 2018. AverageThe increase in utilization from the quarter ended December 31, 2018 reflects the successful repurposing of 1.3 million barrels during 2018 and increased seasonal demand in Bayonne. These are partially offset by the anticipated and previously disclosed impact of the non-renewal of certain contracts for the storage rates declinedof primarily asheavy and residual oil on the Lower Mississippi River and those contracts for storage associated with a result of lower rates achievedrefinery on renewal of gasolinethe IMTT terminal at St. Rose and distillates contractshas been idled. IMTT expects utilization to average in New York Harbor.the mid-80% level during 2019, subject to market conditions.
Based upon available information and industry expectations, IMTT expects the impact of 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 utilization related to growing demand for storage of a range of products and related toservices coinciding with the implementation of the International Maritime Organization’s IMO Marpol Annex VI (IMO 2020) regulations limiting the sulphur content of bunkermarine fuel beginningon January 1, 2020. As with most significant regulatory changes effecting an industry, there are a number of aspects of the implementation of IMO 2020 that cannot be determined with certainty at this time, including the expected impact on the demand for storage and utiliztion at IMTT.
IMTT’s financial results for the first quarter of 2019 also reflect $39 million of proceeds received from the refinery termination payment. Storage rates for gasoline and distillate contracts in Bayonne, NJ and heavy and residual fuel contracts on the Lower Mississippi River were lower in the first quarter of 2019 than in the prior comparable period. IMTT expects lower storage rates to continue to impact its financial results through 2019 to the point at which utilization levels increase and subsequently market pricing increases in line with tightening storage supply.
IMTT is currently both involved in and evaluating a number of initiatives related to repurposing existing storage capacity and repositioning the overall business:
Repurposing
In early 2018, IMTT anticipates cleaning and modifying tanksannounced that it could repurpose up to 3.0 million barrels of capacity 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. Approximatelyoils or in support of repositioning projects involving fundamental users of heavy and residual oil storage. IMTT currently expects to repurpose approximately 1.0 million barrels of capacity in 2019, subject to identification of a corresponding amount of customer demand, in addition to the approximately 1.3 million barrels of storage capacity that it successfully repurposed in 2018.
Repositioning
Repositioning includes projects intended to leverage IMTT’s existing terminal locations through increases in capacity, capability and connectivity designed to meet customer demand and/or further diversify the mix of products handled. During the quarter ended March 31, 2019, IMTT announced approximately $75 million of projects involving the construction of additional capacity and related infrastructure supporting vegetable oil and specialty petroleum products.
During the quarter ended March 31, 2019, IMTT entered into an agreement with Methanex pursuant to which it will accelerate the construction of 157,000 barrels of new methanol storage at IMTT’s terminal in Geismar, LA in support of two existing methanol manufacturing plants. IMTT had previously announced that it would construct up to 714,000 barrels of new methanol storage subject to Methanex proceeding with the construction of a new, third methanol production plant in Geismar. A decision by Methanex on the development of a third plant is being repurposed currentlynot expected until at least the middle of 2019. The project is subject to customary pre-construction permitting and approximately 600,000 of these barrels areapprovals and is not expected to be returnedgenerate any contribution 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-contractedEBITDA in November 2018.2019.
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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.
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 what we believe are 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.
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Results of Operations:IMTT – (continued)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended
September 30, | | Change Favorable/
(Unfavorable) | | Nine Months Ended
September 30, | | Change
Favorable/
(Unfavorable) | | Quarter Ended March 31, | | Change
Favorable/(Unfavorable) |
| | | 2018 | | 2017 | | 2018 | | 2017 | | 2019 | | 2018 |
| | | $ | | $ | | $ | | % | | $ | | $ | | $ | | % | | $ | | $ | | $ | | % |
| | | ($ In Thousands) (Unaudited) | | ($ In Millions) (Unaudited) |
| Revenue | | | 118,229 | | | | 134,167 | | | | (15,938 | ) | | | (11.9 | ) | | | 386,981 | | | | 410,128 | | | | (23,147 | ) | | | (5.6 | ) | | | 161 | | | | 139 | | | | 22 | | | | 16 | |
| Cost of services | | | 43,864 | | | | 48,982 | | | | 5,118 | | | | 10.4 | | | | 148,005 | | | | 148,052 | | | | 47 | | | | 0.0 | | | | 50 | | | | 54 | | | | 4 | | | | 7 | |
| Selling, general and administrative expenses | | | 7,565 | | | | 9,104 | | | | 1,539 | | | | 16.9 | | | | 24,685 | | | | 25,627 | | | | 942 | | | | 3.7 | | | | 8 | | | | 9 | | | | 1 | | | | 11 | |
| Depreciation and amortization | | | 32,683 | | | | 31,511 | | | | (1,172 | ) | | | (3.7 | ) | | | 98,702 | | | | 93,826 | | | | (4,876 | ) | | | (5.2 | ) | | | 33 | | | | 33 | | | | — | | | | — | |
| Operating income | | | 34,117 | | | | 44,570 | | | | (10,453 | ) | | | (23.5 | ) | | | 115,589 | | | | 142,623 | | | | (27,034 | ) | | | (19.0 | ) | | | 70 | | | | 43 | | | | 27 | | | | 63 | |
| Interest expense, net(1) | | | (11,677 | ) | | | (10,187 | ) | | | (1,490 | ) | | | (14.6 | ) | | | (30,349 | ) | | | (30,707 | ) | | | 358 | | | | 1.2 | | | | (13 | ) | | | (8 | ) | | | (5 | ) | | | (63 | ) |
| Other income, net | | | 414 | | | | 794 | | | | (380 | ) | | | (47.9 | ) | | | 864 | | | | 1,954 | | | | (1,090 | ) | | | (55.8 | ) | |
| Provision for income taxes | | | (6,422 | ) | | | (14,422 | ) | | | 8,000 | | | | 55.5 | | | | (24,195 | ) | | | (46,686 | ) | | | 22,491 | | | | 48.2 | | | | (16 | ) | | | (10 | ) | | | (6 | ) | | | (60 | ) |
| Net income | | | 16,432 | | | | 20,755 | | | | (4,323 | ) | | | (20.8 | ) | | | 61,909 | | | | 67,184 | | | | (5,275 | ) | | | (7.9 | ) | | | 41 | | | | 25 | | | | 16 | | | | 64 | |
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 | | | 16,432 | | | | 20,755 | | | | | | | | | | | | 61,909 | | | | 67,184 | | | | | | | | | | | | 41 | | | | 25 | | | | | | | | | |
| Interest expense, net(1) | | | 11,677 | | | | 10,187 | | | | | | | | | | | | 30,349 | | | | 30,707 | | | | | | | | | | | | 13 | | | | 8 | | | | | | | | | |
| Provision for income taxes | | | 6,422 | | | | 14,422 | | | | | | | | | | | | 24,195 | | | | 46,686 | | | | | | | | | | | | 16 | | | | 10 | | | | | | | | | |
| Depreciation and amortization | | | 32,683 | | | | 31,511 | | | | | | | | | | | | 98,702 | | | | 93,826 | | | | | | | | | | | | 33 | | | | 33 | | | | | | | | | |
| Pension expense(2) | | | 1,914 | | | | 1,883 | | | | | | | | | | | | 5,737 | | | | 5,649 | | | | | | | | | | |
| Other non-cash expense, net | | | 207 | | | | 178 | | | | | | | | | | | | 611 | | | | 315 | | | | | | | | | | |
| Other non-cash expenses, net(2) | | | | 1 | | | | 2 | | | | | | | | | |
EBITDA excluding non-cash
items | | | 69,335 | | | | 78,936 | | | | (9,601 | ) | | | (12.2 | ) | | | 221,503 | | | | 244,367 | | | | (22,864 | ) | | | (9.4 | ) | | | 104 | | | | 78 | | | | 26 | | | | 33 | |
EBITDA excluding non-cash
items | | | 69,335 | | | | 78,936 | | | | | | | | | | | | 221,503 | | | | 244,367 | | | | | | | | | | | | 104 | | | | 78 | | | | | | | | | |
| Interest expense, net(1) | | | (11,677 | ) | | | (10,187 | ) | | | | | | | | | | | (30,349 | ) | | | (30,707 | ) | | | | | | | | | | | (13 | ) | | | (8 | ) | | | | | | | | |
| Adjustments to derivative instruments recorded in interest expense(1) | | | (870 | ) | | | (524 | ) | | | | | | | | | | | (6,263 | ) | | | (257 | ) | | | | | | | | | | | 2 | | | | (4 | ) | | | | | | | | |
| Amortization of debt financing costs(1) | | | 411 | | | | 413 | | | | | | | | | | | | 1,234 | | | | 1,236 | | | | | | | | | | | | 1 | | | | — | | | | | | | | | |
| Benefit (provision) for current income taxes | | | 2,593 | | | | 344 | | | | | | | | | | | | (6,059 | ) | | | (3,069 | ) | | | | | | | | | |
| Provision for current income taxes | | | | (11 | ) | | | (4 | ) | | | | | | | | |
| Changes in working capital | | | (721 | ) | | | 3,732 | | | | | | | | | | | | 9,913 | | | | (12,413 | ) | | | | | | | | | | | 8 | | | | 5 | | | | | | | | | |
| Cash provided by operating activities | | | 59,071 | | | | 72,714 | | | | | | | | | | | | 189,979 | | | | 199,157 | | | | | | | | | | | | 91 | | | | 67 | | | | | | | | | |
| Changes in working capital | | | 721 | | | | (3,732 | ) | | | | | | | | | | | (9,913 | ) | | | 12,413 | | | | | | | | | | | | (8 | ) | | | (5 | ) | | | | | | | | |
Maintenance capital
expenditures | | | (8,863 | ) | | | (8,116 | ) | | | | | | | | | | | (21,335 | ) | | | (13,563 | ) | | | | | | | | | | | (6 | ) | | | (7 | ) | | | | | | | | |
| Free cash flow | | | 50,929 | | | | 60,866 | | | | (9,937 | ) | | | (16.3 | ) | | | 158,731 | | | | 198,007 | | | | (39,276 | ) | | | (19.8 | ) | | | 77 | | | | 55 | | | | 22 | | | | 40 | |
| (1) | Interest expense, net, includes adjustments to derivative instruments and non-cash amortization of deferred financing fees. |
| (2) | Other non-cash expenses, net, primarily includes pension expense of $2 million for the quarters ended March 31, 2019 and 2018. Pension expense primarily consists of interest cost, expected return on plan assets and amortization of actuarial and performance gains and losses. See “Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) excluding non-cash items and Free Cash Flow” above for further discussion. |
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Results of Operations:IMTT – (continued)
Revenue
IMTT generates the majority of its revenue from contracts comprising a fixed monthly charge for access to or use of 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. At September 30, 2018,March 31, 2019, firm commitments had a revenue weighted average remaining contract life of 2.0 years, although some customers, particularly those storing certain petroleum products, are renewing and initiating contracts for shorter durations. Certain contracts for chemical and vegetable oil products are renewing and initiating for longer durations. Revenue from firm commitments, excluding proceeds received related to the refinery termination payment, comprised 84.8% and 80.3% of total revenue for the quarter and trailing twelve months ended September 30, 2018, respectively.March 31, 2019.
For the quarter and nine months ended September 30, 2018,March 31, 2019, total revenue decreasedincreased compared with the quarter and nine months ended September 30, 2017March 31, 2018 primarily due to the declinereceipt of $39 million in utilization and lower average storage rates on contract renewals, reduced environmental responseproceeds related to the refinery termination payment. This increase was partially offset by the absence of revenue as a result of the sale of IMTT’s subsidiary OMI Environmental Solutions (OMI) in April 2018, a decline in utilization and lower deferred revenue recognized in connection with the termination of a construction project in 2017. The decrease in revenue was partially offset by contributions from an acquisition of a portfolio of terminals completed in the third quarter of 2017.average storage rates on new and renewing contracts.
Cost 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, 2018March 31, 2019 compared with the quarter and nine months ended September 30, 2017March 31, 2018 primarily due to the absence of costs related to OMI. The cost decreases wereOMI, partially offset by incremental costs related 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 expected increase in property taxes assessed on the terminal at St. Rose.
DepreciationRose LA, increased repair and Amortization
Depreciationmaintenance costs and amortization expense increased for the quarter and nine months ended September 30, 2018 compared with the quarter and nine months ended September 30, 2017 primarily due to an acquisition of terminals in 2017.higher labor costs.
Interest Expense, Net
Interest expense includes losses on derivative instruments of $2 million and gains on derivative instruments of $1.2 million and $6.8$4 million for the quarterquarters ended March 31, 2019 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. Excluding the derivative adjustments, cash interest expense decreased for the quarter ended March 31, 2019 compared with the quarter ended March 31, 2018 primarily due to lower debt balances and a lower weighted average interest rate. Cash interest expense was $12.2 million and $35.4$10 million for the quarter and nine months ended September 30, 2018, respectively,March 31, 2019 compared with $10.3 million and $29.7$12 million for the quarter and nine months ended September 30, 2017, respectively. The increase in cash interest expense reflects a higher average debt balance and a 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 reduction in the corporate tax rate from 35% to 21% under the Tax Cuts and Jobs Act.March 31, 2018.
Income Taxes
The taxable income generated by IMTT is reported on our consolidated federal income tax return. The business files standalone state/state and provincial income tax returns in the jurisdictions in which it operates. For the year ending December 31, 2018,2019, the business expects to pay state/state and provincial income taxes of approximately $5.0$7 million. The Benefit (provision)Provision for current incometaxes of $6.1$11 million for the nine monthsquarter ended September 30, 2018March 31, 2019 in the above table includes $4.9 million of state/provincial income tax expense and $1.2$6 million of federal income tax expense. Any current federalexpense and $5 million of state income tax payable is expected to be offset in consolidation with the application of MIC holding company level NOLs.expense.
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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 qualify for federal bonus tax depreciation. A significant portion of terminal fixed assets in Louisiana that were constructed in the period after Hurricane Katrina in 2005 were financed with GO Zone Bonds. GO Zone Bond financed assets are depreciated, for tax purposes, primarily over 9 to 20 years using the straight-line method. Most of the states in which the business operates do not allow the use of bonus tax depreciation. Louisiana allows the use of bonus depreciation except for assets financed with GO Zone Bonds.
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Results of Operations:IMTT – (continued)
Maintenance Capital Expenditures
DuringFor the nine monthsquarter ended September 30, 2018,March 31, 2019, IMTT incurred maintenance capital expenditures of $21.3$6 million and $7 million on both an accrual basis and cash basis, respectively, compared with $13.6$7 million and $16.4$6 million on an accrual basis and cash basis, respectively, for the nine monthsquarter ended September 30, 2017.March 31, 2018. IMTT expects to incur between $40 million and $50 million of maintenance capital expenditures in 2019. The increase in 2018 compared with 2017 was primarily amaintenance capital expenditures in 2019 is the result of expenditures relatedan estimated $12 million expenditure on the first phase of the rehabilitation of a pier in Bayonne. The total cost of the pier is expected to the repurposing of storage capacitybe approximately $30 million and the timing of tank and dock inspections and repairs.is anticipated to be completed within three years.
Maintenance capital expenditures for the nine months ended September 30, 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%0.2% for the two month period including July and August and the eight monthsquarter ended AugustMarch 31, 2018, respectively,2019 compared with the same periods in 2017.quarter ended March 31, 2018. The number of GA flight movements tends to be correlated with general economic activity over the long-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.
TheAccording to the FAA data, the total number of GA flight movements at airports on whichwhere Atlantic Aviation operates decreasedincreased by 2.0% and 0.1%0.4% during the two month period including July and August and the eight monthsquarter ended AugustMarch 31, 2018, respectively,2019 compared with the same periods in 2017. The decreasequarter ended March 31, 2018. Activity at Atlantic Aviation’s FBOs for the quarter ended March 31, 2019 was consistent with 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 shortening of the runway. Atlantic Aviation believesbusiness’ belief 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
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Results of Operations: Atlantic Aviation operates, other than Santa Monica, decreased by 0.7% for the two month period including July and August and increased 1.1% the eight months ended August 31, 2018. – (continued)
Atlantic Aviation seeks to extend FBO leases prior to their maturity in order to maintain visibility into the cash generating capacity of these 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 19.919.7 years at September 30, 2018March 31, 2019 compared with 20.720.1 years at September 30, 2017.March 31, 2018.
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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) | | Quarter Ended March 31,Change
Favorable/(Unfavorable) |
| | | 2018 | | 2017 | | 2018 | | 2017 | | 2019 | | 2018 |
| | | $ | | $ | | $ | | % | | $ | | $ | | $ | | % | | $ | | $ | | $ | | % |
| | | ($ In Thousands) (Unaudited) | | ($ In Millions) (Unaudited) |
| Revenue | | | 234,908 | | | | 211,457 | | | | 23,451 | | | | 11.1 | | | | 715,041 | | | | 621,149 | | | | 93,892 | | | | 15.1 | | | | 258 | | | | 247 | | | | 11 | | | | 4 | |
| 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 | ) | | | 118 | | | | 117 | | | | (1 | ) | | | (1 | ) |
| Gross margin | | | 121,831 | | | | 119,351 | | | | 2,480 | | | | 2.1 | | | | 369,277 | | | | 348,164 | | | | 21,113 | | | | 6.1 | | | | 140 | | | | 130 | | | | 10 | | | | 8 | |
| Selling, general and administrative expenses | | | 57,146 | | | | 57,026 | | | | (120 | ) | | | (0.2 | ) | | | 173,802 | | | | 163,512 | | | | (10,290 | ) | | | (6.3 | ) | | | 61 | | | | 60 | | | | (1 | ) | | | (2 | ) |
| Depreciation and amortization | | | 25,582 | | | | 25,286 | | | | (296 | ) | | | (1.2 | ) | | | 78,020 | | | | 73,894 | | | | (4,126 | ) | | | (5.6 | ) | | | 26 | | | | 25 | | | | (1 | ) | | | (4 | ) |
| Operating income | | | 39,103 | | | | 37,039 | | | | 2,064 | | | | 5.6 | | | | 117,455 | | | | 110,758 | | | | 6,697 | | | | 6.0 | | | | 53 | | | | 45 | | | | 8 | | | | 18 | |
| Interest expense, net(1) | | | (5,290 | ) | | | (4,295 | ) | | | (995 | ) | | | (23.2 | ) | | | (9,601 | ) | | | (13,648 | ) | | | 4,047 | | | | 29.7 | | | | (19 | ) | | | — | | | | (19 | ) | | | NM | |
| 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 | | | | (9 | ) | | | (12 | ) | | | 3 | | | | 25 | |
| Net income | | | 24,735 | | | | 21,591 | | | | 3,144 | | | | 14.6 | | | | 78,566 | | | | 60,225 | | | | 18,341 | | | | 30.5 | | | | 25 | | | | 33 | | | | (8 | ) | | | (24 | ) |
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 | | | | | | | | | | | | 25 | | | | 33 | | | | | | | | | |
| Interest expense, net(1) | | | 5,290 | | | | 4,295 | | | | | | | | | | | | 9,601 | | | | 13,648 | | | | | | | | | | | | 19 | | | | — | | | | | | | | | |
| Provision for income taxes | | | 9,058 | | | | 11,139 | | | | | | | | | | | | 28,769 | | | | 36,766 | | | | | | | | | | | | 9 | | | | 12 | | | | | | | | | |
| Depreciation and amortization | | | 25,582 | | | | 25,286 | | | | | | | | | | | | 78,020 | | | | 73,894 | | | | | | | | | | | | 26 | | | | 25 | | | | | | | | | |
| 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 | | | | 79 | | | | 70 | | | | 9 | | | | 13 | |
EBITDA excluding non-cash
items | | | 64,993 | | | | 63,528 | | | | | | | | | | | | 196,204 | | | | 185,800 | | | | | | | | | | | | 79 | | | | 70 | | | | | | | | | |
| Interest expense, net(1) | | | (5,290 | ) | | | (4,295 | ) | | | | | | | | | | | (9,601 | ) | | | (13,648 | ) | | | | | | | | | | | (19 | ) | | | — | | | | | | | | | |
| Convertible senior notes interest(3) | | | (2,013 | ) | | | (2,012 | ) | | | | | | | | | | | (6,038 | ) | | | (5,769 | ) | | | | | | | | | |
| Convertible senior notes interest(2) | | | | — | | | | (2 | ) | | | | | | | | |
| Adjustments to derivative instruments recorded in interest expense(1) | | | (354 | ) | | | 464 | | | | | | | | | | | | (5,798 | ) | | | 3,150 | | | | | | | | | | | | 4 | | | | (4 | ) | | | | | | | | |
| Amortization of debt financing costs(1) | | | 280 | | | | 284 | | | | | | | | | | | | 842 | | | | 819 | | | | | | | | | | | | 1 | | | | 1 | | | | | | | | | |
Provision for current income
taxes | | | (5,729 | ) | | | (1,208 | ) | | | | | | | | | | | (19,469 | ) | | | (5,810 | ) | | | | | | | | | | | (7 | ) | | | (7 | ) | | | | | | | | |
| Changes in working capital | | | 6,313 | | | | (1,335 | ) | | | | | | | | | | | 16,904 | | | | (6,667 | ) | | | | | | | | | | | (4 | ) | | | 6 | | | | | | | | | |
| Cash provided by operating activities | | | 58,200 | | | | 55,426 | | | | | | | | | | | | 173,044 | | | | 157,875 | | | | | | | | | | | | 54 | | | | 64 | | | | | | | | | |
| Changes in working capital | | | (6,313 | ) | | | 1,335 | | | | | | | | | | | | (16,904 | ) | | | 6,667 | | | | | | | | | | | | 4 | | | | (6 | ) | | | | | | | | |
| Maintenance capital expenditures | | | (2,191 | ) | | | (2,165 | ) | | | | | | | | | | | (5,300 | ) | | | (5,071 | ) | | | | | | | | | | | (2 | ) | | | (1 | ) | | | | | | | | |
| Free cash flow | | | 49,696 | | | | 54,596 | | | | (4,900 | ) | | | (9.0 | ) | | | 150,840 | | | | 159,471 | | | | (8,631 | ) | | | (5.4 | ) | | | 56 | | | | 57 | | | | (1 | ) | | | (2 | ) |
NM — Not meaningful
| (1) | Interest expense, net, includes adjustments to derivative instruments and non-cash amortization of deferred financing fees. |
| (2) | PensionRepresents the cash interest expense primarily consistsreclassified to Atlantic Aviation related to the 2.00% Convertible Senior Notes due October 2023 through December 6, 2018, the date of Atlantic Aviation’s refinancing. The proceeds from this note issuance in October 2016 were used principally to reduce the drawn balance on Atlantic Aviation’s revolving credit facility. Cash interest cost, expected returnexpense on plan assetsthis note issuance is included in Corporate and amortization of actuarial and performance gains and losses.Other subsequent to December 6, 2018. |
TABLE OF CONTENTS
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 the 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 will 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 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 to the customer or margin per gallon toearned by the customer.business. 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 to the customer or margin per gallon.gallon earned by the business.
