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, 2012

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 COMPANY LLC

(Exact Name of Registrant as Specified in Its Charter)

 
Delaware   43-2052503
(State or Other Jurisdiction of
Incorporation or Organization)
  (IRS Employer
Identification No.)

125 West 55th Street
New York, New York 10019

(Address of Principal Executive Offices) (Zip Code)

(212) 231-1000

(Registrant’s Telephone Number, Including Area Code)



 

(Former Name, Former Address and Former Fiscal Year if Changed Since Last Report): N/A



 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

     
Large Accelerated Filer x    Accelerated Filer o   Non-accelerated Filer o   Smaller Reporting Company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

There were 46,758,875 limited liability company interests without par value outstanding at October 30, 2012.

 

 


 
 

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MACQUARIE INFRASTRUCTURE COMPANY LLC
  
TABLE OF CONTENTS

 
  Page
PART I. FINANCIAL INFORMATION
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations     1  
Quantitative and Qualitative Disclosure About Market Risk     33  
Controls and Procedures     33  
Consolidated Condensed Balance Sheets as of September 30, 2012 (Unaudited) and December 31, 2011     34  
Consolidated Condensed Statements of Operations for the Quarters and Nine Months Ended September 30, 2012 and 2011 (Unaudited)     35  
Consolidated Condensed Statements of Comprehensive Income for the Quarters and Nine Months Ended September 30, 2012 and 2011 (Unaudited)     36  
Consolidated Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2012 and 2011 (Unaudited)     37  
Notes to Consolidated Condensed Financial Statements (Unaudited)     38  
PART II. OTHER INFORMATION
 

Item 1.

Legal Proceedings

    56  

Item 1A.

Risk Factors

    56  

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

    56  

Item 3.

Defaults Upon Senior Securities

    56  

Item 4.

Mine Safety Disclosures

    56  

Item 5.

Other Information

    56  

Item 6.

Exhibits

    56  

Macquarie Infrastructure Company LLC is not an authorized deposit-taking institution for the purposes of the Banking Act 1959 (Commonwealth of Australia) and its obligations do not represent deposits or other liabilities of Macquarie Bank Limited ABN 46 008 583 542 (MBL). MBL does not guarantee or otherwise provide assurance in respect of the obligations of Macquarie Infrastructure Company LLC.

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PART I
  
FINANCIAL INFORMATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of the financial condition and results of operations of Macquarie Infrastructure Company LLC should be read in conjunction with the consolidated condensed financial statements and the notes to those statements included elsewhere herein. This discussion contains forward-looking statements that involve risks and uncertainties and are made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” and similar expressions identify such forward-looking statements. Our actual results and timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth under “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2011. Unless required by law, we can undertake no obligation to update forward-looking statements. Readers should also carefully review the risk factors set forth in other reports and documents filed from time to time with the SEC.

Except as otherwise specified, “Macquarie Infrastructure Company,” “MIC,” “we,” “us,” and “our” refer to the Company and its subsidiaries together from June 25, 2007 and, prior to that date, to the Trust, the Company and its subsidiaries. Macquarie Infrastructure Management (USA) Inc., which we refer to as our Manager, is part of the Macquarie Group, comprised of Macquarie Group Limited and its subsidiaries and affiliates worldwide.

We own, operate and invest in a diversified group of infrastructure businesses that provide basic services, such as chilled water for building cooling and gas utility services to businesses and individuals primarily in the U.S. The businesses we own and operate are energy-related businesses consisting of: a 50% interest in International Matex Tank Terminals, or IMTT, Hawaii Gas and our controlling interest in District Energy; and an aviation-related business, Atlantic Aviation.

Our infrastructure businesses generally operate in sectors with limited competition and significant barriers to entry, including high initial development and construction costs, the existence of long-term contracts or the requirement to obtain government approvals and a lack of immediate cost-efficient alternatives to the services provided. Overall they tend to generate sustainable long-term cash flows.