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 GAAPmeasure — by subtracting selling, general and administrative expenses and depreciation and amortization in the table above.
Revenue and Gross Margin
The majority of the revenue generated and gross margin earned by Atlantic Aviation is the result of fueling GA aircraft at facilities located at the 70 U.S. airports on which the business operates. Atlantic Aviation seeks to maintain and, where appropriate, increase dollar-based margins on fuel sales.
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 for the quarter and nine months ended September 30, 2018March 31, 2019 compared with the quarter and nine months ended September 30, 2017March 31, 2018 as a result of increases in the volume of fuel sold, hangar rentals and ancillary fees, partially offset by a decline in the wholesale cost of fuel and contributions from acquisitions.fuel. The increaseddecrease in the wholesale cost of fuel was largely offset by a corresponding increasedecrease in cost of services, contributing to an increase in gross margin for the quarter and nine months ended September 30, 2018March 31, 2019 compared with the quarter and nine months ended September 30, 2017.March 31, 2018. The improvement in gross margin primarily reflects an increasedresult for the quarter ended March 31, 2019 does not include any material contribution from hangar rentals and ancillary fees, in additionacquisitions as compared 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, 2017 driven by an increased contribution from hangar rentals and ancillary fees.March 31, 2018.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were flatincreased for the quarter ended September 30, 2018March 31, 2019 compared with the quarter ended September 30, 2017. For the nine months ended September 30,March 31, 2018 compared with the nine months ended September 30, 2017, selling general and administrative expenses increased primarily as a result of rent increaseshigher professional fees and higher labor costs, including those related to acquisitions.rent.
Depreciation and Amortization
Depreciation and amortization expense increased for the quarter and nine months ended September 30, 2018March 31, 2019 compared with the quarter and nine months ended September 30, 2017March 31, 2018 primarily as a result of contributions from acquisitions and assets placed in service.
Operating Income
Operating income increased for the quarter and nine months ended September 30, 2018March 31, 2019 compared with the quarter and nine months ended September 30, 2017March 31, 2018 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.amortization expense.
TABLE OF CONTENTS
Results of Operations: Atlantic Aviation – (continued)
Interest Expense, Net
Interest expense includes losses on derivative instruments of $2 million and gains on derivative instruments of $1.5 million and $8.5$5 million for the quarterquarters ended March 31, 2019 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. Excluding the derivative adjustments, cash interest expense was $7.4 million and $20.6$14 million for the quarter and nine months ended September 30, 2018, respectively,March 31, 2019 compared with $5.5 million and $15.4$5 million for the quarter and nine months ended September 30, 2017, respectively.March 31, 2018. The increase in cash interest expense reflects a higher average debt balance and a higher weighted average interest rate.
Cash interest expense for the quarter and nine months ended September 30,March 31, 2018 and 2017 includes the cash interest expensepaid on the $402.5$403 million of the MIC Corporate 2.00% Convertible Senior Notes issued in October 2016 and due in October 2023.through the refinancing of the business’s debt on December 6, 2018. The proceeds from thethis note issuance in October 2016 were used principally to reduce the drawn balance of Atlantic Aviation’s revolving credit facility. Cash interest expense on this note issuance is included in Corporate and Other subsequent to December 6, 2018.
TABLE OF CONTENTS
Results of Operations: Atlantic Aviation – (continued)
Income Taxes
The taxable income generated by Atlantic Aviation is included 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, 2018, Atlantic Aviation2019, the business expects to pay state income taxes of approximately $8.0$8 million. TheProvision for current income taxes of $19.5$7 million for the nine monthsquarter ended September 30, 2018March 31, 2019 in the above table includes $13.8$5 million of federal income tax expense and $5.7$2 million of state income tax expense. Any current federal
At December 31, 2018, Atlantic Aviation had approximately $15 million of state NOL carryforwards. State NOL carryforwards are specific to the state in which the NOL was generated and various states impose limitations on the utilization of NOL carryforwards. Therefore, the business may incur state income tax payableliabilities in the future, even if its consolidated state taxable income is expected to be offset in consolidation with the application of MIC holding company level NOLs.less than $15 million.
Maintenance Capital Expenditures
For the nine monthsquarter ended September 30, 2018,March 31, 2019, Atlantic Aviation incurred maintenance capital expenditures of $5.3$2 million and $5.5 million on both an accrual basis and cash basis, respectively, compared with $5.1$1 million and $5.6$2 million on an accrual basis and cash basis, respectively, for the nine monthsquarter ended September 30, 2017.March 31, 2018.
Results of Operations: Contracted PowerMIC Hawaii
The financial performance of our Contracted Power segmentMIC Hawaii is broadlyin large part a function of the availabilitynumber of windcustomers served, trends in their consumption of energy and solar resourcesthe rates achieved in each of Hawaii Gas’s utility and throughnon-utility operations and under power purchase agreements. The number of customers served tends to be correlated with general economic activity over the third quarterlong term, while customer consumption trends and rates are dependent on customer demand, which is a function of, 2018,among other factors, energy efficiency, the demand for peaking power in New York City. Following the salerange of BEC, our thermal power facility serving New York City, on October 12, 2018, Contracted Power comprises solely windcompetitive energy sources and solar facilities and anyMIC Hawaii’s input commodity costs.
The increased contribution that may result from our relationshipsMIC Hawaii businesses for the quarter ended March 31, 2019 compared with two renewable power project developers.the quarter ended March 31, 2018 primarily reflects the impact of the Hawaii Gas general rate case, lower propane costs and the divestment of a design-build mechanical contractor business, partially offset by a 1% decrease in the volume of gas sold at Hawaii Gas.
TABLE OF CONTENTS
Results of Operations:Contracted PowerMIC 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 | | | 52,450 | | | | 42,445 | | | | 10,005 | | | | 23.6 | | | | 129,140 | | | | 110,681 | | | | 18,459 | | | | 16.7 | |
| Cost of product sales | | | 8,744 | | | | 5,171 | | | | (3,573 | ) | | | (69.1 | ) | | | 20,443 | | | | 15,528 | | | | (4,915 | ) | | | (31.7 | ) |
| Selling, general and administrative expenses | | | 8,204 | | | | 6,909 | | | | (1,295 | ) | | | (18.7 | ) | | | 23,226 | | | | 18,318 | | | | (4,908 | ) | | | (26.8 | ) |
| Depreciation and amortization | | | 8,026 | | | | 14,830 | | | | 6,804 | | | | 45.9 | | | | 38,072 | | | | 45,031 | | | | 6,959 | | | | 15.5 | |
| Operating income | | | 27,476 | | | | 15,535 | | | | 11,941 | | | | 76.9 | | | | 47,399 | | | | 31,804 | | | | 15,595 | | | | 49.0 | |
| Interest expense, net(1) | | | (4,944 | ) | | | (6,281 | ) | | | 1,337 | | | | 21.3 | | | | (10,661 | ) | | | (20,431 | ) | | | 9,770 | | | | 47.8 | |
| Other income, net | | | 3,448 | | | | 4,334 | | | | (886 | ) | | | (20.4 | ) | | | 11,174 | | | | 6,440 | | | | 4,734 | | | | 73.5 | |
| Provision for income taxes | | | (7,852 | ) | | | (6,337 | ) | | | (1,515 | ) | | | (23.9 | ) | | | (12,456 | ) | | | (8,209 | ) | | | (4,247 | ) | | | (51.7 | ) |
| Net income | | | 18,128 | | | | 7,251 | | | | 10,877 | | | | 150.0 | | | | 35,456 | | | | 9,604 | | | | 25,852 | | | | 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 | | | 18,128 | | | | 7,251 | | | | | | | | | | | | 35,456 | | | | 9,604 | | | | | | | | | |
| Interest expense, net(1) | | | 4,944 | | | | 6,281 | | | | | | | | | | | | 10,661 | | | | 20,431 | | | | | | | | | |
| Provision for income taxes | | | 7,852 | | | | 6,337 | | | | | | | | | | | | 12,456 | | | | 8,209 | | | | | | | | | |
| Depreciation and amortization | | | 8,026 | | | | 14,830 | | | | | | | | | | | | 38,072 | | | | 45,031 | | | | | | | | | |
| Other non-cash income, net(2) | | | (1,574 | ) | | | (1,914 | ) | | | | | | | | | | | (5,152 | ) | | | (6,170 | ) | | | | | | | | |
EBITDA excluding non-cash
items | | | 37,376 | | | | 32,785 | | | | 4,591 | | | | 14.0 | | | | 91,493 | | | | 77,105 | | | | 14,388 | | | | 18.7 | |
EBITDA excluding non-cash
items | | | 37,376 | | | | 32,785 | | | | | | | | | | | | 91,493 | | | | 77,105 | | | | | | | | | |
| Interest expense, net(1) | | | (4,944 | ) | | | (6,281 | ) | | | | | | | | | | | (10,661 | ) | | | (20,431 | ) | | | | | | | | |
| Adjustments to derivative instruments recorded in interest expense(1) | | | (1,863 | ) | | | (922 | ) | | | | | | | | | | | (10,011 | ) | | | (1,282 | ) | | | | | | | | |
Amortization of debt financing
costs(1) | | | 380 | | | | 379 | | | | | | | | | | | | 1,138 | | | | 1,137 | | | | | | | | | |
| (Provision) benefit for current income taxes | | | (84 | ) | | | 9 | | | | | | | | | | | | (154 | ) | | | 6 | | | | | | | | | |
| Changes in working capital(3) | | | (5,615 | ) | | | (565 | ) | | | | | | | | | | | (17,390 | ) | | | (8,771 | ) | | | | | | | | |
| Cash provided by operating activities | | | 25,250 | | | | 25,405 | | | | | | | | | | | | 54,415 | | | | 47,764 | | | | | | | | | |
| Changes in working capital(3) | | | 5,615 | | | | 565 | | | | | | | | | | | | 17,390 | | | | 8,771 | | | | | | | | | |
| Maintenance capital expenditures | | | — | | | | — | | | | | | | | | | | | (440 | ) | | | (22 | ) | | | | | | | | |
| Free cash flow | | | 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 increased for the quarter and nine months ended September 30, 2018 compared with the quarter and nine months ended September 30, 2017 due to the contribution from the BEC plant expansion and better wind and solar resources.
Cost of Product Sales
Cost of product sales increased for the quarter and nine months ended September 30, 2018 compared with the quarter and nine months ended September 30, 2017 due to the completion of the BEC plant expansion in May 2018.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased for the quarter and nine months ended September 30, 2018 compared with the quarter and nine months ended September 30, 2017 primarily due to the BEC plant expansion and higher development-related expenses. These increases were partially offset by lower insurance costs at BEC.
Depreciation and Amortization
Depreciation and amortization expense decreased for the quarter and nine months ended September 30, 2018 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, 2018, 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. Excluding the derivative adjustments, cash interest expense was $6.4 million and $19.5 million for the quarter and nine months ended September 30, 2018, respectively, compared with $6.8 million and $20.6 million for the quarter and nine months ended September 30, 2017, respectively. The decrease in cash interest expense reflects primarily a lower average debt balance related to scheduled amortization on all facilities.
Income Taxes
Our wind and solar facilities are held in limited liability companies that are treated as pass through entities for tax purposes. As such, these entities do not pay federal or state income taxes on a standalone basis, but each owner pays federal and state income taxes on its allocable share of taxable income. For the year endingOn December 31, 2018, MIC expects its share of the federal taxable income from these facilities to be a loss of approximately $1.0 million. For 2017, MIC’s share of the federal taxable income from these facilities was a loss of approximately $13.0 million.
TABLE OF CONTENTS
Results of Operations:Contracted Power – (continued)
The taxable income generated by BEC’s operations is included 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, 2018, with the closing of the sale of BEC, the business expects to have a state income tax liability in New Jersey and New York totaling approximately $8.0 million.
Noncontrolling Interest
The increase in 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 certain entities by the Tax Cuts and 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 27,21, 2018, the HPUC issued an Interima Final Decision and Order providingin the regulated utility operations ofrate case filed by Hawaii Gas with interim rate relief.in August 2017, authorizing an increase in regulated revenue of approximately $9 million or 8%. 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) | | Quarter Ended March 31,Change
Favorable/(Unfavorable) |
| | | 2018 | | 2017 | | 2018 | | 2017 | | 2019 | | 2018 |
| | | $ | | $ | | $ | | % | | $ | | $ | | $ | | % | | $ | | $ | | $ | | % |
| | | ($ In Thousands) (Unaudited) | | ($ In Millions) (Unaudited) |
| Product revenue | | | 59,799 | | | | 52,396 | | | | 7,403 | | | | 14.1 | | | | 184,139 | | | | 165,758 | | | | 18,381 | | | | 11.1 | | | | 64 | | | | 64 | | | | — | | | | — | |
| Service revenue | | | 9,122 | | | | 13,826 | | | | (4,704 | ) | | | (34.0 | ) | | | 41,306 | | | | 39,476 | | | | 1,830 | | | | 4.6 | | | | — | | | | 18 | | | | (18 | ) | | | (100 | ) |
| Total revenue | | | 68,921 | | | | 66,222 | | | | 2,699 | | | | 4.1 | | | | 225,445 | | | | 205,234 | | | | 20,211 | | | | 9.8 | | | | 64 | | | | 82 | | | | (18 | ) | | | (22 | ) |
| 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 | ) | | | 40 | | | | 48 | | | | 8 | | | | 17 | |
| 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 | ) | | | — | | | | 16 | | | | 16 | | | | 100 | |
| Cost of revenue – total | | | 48,832 | | | | 42,629 | | | | (6,203 | ) | | | (14.6 | ) | | | 168,049 | | | | 141,630 | | | | (26,419 | ) | | | (18.7 | ) | | | 40 | | | | 64 | | | | 24 | | | | 38 | |
| Gross margin | | | 20,089 | | | | 23,593 | | | | (3,504 | ) | | | (14.9 | ) | | | 57,396 | | | | 63,604 | | | | (6,208 | ) | | | (9.8 | ) | | | 24 | | | | 18 | | | | 6 | | | | 33 | |
| Selling, general and administrative expenses | | | 7,650 | | | | 6,874 | | | | (776 | ) | | | (11.3 | ) | | | 22,853 | | | | 19,729 | | | | (3,124 | ) | | | (15.8 | ) | | | 6 | | | | 7 | | | | 1 | | | | 14 | |
| 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 | ) | | | 4 | | | | 5 | | | | 1 | | | | 20 | |
| Operating (loss) income | | | (1,265 | ) | | | 13,008 | | | | (14,273 | ) | | | (109.7 | ) | | | 11,788 | | | | 32,953 | | | | (21,165 | ) | | | (64.2 | ) | |
| Operating income | | | | 14 | | | | 6 | | | | 8 | | | | 133 | |
| Interest expense, net(1) | | | (2,069 | ) | | | (1,877 | ) | | | (192 | ) | | | (10.2 | ) | | | (5,246 | ) | | | (5,795 | ) | | | 549 | | | | 9.5 | | | | (3 | ) | | | (1 | ) | | | (2 | ) | | | NM | |
| Other expense, net | | | (21,923 | ) | | | (141 | ) | | | (21,782 | ) | | | NM | | | | (23,236 | ) | | | (382 | ) | | | (22,854 | ) | | | NM | | | | — | | | | (1 | ) | | | 1 | | | | 100 | |
| 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 | | | | | | | | | | |
| Provision for income taxes | | | | (3 | ) | | | (1 | ) | | | (2 | ) | | | NM | |
| Net income | | | | 8 | | | | 3 | | | | 5 | | | | 167 | |
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 | | | | 8 | | | | 3 | | | | | | | | | |
| Interest expense, net(1) | | | 2,069 | | | | 1,877 | | | | | | | | | | | | 5,246 | | | | 5,795 | | | | | | | | | | | | 3 | | | | 1 | | | | | | | | | |
| (Benefit) provision for income taxes | | | (7,299 | ) | | | 4,830 | | | | | | | | | | | | (4,350 | ) | | | 10,772 | | | | | | | | | | |
| Goodwill impairment | | | 3,215 | | | | — | | | | | | | | | | | | 3,215 | | | | — | | | | | | | | | | |
| Provision for income taxes | | | | 3 | | | | 1 | | | | | | | | | |
| Depreciation and amortization | | | 10,489 | | | | 3,711 | | | | | | | | | | | | 19,540 | | | | 10,922 | | | | | | | | | | | | 4 | | | | 5 | | | | | | | | | |
| Pension expense(2) | | | 128 | | | | 272 | | | | | | | | | | | | 383 | | | | 817 | | | | | | | | | | |
| Other non-cash expense (income), net(3) | | | 4,303 | | | | (3,360 | ) | | | | | | | | | | | 9,548 | | | | 3,108 | | | | | | | | | | |
| Other non-cash expense, net(2) | | | | 2 | | | | 6 | | | | | | | | | |
| EBITDA excluding non-cash items | | | (5,053 | ) | | | 13,490 | | | | (18,543 | ) | | | (137.5 | ) | | | 21,238 | | | | 47,418 | | | | (26,180 | ) | | | (55.2 | ) | | | 20 | | | | 16 | | | | 4 | | | | 25 | |
| EBITDA excluding non-cash items | | | (5,053 | ) | | | 13,490 | | | | | | | | | | | | 21,238 | | | | 47,418 | | | | | | | | | | | | 20 | | | | 16 | | | | | | | | | |
| Interest expense, net(1) | | | (2,069 | ) | | | (1,877 | ) | | | | | | | | | | | (5,246 | ) | | | (5,795 | ) | | | | | | | | | | | (3 | ) | | | (1 | ) | | | | | | | | |
| Adjustments to derivative instruments recorded in interest expense(1) | | | 33 | | | | 23 | | | | | | | | | | | | (737 | ) | | | 113 | | | | | | | | | | | | 1 | | | | (1 | ) | | | | | | | | |
| Amortization of debt financing costs(1) | | | 97 | | | | 99 | | | | | | | | | | | | 289 | | | | 303 | | | | | | | | | | |
| Provision for current income taxes | | | (2,032 | ) | | | (1,773 | ) | | | | | | | | | | | (3,261 | ) | | | (5,265 | ) | | | | | | | | | | | (3 | ) | | | (1 | ) | | | | | | | | |
| Changes in working capital(4) | | | 22,570 | | | | (2,554 | ) | | | | | | | | | | | 16,420 | | | | (13,093 | ) | | | | | | | | | |
| Changes in working capital | | | | (2 | ) | | | (6 | ) | | | | | | | | |
| Cash provided by operating activities | | | 13,546 | | | | 7,408 | | | | | | | | | | | | 28,703 | | | | 23,681 | | | | | | | | | | | | 13 | | | | 7 | | | | | | | | | |
| Changes in working capital(4) | | | (22,570 | ) | | | 2,554 | | | | | | | | | | | | (16,420 | ) | | | 13,093 | | | | | | | | | | |
| Changes in working capital | | | | 2 | | | | 6 | | | | | | | | | |
| Maintenance capital expenditures | | | (2,318 | ) | | | (1,825 | ) | | | | | | | | | | | (5,649 | ) | | | (4,406 | ) | | | | | | | | | | | (2 | ) | | | (2 | ) | | | | | | | | |
| Free cash flow | | | (11,342 | ) | | | 8,137 | | | | (19,479 | ) | | | NM | | | | 6,634 | | | | 32,368 | | | | (25,734 | ) | | | (79.5 | ) | | | 13 | | | | 11 | | | | 2 | | | | 18 | |
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. |
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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 and 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. |
TABLE OF CONTENTS
Results of Operations:MIC Hawaii – (continued)
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 and the generation of power and the design and construction of building mechanical systems.power.
Hawaii Gas generates a significant portion of its revenue from the sale of gas. Accordingly, revenue can fluctuate based on the wholesale cost of gas to Hawaii Gas and may not reflect the business’ ability to effectively manage volume and gross margin. For example, an increase in revenue may be attributable to an increase in the wholesale cost of gas passed through to Hawaii Gas’ customers and not an increase in the volume of gas sold to the customer or margin per therm.therm earned by the business. Conversely, a decline in revenue may be attributable to a decrease in the wholesale cost of gas passed through to Hawaii Gas’ customers and not a reduction in the volume of gas sold to the customer or margin per therm.therm earned by the business.
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 utilizeuse gross margin to evaluate the business 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 above.
Revenue and Gross Margin
Revenue increaseddecreased for the quarter and nine months ended September 30, 2018March 31, 2019 compared with the quarter and nine months ended September 30, 2017. The increase wasMarch 31, 2018 primarily attributable to increases inas a result of the volumedivestment of utility and nonutility gas sold and a higher average price per therm of utility gas sold by Hawaii Gas together with higherthe design-build mechanical contractor business. Excluding the divestment, revenue from distributed generation assets, partially offset by lower revenue from CPI. On an underlying basis, adjustingincreased slightly for changes in customer inventory, the volume of gas sold increased by 1.8% and 4.8% in the quarter and nine months ended September 30, 2018, respectively,March 31, 2019 compared with the quarter and nine months ended September 30, 2017.March 31, 2018 primarily as a result of the impact of the Hawaii Gas rate case.
Gross margin decreasedincreased by $3.5 million and $6.2$6 million for the quarter and nine months ended September 30, 2018, respectively,March 31, 2019 compared with the quarter and nine months ended September 30, 2017. The decline was partially attributable to unfavorable movementsMarch 31, 2018 primarily as a result of changes in the value of unrealized commodity hedges. The business recorded an insignificant unrealized gains of $305,000 andgain on commodity hedges for the quarter ended March 31, 2019 compared with unrealized losses of $3.0$4 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, respectively, on the commodity hedges.
March 31, 2018. Excluding the impact of unrealized gains and losses on commodity hedges and the divestment of the design-build mechanical contractor business, gross margin was flatincreased by approximately $3 million, or 13%, primarily due to increased contribution margin per therm from the Hawaii Gas rate case and lower propane costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased for the quarter ended September 30, 2018March 31, 2019 compared with the quarter ended September 30, 2017, and decreased $4.9 million, or 7.5%, for the nine months ended September 30,March 31, 2018 compared with the nine months ended September 30, 2017. The decline for the nine months ended was September 30, 2018 attributable primarily to (i) lower margins at CPI due to the divestment of the design-build mechanical contractor business. Excluding the divestment, selling, general and administrative expenses increased costs on fixed revenue contracts attributable to higher labor costs, project delaysby approximately $1 million.
Depreciation and general construction cost escalation in Hawaii;Amortization
Depreciation and (ii) lower margins at Hawaii Gas’ non-utility business. Gross margin at Hawaii Gasamortization expense decreased for the quarter ended September 30,March 31, 2019 compared with the quarter ended March 31, 2018 reflectsprimarily as a result of the divestment of the design-build mechanical contractor business.
Operating Income
Operating income increased for the quarter ended March 31, 2019 compared with the quarter ended March 31, 2018 due to the increase in interim ratesgross margin and the decrease in selling, general and administrative expenses and depreciation and amortization expense.
Interest Expense, Net
Interest expense includes insignificant losses on derivative instruments for the utility business.quarter ended March 31, 2019 compared with gains on derivative instruments of $1 million for the quarter ended March 31, 2018.
TABLE OF CONTENTS
Results of Operations:MIC Hawaii – (continued)
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased for the quarter and nine months ended September 30, 2018 compared with the quarter and nine months ended September 30, 2017 primarily driven by higher salaries and benefit costs.
Goodwill Impairment
During the quarter ended September 30, 2018, MIC Hawaii wrote-off the goodwill balance related to CPI.
Depreciation and Amortization
Depreciation and amortization expense increased for the quarter and nine months ended September 30, 2018 compared with the quarter and nine months ended September 30, 2017 primarily due to the write-offs of the intangible assets and fixed assets balances at CPI.
Operating (Loss) Income
Operating (loss) income decreased for the quarter and nine months ended September 30, 2018 compared with the quarter and nine months ended September 30, 2017 due to the increase in depreciation and amortization expenses, the decrease in gross margin, goodwill impairment and increase in selling, general and administrative expenses.
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. Excluding the derivative adjustments, cash interest expense was $1.9 million and $5.7 millionremained flat for the quarter and nine months ended September 30, 2018, respectively, compared with $1.8 million and $5.4 million for the quarter and nine months ended September 30, 2017, respectively. 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, 2018March 31, 2019 compared with the quarter and nine months ended September 30, 2017 primarily due toMarch 31, 2018. Cash interest expense was $2 million for the write-down of our investment in CPI during the quarterquarters ended September 30,March 31, 2019 and 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 Hawaiireturn. The businesses file standalone state income tax on a stand-alone basis.returns in Hawaii. The tax expense in the table above includes both the state tax and the portion of the consolidated federal tax liability attributable to the businesses. For the year ending December 31, 2018,2019, the business expectsbusinesses expect to pay state income taxes of approximately $500,000.$1 million. TheProvision for current income taxes of $3.3$3 million for the nine monthsquarter ended September 30, 2018March 31, 2019 in the above table includes $3.2$2 million of federal income tax expense and $87,000$1 million of state income tax expense. Any current federal income tax payable is expected to be offset in consolidation with the application of MIC holding company level NOLs.
Maintenance Capital Expenditures
For the nine monthsquarter ended September 30, 2018,March 31, 2019, MIC Hawaii incurred maintenance capital expenditures of $5.6$2 million and $5.7 million on both an accrual basis and cash basis, respectively, compared with $4.4$2 million and $4.7$1 million on an accrual basis and cash basis, respectively, for the nine monthsquarter ended September 30, 2017.March 31, 2018.
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Results of Operations:Corporate and Other
Our Corporate and Other includes expenses paid by the holding company, including base management feessegment comprises results from MIC Corporate, our shared services center and performance fees, if any, professional fees and costs associatedfrom our relationship with being a public company.developer of renewable power facilities (formerly reported in Contracted Power).
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended
September 30, | | Change
Favorable/
(Unfavorable) | | Nine Months Ended September 30, | | Change
Favorable/
(Unfavorable) | | Quarter Ended March 31,Change
Favorable/(Unfavorable) |
| | | 2018 | | 2017 | | 2018 | | 2017 | | 2019 | | 2018 |
| | | $ | | $ | | $ | | % | | $ | | $ | | $ | | % | | $ | | $ | | $ | | % |
| | | ($ In Thousands) (Unaudited) | | ($ In Millions) (Unaudited) |
| Selling, general and administrative expenses | | | | 6 | | | | 5 | | | | (1 | ) | | | (20 | ) |
| Fees to Manager-related party | | | 12,333 | | | | 17,954 | | | | 5,621 | | | | 31.3 | | | | 36,113 | | | | 54,610 | | | | 18,497 | | | | 33.9 | | | | 8 | | | | 13 | | | | 5 | | | | 38 | |
| Selling, general and administrative expenses(1) | | | 7,150 | | | | 6,214 | | | | (936 | ) | | | (15.1 | ) | | | 21,496 | | | | 21,301 | | | | (195 | ) | | | (0.9 | ) | |
| Depreciation | | | 174 | | | | — | | | | (174 | ) | | | NM | | | | 504 | | | | — | | | | (504 | ) | | | NM | | |
| Operating loss | | | (19,657 | ) | | | (24,168 | ) | | | 4,511 | | | | 18.7 | | | | (58,113 | ) | | | (75,911 | ) | | | 17,798 | | | | 23.4 | | | | (14 | ) | | | (18 | ) | | | 4 | | | | 22 | |
| Interest expense, net(2) | | | (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 | | |
| Interest expense, net(1) | | | | (4 | ) | | | (9 | ) | | | 5 | | | | 56 | |
| Other income, net | | | | 4 | | | | 1 | | | | 3 | | | | NM | |
| Benefit for income taxes | | | 8,149 | | | | 11,181 | | | | (3,032 | ) | | | (27.1 | ) | | | 24,512 | | | | 37,149 | | | | (12,637 | ) | | | (34.0 | ) | | | 4 | | | | 5 | | | | (1 | ) | | | (20 | ) |
| Net loss | | | (19,961 | ) | | | (19,584 | ) | | | (377 | ) | | | (1.9 | ) | | | (59,137 | ) | | | (58,181 | ) | | | (956 | ) | | | (1.6 | ) | | | (10 | ) | | | (21 | ) | | | 11 | | | | 52 | |
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 | | | (19,961 | ) | | | (19,584 | ) | | | | | | | | | | | (59,137 | ) | | | (58,181 | ) | | | | | | | | | | | (10 | ) | | | (21 | ) | | | | | | | | |
| Interest expense, net(2) | | | 8,523 | | | | 6,597 | | | | | | | | | | | | 25,532 | | | | 19,419 | | | | | | | | | | |
| Interest expense, net(1) | | | | 4 | | | | 9 | | | | | | | | | |
| Benefit for income taxes | | | (8,149 | ) | | | (11,181 | ) | | | | | | | | | | | (24,512 | ) | | | (37,149 | ) | | | | | | | | | | | (4 | ) | | | (5 | ) | | | | | | | | |
| Depreciation | | | 174 | | | | — | | | | | | | | | | | | 504 | | | | — | | | | | | | | | | |
| Fees to Manager-related party | | | 12,333 | | | | 17,954 | | | | | | | | | | | | 36,113 | | | | 54,610 | | | | | | | | | | | | 8 | | | | 13 | | | | | | | | | |
| Pension expense(3) | | | 47 | | | | — | | | | | | | | | | | | 148 | | | | — | | | | | | | | | | |
| Other non-cash expense, net | | | 178 | | | | 159 | | | | | | | | | | | | 564 | | | | 534 | | | | | | | | | | |
| Other non-cash expenses, net | | | | 1 | | | | 1 | | | | | | | | | |
| EBITDA excluding non-cash items | | | (6,855 | ) | | | (6,055 | ) | | | (800 | ) | | | (13.2 | ) | | | (20,788 | ) | | | (20,767 | ) | | | (21 | ) | | | (0.1 | ) | | | (1 | ) | | | (3 | ) | | | 2 | | | | 67 | |
| EBITDA excluding non-cash items | | | (6,855 | ) | | | (6,055 | ) | | | | | | | | | | | (20,788 | ) | | | (20,767 | ) | | | | | | | | | | | (1 | ) | | | (3 | ) | | | | | | | | |
| Interest expense, net(2) | | | (8,523 | ) | | | (6,597 | ) | | | | | | | | | | | (25,532 | ) | | | (19,419 | ) | | | | | | | | | |
| Convertible senior notes interest(4) | | | 2,013 | | | | 2,012 | | | | | | | | | | | | 6,038 | | | | 5,769 | | | | | | | | | | |
| Amortization of debt financing costs(2) | | | 1,023 | | | | 988 | | | | | | | | | | | | 3,927 | | | | 2,969 | | | | | | | | | | |
| Amortization of debt discount(2) | | | 910 | | | | 882 | | | | | | | | | | | | 2,710 | | | | 2,377 | | | | | | | | | | |
| Interest expense, net(1) | | | | (4 | ) | | | (9 | ) | | | | | | | | |
| Convertible senior notes interest(2) | | | | — | | | | 2 | | | | | | | | | |
| Amortization of debt financing costs(1) | | | | 1 | | | | 2 | | | | | | | | | |
| Amortization of debt discount(1) | | | | 1 | | | | 1 | | | | | | | | | |
| Benefit for current income taxes | | | 2,176 | | | | 474 | | | | | | | | | | | | 18,284 | | | | 5,645 | | | | | | | | | | | | 14 | | | | 8 | | | | | | | | | |
| Changes in working capital | | | 240 | | | | (2,934 | ) | | | | | | | | | | | (17,727 | ) | | | (6,691 | ) | | | | | | | | | | | (18 | ) | | | (9 | ) | | | | | | | | |
| Cash used in operating activities | | | (9,016 | ) | | | (11,230 | ) | | | | | | | | | | | (33,088 | ) | | | (30,117 | ) | | | | | | | | | | | (7 | ) | | | (8 | ) | | | | | | | | |
| Changes in working capital | | | (240 | ) | | | 2,934 | | | | | | | | | | | | 17,727 | | | | 6,691 | | | | | | | | | | | | 18 | | | | 9 | | | | | | | | | |
| Free cash flow | | | (9,256 | ) | | | (8,296 | ) | | | (960 | ) | | | (11.6 | ) | | | (15,361 | ) | | | (23,426 | ) | | | 8,065 | | | | 34.4 | | | | 11 | | | | 1 | | | | 10 | | | | NM | |
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 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. |
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Results of Operations:
Corporate and Other – (continued)
| (4)(2) | 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 portionthrough December 6, 2018, the date of Atlantic Aviation’s credit facilityrefinancing. The proceeds from this note issuance in October 2016.2016 were used principally to reduce the drawn balance on Atlantic Aviation’s revolving credit facility. Cash interest expense on this note issuance is included in Corporate and Other subsequent to December 6, 2018. |
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased for the quarter ended March 31, 2019 compared with the quarter ended March 31, 2018 primarily due to higher professional fees, including costs incurred in connection with addressing shareholder and other legal matters.
Fees to Manager
Fees to Manager for the quarters ended March 31, 2019 and 2018 comprise base management fees of $8 million and $13 million, respectively. Base management fees decreased for the quarter ended March 31, 2019 compared with the quarter ended March 31, 2018 primarily due to the Manager’s waiver of two portions of the base management fee to which it is entitled and a reduction in the market capitalization of our Company. In the first quarter of 2019, base management fees were calculated on the equity market capitalization of our Company less cash on hand at the holding company. No performance fees were incurred in either of the current or prior comparable period.
Interest Expense, Net
Cash interest expense was $2 million for the quarter ended March 31, 2019 compared with $4 million for the quarter ended March 31, 2018. The decrease in cash interest expense primarily reflects a lower debt balance.
Cash interest expense for the quarter ended March 31, 2018 excludes the cash interest paid on the $403 million of MIC Corporate 2.00% Convertible Senior Notes issued in October 2016 through the date of the refinancing of Atlantic Aviation’s debt on December 6, 2018. The proceeds from this note issuance in October 2016 were used principally to reduce the drawn balance of Atlantic Aviation’s revolving credit facility. Cash interest expense on this note issuance is included in Corporate and Other subsequent to December 6, 2018.
Other Income, Net
Other income, net, increased primarily due to fee income from a third party developer of renewable power facilities during the quarter ended March 31, 2019.
Income Taxes
TheBenefit for current income taxes of $14 million for the quarter ended March 31, 2019 in the above table includes $13 million of federal income tax benefit and $1 million of state income tax benefit. The federal income tax benefit represents the combined federal income tax payable by IMTT, Atlantic Aviation and MIC Hawaii that is offset in consolidation with the application of MIC holding company level NOLs. At December 31, 2018, we had $152 million in federal NOLs available to offset taxable income generated by the members of our consolidated group.
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.
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Liquidity and Capital Resources – (continued)
At September 30, 2018, including BEC debt classified as held for sale in our consolidated condensed balance sheet,March 31, 2019, our consolidated debt outstanding from continuing operations totaled $3,690.7$3,080 million (excluding adjustments for unamortized debt discounts), our consolidated cash balance from continuing operations totaled $50.2$603 million and consolidated available capacity under our revolving credit facilities from continuing operations totaled $955.5$1,610 million, excluding letters of credit outstanding of $48.4$26 million.
FollowingIn December 2018, Atlantic Aviation refinanced its then existing term loan balance of $375 million and its $350 million revolving credit facility, which was undrawn. Both the quarter end, we have usedterm loan and the revolver had October 2021 maturities. The new facility consists of a term loan of $1,025 million maturing in December 2025 and a $350 million revolving credit facility maturing in December 2023. The revolving credit facility is currently undrawn. In December 2018, IMTT amended its debt facilities and extended the maturity date for each of the business’ $600 million revolving credit facility and $509 million of tax-exempt bonds by three and a half years to December of 2023 and 2025, respectively.
The additional proceeds from the sale of BEC and cash on handAtlantic Aviation refinancing are expected to pay downbe used to repay 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 $150.0 million of debt we repaid at IMTT that we do not expect to redraw, to fund a portion of our planned growth capital deployments.
In July 2018, we included ourholding company level 2.875% Convertible Senior Notes due July 2019 in the current portion of the long-term debt on our consolidated condensed balance sheet. We expect to refinance this debt prior to its maturity in July 2019.and for general corporate purposes.
The following table shows MIC’s proportionate debt obligations at OctoberApril 30, 20182019 ($in thousands)millions):
| | | | | | | | | | | | | | | | |
| Business | | Debt | | Weighted Average Remaining Life
(in years) | | Balance Outstanding(1) | | Weighted Average Rate(2) | | Debt | | Weighted Average Remaining Life
(in years) | | Balance Outstanding | | Weighted Average Rate(1) |
| MIC Corporate | | | Revolving Facility | | | | 3.2 | | | $ | 26,500 | | | | 4.05 | % | | | Convertible Senior Notes | (2) | | | 2.5 | | | $ | 753 | | | | 2.41 | % |
| | | | Convertible Senior Notes | | | | 3.0 | | | | 752,445 | | | | 2.41 | % | |
| IMTT | | | Senior Notes | | | | 7.5 | | | | 600,000 | | | | 3.97 | % | | | Senior Notes | | | | 7.0 | | | | 600 | | | | 3.97 | % |
| | | | Tax-Exempt Bonds(3)
| | | | 3.6 | | | | 508,975 | | | | 3.37 | % | | | Tax-Exempt Bonds | (3) | | | 6.6 | | | | 509 | | | | 2.97 | % |
| Atlantic Aviation | | | Term Loan | | | | 2.9 | | | | 375,000 | | | | 2.75 | % | | | Term Loan | (4)(5) | | | 6.6 | | | | 1,022 | | | | 5.65 | % |
| Contracted Power | | | Renewables – Project Finance | | | | 13.6 | | | | 242,343 | | | | 4.83 | % | |
| MIC Hawaii(4) | | | Term Loan | | | | 4.8 | | | | 95,821 | | | | 2.85 | % | |
| MIC Hawaii | | | | Term Loan | (5) | | | 4.3 | | | | 96 | | | | 2.84 | % |
| | | | Senior Notes | | | | 3.8 | | | | 100,000 | | | | 4.22 | % | | | Senior Notes | | | | 3.3 | | | | 100 | | | | 4.22 | % |
| Total | | | | | | | 5.1 | | | $ | 2,701,084 | | | | 3.30 | % | |
| Total(6) | | | | | | | | 5.5 | | | $ | 3,080 | | | | 3.95 | % |
| (1) | Proportionate to MIC’s ownership interest. |
| (2) | Reflects annualized interest rate on all facilities including interest rate hedges. |
| (3)(2) | Interest rate reflect the impactThe balance includes $350 million of the Tax Cuts2.875% Convertible Senior Notes due July 2019. Using a portion of the proceeds from the Atlantic Aviation refinancing in December 2018, we expect to repay the outstanding balance at maturity. |
| (3) | On December 5, 2018, IMTT completed the amendment of its existing $509 million Tax-Exempt bonds and Jobs Actextended the maturity to December 2025. |
| (4) | On December 6, 2018, Atlantic Aviation completed the refinancing of its $1,025 million Term Loan facility maturing in December 2025. |
| (5) | The weighted average remaining life does not reflect the scheduled amortization on these facilities. |
| (6) | Excludes $2.2debt obligations of $302 million of equipment loans at the MIC Hawaii business.from discontinued operations. |
The following table profiles each revolving credit facility from continuing operations at our businesses and at MIC Corporate as of April 30, 2019 ($ in millions):
| | | | | | | | |
| Business | | Debt | | Weighted Average Remaining Life (in years) | | Undrawn Amount | | Interest Rate(1) |
| MIC Corporate(2) | | | Revolving Facility | | | | 2.7 | | | $ | 600 | | | | LIBOR + 2.00%
| |
| IMTT(3) | | | USD Revolving Facility | | | | 4.6 | | | | 550 | | | | LIBOR + 1.50%
| |
| | | | CAD Revolving Facility | | | | 4.6 | | | | 50 | | | | Bankers’ Acceptance Rate + 1.50%
| |
| Atlantic Aviation(4) | | | Revolving Facility | | | | 4.6 | | | | 350 | | | | LIBOR + 2.25%
| |
| MIC Hawaii(5) | | | Revolving Facility | | | | 3.8 | | | | 60 | | | | LIBOR + 1.25%
| |
| Total(6) | | | | | | | 3.9 | | | $ | 1,610 | | | | | |
| (1) | Excludes commitment fees. |
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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 30, 2018 ($in thousands):
| | | | | | | | |
| Business | | Debt | | Weighted
Average
Remaining Life
(in years) | | Undrawn
Amount | | Interest Rate(1) |
| MIC Corporate(2) | | | Revolving Facility | | | | 3.2 | | | $ | 573,500 | | | | LIBOR + 1.750% | |
| IMTT | | | USD Revolving Facility | | | | 1.6 | | | | 550,000 | | | | LIBOR + 1.500% | |
| | | | CAD Revolving Facility | | | | 1.6 | | | | 50,000 | | | | Bankers’ Acceptance Rate + 1.500% | |
| Atlantic Aviation | | | Revolving Facility | | | | 2.9 | | | | 350,000 | | | | LIBOR + 1.750% | |
| 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. |
| (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. The applicable margin on the interest rate is based on a ratings grid. |
| (3) | On December 5, 2018, IMTT completed the amendment of its $550 million USD revolving credit facility and $50 million CAD revolving credit facility and extended the maturity for both facilities to December 2023. The applicable margin on the interest rate is based on a ratings and leverage grid. |
| (4) | On December 6, 2018, Atlantic Aviation completed the refinancing of its $350 million revolving credit facility and extended the maturity to December 2023. The applicable margin on the interest rate is based on a leverage grid. |
| (5) | On February 12, 2018, Hawaii Gas completed the refinancing of its existing $60.0$60 million revolving credit facility and extended its maturity to February 2023. |
| (4)(6) | Excludes letters of credit outstanding of $37.8$33 million. |
We will, in general, apply available cash to the repayment of revolving credit facility balances as a means of minimizing interest expense and periodically 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 sourcemeans of maintaining access to sufficient liquidity to meet future requirements, managemanaging interest expense and fund 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 fivefour and seven years. In general, we hedge any 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 atof 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 from Continuing Operations
The following section discusses our sources and uses of cash on a consolidated basis.basis from continuing operations. 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 on consolidation.
| | | | | | | | | | | | | | | | |
| ($ In Thousands) | | Nine Months Ended
September 30, | | Change
Favorable/(Unfavorable) | |
| | 2018 | | 2017(1) | |
| | $ | | $ | | $ | | % | |
| | | Quarter Ended March 31, | | Change
Favorable/(Unfavorable) |
| | | | 2019 | | 2018 |
| ($ In Millions) | | | $ | | $ | | $ | | % |
| Cash provided by operating activities | | | 413,053 | | | | 398,360 | | | | 14,693 | | | | 3.7 | | | | 151 | | | | 130 | | | | 21 | | | | 16 | |
| Cash used in investing activities | | | (131,286 | ) | | | (455,102 | ) | | | 323,816 | | | | 71.2 | | | | (45 | ) | | | (57 | ) | | | 12 | | | | 21 | |
| Cash (used in) provided by financing activities | | | (246,201 | ) | | | 53,582 | | | | (299,783 | ) | | | NM | | |
| Cash used in financing activities | | | | (90 | ) | | | (41 | ) | | | (49 | ) | | | (120 | ) |
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. |
Liquidity and Capital Resources – (continued)
Operating Activities from Continuing Operations
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 from continuing operations and for each of our businesses above.