Overview

In analyzing the financial condition and results of operations of our businesses, we focus primarily on cash generation, and our ability to distribute cash to shareholders in particular. The ability of our businesses to generate cash, broadly, is tied to their ability to effectively manage the volume of products/ services sold and the margin earned on those sales. Offsetting these are required payments on debt facilities, taxes and capital expenditures necessary to maintain the productivity of the fixed assets of the businesses, among others.

At IMTT, we focus on the amount of storage under contract and the rates at which that storage is leased to third parties and on making appropriate expenditures in maintaining fixed assets of the business. Management of IMTT believes that the average rate on all storage contracts will be modestly higher in 2012 compared with 2011. Storage utilization is expected to be consistent with 2011, subject to certain tanks being removed from service for cleaning and inspection.

During the third quarter of 2012, our gas processing and distribution business rebranded itself as Hawaii Gas. At Hawaii Gas, our focus is on the number of customers served by each of the utility and non-utility portions of the business, and in the case of the non-utility portion, the margins achieved on sales of gas as well. Hawaii Gas has an active marketing program that seeks to develop new customers throughout Hawaii. We periodically pursue rate cases that allow for adjustment of the rates in the utility portion of the business, although we do not intend to pursue any significant rate case for the remainder of 2012. The pricing of non-utility gas will be adjusted to reflect changes in the cost of the product and the costs associated with delivering it to customers. In addition to the existing utility and non-utility operations, Hawaii Gas is developing strategies related to the importation and distribution of Liquefied Natural Gas, or LNG. Small scale importation of LNG is expected to be underway in late 2012 or early 2013.

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At District Energy, we focus on attracting and maintaining relationships with building owners and managers such that they choose to install or continue to use the business’ cooling services. Absent a resurgence in new construction in downtown Chicago, we expect District Energy to produce financial results consistent with prior years’, although full year results remain subject to slight variation based on the extent to which the temperatures and humidity in Chicago are above or below historic norms.

Our energy-related businesses were largely resistant to the recent economic downturn, primarily due to the contracted or utility-like nature of their revenues combined with the essential services they provide and the contractual or regulatory ability to pass through most cost increases to customers. We believe these businesses are generally able to generate consistent cash flows throughout the business cycle.

At Atlantic Aviation, our focus is on attracting and maintaining relationships with general aviation aircraft owners and pilots such that they are incentivized to use our FBOs. General aviation activity has improved since the first quarter of 2009. However, forecasting flight activity levels remains difficult. Nonetheless, we believe that flight activity levels will continue to increase in 2012, subject to continued economic recovery in the United States.

Improvement in general aviation activity levels has resulted in improvement in the operating performance of Atlantic Aviation. Atlantic Aviation is generating a substantial amount of cash; however all of the cash is being used to reduce Atlantic Aviation’s indebtedness. Those repayments are expected to enhance the terms on which we may be able to refinance this debt prior to its maturity in 2014.

Distributions From IMTT For Fiscal Year 2012

Distributions calculated in accordance with the Shareholders’ Agreement between MIC and its co-investor in IMTT (“Voting Trust”) for the first half of 2012 were $100.6 million ($50.3 million per shareholder). By unanimous agreement, this amount has been paid to each shareholder.

Distributions calculated in accordance with the Shareholders’ Agreement between MIC and the Voting Trust for the third quarter of 2012 were $30.4 million ($15.2 million per shareholder). On October 25, 2012, the Board of IMTT unanimously declared a distribution of this amount. The third quarter of 2012 distribution is expected to be paid on October 31, 2012.

Dividends

Since January 1, 2011, MIC has paid or declared the following dividends:

       
Declared   Period Covered   $ per LLC Interest   Record Date   Payable Date
October 29, 2012     Third quarter 2012     $ 0.6875       November 12, 2012       November 15, 2012  
July 30, 2012     Second quarter 2012     $ 0.625       August 13, 2012       August 16, 2012  
April 30, 2012     First quarter 2012     $ 0.20       May 14, 2012       May 17, 2012  
February 1, 2012     Fourth quarter 2011     $ 0.20       March 5, 2012       March 8, 2012  
October 31, 2011     Third quarter 2011     $ 0.20       November 14, 2011       November 17, 2011  
August 1, 2011     Second quarter 2011     $ 0.20       August 15, 2011       August 18, 2011  
May 2, 2011     First quarter 2011     $ 0.20       May 11, 2011       May 18, 2011  

Our Board has expressed its intent to distribute substantially all of the cash generated by our businesses to our shareholders in the form of a quarterly cash dividend. Not all of the cash flow generated by our businesses is currently available for distribution. The payment of a quarterly cash dividend of $0.6875 per share is being paid out of cash generated by our operating entities, supplemented by cash on hand. Following the successful refinancing of Atlantic Aviation’s debt facilities prior to their maturity in October of 2014, and contingent upon the continued stable performance of MIC’s businesses, and subject to prevailing economic conditions, our Board will consider increasing the amount of the quarterly cash dividend.

We expect that dividends paid in 2012 are likely to be characterized as a dividend for tax purposes. Holders of MIC LLC interests are encouraged to seek their own tax advice with regards to their investment in MIC.

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Income Taxes

We file a consolidated federal income tax return that includes the taxable income of Hawaii Gas and Atlantic Aviation. IMTT and District Energy file separate federal income tax returns. Distributions from IMTT and District Energy may be characterized as non-taxable returns of capital and reduce our tax basis in these businesses, or as a taxable dividend. We will include in our taxable income the dividend portion of any distributions, which are eligible for the 80% dividends received deduction. We also receive and include in taxable income interest income from District Energy on intercompany debt.

As a result of having federal net operating loss, or NOL, carryforwards, we do not expect to make regular federal tax payments at least through the 2014 tax year. However, we expect to pay an Alternative Minimum Tax of approximately $264,000 for 2012, which includes $161,000 related to District Energy. We expect that the Alternative Minimum Tax paid for 2012 will be available as a credit against regular federal income taxes in the future. The cash state and local taxes paid by our individual businesses are discussed in the sections entitled “Income Taxes” for each of these businesses.

Pursuant to the tax sharing agreements, the individual businesses included in our consolidated federal income tax return pay MIC an amount equal to the federal income taxes each would have paid on a standalone basis if they were not part of the MIC consolidated federal income tax return.

Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010

In December of 2010, the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (the “Act”) was signed. The Act provides for 100% tax depreciation for certain fixed assets placed in service after September 8, 2010 and before January 1, 2012, and 50% tax depreciation for certain fixed assets placed in service during 2012 for federal income tax purposes. Generally, states do not allow this tax depreciation deduction in determining state taxable income. Importantly, Illinois and Louisiana, two states in which we have significant operations, do permit the use of federal tax depreciation deductions in calculating state taxable income. The Company took and will take into consideration the benefits of these accelerated depreciation provisions of the Act when evaluating capital expenditure plans for the remainder of 2012.

Results of Operations

Consolidated

Key Factors Affecting Operating Results To Date:

strong performance from our energy-related businesses reflecting:
an increase in average storage rates at IMTT;
an increase in non-utility contribution margin at Hawaii Gas; and
an increase in consumption gross profit at District Energy.
improved contribution from Atlantic Aviation reflecting:
increased volume of general aviation (“GA”) fuel sold and higher weighted average GA fuel margins; and
lower interest expense driven by reduced debt levels; partially offset by
reduced de-icing revenue.

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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)
     2012   2011   $   %   2012   2011   $   %
     ($ In Thousands) (Unaudited)
Revenue
                                                                       
Revenue from product sales   $ 166,385     $ 159,834       6,551       4.1     $ 508,468     $ 474,480       33,988       7.2  
Revenue from product sales –  utility     35,535       35,088       447       1.3       110,656       105,782       4,874       4.6  
Service revenue     56,214       55,420       794       1.4       160,053       154,590       5,463       3.5  
Financing and equipment lease income     1,119       1,236       (117 )      (9.5 )      3,448       3,784       (336 )      (8.9 ) 
Total revenue     259,253       251,578       7,675       3.1       782,625       738,636       43,989       6.0  
Costs and expenses
                                                                       