The increase in consolidated cash provided by operating activities from continuing operations for the nine monthsquarter ended September 30, 2018March 31, 2019 compared with the nine monthsquarter ended September 30, 2017March 31, 2018 was primarily due to:
the improvementan increase in collection ofEBITDA excluding non-cash items; partially offset by
an unfavorable movement in accounts receivable due to timing of collections on higher balances from the increase in the cost of jet fuel at Atlantic Aviation and the increase in the cost of propane and synthetic natural gas at MIC Hawaii;
timing of prepaid expenses, primarilyIMTT related to insurance premiums; and
collection of development fees and interest receivable from a renewables developer on a revolving credit facility provided by our Contracted Power business; partially offset bystorage contracts;
an increase in interest expense; and
an increase in current state taxes.
Investing Activities from Continuing Operations
Cash provided by investing activities include proceeds from divestitures of businesses and disposal of 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 drawingsdrawing on credit facilities.
In general, maintenance capital expenditures are funded byfrom cash fromprovided by 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 Operation” for maintenance capital expenditures for each of our businesses.
The decrease in consolidated cash used in investing activities from continuing operations for the nine monthsquarter ended September 30, 2018March 31, 2019 compared with the nine monthsquarter ended September 30, 2017March 31, 2018 was primarily due to:
a larger amount ofan acquisition and investment activities completed in 2017;
a decrease in capital expenditures generally;
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Liquidity and Capital Resources – (continued)
proceeds fromduring the sale of businesses duringquarter ended March 31, 2018; and
a decrease in net borrowings by a renewablesthird party renewable developer on a revolving credit facility providedfacility; partially offset by our Contracted Power business.
an increase in capital expenditures.
Capital Deployment (includes both continuing and discontinued operations)
Capital deployment includes growth capital expenditures and “bolt-on” acquisitions, the majority of which are expected to generate incremental earnings. For the nine monthsquarters ended September 30,March 31, 2019 and 2018, and 2017, wecapital deployed $138.6was $40 million and $541.5$50 million, respectively, of growth capital in our existing businesses including an on-field consolidation (acquisition) of an FBOrespectively. Capital deployed from continuing operations for $11.4 million during the first quarter of 2018.ended March 2019 was $33 million.
We continuously evaluate opportunities to prudently deploy capital in acquisitions and growth projects, whether in our existing businesses or new lines of business. We expect to undertake a number of capital projects related to the repurposing and repositioning of certain assets at IMTT and the improvement in capacity andenhancement of the capabilities of the businesses in our other segments. We estimate that the majority of our 2019 growth capital expenditures will be made in support of IMTT. In total, we expect to deploy approximately $200.0$275 million to $300 million of growth capital into growth projects and “bolt-on” acquisitions during the year.2019.
Financing Activities from Continuing Operations
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 stockholdersshareholders and the repayment of debt principal balances on maturing debt.
The change from consolidated cash provided by financing activities for the nine months ended September 30, 2017 to cash used in financing activities for the nine months ended September 30, 2018 was primarily due to:
a decrease in net borrowings used partially to fund capital deployment and general corporate purposes; partially offset by
a decrease in dividends paid to stockholders in 2018.
IMTT
During the nine months ended September 30, 2018, IMTT borrowed $17.0 million primarily for general corporate purposes and repaid $10.0 million on its revolving credit facility. At September 30, 2018, IMTT had $1.3 billion of total debt outstanding consisting of $600.0 million of senior notes, $509.0 million of tax-exempt bonds and $217.0 million drawn on its revolving credit facility. IMTT has access to $600.0 million of revolving credit facilities, of which $383.0 million remained undrawn at September 30, 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 $35.4 million and $29.7 million for the nine months ended September 30, 2018 and 2017, respectively. At September 30, 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, 2018, Atlantic Aviation had total debt outstanding of $666.0 million comprised of a $375.0 million senior secured, first lien term loan facility and a $291.0 million balance outstanding on its senior secured, first lien revolving credit facility. Atlantic Aviation has access to a $350.0 million revolving credit facility, of which $59.0 million remained undrawn at September 30, 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)
CashThe increase in consolidated cash used in financing activities from continuing operations for the quarter ended March 31, 2019 compared with the quarter ended March 31, 2018 was primarily due to:
higher net borrowings during the quarter ended March 31, 2018 primarily to fund an acquisition, growth capital expenditures and general corporate purposes; partially offset by
a decrease in dividends paid to shareholders in 2019.
IMTT
At March 31, 2019, IMTT had $1,109 million of debt outstanding consisting of $600 million of senior notes and $509 million of tax-exempt bonds. An additional $600 million of capacity on revolving credit facilities was undrawn. For the quarters ended March 31, 2019 and 2018, cash interest expense was $20.6$10 million and $15.4$12 million, forrespectively. At March 31, 2019, IMTT was in compliance with its financial covenants.
Atlantic Aviation
At March 31, 2019, Atlantic Aviation had $1,022 million outstanding on its senior secured, first lien term loan facility. An additional $350 million of capacity on a revolving credit facility was undrawn.
For the nine monthsquarters ended September 30,March 31, 2019 and 2018, cash interest expense was $14 million and 2017,$5 million, respectively. Cash interest expense for the nine monthsquarter ended September 30,March 31, 2018 and 2017 includes the cash interest expensepaid on the $402.5$403 million of the MIC Corporate 2.00% Convertible Senior Notes issued in October 2016 and due in October 2023.through the refinancing of the business’ debt on December 6, 2018. The proceeds from thethis note issuance in October 2016 were used principally to reduce the drawn balance of Atlantic Aviation’s revolving credit facility. Cash interest expense on this note issuance is included in MIC Corporate and Other subsequent to December 6, 2018. At September 30, 2018,March 31, 2019, Atlantic Aviation was in compliance with its financial covenants.
Contracted PowerMIC Hawaii
At September 30, 2018, the businesses within our Contracted Power segmentMarch 31, 2019, MIC Hawaii had $556.7total debt outstanding of $196 million consisting of $100 million in senior secured note borrowings and $96 million in term loans outstanding,loan debt. An additional $60 million 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 $19.5 million and $20.6 million for the nine months ended September 30, 2018 and 2017, respectively.
At September 30, 2018, BEC also had access tocapacity on a revolving credit facility of $25.0 million that was undrawn. Cash interest expense for BEC was $7.5 million and $7.9$2 million for the nine monthsquarters ended September 30, 2018March 31, 2019 and 2017, respectively.2018. At September 30, 2018, BECMarch 31, 2019, MIC Hawaii was in compliance with its financial covenants. On October 12, 2018, we concluded the sale of BEC
MIC Corporate
At March 31, 2019, MIC had $350 million and 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, 2018, our wind and solar facilities had an aggregate $313.2$403 million in term loan debt outstanding. Cashconvertible senior notes outstanding that bear interest expense totaled $12.0at 2.875% and 2.00%, respectively. An additional $600 million and $12.7 million for the nine months ended September 30, 2018 and 2017, respectively. At September 30, 2018, all of the wind and solar facilities were in compliance with their respective financial covenants.
MIC Hawaii
At September 30, 2018, the businesses of MIC Hawaii had total debt outstanding of $213.2 million comprising $198.2 million in term loans and $15.0 million outstandingcapacity on revolving credit facilities. Cash interest expense totaled $5.7 million and $5.4 million for the nine months ended September 30, 2018 and 2017, respectively.
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 milliona revolving credit facility extending their respective maturities to February 2023.was undrawn.
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$2 million and $4.8$4 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 $18.2 million of debt outstanding, consisting primarily of $16.0 million term loan debt related to our solar facilities. At September 30, 2018, these businesses were in compliance with their financial covenants.
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Liquidity and Capital Resources – (continued)
MIC Corporate
At September 30, 2018, MIC had $350.0 million of 2.875% Convertible Senior Notes due July 2019 and $402.5 million of 2.00% Convertible Senior Notes due October 2023 outstanding. At September 30, 2018, MIC also had an outstanding balance on a $600.0 million senior secured revolving credit facility of $176.5 million.
In October 2018, using the proceeds from the sale of BEC and cash on hand, we repaid $150.0 million on our revolving credit facility.
Cash interest expense was $12.9 million and $8.3 million for the nine months ended September 30, 2018 and 2017, respectively. Cash interest expense in both periodsfor the quarter ended March 31, 2018 excludes the cash interest expense related topaid on the $402.5$403 million of MIC Corporate 2.00% Convertible Senior Notes issued in October 2016 and due in October 2023.through the date of the refinancing of Atlantic Aviation’s debt on December 6, 2018. The proceeds from thethis note issuance in October 2016 were used principally to reduce the drawn balance of Atlantic Aviation’s revolving credit facility. SeeAtlantic Aviation above.Cash interest expense on this note issuance is included in MIC Corporate and Other subsequent to December 6, 2018. At September 30, 2018,March 31, 2019, 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 7,9, “Long-Term Debt”, in Part II, Item 8, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2017.2018.
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Commitments and Contingencies
Except as noted above, at September 30, 2018,March 31, 2019, there were no material changes in our commitments and contingencies compared with those at December 31, 2017.2018. At September 30, 2018,March 31, 2019, 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, 2017,2018, filed with the SEC on February 21, 2018.20, 2019.
At September 30, 2018,March 31, 2019, 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”);
| �� | undrawn balances on 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, 20172018 and see Note 2, “Basis of Presentation”, and Note 4, “Implementation of ASU 2016-02”, 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.
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, 2017.2018. Our exposure to market risk has not changed materially since February 21, 2018,20, 2019, 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, due to a material weakness in internal control over financial reporting at Atlantic Aviation described in Part II, Item 9A of our Form 10-K for the year ended December 31, 2018, because such material weakness has not yet been remediated, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of September 30, 2018.March 31, 2019.
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Controls and Procedures – (continued)
Changes in Internal Control Over Financial Reporting
Effective January 1, 2019, we adopted ASC Topic 842,Leases. The adoption of this accounting standard required the implementation of new internal controls over reporting of operating leases. For example, we implemented new controls related to the adoption process and a new IT system to capture, calculate, and account for leases, and gather the necessary data to properly account for leases under ASC 842. There has beenwere no changeother changes in our internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) that occurred during the quarter ended September 30, 2018March 31, 2019 that hashave materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting, other than as described below under the caption “Remediation.”
Remediation
As previously described in Part II, Item 9A of our Form 10-K for the year ended December 31, 2018, we began implementing remediation measures to address the control deficiencies that led to the material weakness mentioned above. The remediation measures at Atlantic Aviation include the following:
| (i) | reinforcing the importance of the performance of the fuel gallon and pricing management review procedures and controls; |
| (ii) | developing and maintaining documentation to be utilized by FBO personnel in performing revenue procedures and controls; |
| (iii) | training control owners on revenue procedures and controls; |
| (iv) | re-enforcing accountability for compliance with internal control policies and procedure; and |
| (v) | enhancing the existing centralized revenue control monitoring function. |
We are in the process of implementing and testing these enhanced internal controls and related procedures. We believe that these actions will be sufficient to remediate the material weakness and strengthen our internal control over financial reporting. The material weakness will not be considered remediated, however, until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We expect that the remediation of this material weakness will be completed prior to December 31, 2019.
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MACQUARIE INFRASTRUCTURE CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
($ in Thousands,Millions, Except Share Data)
| | | | | | | | |
| | September 30,
2018 | | December 31,
2017 | | March 31,
2019 | | December 31,
2018 |
| | | (Unaudited) | | | | (Unaudited) |
ASSETS
| | | | | | | | | | | | | | | | |
Current assets:
| | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 50,162 | | | $ | 47,121 | | | $ | 603 | | | $ | 589 | |
| Restricted cash | | | 41,238 | | | | 24,963 | | | | 23 | | | | 23 | |
| Accounts receivable, less allowance for doubtful accounts of $1,114 and $895, respectively | | | 130,777 | | | | 158,152 | | |
| Accounts receivable, net of allowance for doubtful accounts | | | | 106 | | | | 95 | |
| Inventories | | | 30,807 | | | | 36,955 | | | | 30 | | | | 29 | |
| Prepaid expenses | | | 9,329 | | | | 14,685 | | | | 13 | | | | 13 | |
| Fair value of derivative instruments | | | 17,510 | | | | 11,965 | | | | 9 | | | | 11 | |
| Other current assets | | | 13,040 | | | | 13,804 | | | | 32 | | | | 12 | |
| Assets held for sale(1) | | | 971,934 | | | | — | | |
| Current assets held for sale(1) | | | | 722 | | | | 648 | |
| Total current assets | | | 1,264,797 | | | | 307,645 | | | | 1,538 | | | | 1,420 | |
| Property, equipment, land and leasehold improvements, net | | | 3,753,291 | | | | 4,659,614 | | | | 3,115 | | | | 3,141 | |
| Operating lease assets | | | | 321 | | | | — | |
| Investment in unconsolidated business | | | 9,296 | | | | 9,526 | | | | 8 | | | | 8 | |
| Goodwill | | | 2,043,800 | | | | 2,068,668 | | | | 2,043 | | | | 2,043 | |
| Intangible assets, net | | | 813,348 | | | | 914,098 | | | | 774 | | | | 789 | |
| Fair value of derivative instruments | | | 26,958 | | | | 24,455 | | | | 9 | | | | 15 | |
| Other noncurrent assets | | | 26,980 | | | | 24,945 | | | | 12 | | | | 28 | |
| Total assets | | $ | 7,938,470 | | | $ | 8,008,951 | | | $ | 7,820 | | | $ | 7,444 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY
| | | | | | | | | | | | | | | | |
Current liabilities:
| | | | | | | | | | | | | | | | |
| Due to Manager-related party | | $ | 4,474 | | | $ | 5,577 | | | $ | 3 | | | $ | 3 | |
| Accounts payable | | | 54,628 | | | | 60,585 | | | | 42 | | | | 38 | |
| Accrued expenses | | | 83,424 | | | | 89,496 | | | | 74 | | | | 86 | |
| Current portion of long-term debt | | | 392,903 | | | | 50,835 | | | | 361 | | | | 361 | |
| Fair value of derivative instruments | | | 534 | | | | 1,710 | | |
| Operating lease liabilities – current | | | | 21 | | | | — | |
| Other current liabilities | | | 52,089 | | | | 47,762 | | | | 35 | | | | 33 | |
| Liabilities held for sale(1) | | | 299,659 | | | | — | | |
| Current liabilities held for sale(1) | | | | 384 | | | | 317 | |
| Total current liabilities | | | 887,711 | | | | 255,965 | | | | 920 | | | | 838 | |
| Long-term debt, net of current portion | | | 3,009,008 | | | | 3,530,311 | | | | 2,653 | | | | 2,653 | |
| Deferred income taxes | | | 656,708 | | | | 632,070 | | | | 684 | | | | 681 | |
| Fair value of derivative instruments | | | 1,174 | | | | 4,668 | | |
| Tolling agreements – noncurrent | | | — | | | | 52,595 | | |
| Operating lease liabilities – noncurrent | | | | 306 | | | | — | |
| Other noncurrent liabilities | | | 187,957 | | | | 182,639 | | | | 151 | | | | 155 | |
| Total liabilities | | | 4,742,558 | | | | 4,658,248 | | | | 4,714 | | | | 4,327 | |
| 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,Millions, Except Share Data)
| | | | | | | | |
| | September 30,
2018 | | December 31,
2017 | | March 31,
2019 | | December 31,
2018 |
| | | (Unaudited) | | | | (Unaudited) |
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 | | | 1,585,328 | | | | 1,840,033 | | | $ | 1,432 | | | $ | 1,510 | |
| Accumulated other comprehensive loss | | | (32,085 | ) | | | (29,993 | ) | | | (30 | ) | | | (30 | ) |
| Retained earnings | | | 1,480,471 | | | | 1,343,567 | | | | 1,555 | | | | 1,485 | |
| Total stockholders’ equity | | | 3,033,800 | | | | 3,153,692 | | | | 2,957 | | | | 2,965 | |
| Noncontrolling interests | | | 162,112 | | | | 197,011 | | |
| Noncontrolling interests(3) | | | | 149 | | | | 152 | |
| Total equity | | | 3,195,912 | | | | 3,350,703 | | | | 3,106 | | | | 3,117 | |
| Total liabilities and equity | | $ | 7,938,470 | | | $ | 8,008,951 | | | $ | 7,820 | | | $ | 7,444 | |
| (1) | See Note 2, “Basis of Presentation”3, “Discontinued Operations and Dispositions”, for further discussion on assets and liabilities held for sale. |
| (2) | The Company is authorized to issue the following classes of stock: (i) 500,000,000 shares of common stock, par value $0.001 per share. At March 31, 2019 and December 31, 2018, the Company had 85,982,332 shares and 85,800,303 shares of common stock issued and outstanding, respectively; (ii) 100,000,000 shares of preferred stock, par value $0.001 per share. At September 30, 2018March 31, 2019 and December 31, 2017,2018, no preferred stockstocks were issued or outstanding. The Company hadoutstanding; and (iii) 100 shares of special stock, par value $0.001 per share, issued and outstanding to its Manager as at September 30, 2018March 31, 2019 and December 31, 2017.2018. |
| (3) | Includes $141 million of noncontrolling interest related to discontinued operations at March 31, 2019 and December 31, 2018. See Note 3, “Discontinued Operations and Dispositions”, for further discussions. |
See accompanying notes to the consolidated condensed financial statements.
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MACQUARIE INFRASTRUCTURE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
($ in Thousands,Millions, Except Share and Per Share Data)
| | | | | | | | | | | | |
| | Quarter Ended
September 30, | | Nine Months Ended
September 30, | | Quarter Ended March 31, |
| | | 2018 | | 2017 | | 2018 | | 2017 | | 2019 | | 2018 |
Revenue
| | | | | | | | | | | | | | | | | | | | | | | | |
| Service revenue | | $ | 361,031 | | | $ | 358,220 | | | $ | 1,139,637 | | | $ | 1,067,069 | | | $ | 418 | | | $ | 403 | |
| Product revenue | | | 112,249 | | | | 94,841 | | | | 313,279 | | | | 276,439 | | | | 64 | | | | 64 | |
| Total revenue | | | 473,280 | | | | 453,061 | | | | 1,452,916 | | | | 1,343,508 | | | | 482 | | | | 467 | |
Costs and expenses
| | | | | | | | | | | | | | | | | | | | | | | | |
| Cost of services | | | 166,694 | | | | 153,218 | | | | 533,889 | | | | 455,038 | | | | 168 | | | | 187 | |
| Cost of product sales | | | 47,823 | | | | 35,669 | | | | 148,372 | | | | 123,143 | | | | 40 | | | | 48 | |
| Selling, general and administrative | | | 86,487 | | | | 84,898 | | | | 262,371 | | | | 244,817 | | | | 80 | | | | 80 | |
| Fees to Manager-related party | | | 12,333 | | | | 17,954 | | | | 36,113 | | | | 54,610 | | | | 8 | | | | 13 | |
| Goodwill impairment | | | 3,215 | | | | — | | | | 3,215 | | | | — | | |
| Depreciation | | | 56,924 | | | | 58,009 | | | | 179,368 | | | | 172,753 | | | | 48 | | | | 47 | |
| Amortization of intangibles | | | 20,030 | | | | 17,329 | | | | 55,470 | | | | 50,920 | | | | 15 | | | | 16 | |
| Total operating expenses | | | 393,506 | | | | 367,077 | | | | 1,218,798 | | | | 1,101,281 | | | | 359 | | | | 391 | |
| Operating income | | | 79,774 | | | | 85,984 | | | | 234,118 | | | | 242,227 | | | | 123 | | | | 76 | |
Other income (expense)
| | | | | | | | | | | | | | | | | | | | | | | | |
| Interest income | | | 113 | | | | 54 | | | | 304 | | | | 129 | | | | 3 | | | | — | |
| Interest expense(1) | | | (32,616 | ) | | | (29,291 | ) | | | (81,693 | ) | | | (90,129 | ) | | | (42 | ) | | | (18 | ) |
| Other (expense) income, net | | | (18,011 | ) | | | 4,973 | | | | (11,721 | ) | | | 7,893 | | |
| Net income before income taxes | | | 29,260 | | | | 61,720 | | | | 141,008 | | | | 160,120 | | |
| Other income, net | | | | 4 | | | | — | |
| Net income from continuing operations before income taxes | | | | 88 | | | | 58 | |
| Provision for income taxes | | | (7,884 | ) | | | (25,547 | ) | | | (36,558 | ) | | | (65,284 | ) | | | (24 | ) | | | (18 | ) |
| Net income from continuing operations | | | $ | 64 | | | $ | 40 | |
Discontinued Operations(2)
| | | | | | | | | |
| Net income from discontinued operations before income taxes | | | $ | 3 | | | $ | 6 | |
| Benefit for income taxes | | | | 2 | | | | 1 | |
| Net income from discontinued operations | | | $ | 5 | | | $ | 7 | |
| Net income | | $ | 21,376 | | | $ | 36,173 | | | $ | 104,450 | | | $ | 94,836 | | | $ | 69 | | | $ | 47 | |
| Net income from continuing operations | | | $ | 64 | | | $ | 40 | |
| Net income from continuing operations attributable to MIC | | | $ | 64 | | | $ | 40 | |
| Net income from discontinued operations | | | $ | 5 | | | $ | 7 | |
| Less: net loss attributable to noncontrolling interests | | | (328 | ) | | | (3,922 | ) | | | (32,454 | ) | | | (7,294 | ) | | | (1 | ) | | | (30 | ) |
| Net income from discontinued operations attributable to MIC | | | $ | 6 | | | $ | 37 | |
| Net income attributable to MIC | | $ | 21,704 | | | $ | 40,095 | | | $ | 136,904 | | | $ | 102,130 | | | $ | 70 | | | $ | 77 | |
| Basic income per share from continuing operations attributable to MIC | | | $ | 0.75 | | | $ | 0.47 | |
| Basic income per share from discontinued operations attributable to MIC | | | | 0.07 | | | | 0.44 | |
| Basic income per share attributable to MIC | | $ | 0.25 | | | $ | 0.48 | | | $ | 1.61 | | | $ | 1.23 | | | $ | 0.82 | | | $ | 0.91 | |
| Weighted average number of shares outstanding: basic | | | 85,378,088 | | | | 83,644,806 | | | | 85,095,956 | | | | 82,743,285 | | | | 85,872,132 | | | | 84,821,453 | |
| Diluted income per share from continuing operations attributable to MIC | | | $ | 0.73 | | | $ | 0.47 | |
| Diluted income per share from discontinued operations attributable to MIC | | | | 0.06 | | | | 0.44 | |
| Diluted income per share attributable to MIC | | $ | 0.25 | | | $ | 0.48 | | | $ | 1.61 | | | $ | 1.23 | | | $ | 0.79 | | | $ | 0.91 | |
| Weighted average number of shares outstanding: diluted | | | 85,398,566 | | | | 87,916,538 | | | | 85,109,213 | | | | 82,752,800 | | | | 93,913,267 | | | | 84,830,888 | |
| Cash dividends declared per share | | $ | 1.00 | | | $ | 1.42 | | | $ | 3.00 | | | $ | 4.12 | | | $ | 1.00 | | | $ | 1.00 | |
| (1) | Interest expense includes losses on derivative instruments of $4 million and gains on derivative instruments of $4.8 million and $25.8$10 million for the quarterquarters ended March 31, 2019 and nine months ended September 30, 2018, respectively. For the quarter |
| (2) | See Note 3, “Discontinued Operations and nine months ended September 30, 2017, interest expense includes lossesDispositions”, for discussions on derivative instruments of $162,000 and $6.9 million, respectively.businesses classified as held for sale. |
See accompanying notes to the consolidated condensed financial statements.