Cost of product sales     111,677       107,475       (4,202 )      (3.9 )      346,778       326,026       (20,752 )      (6.4 ) 
Cost of product sales – utility     31,001       29,205       (1,796 )      (6.1 )      94,497       86,842       (7,655 )      (8.8 ) 
Cost of services     15,044       15,860       816       5.1       41,489       40,704       (785 )      (1.9 ) 
Gross profit     101,531       99,038       2,493       2.5       299,861       285,064       14,797       5.2  
Selling, general and administrative     51,571       50,706       (865 )      (1.7 )      157,301       150,685       (6,616 )      (4.4 ) 
Fees to manager-related party     29,353       3,465       (25,888 )      NM       39,108       11,253       (27,855 )      NM  
Depreciation     7,596       10,072       2,476       24.6       22,704       25,905       3,201       12.4  
Amortization of intangibles     8,800       8,637       (163 )      (1.9 )      25,892       33,400       7,508       22.5  
(Gain) loss on disposal of assets     (1,706 )      518       2,224       NM       (1,379 )      1,743       3,122       179.1  
Total operating expenses     95,614       73,398       (22,216 )      (30.3 )      243,626       222,986       (20,640 )      (9.3 ) 
Operating income     5,917       25,640       (19,723 )      (76.9 )      56,235       62,078       (5,843 )      (9.4 ) 
Other income (expense)
                                                                       
Interest income     110       3       107       NM       116       104       12       11.5  
Interest expense(1)     (15,144 )      (14,638 )      (506 )      (3.5 )      (39,076 )      (48,973 )      9,897       20.2  
Equity in earnings and amortization charges of investee     6,989       2,436       4,553       186.9       23,295       14,068       9,227       65.6  
Other income, net     249       1,200       (951 )      (79.3 )      245       805       (560 )      (69.6 ) 
Net (loss) income before income taxes     (1,879 )      14,641       (16,520 )      (112.8 )      40,815       28,082       12,733       45.3  
Benefit (provision) for income taxes     1,758       (5,137 )      6,895       134.2       (14,698 )      (11,635 )      (3,063 )      (26.3 ) 
Net (loss) income   $ (121 )    $ 9,504       (9,625 )      (101.3 )    $ 26,117     $ 16,447       9,670       58.8  
Less: net income attributable to noncontrolling interests     1,758       3,128       1,370       43.8       2,766       1,396       (1,370 )      (98.1 ) 
Net (loss) income attributable to MIC LLC   $ (1,879 )    $ 6,376       (8,255 )      (129.5 )    $ 23,351     $ 15,051       8,300       55.1  

NM — Not meaningful

(1) Interest expense includes non-cash losses on derivative instruments of $9.4 million and $20.3 million for the quarter and nine months ended September 30, 2012, respectively. For the quarter and nine months ended September 30, 2011, interest expense includes non-cash losses on derivative instruments of $8.7 million and $31.2 million, respectively.

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Results of Operations: Consolidated – (continued)

Gross Profit

Consolidated gross profit for the quarter and nine months ended September 30, 2012 increased reflecting improved results in the non-utility business at Hawaii Gas. In addition, gross profit for the nine months ended September 30, 2012 reflects primarily the increase in both fuel and non-fuel gross profit at Atlantic Aviation.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased for the quarter and nine months ended September 30, 2012 compared to the quarter and nine months ended September 30, 2011 primarily due to legal costs at the holding company level, most significantly those incurred in the arbitration proceedings and related matters between MIC and its IMTT co-investor. Selling, general and administrative expenses were also higher at Hawaii Gas and District Energy for these periods.

Fees to Manager

Our Manager is entitled to a quarterly base management fee based primarily on our market capitalization, and a performance fee, based on the performance of our stock relative to a U.S. utilities index. For the quarter and nine months ended September 30, 2012, we recorded a performance fee payable of $23.5 million to our Manager. Our Manager elected to reinvest this performance fee in additional LLC interests. LLC interests for the third quarter of 2012 performance fee will be issued to our Manager during the fourth quarter of 2012. For the nine months ended September 30, 2011, our Manager did not earn a performance fee.