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MACQUARIE INFRASTRUCTURE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
($ in Thousands)Millions)
| | | | | | | | | | | | |
| | Quarter Ended
September 30, | | Nine Months Ended
September 30, | | Quarter Ended March 31, |
| | | 2018 | | 2017 | | 2018 | | 2017 | | 2019 | | 2018 |
| Net income | | $ | 21,376 | | | $ | 36,173 | | | $ | 104,450 | | | $ | 94,836 | | | $ | 69 | | | $ | 47 | |
Other comprehensive income (loss), net of taxes:
| | | | | | | | | | | | | | | | | |
Other comprehensive loss, net of taxes:
| | | | | | | | | |
Translation adjustment(1) | | | 1,381 | | | | 1,641 | | | | (2,092 | ) | | | 2,738 | | | | — | | | | (1 | ) |
| Other comprehensive income (loss) | | | 1,381 | | | | 1,641 | | | | (2,092 | ) | | | 2,738 | | |
| Other comprehensive loss | | | | — | | | | (1 | ) |
| Comprehensive income | | $ | 22,757 | | | $ | 37,814 | | | $ | 102,358 | | | $ | 97,574 | | | | 69 | | | | 46 | |
| Less: comprehensive loss attributable to noncontrolling interests | | | (328 | ) | | | (3,922 | ) | | | (32,454 | ) | | | (7,294 | ) | | | (1 | ) | | | (30 | ) |
| Comprehensive income attributable to MIC | | $ | 23,085 | | | $ | 41,736 | | | $ | 134,812 | | | $ | 104,868 | | | $ | 70 | | | $ | 76 | |
See accompanying notes to the consolidated condensed financial statements.
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MACQUARIE INFRASTRUCTURE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
($ in Millions, Except Share Data)
| | | | | | | | | | | | | | | | |
| | In Shares | | Additional
Paid In
Capital | | Accumulated
Other
Comprehensive
Loss | | Retained
Earnings | | Total
Stockholders’
Equity | | Noncontrolling
Interests(2) | | Total
Equity |
| | | Special
Stock | | Common
Stock(1) |
| Balance at December 31, 2018 | | | 100 | | | | 85,800,303 | | | $ | 1,510 | | | $ | (30 | ) | | $ | 1,485 | | | $ | 2,965 | | | $ | 152 | | | $ | 3,117 | |
| Issuance of shares to Manager | | | — | | | | 182,029 | | | | 8 | | | | — | | | | — | | | | 8 | | | | — | | | | 8 | |
| Dividends to common stockholders(3) | | | — | | | | — | | | | (86 | ) | | | — | | | | — | | | | (86 | ) | | | — | | | | (86 | ) |
| Distributions to noncontrolling interests | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (2 | ) | | | (2 | ) |
| Comprehensive income (loss), net of taxes | | | — | | | | — | | | | — | | | | — | | | | 70 | | | | 70 | | | | (1 | ) | | | 69 | |
| Balance at March 31, 2019 | | | 100 | | | | 85,982,332 | | | $ | 1,432 | | | $ | (30 | ) | | $ | 1,555 | | | $ | 2,957 | | | $ | 149 | | | $ | 3,106 | |
| Balance at December 31, 2017 | | | 100 | | | | 84,733,957 | | | $ | 1,840 | | | $ | (30 | ) | | $ | 1,343 | | | $ | 3,153 | | | $ | 197 | | | $ | 3,350 | |
| Issuance of shares to Manager | | | — | | | | 166,615 | | | | 11 | | | | — | | | | — | | | | 11 | | | | — | | | | 11 | |
| Issuance of shares, net of offering costs | | | — | | | | 1,916 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Issuance of shares pursuant to conversion of convertible senior notes | | | — | | | | 74 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Dividends to common stockholders(3) | | | — | | | | — | | | | (122 | ) | | | — | | | | — | | | | (122 | ) | | | — | | | | (122 | ) |
| Distributions to noncontrolling interests | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (1 | ) | | | (1 | ) |
| Comprehensive (loss) income, net of taxes | | | — | | | | — | | | | — | | | | (1 | ) | | | 77 | | | | 76 | | | | (30 | ) | | | 46 | |
| Balance at March 31, 2018 | | | 100 | | | | 84,902,562 | | | $ | 1,729 | | | $ | (31 | ) | | $ | 1,420 | | | $ | 3,118 | | | $ | 166 | | | $ | 3,284 | |
| (1) | Translation adjustmentThe Company is presented netauthorized to issue 500,000,000 shares of tax expensecommon stock with a par value $0.001 per share. |
| (2) | Includes $141 million and $153 million of $515,000noncontrolling interest related to discontinued operations at March 31, 2019 and tax benefit of $802,000 for the quarter and nine months ended September 30, 2018, respectively. For the quarterSee Note 3, “Discontinued Operations and nine months ended September 30, 2017, translation adjustment is presented net of tax expense of $1.1 million and $1.9 million, respectively.Dispositions”, for further discussions. |
| (3) | See Note 14, “Related Party Transactions”, for cash dividends paid on shares for each period. |
See accompanying notes to the consolidated condensed financial statements.
TABLE OF CONTENTS
MACQUARIE INFRASTRUCTURE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
($ in Thousands)Millions)
| | | | | | | | |
| | Nine Months Ended
September 30, | | Quarter Ended March 31, |
| | | 2018 | | 2017(1) | | 2019 | | 2018 |
Operating activities
| | | | | | | | | | | | | | | | |
| Net income | | $ | 104,450 | | | $ | 94,836 | | |
Adjustments to reconcile net income to net cash provided by operating activities:
| | | | | | | | | |
| Non-cash goodwill impairment | | | 3,215 | | | | — | | |
| Net income from continuing operations | | | $ | 64 | | | $ | 40 | |
Adjustments to reconcile net income to net cash provided by operating activities from continuing operations:
| | | | | | | | | |
| Depreciation and amortization of property and equipment | | | 179,368 | | | | 172,753 | | | | 48 | | | | 47 | |
| Amortization of intangible assets | | | 55,470 | | | | 50,920 | | | | 15 | | | | 16 | |
| Amortization of debt financing costs | | | 7,430 | | | | 6,464 | | | | 3 | | | | 3 | |
| Amortization of debt discount | | | 2,710 | | | | 2,377 | | | | 1 | | | | 1 | |
| Adjustments to derivative instruments | | | (19,782 | ) | | | 3,414 | | | | 7 | | | | (5 | ) |
| Fees to Manager-related party | | | 36,113 | | | | 54,610 | | | | 8 | | | | 13 | |
| Deferred taxes | | | 25,899 | | | | 56,791 | | | | 17 | | | | 14 | |
| Pension expense | | | 6,284 | | | | 6,481 | | |
| Other non-cash expense (income), net(2) | | | 14,359 | | | | (2,651 | ) | |
Changes in other assets and liabilities, net of acquisitions/dispositions:
| | | | | | | | | |
| Other non-cash expense, net | | | | 4 | | | | 5 | |
Changes in other assets and liabilities, net of acquisitions:
| | | | | | | | | |
| Accounts receivable | | | 6,200 | | | | (18,938 | ) | | | (11 | ) | | | 5 | |
| Inventories | | | (2,003 | ) | | | (4,563 | ) | | | — | | | | (2 | ) |
| Prepaid expenses and other current assets | | | 2,605 | | | | (7,040 | ) | | | (5 | ) | | | (3 | ) |
| Due to Manager-related party | | | 155 | | | | (178 | ) | |
| Accounts payable and accrued expenses | | | 4,896 | | | | (4,444 | ) | | | (2 | ) | | | (5 | ) |
| Income taxes payable | | | 654 | | | | (1,223 | ) | | | 7 | | | | 2 | |
| Other, net | | | (14,970 | ) | | | (11,249 | ) | | | (5 | ) | | | (1 | ) |
| Net cash provided by operating activities | | | 413,053 | | | | 398,360 | | |
| Net cash provided by operating activities from continuing operations | | | | 151 | | | | 130 | |
Investing activities
| | | | | | | | | | | | | | | | |
| Acquisitions of businesses and investments, net of cash acquired | | | (12,515 | ) | | | (208,377 | ) | |
| Acquisitions of businesses and investments, net of cash, cash equivalents and restricted cash acquired | | | | — | | | | (11 | ) |
| Purchases of property and equipment | | | (159,037 | ) | | | (234,833 | ) | | | (44 | ) | | | (40 | ) |
| Loan to project developer | | | (17,800 | ) | | | (18,675 | ) | | | (1 | ) | | | (11 | ) |
| Loan repayment from project developer | | | 16,561 | | | | 6,604 | | | | — | | | | 5 | |
| Proceeds from sale of business, net of cash divested | | | 41,038 | | | | — | | |
| Other, net | | | 467 | | | | 179 | | |
| Net cash used in investing activities | | | (131,286 | ) | | | (455,102 | ) | |
| Net cash used in investing activities from continuing operations | | | | (45 | ) | | | (57 | ) |
Financing activities
| | | | | | | | | |
| Proceeds from long-term debt | | | | — | | | | 142 | |
| Payment of long-term debt | | | | (3 | ) | | | (58 | ) |
| Dividends paid to common stockholders | | | | (86 | ) | | | (122 | ) |
| Debt financing costs paid | | | | (1 | ) | | | (3 | ) |
| Net cash used in financing activities from continuing operations | | | | (90 | ) | | | (41 | ) |
| Net change in cash, cash equivalents and restricted cash from continuing operations | | | | 16 | | | | 32 | |
See accompanying notes to the consolidated condensed financial statements.
TABLE OF CONTENTS
MACQUARIE INFRASTRUCTURE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS – (continued)
(Unaudited)
($ in Thousands)Millions)
| | | | |
| | Nine Months Ended
September 30, |
| | | 2018 | | 2017(1) |
Financing activities
| | | | | | | | |
| Proceeds from long-term debt | | $ | 275,500 | | | $ | 585,500 | |
| Payment of long-term debt | | | (223,529 | ) | | | (200,722 | ) |
| Proceeds from the issuance of shares | | | — | | | | 5,699 | |
| Dividends paid to common stockholders | | | (292,715 | ) | | | (332,867 | ) |
| Contributions received from noncontrolling interests | | | 567 | | | | 102 | |
| Distributions paid to noncontrolling interests | | | (3,028 | ) | | | (2,962 | ) |
| Offering and equity raise costs paid | | | (35 | ) | | | (355 | ) |
| Debt financing costs paid | | | (2,874 | ) | | | (447 | ) |
| Payment of capital lease obligations | | | (87 | ) | | | (366 | ) |
| Net cash (used in) provided by financing activities | | | (246,201 | ) | | | 53,582 | |
| Effect of exchange rate changes on cash and cash equivalents | | | (442 | ) | | | 449 | |
| 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 | | $ | 83 | | | $ | 97 | |
| Accrued financing costs | | $ | — | | | $ | 21 | |
| Accrued purchases of property and equipment | | $ | 23,801 | | | $ | 33,184 | |
| Issuance of shares to Manager | | $ | 37,372 | | | $ | 54,927 | |
| Issuance of shares to independent directors | | $ | 750 | | | $ | 681 | |
| Issuance of shares for acquisition of business | | $ | — | | | $ | 125,000 | |
| Conversion of convertible senior notes to shares | | $ | 6 | | | $ | 17 | |
| Distributions payable to noncontrolling interests | | $ | 5 | | | $ | 32 | |
| Taxes paid, net | | $ | 10,991 | | | $ | 9,810 | |
| Interest paid | | $ | 91,200 | | | $ | 82,108 | |
| | | | |
| | Quarter Ended March 31, |
| | | 2019 | | 2018 |
Cash flows (used in) provided by discontinued operations:
| | | | | | | | |
| Net cash (used in) provided by operating activities | | $ | (13 | ) | | $ | 14 | |
| Net cash used in investing activities | | | (8 | ) | | | (8 | ) |
| Net cash provided by (used in) financing activities | | | 23 | | | | (7 | ) |
| Net cash provided by (used in) discontinued operations | | | 2 | | | | (1 | ) |
| Net change in cash, cash equivalents and restricted cash | | | 18 | | | | 31 | |
| Cash, cash equivalents and restricted cash, beginning of period | | | 629 | | | | 72 | |
| Cash, cash equivalents and restricted cash, end of period | | $ | 647 | | | $ | 103 | |
Supplemental disclosures of cash flow information from continuing operations:
| | | | | | | | |
Non-cash investing and financing activities:
| | | | | | | | |
| Accrued purchases of property and equipment | | $ | 12 | | | $ | 18 | |
| Issuance of shares to Manager | | | 8 | | | | 11 | |
| Taxes paid, net | | | 1 | | | | 2 | |
| Interest paid, net | | | 31 | | | | 20 | |
| (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 from both continuing and discontinued operations reported within the consolidated condensed balance sheets that sum to the total of the same amountsis presented in the consolidated condensed statements of cash flows:
| | | | | | | | |
| | As of September 30, | | As of March 31, |
| | | 2018 | | 2017 | | 2019 | | 2018 |
| Cash and cash equivalents | | $ | 50,162 | | | $ | 35,737 | | | $ | 603 | | | $ | 75 | |
| Restricted cash – current | | | 41,238 | | | | 22,809 | | | | 23 | | | | 10 | |
| Restricted cash held for sale(3) | | | 15,808 | | | | — | | |
| Cash, cash equivalents and restricted cash included in assets held for sale(1) | | | | 21 | | | | 18 | |
| Total of cash, cash equivalents and restricted cash shown in the consolidated condensed statement of cash flows | | $ | 107,208 | | | $ | 58,546 | | | $ | 647 | | | $ | 103 | |
| (3)(1) | Represents cash, cash equivalents and restricted cash related to BEC, which werebusinesses classified as held for sale at September 30, 2018.sale. See Note 2, “Basis of Presentation”3, “Discontinued Operations and Dispositions”, 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 board of directors.Board. The majority of the members of the Board, of Directors, and each member of all Board Committees,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 Securities 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 infrastructure and infrastructure-like businesses that provide services to other businesses,corporate, government agencies and individualsindividual customers primarily in the U.S. The businesses it owns and operates are organized into four segments:
| • | International-Matex Tank Terminals (IMTT): a business providing bulk liquid terminalling to third parties at 17 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: comprising 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 in Hawaii.Hawaii; and |
| • | Corporate and Other: comprised of MIC Corporate (holding company), a shared services center and other smaller businesses. |
ThroughEffective October 12,1, 2018, the Bayonne Energy Center (BEC) and substantially all of the Company’s portfolio of solar and wind power generation businesses were classified as discontinued operations and the Company’s Contracted Power segment was eliminated. Effective January 1, 2019, the Company’s interest in its renewable power development business was also includedclassified as discontinued operations. A remaining relationship with a gas-fired facility.third party developer of renewable power facilities has been reported as a component of Corporate and Other and is expected to conclude during 2019 pursuant to the agreement. All prior comparable periods have been restated to reflect this change. The Company did not restate the prior period related to the commencement of the sale process involving its majority interest in a renewable power development business as the disposition is insignificant. See Note 2, “Basis of Presentation”,3, “Discontinued Operations and Dispositions” for further information.discussions.
2. Basis of Presentation
The unaudited consolidated condensed financial statements have been prepared in accordance with generally accepted accounting principles generally accepted(GAAP) 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.
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(Unaudited)
2. Basis of Presentation – (continued)
The consolidated balance sheet at December 31, 20172018 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, 20172018 included in the Company’s Annual Report on Form 10-K, as filed with the SEC on February 21, 2018.20, 2019. Operating results for the quarter and nine months ended September 30, 2018March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 20182019 or for any future interim periods.
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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 fair values of the quarter endedCompany’s other debt instruments fall within level 1 or level 2 of the fair value hierarchy.
At March 31, 2018,2019, the Company announced that it was exploring the potential salehad $430 million of commercial paper included incash and cash equivalents. Commercial paper consists of maturities of three months or less and are issued by a portion or allcounterparties with Standard & Poor rating 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.A1+. 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,did not have any commercial paper at December 31, 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)Income Taxes
The Company continuesexpects to reviewincur federal consolidated taxable income from continuing operations for the year ending December 31, 2019, 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 strategic options available, including with respectfederal prior year NOLs, which will begin to certain other, smaller businesses in its portfolio. Consistent with this,expire after 2029 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.completely expire after 2035.
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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.
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(Unaudited)
2. Basis of Presentation – (continued)
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.
3. Discontinued Operations and Dispositions
In February 2018, the FASB issued ASU No. 2018-02, Income Statement — Reporting Comprehensive Income (Topic 220): ReclassificationThe Company accounts for disposals that represent a strategic shift that should have or will have a major effect on operations as discontinued operations. The results of Certain Tax Effects from Accumulated Other Comprehensive Income (AOCI). The amendmentsdiscontinued operations are reported 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 changediscontinued operations in the federal tax rate (i.e. state taxes). However, becauseconsolidated condensed statement of operations for current and prior periods commencing in 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 effectbusiness or group of businesses meets 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 valuecriteria of a reporting unit and its carrying amount. An impairment charge would bediscontinued operation. These results include any gain or loss recognized for the amount by whichon disposal or adjustment of the carrying amount exceeds the reporting unit’sto fair value on condition thatless cost to sell.
On October 12, 2018, the charge doesn’t exceedCompany concluded the total amountsale of goodwill allocatedBEC and received cash of $657 million, net of the assumption of the outstanding debt balance of $244 million by the buyer and subject to that reporting unit. The guidancepost-closing working capital adjustments, resulting in a loss of approximately $17 million (excluding any transaction costs). Any adjustment for working capital adjustments is not expected to be significant. During the year ended December 31, 2018, the Company incurred $9 million in professional fees in relation to this transaction, which was included inselling, general and administrative expenses 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.consolidated statement of operations. The Company adoptedguaranteed its subsidiary’s payment and certain post-closing indemnity obligations under the purchase agreement.
During the fourth quarter of 2018, the Company commenced a sale process involving its portfolios of solar and wind facilities within the former Contracted Power segment. In April 2019, the Company entered into agreements for the sale of these portfolios. Aggregate gross proceeds to the Company from the sales are expected to be approximately $215 million or approximately $160 million net of taxes and transaction related expenses. In addition, upon closing, MIC will deconsolidate $302 million of long-term debt. Under the agreements, the Company will sell its 203 megawatts (MW) (gross) portfolio of wind generation assets to DIF Infrastructure V, a fund managed by Dutch Infrastructure Fund, a global infrastructure fund management company, and its 142 MW portfolio of solar power generation assets to Goldman Sachs Renewable Power LLC. Closing of the transactions is subject to receipt of customary consents for transactions of this ASU on January 1, 2018.type. The sale of the individual businesses comprising the portfolios are expected to close in two or possibly three stages over the balance of 2019.
At March 31, 2019, excluding any transaction costs, the Company estimates a pre-tax gain of approximately $33 million upon the conclusion of the sale. Through March 31, 2019, the Company incurred $1 million in professional fees in relation to these transactions, which is included inselling, general and administrative expenses in the consolidated condensed statement of operations, and is expected to incur a total of approximately $8 million in professional fees upon the conclusion of the sale in 2019.
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
2. Basis of Presentation3. Discontinued Operations and Dispositions – (continued)
On January 5, 2017,The combination of the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definitiondisposal 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 company acquires a set of assets or a business will impact the initial measurement, the accounting treatment of direct acquisition related costs, contingent considerationsBEC and the bargain purchase price. The guidancecommencement of the sale process of substantially all of its portfolio of solar and wind facilities represented a strategic shift for the Company that will have a major effect on operations. Accordingly, beginning in the ASUfourth quarter of 2018, these businesses were classified as discontinued operations and the Contracted Power segment was eliminated. There was no write-down of the carrying amount of the solar and wind facility assets as a result of this change in classification. The assets and liabilities of the solar and wind facilities have been classified as held for sale in the consolidated condensed balance sheets up until the date those assets are disposed. All prior periods have been restated to reflect these changes.
During the first quarter of 2019, the Company also commenced the sale of its majority interest in its renewable power development business that was reported as part of the Company’s Corporate and Other segment in the fourth quarter of 2018. Accordingly, beginning in the first quarter of 2019, this business was classified as discontinued operations and the assets and liabilities of this business have been classified as held for sale in the consolidated condensed balance sheets. A remaining relationship with a third party developer of renewable power facilities has been reported as a component of Corporate and Other and 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.expected to conclude during 2019 pursuant to the agreement. The Company adopted this ASU on January 1, 2018did not restate the prior period related to the commencement of the sale process involving its majority interest in a renewable power development business as the disposition is insignificant.
The following is a summary of the assets and will apply this ASU prospectivelyliabilities held for asset acquisitions and business 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 changessale included in the totalCompany’s consolidated condensed balance sheets related to its former Contracted Power segment as of cash, cash equivalents, restricted cashMarch 31, 2019 and restricted cash equivalentsDecember 31, 2018 ($ in millions):
| | | | |
| | March 31,
2019 | | December 31,
2018 |
Assets
| | | | | | | | |
| Cash and cash equivalents | | $ | 6 | | | $ | 3 | |
| Restricted cash | | | 15 | | | | 14 | |
| Accounts receivable | | | 8 | | | | 9 | |
| Other current assets | | | 25 | | | | 5 | |
| Total current assets | | | 54 | | | | 31 | |
| Property, equipment, land and leasehold improvements, net | | | 632 | | | | 606 | |
| Operating lease assets | | | 21 | | | | — | |
| Intangible assets, net | | | 9 | | | | 9 | |
| Other noncurrent assets | | | 6 | | | | 2 | |
| Total assets | | $ | 722 | | | $ | 648 | |
Liabilities
| | | | | | | | |
| Accounts payable and accrued expenses | | $ | 10 | | | $ | 7 | |
| Current portion of long-term debt | | | 21 | | | | 20 | |
| Notes payable | | | 27 | | | | — | |
| Other current liabilities | | | 3 | | | | 1 | |
| Total current liabilities | | | 61 | | | | 28 | |
| Long term debt, net of current portion | | | 279 | | | | 283 | |
| Operating lease liabilities | | | 21 | | | | — | |
| Other noncurrent liabilities | | | 23 | | | | 6 | |
| Total liabilities | | $ | 384 | | | $ | 317 | |
| Noncontrolling interests | | $ | 141 | | | $ | 141 | |
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
3. Discontinued Operations and Dispositions – (continued)
Summarized financial information for discontinued operations included 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. The Company adopted this ASU on January 1, 2018 and included the retrospective application of this ASU in the accompanyingCompany’s consolidated condensed statement of cash flows.operations for the quarters ended March 31, 2019 and 2018 are as follows ($ in millions):
| | | | |
| | Quarter Ended March 31, |
| | | 2019 | | 2018 |
| Product revenue | | $ | 16 | | | $ | 35 | |
| Cost of product sales | | | (3 | ) | | | (6 | ) |
| Selling, general & administrative expenses | | | (4 | ) | | | (7 | ) |
| Depreciation and amortization | | | — | | | | (16 | ) |
| Interest expense, net | | | (5 | ) | | | (1 | ) |
| Other (expense) income, net | | | (1 | ) | | | 1 | |
| Net income from discontinued operations before income taxes | | $ | 3 | | | $ | 6 | |
| Benefit for income taxes | | | 2 | | | | 1 | |
| Net income from discontinued operations | | $ | 5 | | | $ | 7 | |
| Less: net loss attributable to noncontrolling interests | | | (1 | ) | | | (30 | ) |
| Net income from discontinued operations attributable to MIC | | $ | 6 | | | $ | 37 | |
Other Dispositions
The Company continues to review strategic options available, including with respect to certain other, smaller businesses in its portfolio in an effort to rationalize its portfolio and enhance the infrastructure characteristics of its businesses. Consistent with this, the Company sold (i) OMI Environmental Solutions, a subsidiary within IMTT, in April 2018; (ii) its equity interests in projects involving two properties in May 2018; and (iii) a design-build mechanical contractor business within MIC Hawaii in November 2018. Collectively, the sale of these business are insignificant and do not qualify for discontinued operations.
Prior to the execution of the sale agreement for the design-build mechanical contractor business, the Company wrote-down the value of its investment in this business to reflect its underperformance during the third quarter of 2018. In total, the Company wrote-down approximately $30 million, including fixed assets and intangible assets of approximately $9 million, as well as reserving for certain contract related amounts recorded in other current liabilities and other expenses.
4. Implementation of ASU 2016-02
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 (ROU) asset and a lease liability. The Company also serves as a lessor primarily through operating leases. The accounting for lessors ishas not expected to fundamentally changechanged 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.ASC 606,Revenue.
The substantial population of the Company’s newly recognized ROU assets and lease liabilities relate to Atlantic Aviation’s operating leases of land, buildings and certain equipment. ROU assets represent the Company’s right to use an underlying asset for the lease term and the lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. The
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
4. Implementation of ASU 2016-02 is– (continued)
considerations given for the incremental borrowing rate used in determining the present value of lease payments were the Company’s recent debt refinancing and amendment during 2018 and the Company’s credit rating.
Upon adoption of ASU No. 2016-02, the Company recorded ROU assets and corresponding lease liabilities of $345 million and $352 million, respectively, of which $21 million and $22 million related to asset and liabilities held for sale, respectively. The adoption of this ASU did not have a material impact on its consolidated condensed statements of operations, liquidity or debt covenant compliance under its current agreements.
The Company adopted the standard 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 aJanuary 1, 2019 utilizing the modified retrospective approach,method, which includes a number of optional practical expedients. In July 2018,allowed the FASB issued ASU 2018-11,Leases (Topic 842) Targeted Improvements, which allows lessees and lessorsCompany, where it was the lessee or lessor to recognize and measure leases at the beginning of the period of adoption without modifying the comparative period financial statements.
The Company is inelected the processpackage of completing its assessment ofpractical expedients permitted under the overall impact and is currently planning fortransition guidance within the adoption and implementation of ASU 2016-02. ASU 2016-02 will have a material impact on the Company’s consolidated balance sheets; however,new standard, which among other things, allowed the Company does not expect a material impact on its consolidated statementsto carryforward the historical lease classification. The Company also made an accounting policy election to keep leases with an initial term of operations.12 months or less off the balance sheet. Further, the Company doesstandard did not expect the standard to have a material impact on the accounting and reporting requirements for existing operating leases where the Company is the lessor as it expects to electhas elected the practical expedient whereby the Company will not separate a qualifying contract into its lease and non-lease components. WhileThe Company also determined that the accounting for sales taxes, certain lessor costs, and certain requirements related to variable payments in contracts did not have a material effect on the consolidated condensed balance sheet, statement of operations or statement of cash flows.
5. Leases
The Company has operating leases primarily for land, buildings, office space and certain office equipment under non-cancellable lease agreements. Leases with an initial term of 12 months or less are not recorded on the consolidated balance sheet. Some leases include one or more options to renew, with renewal terms that can extend the lease term from one to 10 years or more. The exercise of these lease renewal options is continuing to assess potential impactsat the Company’s sole discretion.
For the quarter ended March 31, 2019, the Company’s operating lease expenses recorded within the consolidated condensed statement of the standard, it currently expects the most significant impact will be the recognition of ROU assets and lease liabilitiesoperations were as follows ($ in millions):
| | |
| Income Statement Classification | | Quarter Ended March 31, 2019 |
| Cost of product sales | | $ | 1 | |
| Selling, general and administrative | | | 13 | |
| Total operating lease expense(1) | | $ | 14 | |
| (1) | Includes leases less than one year, which are not significant. |
Cash paid for operating leases with original termsare reported in operating activities on the consolidated condensed statement of over one year where the Company is 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.cash flows.
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(Unaudited)
3. Implementation5. Leases – (continued)
At March 31, 2019, the weighted-average remaining operating lease term was 18 years and weighted average discount rate was approximately 8%. The following table represents the future maturities of ASU 2014-09lease liabilities at March 31, 2019 ($ in millions):
| | |
| | | | |
| 2019 remaining | | $ | 35 | |
| 2020 | | | 45 | |
| 2021 | | | 43 | |
| 2022 | | | 42 | |
| 2023 | | | 41 | |
| 2024 | | | 41 | |
| Thereafter | | | 424 | |
| Total lease payment | | $ | 671 | |
| Less: interest | | | (344 | ) |
| Present value of lease liability | | $ | 327 | |
Future minimum lease commitments at December 31, 2018 are ($ in millions):
| | |
| | | | |
| 2019 | | $ | 48 | |
| 2020 | | | 44 | |
| 2021 | | | 41 | |
| 2022 | | | 40 | |
| 2023 | | | 39 | |
| Thereafter | | | 461 | |
| Total | | $ | 673 | |
6. Income per Share
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 thatFollowing 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 termsa reconciliation of the agreements. See Note 11, “Long-Term Contracted Revenue”, for further discussionsbasic and disclosures.diluted income per share computations ($ in millions, except share and per share data):
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This guidance sets forth a five-step revenue recognition model that replaces the prior revenue recognition guidance in its entirety. 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 Company adopted ASU 2014-09 during the first quarter of 2018 using the modified retrospective method. There was no adjustment to the beginning balance of retained earnings and the adoption of this ASU did not have a significant impact to the Company’s consolidated financial statements other than the additional required qualitative and quantitative disclosures. 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 predominantly 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 ratably recognized as revenues over the contract term.
| | | | |
| | Quarter Ended March 31, |
| | | 2019 | | 2018 |
Numerator:
| | | | | | | | |
| Net income from continuing operations attributable to MIC | | $ | 64 | | | $ | 40 | |
| Interest expense attributable to 2.875% Convertible Senior Notes due July 2019, net of taxes | | | 2 | | | | — | |
| Interest expense attributable to 2.00% Convertible Senior Notes due October 2023, net of taxes | | | 3 | | | | — | |
| Diluted net income from continuing operations attributable to MIC | | $ | 69 | | | $ | 40 | |
| Basic and diluted net income from discontinued operations attributable to MIC | | $ | 6 | | | $ | 37 | |
Denominator:
| | | | | | | | |
| Weighted average number of shares outstanding: basic | | | 85,872,132 | | | | 84,821,453 | |
| Dilutive effect of restricted stock unit grants to directors | | | 23,646 | | | | 9,435 | |
| Dilutive effect of 2.875% Convertible Senior Notes due July 2019 | | | 4,383,316 | | | | — | |
| Dilutive effect of 2.00% Convertible Senior Notes due October 2023 | | | 3,634,173 | | | | — | |
| Weighted average number of shares outstanding: diluted | | | 93,913,267 | | | | 84,830,888 | |
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MACQUARIE INFRASTRUCTURE CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
3. Implementation of ASU 2014-096. Income per Share – (continued)
Other. Other revenue is comprised primarily of environmental response service activities through the date of sale and railroad operations. These revenues are generally recognized at a point in time as services are performed.
Atlantic Aviation
Revenue from Atlantic Aviation is recorded 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 the 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 time 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 product 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 amount of gas that has been delivered but not billed to customers from the latest meter reading or billed delivery date to the end of an accounting period. The related costs are charged to expense.
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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 recognized from long-term construction contracts (commonly referred to as the percentage-of-completion method) and is recorded in service revenue. PPAs at the renewable facilities are accounted for as operating leases and the related lease income is recorded in product revenues when the electricity is delivered.
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, |
| | | 2018 | | 2017 | | 2018 | | 2017 |
Numerator:
| | | | | | | | | | | | | | | | |
| Net income attributable to MIC | | $ | 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 | | | | — | | | | — | |
| Diluted net income attributable to MIC | | $ | 21,704 | | | $ | 42,036 | | | $ | 136,904 | | | $ | 102,130 | |
Denominator:
| | | | | | | | | | | | | | | | |
| Weighted average number of shares outstanding: basic | | | 85,378,088 | | | | 83,644,806 | | | | 85,095,956 | | | | 82,743,285 | |
| Dilutive effect of restricted stock unit grants | | | 20,478 | | | | 9,435 | | | | 13,257 | | | | 9,515 | |
| Dilutive effect of 2.875% Convertible Senior Notes due July 2019 | | | — | | | | 4,262,297 | | | | — | | | | — | |
| Weighted average number of shares outstanding: diluted | | | 85,398,566 | | | | 87,916,538 | | | | 85,109,213 | | | | 82,752,800 | |
Income per share:
| | | | | | | | | | | | | | | | |
| Basic income per share attributable to MIC | | $ | 0.25 | | | $ | 0.48 | | | $ | 1.61 | | | $ | 1.23 | |
| Diluted income per share attributable to MIC | | $ | 0.25 | | | $ | 0.48 | | | $ | 1.61 | | | $ | 1.23 | |
| | | | |
| | Quarter Ended March 31, |
| | | 2019 | | 2018 |
Income per share:
| | | | | | | | |
| Basic income per share from continuing operations attributable to MIC | | $ | 0.75 | | | $ | 0.47 | |
| Basic income per share from discontinued operations attributable to MIC | | | 0.07 | | | | 0.44 | |
| Basic income per share attributable to MIC | | $ | 0.82 | | | $ | 0.91 | |
| Diluted income per share from continuing operations attributable to MIC | | $ | 0.73 | | | $ | 0.47 | |
| Diluted income per share from discontinued operations attributable to MIC | | | 0.06 | | | | 0.44 | |
| Diluted income per share attributable to MIC | | $ | 0.79 | | | $ | 0.91 | |
The effect of potentially dilutive shares for the quarter ended September 30, 2018March 31, 2019 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) 2.875% Convertible Senior Notes due July 2019 and 2.00% Convertible Senior Notes due October 2023 had been fully converted into shares on the 9,435date of issuance.
The effect of potentially dilutive shares for the quarter ended March 31, 2018 is calculated assuming that the restricted stock unit grants totaling 9,435 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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MACQUARIE INFRASTRUCTURE CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
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 vested 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 vested 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.March 31, 2018.
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, | | Quarter Ended March 31, |
| | | 2018 | | 2017 | | 2018 | | 2017 | | 2019 | | 2018 |
| 2.875% Convertible Senior Notes due July 2019 | | | 4,381,499 | | | | — | | | | 4,363,806 | | | | 4,237,753 | | | | — | | | | 4,338,210 | |
| 2.00% Convertible Senior Notes due October 2023 | | | 3,634,173 | | | | 3,608,218 | | | | 3,631,068 | | | | 3,603,742 | | | | — | | | | 3,624,754 | |
| Total | | | 8,015,672 | | | | 3,608,218 | | | | 7,994,874 | | | | 7,841,495 | | | | — | | | | 7,962,964 | |
5.7. Property, Equipment, Land and Leasehold Improvements
Property, equipment, land and leasehold improvements at September 30, 2018March 31, 2019 and December 31, 20172018 consisted of the following ($ in thousands)millions):
| | | | | | | | |
| | September 30,
2018(1) | | December 31,
2017 | | March 31,
2019 | | December 31,
2018 |
| Land | | $ | 319,266 | | | $ | 339,148 | | | $ | 319 | | | $ | 319 | |
| Easements | | | 131 | | | | 131 | | |
| Buildings | | | 39,933 | | | | 41,776 | | | | 40 | | | | 40 | |
| Leasehold and land improvements | | | 748,593 | | | | 834,241 | | | | 783 | | | | 770 | |
| Machinery and equipment | | | 3,486,263 | | | | 4,092,624 | | | | 2,800 | | | | 2,783 | |
| Furniture and fixtures | | | 41,956 | | | | 39,386 | | | | 45 | | | | 45 | |
| Construction in progress | | | 136,514 | | | | 246,422 | | | | 105 | | | | 113 | |
| | | | 4,772,656 | | | | 5,593,728 | | | | 4,092 | | | | 4,070 | |
| Less: accumulated depreciation | | | (1,019,365 | ) | | | (934,114 | ) | | | (977 | ) | | | (929 | ) |
| Property, equipment, land and leasehold improvements, net | | $ | 3,753,291 | | | $ | 4,659,614 | | | $ | 3,115 | | | $ | 3,141 | |
| (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)
6.8. Intangible Assets and Goodwill
Intangible assets at September 30, 2018March 31, 2019 and December 31, 20172018 consisted of the following ($ in thousands)millions):
| | | | | | | | |
| | September 30,
2018(1) | | December 31,
2017 | | March 31,
2019 | | December 31,
2018 |
| Contractual arrangements | | $ | 932,219 | | | $ | 989,228 | | | $ | 921 | | | $ | 921 | |
| Non-compete agreements | | | 14,014 | | | | 14,014 | | | | 14 | | | | 14 | |
| Customer relationships | | | 353,520 | | | | 361,623 | | | | 353 | | | | 353 | |
| Leasehold rights | | | 350 | | | | 350 | | |
| Trade names | | | 16,091 | | | | 16,091 | | | | 16 | | | | 16 | |
| Technology | | | 8,760 | | | | 8,760 | | | | 9 | | | | 9 | |
| | | | 1,324,954 | | | | 1,390,066 | | | | 1,313 | | | | 1,313 | |
| Less: accumulated amortization | | | (511,606 | ) | | | (475,968 | ) | | | (539 | ) | | | (524 | ) |
| Intangible assets, net | | $ | 813,348 | | | $ | 914,098 | | | $ | 774 | | | $ | 789 | |
| (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, 2018March 31, 2019 is comprised of the following ($ in thousands)millions):
| | |
| 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 | |
| | | | |
| Goodwill acquired in business combinations, net of disposals | | | | | | $ | 2,172 | |
| Accumulated impairment charges | | | | | | | (126 | ) |
| Other | | | | | | | (3 | ) |
| Balance at March 31, 2019 | | | | | | $ | 2,043 | |
| (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. The Company continuously monitorsThere were no triggering events which could trigger an interimindicating impairment analysis, such as changing business conditionsfor the quarters ended March 31, 2019 and industry2018.
9. Long-Term Debt
At March 31, 2019 and other economic factors. The Company experienced a sustained decline in market capitalization since February 2018, and during the third quarter ofDecember 31, 2018, the Company concluded a sustained decline in its market capitalization had occurred, leading to the determination that a triggering event had occurred for all reporting units.
The Company performed an interim impairment analysis using financial information through September 30, 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 eachCompany’s consolidated long-term debt balance comprised of the Company’s reporting units exceededfollowing ($ in millions):
| | | | |
| | March 31,
2019 | | December 31,
2018 |
| IMTT | | $ | 1,109 | | | $ | 1,109 | |
| Atlantic Aviation | | | 1,022 | | | | 1,025 | |
| MIC Hawaii | | | 196 | | | | 196 | |
| MIC Corporate | | | 735 | | | | 734 | |
| Total | | | 3,062 | | | | 3,064 | |
| Current portion | | | (361 | ) | | | (361 | ) |
| Long-term portion | | | 2,701 | | | | 2,703 | |
| Unamortized deferred financing costs(1) | | | (48 | ) | | | (50 | ) |
| Long-term portion less unamortized debt discount and deferred financing costs | | $ | 2,653 | | | $ | 2,653 | |
| (1) | The weighted average remaining life of the deferred financing costs at March 31, 2019 was 6 years. |
At March 31, 2019, the carrying valuetotal undrawn capacity on the revolving credit facilities was $1,610 million excluding letters of credit outstanding of $26 million.
MIC Corporate
At March 31, 2019 and no impairment was recorded.
At September 30,December 31, 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.MIC Corporate’s $600 million senior secured revolving credit facility remained undrawn.
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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 $80.0 million. Any increase in discount rate, in conjunction with any decrease to the long-term projections in cash flows for IMTT will negatively affect the current valuations. Due to the inherent uncertainties involved in making the estimates and assumptions used in the fair value analysis, actual results may differ, which could alter the fair value of the reporting units, and possibly result in impairment charges in future periods. The Company will continue to evaluate the fair value of goodwill through the fourth quarter of fiscal year 2018 for any potential impairment.
7. Long-Term Debt
At September 30, 2018 and December 31, 2017, the Company’s consolidated long-term debt balance comprised of the following ($ in thousands):
| | | | |
| | September 30,
2018(1) | | December 31,
2017 |
| IMTT | | $ | 1,325,975 | | | $ | 1,318,975 | |
| Atlantic Aviation | | | 666,000 | | | | 648,000 | |
| Contracted Power | | | 313,154 | | | | 576,558 | |
| MIC Hawaii | | | 213,160 | | | | 199,282 | |
| MIC Corporate | | | 909,180 | | | | 873,477 | |
| Total | | | 3,427,469 | | | | 3,616,292 | |
| Current portion | | | (392,903 | ) | | | (50,835 | ) |
| Long-term portion | | | 3,034,566 | | | | 3,565,457 | |
| Unamortized deferred financing costs(2) | | | (25,558 | ) | | | (35,146 | ) |
| Long-term portion less unamortized debt discount and deferred financing costs | | $ | 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, 2018 was 5.3 years. |
At September 30, 2018, the total undrawn capacity on the revolving credit facilities was $930.5 million excluding letters of credit outstanding of $37.8 million.
MIC Corporate
Senior Secured Revolving Credit Facility
On January 3, 2018, the Company completed 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 and repaid $172.5 million on its revolving credit facility. At September 30, 2018, the undrawn balance on the senior secured revolving credit facility was $423.5 million. In October 2018, using the proceeds from the BEC sale, the Company repaid $150.0 million on its revolving credit facility.
TABLE OF CONTENTS
MACQUARIE INFRASTRUCTURE CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
7.9. Long-Term Debt – (continued)
2.875% Convertible Senior Notes due July 2019
At September 30, 2018March 31, 2019 and December 31, 2017,2018, the Company had $350.0$350 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 JulyAt March 31, 2019, to current portion of long-term debt. At September 30, 2018, the fair value of these convertible senior notes was approximately $348.0$350 million. These convertible senior notes fall within Level 1 of the fair value hierarchy.
On July 15, 2018, the Company increased the conversion rate to 12.5258 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, 2018March 31, 2019 and December 31, 2017,2018, the Company had $375.2$385 million and $371.4$384 million, respectively, outstanding on its seven year, 2.00% convertible senior notes due October 2023. At September 30, 2018,March 31, 2019, the fair value of the liability component of these convertible senior notes was approximately $345.0$340 million. These convertible senior notes fall within Level 1 of the fair value hierarchy.