For the nine months ended September 30, 2012 and 2011, we incurred base management fees of $15.6 million and $11.3 million, respectively. The unpaid portion of the base management fees at the end of each reporting period is included in due to manager-related party in the consolidated condensed balance sheets. The following table shows our Manager’s election to reinvest its quarterly base management fees and performance fees, if any, in additional LLC interests:

       
Period   Base Management
Fee Amount
($ in thousands)
  Performance
Fee Amount
($ in thousands)
  LLC Interests Issued   Issue Date
2012 Activities:
                                   
Third quarter 2012   $ 5,844     $ 23,509       (1)       (1)  
Second quarter 2012     4,760             113,847       August 30, 2012  
First quarter 2012     4,995             147,682       May 31, 2012  
2011 Activities:
                                   
Fourth quarter 2011   $ 4,222     $       135,987       March 20, 2012  
Third quarter 2011     3,465             130,344       November 30, 2011  
Second quarter 2011     4,156             179,623       August 31, 2011  
First quarter 2011     3,632             144,742       June 6, 2011  

(1) LLC interests for the third quarter of 2012 base management fee and performance fee will be issued to our Manager during the fourth quarter of 2012.

Depreciation

Depreciation for the quarter and nine months ended September 30, 2012 were lower due to the consolidation of two FBOs that Atlantic Aviation operated at one airport during 2011. Atlantic Aviation vacated a portion of its leased premises and recorded non-cash write-offs of $2.9 million primarily associated with leasehold improvements. The decrease in the nine months ended September 30, 2012 also reflects the non-cash asset impairment charge of $1.4 million recorded at Atlantic Aviation during the quarter ended June 30, 2011. This non-cash impairment charge resulted from adverse trading conditions specific to three small locations.

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Results of Operations: Consolidated – (continued)

Amortization of Intangibles

Amortization of intangibles expense for the nine months ended September 30, 2012 were lower due to the non-cash impairment charge of $7.3 million recorded at Atlantic Aviation during the quarter ended June 30, 2011. This impairment charge resulted from adverse trading conditions specific to three small locations.

Interest Expense and Losses on Derivative Instruments

Interest expense includes non-cash losses on derivative instruments of $9.4 million and $20.3 million for the quarter and nine months ended September 30, 2012, respectively, and non-cash losses on derivative instruments of $8.7 million and $31.2 million for the quarter and nine months ended September 30, 2011, respectively. Non-cash losses on derivatives recorded in interest expense are attributable to the change in fair value of interest rate instruments and includes the reclassification of amounts from accumulated other comprehensive loss into earnings.

Excluding the portion related to non-cash losses on derivatives, interest expense decreased for the quarter and nine months ended September 30, 2012 primarily due to the lower term loan principal balance at Atlantic Aviation.

Equity in Earnings and Amortization Charges of Investee

The increase in equity in the earnings for the quarter and nine months ended September 30, 2012 reflects our share of the decrease in non-cash derivative losses and our share of the increase in operating results from IMTT.

Income Taxes

For 2012, we expect that any consolidated taxable income will be fully offset by our NOL carryforwards. At December 31, 2011, our federal NOL balance was $135.2 million. This balance excludes the NOL carryforwards of District Energy (see District Energy — Income Taxes below). For 2012, we expect to pay a federal Alternative Minimum Tax of approximately $264,000, which includes $161,000 related to District Energy.

As we own less than 80% of IMTT and District Energy, these businesses are not included in our consolidated federal tax return. These businesses file separate federal income tax returns. We expect that distributions from District Energy in 2012 will be treated as taxable dividends and qualify for the 80% Dividends Received Deduction. With respect to IMTT, we expect that approximately $10.0 million of distributions received will be taxable as a dividend, with the balance being a return of capital.

As of September 30, 2012, our projected full year federal and state income taxes will be approximately 36.0% of net income before taxes. Accordingly, our provision for income taxes for the nine months ended September 30, 2012 is approximately $14.7 million, of which $3.1 million is for state and local income taxes. The difference between our effective tax rate and the U.S. federal statutory rate of 35% is primarily attributable to state and local income taxes and adjustments for our less than 80% owned businesses.

Valuation allowance:

From the date of sale of the noncontrolling interest in District Energy and onwards, we evaluate the need for a valuation allowance against our deferred tax assets without taking into consideration the deferred tax liabilities of District Energy. As of December 31, 2011, our valuation allowance was approximately $10.5 million. In calculating our consolidated income tax provision for the nine months ended September 30, 2012, we provided for an increase in the valuation allowance of $1.8 million. During 2011, we increased the valuation allowance by $1.3 million for certain state NOL carryforwards.

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Results of Operations: Consolidated – (continued)

Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) excluding non-cash items and Free Cash Flow

We have disclosed EBITDA excluding non-cash items for our Company and each of our operating segments in Note 9, “Reportable Segments”, in our consolidated condensed financial statements, as a key performance metric relied on by management in evaluating our performance. EBITDA excluding non-cash items is defined as earnings before interest, taxes, depreciation and amortization and non-cash items, which includes impairments, derivative gains and losses and adjustments for other non-cash items reflected in the statements of operations. We believe EBITDA excluding non-cash items provides additional insight into the performance of our operating businesses relative to each other and similar businesses without regard to their capital structure, and their ability to service or reduce debt, fund capital expenditures and/or support distributions to the holding company.

We also disclose Free Cash Flow, as defined by us, as a means of assessing the amount of cash generated by our businesses and supplementing other information provided in accordance with GAAP. We define Free Cash Flow as cash from operating activities, less maintenance capital expenditures and changes in working capital.

We believe that reporting Free Cash Flow will provide our investors with additional insight into our future ability to deploy cash, as GAAP metrics such as net income and cash from operating activities do not reflect all of the items that our management considers in estimating the amount of cash generated by our operating entities. In this Quarterly Report on Form 10-Q, we have disclosed Free Cash Flow for our consolidated results and for each of our operating segments.

We note that Free Cash Flow does not fully reflect our ability to freely deploy generated cash, as it does not reflect required payments to be made on our indebtedness, pay dividends and other fixed obligations or the other cash items excluded when calculating Free Cash Flow. We also note that Free Cash Flow may be calculated in a different manner by other companies, which limits its usefulness as a comparative measure. Therefore, our Free Cash Flow should be used as a supplemental measure and not in lieu of our financial results reported under GAAP.

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Results of Operations: Consolidated – (continued)

A reconciliation of net (loss) income attributable to MIC LLC to EBITDA excluding non-cash items and EBITDA excluding non-cash items to Free Cash Flow, on a consolidated basis, is provided below:

               
               
  Quarter Ended September 30,   Change
Favorable/(Unfavorable)
  Nine Months Ended September 30,   Change Favorable/(Unfavorable)
     2012   2011   $   %   2012   2011   $   %
     ($ In Thousands) (Unaudited)
Net (loss) income attributable to MIC LLC(1)   $ (1,879 )    $ 6,376                       $ 23,351     $ 15,051                    
Interest expense, net(2)     15,034       14,635                         38,960       48,869                    
(Benefit) provision for income taxes     (1,758 )      5,137                         14,698       11,635                    
Depreciation(3))     7,596       10,072                         22,704       25,905                    
Depreciation – cost of services(3)     1,685       1,664                         5,036       4,969                    
Amortization of intangibles(4)     8,800       8,637                         25,892       33,400                    
(Gain) loss on disposal of assets     (1,850 )      (204 )                        (1,803 )      949                    
Equity in earnings and amortization charges of investee(5)           (2,436 )                              (14,068 )                   
Base management fees settled/to be settled in LLC interests     5,844       3,465                         15,599       11,253                    
Performance fees to be settled in LLC interests     23,509                               23,509                          
Other non-cash expense, net     2,695       4,286                      5,420       3,973                 
EBITDA excluding non-cash items   $ 59,676     $ 51,632       8,044       15.6     $ 173,366     $ 141,936       31,430       22.1  
EBITDA excluding non-cash items   $ 59,676     $ 51,632                       $ 173,366     $ 141,936                    
Interest expense, net(2)     (15,034 )      (14,635 )                        (38,960 )      (48,869 )                   
Interest rate swap breakage fees – Hawaii Gas(2)     (8,701 )                              (8,701 )                         
Interest rate swap breakage fees – Atlantic Aviation(2)     (95 )      (515 )                        (595 )      (2,247 )                   
Adjustments to derivative instruments recorded in interest expense(2)     (1,770 )      (4,093 )                        (14,384 )      (7,326 )                   
Amortization of debt financing costs(2)     1,347       1,014                         3,290       3,074                    
Cash distributions received in excess of equity in earnings and amortization charges of investee(6)                                   54,625                          
Equipment lease receivables, net     885       778                         2,595       2,271                    
Benefit/provision for income taxes, net of changes in deferred taxes     (1,913 )      (1,827 )                        (4,239 )      (2,955 )                   
Changes in working capital     5,357       (6,476 )                  (2,414 )      (18,719 )             
Cash provided by operating activities     39,752       25,878                         164,583       67,165                    
Changes in working capital     (5,357 )      6,476                         2,414       18,719                    
Maintenance capital expenditures     (5,371 )      (5,197 )                     (13,832 )      (12,271 )                
Free cash flow   $ 29,024     $ 27,157       1,867       6.9     $ 153,165     $ 73,613       79,552       108.1  