On October 13, 2018, the Company increased the conversion rate to 9.0290 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)millions):
| | | | | | | | |
| | September 30,
2018 | | December 31,
2017 | | March 31,
2019 | | December 31,
2018 |
Liability Component:
| | | | | | | | | | | | | | | | |
| Principal | | $ | 402,500 | | | $ | 402,500 | | | $ | 403 | | | $ | 403 | |
| Unamortized debt discount | | | (19,765 | ) | | | (22,475 | ) | | | (18 | ) | | | (19 | ) |
| Long-term debt, net of unamortized debt discount | | | 382,735 | | | | 380,025 | | | | 385 | | | | 384 | |
| Unamortized deferred financing costs | | | (7,515 | ) | | | (8,643 | ) | | | (7 | ) | | | (7 | ) |
| Net carrying amount | | $ | 375,220 | | | $ | 371,382 | | | $ | 378 | | | $ | 377 | |
| Equity Component | | $ | 26,748 | | | $ | 26,748 | | | $ | 27 | | | $ | 27 | |
For the quarters ended March 31, 2019 and nine months ended September 30, 2018, and 2017, total interest expense recognized related to the 2.00% Convertible Senior Notes due October 2023 consistedwas $3 million, of which $1 million related to the following ($ in thousands):amortization of debt discount.
| | | | | | | | |
| | Quarter Ended
September 30, | | Nine Months Ended
September 30, |
| | | 2018 | | 2017 | | 2018 | | 2017 |
| Contractual interest expense | | $ | 2,013 | | | $ | 2,012 | | | $ | 6,038 | | | $ | 5,769 | |
| Amortization of debt discount | | | 910 | | | | 882 | | | | 2,710 | | | | 2,377 | |
| Amortization of deferred financing costs | | | 376 | | | | 376 | | | | 1,128 | | | | 1,133 | |
| Total interest expense | | $ | 3,299 | | | $ | 3,270 | | | $ | 9,876 | | | $ | 9,279 | |
TABLE OF CONTENTS
MACQUARIE INFRASTRUCTURE CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
7. Long-Term Debt – (continued)
IMTT
At September 30,In December 2018, and December 31, 2017, IMTT had $217.0entered into the Second Amendment to Credit Agreement (the Amendment) which, among other things, extended the maturity date of its $600 million and $210.0 million outstanding on its revolving credit facilities respectively. Duringfrom May 21, 2020 to December 5, 2023 and extended the nine months ended September 30, 2018,maturity date of its $509 million Tax Exempt Bonds purchase facility from May 21, 2022 to December 5, 2025. In connection with the Amendment, supplemental indentures were entered into with respect to the $509 million of outstanding Tax Exempt Bonds. The Tax Exempt Bonds were reissued and sold to certain lenders under the IMTT borrowed $17.0 million primarilyCredit Agreement pursuant to the bond purchase facility. The supplemental indentures provide for general corporate purposes and repaid $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(i) an interest rate on the IMTT revolving credit facility.
At September 30, 2018, IMTT had $600.0 millionTax Exempt Bonds of fixed rate senior notes outstanding. At September 30, 2018, the fair value80% of one month LIBOR plus applicable margin plus 0.45% and (ii) an extension of the senior notes was approximately $585.0 million. The senior notes fall within Level 1date on which holders have the right to require repurchase of the fair value hierarchy.
Atlantic Aviation
At September 30, 2018 andTax Exempt Bonds from May 21, 2022 to 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.5, 2025.
TABLE OF CONTENTS
MACQUARIE INFRASTRUCTURE CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
7.9. Long-Term Debt – (continued)
During the quarters endedAt March 31, 2019, IMTT also had $600 million of fixed rate senior notes outstanding that had a fair value of approximately $610 million. IMTT’s $600 million of revolving credit facilities was undrawn at March 31, 2019 and December 31, 2018.
Atlantic Aviation
In December 2018, Atlantic Aviation refinanced its debt and June 30, 2018,entered into a credit agreement (the New AA Credit Agreement) that provides for a seven-year, $1,025 million senior secured first lien term loan facility and a five-year, $350 million senior secured first lien revolving credit facility, which was undrawn at March 31, 2019 and December 31, 2018.
MIC Hawaii
At March 31, 2019, Hawaii Gas was nothad $100 million of fixed rate senior notes, which approximates its fair value, and $80 million in compliance with certain credit agreement provisions. Duringterm loans outstanding. The remaining balance of $16 million related to a term loan for the quarter ended September 30, 2018, the business received waivers from its syndicate of lenders relating to the non-compliance. At September 30, 2018,solar facilities in Hawaii. In addition, Hawaii Gas has $60 million of a revolving credit facility that was again in compliance with its credit agreement having received waivers from its lenders.undrawn at March 31, 2019 and December 31, 2018.
8.10. 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, 2018,March 31, 2019, the Company had $3.4 billion$3,080 million of current and long-term debt, of which $1.1 billion$947 million was economically hedged with interest rate contracts, $1.6 billion$1,452 million was fixed rate debt and $758.7$681 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 propaneliquefied petroleum gas (LPG) is principally a result of market forces reflecting changes in supply and demand for propaneLPG 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’ propaneLPG 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 propaneLPG are generally settled at expiration of the contract.
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 use primarily observable (level 2) inputs, including contractual terms, interest rates and yield curves observable at commonly quoted intervals.
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
8.10. 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, 2018March 31, 2019 and December 31, 20172018 were ($ in thousands)millions):
| | | | | | | | |
| Balance Sheet Location | | Assets (Liabilities) at Fair Value | |
| | September 30,
2018(1) | | December 31,
2017 | |
| | | Assets (Liabilities) at Fair Value |
| Balance Sheet Classification | | | March 31, 2019 | | December 31, 2018 |
| Fair value of derivative instruments – current assets | | $ | 17,510 | | | $ | 11,965 | | | $ | 9 | | | $ | 11 | |
| Fair value of derivative instruments – noncurrent assets | | | 26,958 | | | | 24,455 | | | | 9 | | | | 15 | |
| Total derivative contracts – assets | | $ | 44,468 | | | $ | 36,420 | | | $ | 18 | | | $ | 26 | |
| Fair value of derivative instruments – current liabilities | | $ | (534 | ) | | $ | (1,710 | ) | |
| Fair value of derivative instruments – noncurrent liabilities | | | (1,174 | ) | | | (4,668 | ) | |
| Fair value of derivative instruments – other current liabilities | | | $ | (2 | ) | | $ | (3 | ) |
| Total derivative contracts – liabilities | | $ | (1,708 | ) | | $ | (6,378 | ) | | $ | (2 | ) | | $ | (3 | ) |
| (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 ended March 31, 2019 and nine months ended September 30, 2018 and 2017 and the related location within the consolidated condensed statements of operations were ($ in thousands)millions):
| | | | | | | | | | | | |
| | Amount of Gain (Loss) Recognized in Consolidated
Condensed Statements of Operations | | Amount of (Loss) Gain Recognized in Consolidated Condensed Statements of Operations for the Quarter Ended March 31, |
| | | Quarter ended
September 30, | | Nine Months Ended
September 30, | |
| Financial Statement Account | | 2018 | | 2017 | | 2018 | | 2017 | |
| Income Statement Classification | | | 2019 | | 2018 |
| Interest expense – interest rate caps | | $ | 1,469 | | | $ | (219 | ) | | $ | 8,470 | | | $ | (2,888 | ) | | $ | (2 | ) | | $ | 5 | |
| Interest expense – interest rate swaps | | | 3,260 | | | | 57 | | | | 17,294 | | | | (4,051 | ) | | | (2 | ) | | | 5 | |
| Cost of product sales – commodity swaps | | | 2,695 | | | | 5,769 | | | | 3,497 | | | | 2,154 | | | | 1 | | | | (2 | ) |
| Total | | $ | 7,424 | | | $ | 5,607 | | | $ | 29,261 | | | $ | (4,785 | ) | | $ | (3 | ) | | $ | 8 | |
All of the Company’s derivative instruments are collateralized by the assets of the respective businesses.
9.11. 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. On March 28, 2019, the Company’s Board adopted Amendment No. 1 to the Plan (the Amendment), subject to its approval by the Company’s shareholders at the 2019 Annual Meeting of Shareholders. If so approved, the Amendment, among other things, will increase the number of shares of common stock available for grant under the Plan from 500,000 to 1,500,000.
Macquarie Infrastructure Corporation Short Term Incentive Plan (STIP Plan) for MIC Operating Businesses — Restricted Stock Units (RSUs)
During the first quarter of 2019, the Company established the STIP Plan to provide cash and stock-based incentives to eligible employees of its operating businesses under the Company’s 2016 Omnibus Employee Incentive Plan. In general, the cash component comprises approximately 75% of any incentive award and is paid in a lump-sum. The remaining 25% of any incentive award is in the form of RSUs representing an interest in the common stock of the Company. RSUs are granted following assessment of performance against Key Performance Indicators post the one-year performance period and vest in two equal annual installments following the grant date. At September 30, 2018, there wereMarch 31, 2019, no awards outstandinggrants of RSUs under this Plan.the STIP Plan had been made.
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
9.11. Stockholders’ Equity – (continued)
Macquarie Infrastructure Corporation Long Term Incentive Plan (LTIP Plan) for MIC Operating Businesses — Performance Stock Units (PSUs)
During the first quarter of 2019, the Company established the LTIP Plan pursuant to which it may make stock-based incentive awards to eligible employees of its operating businesses. The awards would take the form of PSUs convertible into common stock of the Company as authorized under its 2016 Omnibus Employee Incentive Plan. The number of PSUs a participant may be awarded reflects a target level of performance by the participant. The participant may be awarded more (over performance limit) or less (threshold limit) than the target number of PSUs based on their achievements relative to Key Performance Indicators during the three-year performance period. Following finalization of the participant’s performance review at the end of the third year of the program, the Company may award the PSUs.
On March 7, 2019, the Company granted awards pursuant to the 2019 LTIP Plan which would result in 106,020 PSUs issued at the target level of performance. Depending upon actual performance, the number of PSUs to be issued will vary from zero to 197,008. The Company has used a ten day volume weighted average price of $40.58 in the calculation of the value of the potential awards. On March 7, 2019, the grant date fair value of the awards was $4 million reflecting target performance by all participants.
Accumulated Other Comprehensive Loss
The following represents the changes and balances to the components of accumulated other comprehensive loss for the nine monthsquarters ended September 30,March 31, 2019 and 2018 and 2017 ($ in thousands)millions):
| | | | | | | | | | | | |
| | Post-Retirement
Benefit Plans, net
of taxes | | Translation
Adjustment, net
of taxes(1) | | Total Stockholders’
Accumulated Other
Comprehensive
Loss, net of taxes | | Post-Retirement Benefit Plans, net of taxes | | Translation Adjustment, net of taxes | | Total Stockholders’ Accumulated Other Comprehensive Loss, net of taxes |
| Balance at December 31, 2016 | | $ | (16,805 | ) | | $ | (12,155 | ) | | $ | (28,960 | ) | |
| Translation adjustment | | | — | | | | 2,738 | | | | 2,738 | | |
| Balance at September 30, 2017 | | $ | (16,805 | ) | | $ | (9,417 | ) | | $ | (26,222 | ) | |
| Balance at December 31, 2017 | | $ | (20,456 | ) | | $ | (9,537 | ) | | $ | (29,993 | ) | | $ | (20 | ) | | $ | (10 | ) | | $ | (30 | ) |
| Translation adjustment | | | — | | | | (2,092 | ) | | | (2,092 | ) | | | — | | | | (1 | ) | | | (1 | ) |
| Balance at September 30, 2018 | | $ | (20,456 | ) | | $ | (11,629 | ) | | $ | (32,085 | ) | |
| Balance at March 31, 2018 | | | $ | (20 | ) | | $ | (11 | ) | | $ | (31 | ) |
| Balance at December 31, 2018 | | | $ | (16 | ) | | $ | (14 | ) | | $ | (30 | ) |
| Balance at March 31, 2019 | | | $ | (16 | ) | | $ | (14 | ) | | $ | (30 | ) |
| (1) | Translation adjustment is presented net of tax benefit of $802,000 and net of tax expense of $1.9 million for the nine months ended September 30, 2018 and 2017, respectively. |
10.12. Reportable Segments
At September 30, 2018,March 31, 2019, the Company’s businesses consisted of four reportable segments: IMTT, Atlantic Aviation, MIC Hawaii and Corporate and Other.
Effective October 1, 2018, BEC and substantially all of the Company’s portfolio of solar and wind power generation businesses were classified as discontinued operations and the Company’s Contracted Power segment was eliminated. Effective January 1, 2019, the Company’s interest in its renewable power development business was also classified as discontinued operations. A remaining relationship with a third party developer of renewable power facilities has been reported as a component of Corporate and MIC Hawaii.Other and is expected to conclude during 2019 pursuant to the agreement. All prior periods have been restated to reflect these changes. The Company did not restate the prior period related to the commencement of the sale process involving its majority interest in a renewable power development business as the disposition is insignificant. See Note 3, “Discontinued Operations and Dispositions” for further discussions.
IMTT
IMTT provides bulk liquid storage, handling and other services in North America through seventeen17 terminals located in the United States, one terminal in Quebec, Canada and one partially owned terminal in Newfoundland, Canada. IMTT derives the majority of its revenue from storage and handling of petroleum
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
12. Reportable Segments – (continued)
products, various chemicals, renewable fuels, and vegetable and tropical 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 includedgenerated from the following sources and recorded in service revenue.
Lease. These are contracts with predominantly non-cancelable terms for access to and the use of storage capacity at the various terminals owned and operated by the business. At March 31, 2019, 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 (throughput) 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 842, Leases.
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 ratably recognized as revenues over the contract term.
Other. Other revenue is comprised primarily of environmental response service activities through the date of sale and railroad operations. These revenues are generally recognized at a point in time as services are performed.
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 includedrecorded in service revenue. Services provided by Atlantic Aviation include:
Contracted Power
At September 30, 2018,Fuel. Fuel services are recognized when fuel has been delivered to the Contracted Power business segment has controlling interestscustomer, collection of the resulting receivable is probable, persuasive evidence of an arrangement exists and the 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 seven utility-scale solar photovoltaic facilities, two wind facilitiestime as services are performed.
Hangar. Hangar rentals includes both month-to-month rentals and 100% ownershiprentals from longer term contracts. Hangar rental revenue excludes transient customer overnight hangar usage (seeOther FBO servicesbelow).
Other FBO services. Other fixed based operation (FBO) services consist principally of a gas-fired facilityde-icing services, landing, concession, transient overnight hangar usage, terminal use and fuel distribution fees that are in operations in the United States. The wind and solar facilities that are operational at September 30, 2018 have an aggregate generating capacityrecognized as sales of 345 megawatt (MW) of wholesale electricity to utilities.services. Revenue from the wind, solar and gas-fired power facilities are included in product 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 ittransactions is appropriate to consolidate these projects, with the co-investors’ interest reflected asNoncontrolling interests in the consolidated condensed financial statements.
Through October 12, 2018, the Company owned 100% of BEC, a 644 MW gas-fired facility located in Bayonne, New Jersey, adjacent to IMTT’s Bayonne facility. Power produced by BEC was 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 generated revenue whether or not the facility was in use for power production. In addition to revenue from the tolling agreements and capacity payments from the grid operator, BEC generated an energy margin when the facility was dispatched. Revenue produced by BEC was accounted for as an operating lease that did not have minimum lease payments. All of the lease income under the lease were recorded within product revenue when natural gas transportation services were performed.
At September 30, 2018, the assets and liabilities of BEC were classified as held for salebased 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.service fee earned.
MIC Hawaii
MIC Hawaii comprises:primarily comprises of (i) 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(ii) controlling interests in two solar facilities on Oahu. Revenue from Hawaii Gas and the solar facilities are recorded in product revenue (see above in Contracted Power for further discussion on revenue from PPAs). Revenue from the design-build mechanical contractor business is recorded in service revenue.
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) and renewable natural gas (RNG). Revenue is primarily a function of the volume of SNG, LPG, LNG and LNGRNG consumed by customers and the
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
12. Reportable Segments – (continued)
price per British 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.
Revenue from Hawaii Gas is recorded in product 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. This is based on the amount of gas that has been delivered but not billed to customers from the latest meter reading or billed delivery date to the end of an accounting period. The related costs are charged to expense.
Renewable Businesses
The renewables projects within MIC Hawaii and discontinued operations 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.
Corporate and Other
Corporate and Other comprises of MIC Corporate (holding company), a shared services center and other smaller businesses.
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.
Revenue from external customers for the Company’s consolidated reportable segments were ($ in millions):
| | | | | | | | | | |
| | Quarter Ended March 31, 2019 |
| | | IMTT | | Atlantic
Aviation | | MIC
Hawaii | | Intercompany Adjustments | | Total Reportable Segments |
Service revenue
| | | | | | | | | | | | | | | | | | | | |
| Terminal services | | $ | 24 | | | $ | — | | | $ | — | | | $ | — | | | $ | 24 | |
| Lease | | | 135 | | | | — | | | | — | | | | (1 | ) | | | 134 | |
| Fuel | | | — | | | | 181 | | | | — | | | | — | | | | 181 | |
| Hangar | | | — | | | | 23 | | | | — | | | | — | | | | 23 | |
| Other | | | 2 | | | | 54 | | | | — | | | | — | | | | 56 | |
| Total service revenue | | $ | 161 | | | $ | 258 | | | $ | — | | | $ | (1 | ) | | $ | 418 | |
Product revenue
| | | | | | | | | | | | | | | | | | | | |
| Lease | | $ | — | | | $ | — | | | $ | 1 | | | $ | — | | | $ | 1 | |
| Gas | | | — | | | | — | | | | 60 | | | | — | | | | 60 | |
| Other | | | — | | | | — | | | | 3 | | | | — | | | | 3 | |
| Total product revenue | | $ | — | | | $ | — | | | $ | 64 | | | $ | — | | | $ | 64 | |
| Total revenue | | $ | 161 | | | $ | 258 | | | $ | 64 | | | $ | (1 | ) | | $ | 482 | |
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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, 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, 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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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
10.12. Reportable Segments – (continued)
| | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2018 | | Quarter Ended March 31, 2018 |
| | | IMTT | | Atlantic
Aviation | | Contracted
Power | | MIC
Hawaii | | Intersegment
Revenue | | Total
Reportable Segments | | IMTT | | Atlantic
Aviation | | MIC
Hawaii | | Intercompany Adjustments | | Total Reportable Segments |
Service Revenue
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Terminal Services | | $ | 66,719 | | | $ | — | | | $ | — | | | $ | — | | | $ | (22 | ) | | $ | 66,697 | | |
Service revenue
| | | | | | | | | | | | | | | | | | | | | |
| Terminal services | | | $ | 26 | | | $ | — | | | $ | — | | | $ | — | | | $ | 26 | |
| Lease | | | 303,633 | | | | — | | | | — | | | | — | | | | (3,669 | ) | | | 299,964 | | | | 104 | | | | — | | | | — | | | | (1 | ) | | | 103 | |
| Fuel | | | — | | | | 523,867 | | | | — | | | | — | | | | — | | | | 523,867 | | | | — | | | | 177 | | | | — | | | | — | | | | 177 | |
| Hangar | | | — | | | | 65,515 | | | | — | | | | — | | | | — | | | | 65,515 | | | | — | | | | 22 | | | | — | | | | — | | | | 22 | |
| Construction | | | — | | | | — | | | | — | | | | 38,478 | | | | — | | | | 38,478 | | | | — | | | | — | | | | 17 | | | | — | | | | 17 | |
| 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
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Other | | | | 9 | | | | 48 | | | | 1 | | | | — | | | | 58 | |
| Total service revenue | | | $ | 139 | | | $ | 247 | | | $ | 18 | | | $ | (1 | ) | | $ | 403 | |
Product revenue
| | | | | | | | | | | | | | | | | | | | | |
| Lease | | $ | — | | | $ | — | | | $ | 117,596 | | | $ | 3,410 | | | $ | — | | | $ | 121,006 | | | $ | — | | | $ | — | | | $ | 1 | | | $ | — | | | $ | 1 | |
| Gas | | | — | | | | — | | | | — | | | | 172,206 | | | | — | | | | 172,206 | | | | — | | | | — | | | | 60 | | | | — | | | | 60 | |
| Other | | | — | | | | — | | | | 11,544 | | | | 8,523 | | | | — | | | | 20,067 | | | | — | | | | — | | | | 3 | | | | — | | | | 3 | |
| Total Product Revenue | | $ | — | | | $ | — | | | $ | 129,140 | | | $ | 184,139 | | | $ | — | | | $ | 313,279 | | |
| Total Revenue | | $ | 386,981 | | | $ | 715,041 | | | $ | 129,140 | | | $ | 225,445 | | | $ | (3,691 | ) | | $ | 1,452,916 | | |
| Total product revenue | | | $ | — | | | $ | — | | | $ | 64 | | | $ | — | | | $ | 64 | |
| Total revenue | | | $ | 139 | | | $ | 247 | | | $ | 82 | | | $ | (1 | ) | | $ | 467 | |
| | | | | | | | | | | | |
| | 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 | |
| (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)
10. Reportable Segments – (continued)
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 from continuing operations is shown in the tables below ($ in thousands)millions). 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 | |
| | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2018 | | Quarter Ended March 31, 2019 |
| | | IMTT | | Atlantic
Aviation | | Contracted
Power | | MIC
Hawaii | | Total
Reportable
Segments | | IMTT | | Atlantic
Aviation | | MIC
Hawaii | | Corporate and Other | | Total Reportable Segments |
| Net income (loss) | | $ | 61,909 | | | $ | 78,566 | | | $ | 35,456 | | | $ | (12,344 | ) | | $ | 163,587 | | | $ | 41 | | | $ | 25 | | | $ | 8 | | | $ | (10 | ) | | $ | 64 | |
| Interest expense, net | | | 30,349 | | | | 9,601 | | | | 10,661 | | | | 5,246 | | | | 55,857 | | | | 13 | | | | 19 | | | | 3 | | | | 4 | | | | 39 | |
| Provision (benefit) for income taxes | | | 24,195 | | | | 28,769 | | | | 12,456 | | | | (4,350 | ) | | | 61,070 | | | | 16 | | | | 9 | | | | 3 | | | | (4 | ) | | | 24 | |
| Goodwill impairment | | | — | | | | — | | | | — | | | | 3,215 | | | | 3,215 | | |
| Depreciation | | | 87,066 | | | | 43,143 | | | | 35,680 | | | | 12,975 | | | | 178,864 | | | | 29 | | | | 15 | | | | 4 | | | | — | | | | 48 | |
| Amortization of intangibles | | | 11,636 | | | | 34,877 | | | | 2,392 | | | | 6,565 | | | | 55,470 | | | | 4 | | | | 11 | | | | — | | | | — | | | | 15 | |
| Pension expense | | | 5,737 | | | | 16 | | | | — | | | | 383 | | | | 6,136 | | |
| Other non-cash expense (income) | | | 611 | | | | 1,232 | | | | (5,152 | ) | | | 9,548 | | | | 6,239 | | |
| Fees to Manager-related party | | | | — | | | | — | | | | — | | | | 8 | | | | 8 | |
| Other non-cash expense | | | | 1 | | | | — | | | | 2 | | | | 1 | | | | 4 | |
| EBITDA excluding non-cash items | | $ | 221,503 | | | $ | 196,204 | | | $ | 91,493 | | | $ | 21,238 | | | $ | 530,438 | | | $ | 104 | | | $ | 79 | | | $ | 20 | | | $ | (1 | ) | | $ | 202 | |
TABLE OF CONTENTS
MACQUARIE INFRASTRUCTURE CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
10.12. Reportable Segments – (continued)
| | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2017 | | Quarter Ended March 31, 2018 |
| | | IMTT | | Atlantic
Aviation | | Contracted
Power | | MIC
Hawaii | | Total
Reportable
Segments | | IMTT | | Atlantic
Aviation | | MIC
Hawaii | | Corporate and Other | | Total Reportable Segments |
| Net income | | $ | 67,184 | | | $ | 60,225 | | | $ | 9,604 | | | $ | 16,004 | | | $ | 153,017 | | |
| Net income (loss) | | | $ | 25 | | | $ | 33 | | | $ | 3 | | | $ | (21 | ) | | $ | 40 | |
| Interest expense, net | | | 30,707 | | | | 13,648 | | | | 20,431 | | | | 5,795 | | | | 70,581 | | | | 8 | | | | — | | | | 1 | | | | 9 | | | | 18 | |
| Provision for income taxes | | | 46,686 | | | | 36,766 | | | | 8,209 | | | | 10,772 | | | | 102,433 | | |
| Provision (benefit) for income taxes | | | | 10 | | | | 12 | | | | 1 | | | | (5 | ) | | | 18 | |
| Depreciation | | | 84,797 | | | | 36,468 | | | | 41,711 | | | | 9,777 | | | | 172,753 | | | | 29 | | | | 13 | | | | 5 | | | | — | | | | 47 | |
| Amortization of intangibles | | | 9,029 | | | | 37,426 | | | | 3,320 | | | | 1,145 | | | | 50,920 | | | | 4 | | | | 12 | | | | — | | | | — | | | | 16 | |
| Pension expense | | | 5,649 | | | | 15 | | | | — | | | | 817 | | | | 6,481 | | |
| Other non-cash expense (income) | | | 315 | | | | 1,252 | | | | (6,170 | ) | | | 3,108 | | | | (1,495 | ) | |
| Fees to Manager-related party | | | | — | | | | — | | | | — | | | | 13 | | | | 13 | |
| Other non-cash expense | | | | 2 | | | | — | | | | 6 | | | | 1 | | | | 9 | |
| EBITDA excluding non-cash items | | $ | 244,367 | | | $ | 185,800 | | | $ | 77,105 | | | $ | 47,418 | | | $ | 554,690 | | | $ | 78 | | | $ | 70 | | | $ | 16 | | | $ | (3 | ) | | $ | 161 | |
Reconciliations of total reportable segments’ EBITDA excluding non-cash items to consolidated net income from continuing operations before income taxes were ($ in thousands)millions):
| | | | | | | | | | | | |
| | Quarter Ended
September 30, | | Nine Months Ended
September 30, | | Quarter Ended March 31, |
| | | 2018 | | 2017 | | 2018 | | 2017 | | 2019 | | 2018 |
| Total reportable segments EBITDA excluding non-cash items | | $ | 166,651 | | | $ | 188,739 | | | $ | 530,438 | | | $ | 554,690 | | | $ | 202 | | | $ | 161 | |
| Interest income | | | 113 | | | | 54 | | | | 304 | | | | 129 | | | | 3 | | | | — | |
| Interest expense | | | (32,616 | ) | | | (29,291 | ) | | | (81,693 | ) | | | (90,129 | ) | | | (42 | ) | | | (18 | ) |
| Goodwill impairment | | | (3,215 | ) | | | — | | | | (3,215 | ) | | | — | | |
| Depreciation | | | (56,924 | ) | | | (58,009 | ) | | | (179,368 | ) | | | (172,753 | ) | | | (48 | ) | | | (47 | ) |
| Amortization of intangibles | | | (20,030 | ) | | | (17,329 | ) | | | (55,470 | ) | | | (50,920 | ) | | | (15 | ) | | | (16 | ) |
| Selling, general and administrative expenses – Corporate and Other | | | (7,150 | ) | | | (6,214 | ) | | | (21,496 | ) | | | (21,301 | ) | |
| Fees to Manager-related party | | | (12,333 | ) | | | (17,954 | ) | | | (36,113 | ) | | | (54,610 | ) | | | (8 | ) | | | (13 | ) |
| Pension expense | | | (2,047 | ) | | | (2,160 | ) | | | (6,136 | ) | | | (6,481 | ) | |
| Other (expense) income, net | | | (3,189 | ) | | | 3,884 | | | | (6,243 | ) | | | 1,495 | | |
| Total consolidated net income before income taxes | | $ | 29,260 | | | $ | 61,720 | | | $ | 141,008 | | | $ | 160,120 | | |
| Other expense, net | | | | (4 | ) | | | (9 | ) |
| Total consolidated net income from continuing operations before income taxes | | | $ | 88 | | | $ | 58 | |
Capital expenditures, on a cash basis, for the Company’s reportable segments were ($ in thousands)millions):
| | | | | | | | | | | | |
| | Quarter Ended
September 30, | | Nine Months Ended
September 30, | | Quarter Ended March 31, |
| | | 2018 | | 2017 | | 2018 | | 2017 | | 2019 | | 2018 |
| IMTT | | $ | 17,454 | | | $ | 20,232 | | | $ | 41,786 | | | $ | 52,291 | | | $ | 26 | | | $ | 9 | |
| Atlantic Aviation | | | 15,187 | | | | 23,661 | | | | 51,634 | | | | 57,757 | | | | 13 | | | | 19 | |
| Contracted Power | | | 8,501 | | | | 50,461 | | | | 42,702 | | | | 99,961 | | |
| MIC Hawaii | | | 6,729 | | | | 7,604 | | | | 17,398 | | | | 21,054 | | | | 5 | | | | 6 | |
| Corporate and other | | | | — | | | | 6 | |
| Total capital expenditures of reportable segments | | $ | 47,871 | | | $ | 101,958 | | | $ | 153,520 | | | $ | 231,063 | | | $ | 44 | | | $ | 40 | |
| Corporate and other | | | 1,336 | | | | 2,524 | | | | 5,517 | | | | 3,770 | | |
| 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)
10.12. 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)millions):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Property, Equipment,
Land and Leasehold
Improvements, net | | Goodwill | | Total Assets | | Property, Equipment,
Land and Leasehold
Improvements, net | | Goodwill | | Total Assets |
| | | September 30,
2018 | | December 31,
2017 | | September 30,
2018 | | December 31,
2017 | | September 30,
2018 | | December 31,
2017 | | March 31,
2019 | | December 31,
2018 | | March 31,
2019 | | December 31,
2018 | | March 31,
2019 | | December 31,
2018 |
| IMTT | | $ | 2,254,203 | | | $ | 2,305,440 | | | $ | 1,427,588 | | | $ | 1,427,863 | | | $ | 4,027,790 | | | $ | 4,109,448 | | | $ | 2,243 | | | $ | 2,249 | | | $ | 1,427 | | | $ | 1,427 | | | $ | 4,085 | | | $ | 4,020 | |
| Atlantic Aviation | | | 568,741 | | | | 559,597 | | | | 496,019 | | | | 495,769 | | | | 1,694,075 | | | | 1,710,535 | | | | 563 | | | | 565 | | | | 496 | | | | 496 | | | | 2,002 | | | | 1,676 | |
| Contracted Power | | | 625,412 | | | | 1,466,139 | | | | — | | | | 21,628 | | | | 704,429 | | | | 1,617,658 | | |
| MIC Hawaii | | | 298,861 | | | | 302,220 | | | | 120,193 | | | | 123,408 | | | | 529,285 | | | | 532,144 | | | | 300 | | | | 300 | | | | 120 | | | | 120 | | | | 516 | | | | 501 | |
| Corporate and other | | | | 9 | | | | 27 | | | | — | | | | — | | | | 495 | | | | 599 | |
| Total assets of reportable segments | | $ | 3,747,217 | | | $ | 4,633,396 | | | $ | 2,043,800 | | | $ | 2,068,668 | | | $ | 6,955,579 | | | $ | 7,969,785 | | | $ | 3,115 | | | $ | 3,141 | | | $ | 2,043 | | | $ | 2,043 | | | $ | 7,098 | | | $ | 6,796 | |
| Corporate and other | | | 6,074 | | | | 26,218 | | | | — | | | | — | | | | 10,957 | | | | 39,166 | | |
| Assets held for sale(1) | | | — | | | | — | | | | — | | | | — | | | | 971,934 | | | | — | | |
| Assets held for sale | | | | — | | | | — | | | | — | | | | — | | | | 722 | | | | 648 | |
| Total consolidated assets | | $ | 3,753,291 | | | $ | 4,659,614 | | | $ | 2,043,800 | | | $ | 2,068,668 | | | $ | 7,938,470 | | | $ | 8,008,951 | | | $ | 3,115 | | | $ | 3,141 | | | $ | 2,043 | | | $ | 2,043 | | | $ | 7,820 | | | $ | 7,444 | |
| (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. |
11.13. Long-Term Contracted Revenue
Long-term contracted revenue consists of revenue from future minimum lease revenue accounted in accordance with ASC 840,842, 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, 2018March 31, 2019 ($ in thousands)millions):
| | | | | | | | | | | | |
| | Lease
Revenue
(ASC 840) | | Contract
Revenue
(ASC 606) | | Total
Long-Term
Revenue | | Lease
Revenue
(ASC 842) | | Contract
Revenue
(ASC 606) | | Total
Long-Term
Revenue |
| 2018 remaining | | $ | 87,187 | | | $ | 21,102 | | | $ | 108,289 | | |
| 2019 | | | 236,685 | | | | 49,066 | | | | 285,751 | | |
| 2019 remaining | | | $ | 222 | | | $ | 51 | | | $ | 273 | |
| 2020 | | | 126,915 | | | | 33,459 | | | | 160,374 | | | | 171 | | | | 38 | | | | 209 | |
| 2021 | | | 65,912 | | | | 27,176 | | | | 93,088 | | | | 95 | | | | 30 | | | | 125 | |
| 2022 | | | 44,422 | | | | 23,016 | | | | 67,438 | | | | 59 | | | | 25 | | | | 84 | |
| 2023 | | | 29,196 | | | | 15,718 | | | | 44,914 | | | | 37 | | | | 17 | | | | 54 | |
| 2024 | | | | 16 | | | | 6 | | | | 22 | |
| Thereafter | | | 51,356 | | | | 16,058 | | | | 67,414 | | | | 87 | | | | 12 | | | | 99 | |
| Total | | $ | 641,673 | | | $ | 185,595 | | | $ | 827,268 | | | $ | 687 | | | $ | 179 | | | $ | 866 | |
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.segment. 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)
12.14. Related Party Transactions
Management Services
At September 30, 2018March 31, 2019 and December 31, 2017,2018, the Manager held 12,227,73612,659,467 shares and 5,435,44212,477,438 shares, respectively, of the Company.Company’s common stock. Pursuant to the terms of the Third Amended and Restated Management Services Agreement (Management Services Agreement), the Manager may sell these shares at any time. Under the Management Services 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.
TABLE OF CONTENTS
MACQUARIE INFRASTRUCTURE CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
14. Related Party Transactions – (continued)
Since January 1, 2017,2018, 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 millions) |
April 29, 2019
| | | | First quarter 2019 | | | $ | 1.00 | | | | May 13, 2019 | | | | May 16, 2019 | | | | | (1) |
February 14, 2019
| | | | Fourth quarter 2018 | | | | 1.00 | | | | March 4, 2019 | | | | March 7, 2019 | | | $ | 13 | |
| October 30, 2018 | | | Third quarter 2018 | | | $ | 1.00 | | | | November 12, 2018 | | | | November 15, 2018 | | | | (1) | | | | Third quarter 2018 | | | | 1.00 | | | | November 12, 2018 | | | | November 15, 2018 | | | | 12 | |
| July 31, 2018 | | | Second quarter 2018 | | | | 1.00 | | | | August 13, 2018 | | | | August 16, 2018 | | | $ | 10,711 | | | | Second quarter 2018 | | | | 1.00 | | | | August 13, 2018 | | | | August 16, 2018 | | | | 11 | |
| May 1, 2018 | | | First quarter 2018 | | | | 1.00 | | | | May 14, 2018 | | | | May 17, 2018 | | | | 6,213 | | | | First quarter 2018 | | | | 1.00 | | | | May 14, 2018 | | | | May 17, 2018 | | | | 6 | |
| February 19, 2018 | | | Fourth quarter 2017 | | | | 1.44 | | | | March 5, 2018 | | | | March 8, 2018 | | | | 8,067 | | | | Fourth quarter 2017 | | | | 1.44 | | | | March 5, 2018 | | | | March 8, 2018 | | | | 8 | |
| October 30, 2017 | | | 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 | | |
| May 2, 2017 | | | 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 | | |
| (1) | The amount of dividend payable to the Manager for the thirdfirst quarter of 20182019 will be determined on November 12, 2018,May 13, 2019, the record date. |
Under the Management Services Agreement, subject to the oversight and supervision of the Company’s board of directors,Board, the Manager is responsible for and oversees the management of the Company’s operating businesses. In addition, the Manager has the right to electappoint 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.
In accordance with the Management Services 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 new primaryadditional shares. For the quarterquarters ended March 31, 2019 and nine months ended September 30, 2018, the Company incurred base management fees of $12.3$8 million and $36.1$13 million, respectively, compared with $17.9 million and $54.6 million for the quarter and nine months ended September 30, 2017, respectively. The Company did not incur any performance fees for the quarterquarters ended March 31, 2019 and nine months ended September 30,2018.
Effective November 1, 2018, the Manager waived two portions of the base management fee to which it was entitled under the terms of the Management Services Agreement. In effect, the waivers cap the base management fee at 1% of the Company’s equity market capitalization less any cash balances at the holding company. The waiver applies only to the calculation of the base management fees and 2017.not to the remainder of the Management Services Agreement. The Manager reserves the right to revoke the waivers and revert to the prior terms of the Management Services Agreement, subject to providing the Company with not less than a one year notice. A revocation of the waiver would not trigger a recapture of previously waived fees.
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MACQUARIE INFRASTRUCTURE CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
12.14. Related Party Transactions – (continued)
The unpaid portion of the base management fees and performance fees, if any, at the end of each reporting period is included inDue to Manager-related party in the consolidated condensed balance sheets.
| | | | | | | | | | | | |
| Period | | Base Management
Fee Amount
($ in Thousands) | | Performance
Fee Amount
($ in Thousands) | | Shares
Issued | | Base Management
Fee Amount
($ in millions) | | Performance
Fee Amount
($ in millions) | | Shares
Issued |
2019 Activities:
| | | | | | | | | | | | | |
| First quarter 2019 | | | $ | 8 | | | $ | — | | | | 184,448 | (1) |
2018 Activities:
| | | | | | | | | | | | | | | | | | | | | | | | |
| Fourth quarter 2018 | | | $ | 9 | | | $ | — | | | | 220,208 | |
| Third quarter 2018 | | $ | 12,333 | | | $ | — | | | | 269,286 | (1) | | | 12 | | | | — | | | | 269,286 | |
| Second quarter 2018 | | | 10,852 | | | | — | | | | 277,053 | | | | 11 | | | | — | | | | 277,053 | |
| First quarter 2018 | | | 12,928 | | | | — | | | | 265,002 | | | | 13 | | | | — | | | | 265,002 | |
2017 Activities:
| | | | | | | | | | | | | |
| Fourth quarter 2017 | | $ | 16,778 | | | $ | — | | | | 248,162 | | |
| Third quarter 2017 | | | 17,954 | | | | — | | | | 240,674 | | |
| Second quarter 2017 | | | 18,433 | | | | — | | | | 233,394 | | |
| First quarter 2017 | | | 18,223 | | | | — | | | | 232,398 | | |
| (1) | The Manager elected to reinvest all of the monthly base management fees for the thirdfirst quarter of 20182019 in shares. The Company issued 269,286184,448 shares for the quarter ended September 30, 2018,March 31, 2019, including 89,54262,467 shares that were issued in October 2018April 2019 for the September 2018March 2019 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 quarterquarters ended March 31, 2019 and nine months ended September 30, 2018, the Manager charged the Company $296,000$246,000 and $705,000,$268,000, respectively, for reimbursement of out-of-pocket expenses compared with $284,000 and $729,000, respectively, for the quarter and nine months ended September 30, 2017.expenses. The unpaid portion of the out-of-pocket expenses at the end of the reporting period is included in Due to Manager-related party in the consolidated condensed balance sheets.
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 board of directors.Board. 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 June 2015, the Company entered into an equity distribution agreement with sales agents, including MCUSA, providing for the sale 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. The equity distribution agreement also
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MACQUARIE INFRASTRUCTURE CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
12. Related Party Transactions – (continued)
provides for sales of 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, 2018 and 2017, the Company did not engage MCUSA for such activities.
Long-Term Debt
In January 2018, the Company completed the refinancing and upsizing of its senior secured revolving credit facility to $600.0$600 million from $410.0$410 million and extended the maturity through January 3, 2022. As part of the refinancing and upsizing, MIHI LLC’s $50.0$50 million commitment was replaced by a $40.0$40 million commitment from Macquarie Capital Funding LLC. As part of the closing, the Company paid Macquarie Capital Funding LLC $80,000 in closing fees.
Prior to the refinancing in January 2018, the Company incurred $4,000 in interest expense related to MIHI LLC’s portion of the MIC senior secured revolving credit 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. Subsequent to the refinancing in
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MACQUARIE INFRASTRUCTURE CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
14. Related Party Transactions – (continued)
January 2018, for the quarters ended March 31, 2019 and 2018, the Company incurred $139,000$34,000 and $376,000,$107,000, 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, 2018.facility.
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$27 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. During the nine months ended September 30, 2017, IMTT recognized $907,000 in revenues from MENAT. The contracts expired during the quarter ended June 30, 2017.
13. Income Taxes
The Company expects to incur federal consolidated taxable income for the year ending December 31, 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 2029 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)
14.15. 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 captionedCity 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 captionedDaniel 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 assertasserted 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 arewere 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. On January 30, 2019, the Court issued an opinion and order consolidating the two cases, appointing Moab Partners, L.P. (Moab) as Lead Plaintiff, approving Moab’s selection of lead counsel. On February 20, 2019, Moab filed a consolidated class action complaint. In addition to the claims noted above, the consolidated class action complaint also asserts claims under Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 relating to the Company’s November 2016 secondary public offering of common stock. The consolidated amended complaint also adds Macquarie Infrastructure Management (USA) Inc., Barclays Capital Inc. and seven additional current or former officers or directors of MIC as defendants. On April 22, 2019, the Company and the other defendants filed motions to dismiss the consolidated class action complaint in its entirety, with prejudice. The Company intends to continue 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. BothA third and substantially similar shareholder derivative complaint captionedKim Johnson v. Liam Stewart, et al., Case No. 1:18-cv-011062 (VSB) was filed in the same court on November 27, 2018. Each of the shareholder derivative 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 andFajardo 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 plaintiffsA motion to consolidate the three actions is currently pending.
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MACQUARIE INFRASTRUCTURE CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
15. Legal Proceedings and Contingencies – (continued)
Proceedings in theWright, Greenlee case have agreed to stay the matterandJohnsoncases are otherwise stayed 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 theWrightand,Greenlee andJohnsoncomplaints.
15.16. Subsequent Events
Dividend
On October 30, 2018,April 29, 2019, the board of directorsBoard declared a dividend of $1.00 per share for the quarter ended September 30, 2018,March 31, 2019, which is expected to be paid on November 15, 2018May 16, 2019 to holders of record on November 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.May 13, 2019.
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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, 2017,2018, filed with the SEC on February 21, 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, 2018,20, 2019, except for the following:
Shareholder Litigation
On April 23, 2018, a complaint captionedCity 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 captionedDaniel 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 asserted 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 were the Company and four current or former officers of MIC and one of its subsidiaries, IMTT Holdings LLC. The complaints in both actions 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. On January 30, 2019, the Court issued an opinion and order consolidating the two cases, appointing Moab Partners, L.P. (Moab) as Lead Plaintiff, approving Moab’s selection of lead counsel. On February 20, 2019, Moab filed a consolidated class action complaint. In addition to the claims noted above, the consolidated class action complaint also asserts claims under Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 relating to the Company’s November 2016 secondary public offering of common stock. The consolidated amended complaint also adds Macquarie Infrastructure Management (USA) Inc., Barclays Capital Inc. and seven additional current or former officers or directors of MIC as defendants. On April 22, 2019, the Company and the other defendants filed motions to dismiss the consolidated class action complaint in its entirety, with prejudice. The Company intends to continue to vigorously contest the claims asserted, 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. BothA third and substantially similar shareholder derivative complaint captionedKim Johnson v. Liam Stewart, et al., Case No. 1:18-cv-011062 (VSB) was filed in the same court on November 27, 2018. Each of the shareholder derivative 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 andFajardo 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.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 plaintiffsA motion to consolidate the three actions is currently pending. Proceedings in theWright, Greenlee case have agreed to stay the matterandJohnsoncases are otherwise stayed pending resolution of an anticipated motion to dismiss the securities class actions.actions described above. The Company expects that the named defendants will vigorously contest the claims asserted in theWrightand,Greenlee andJohnsoncomplaints.
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, 2017,2018, filed with the SEC on February 21, 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.20, 2019.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
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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-1E-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: October 31, 2018May 1, 2019 | | By: /s/ Christopher Frost
Name: Christopher Frost
Title: Chief Executive Officer
|
Dated: October 31, 2018May 1, 2019 | | 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). |
| 10.1* | | First Amendment, dated as of March 26, 2019, to Note Purchase Agreement, dated May 8 2015, among ITT Holdings LLC and the purchasers named therein. |
| 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, 2018,March 31, 2019, filed on October 31, 2018,May 1, 2019, formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Condensed Balance Sheets as of September 30, 2018March 31, 2019 (Unaudited) and December 31, 2017,2018, (ii) the Consolidated Condensed Statements of Operations for the quarters ended March 31, 2019 and nine months ended September 30, 2018 and 2017 (Unaudited), (iii) the Consolidated Condensed Statements of Comprehensive Income for the quarters ended March 31, 2019 and nine months ended September 30, 2018 and 2017 (Unaudited), (iv) the Consolidated Condensed Statements of Stockholders’ Equity for the quarters ended March 31, 2019 and 2018 (Unaudited), (v) the Consolidated Condensed Statements of Cash Flows for the nine monthsquarters ended September 30,March 31, 2019 and 2018 and 2017 (Unaudited) and (v)(vi) 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