(1) Net (loss) income attributable to MIC LLC excludes net income attributable to noncontrolling interests of $1.8 million and $2.8 million for the quarter and nine months ended September 30, 2012, respectively, and net income attributable to noncontrolling interests of $3.1 million and $1.4 million for the quarter and nine months ended September 30, 2011, respectively.
(2) Interest expense, net, includes adjustments to derivative instruments, non-cash amortization of deferred financing fees and interest rate swap breakage fees at Hawaii Gas and Atlantic Aviation.

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Results of Operations: Consolidated – (continued)

(3) Depreciation — cost of services includes depreciation expense for District Energy, which is reported in cost of services in our consolidated condensed statements of operations. Depreciation and Depreciation — cost of services does not include acquisition- related step-up depreciation expense of $2.0 million and $5.9 million for the quarter and nine months ended September 30, 2012, respectively, and $2.0 million and $5.5 million for the quarter and nine months ended September 30, 2011, respectively, in connection with our investment in IMTT, which is reported in equity in earnings and amortization charges of investee in our consolidated condensed statements of operations.
(4) Amortization of intangibles does not include acquisition-related step-up amortization expense of $85,000 and $256,000 for the quarter and nine months ended September 30, 2012, respectively, and $85,000 and $520,000 for the quarter and nine months ended September 30, 2011, respectively, in connection with our investment in IMTT, which is reported in equity in earnings and amortization charges of investee in our consolidated condensed statements of operations.
(5) Equity in earnings and amortization charges of investee in the above table includes our 50% share of IMTT's earnings, offset by the distributions we received only up to our share of the earnings recorded in the calculation for EBITDA excluding non-cash items. For the quarter and nine months ended September 30, 2012, we recognized equity in earnings and amortization charges of investee income of $7.0 million and $23.3 million, respectively, in the consolidated condensed statement of operations, which was fully offset by the cash distributions received during the nine months ended September 30, 2012.
(6) Cash distributions received in excess of equity in earnings and amortization charges of investee in the above table is the excess cumulative distributions received to the cumulative earnings recorded in equity in earnings and amortization charges of investee, since our investment in IMTT, adjusted for the current periods equity in earnings and amortization charges of investee in the calculation from net (loss) income attributable to MIC LLC to EBITDA excluding non-cash items above. The cumulative allocation of the $128.8 million distributions received during the nine months ended September 30, 2012 was $77.9 million recorded in net cash provided by operating activities and $50.9 million recorded in net cash provided by investing activities, as a return of investment, on the consolidated condensed statements of cash flows.

Energy-Related Businesses

IMTT

We account for our 50% interest in IMTT under the equity method. To enable meaningful analysis of IMTT’s performance across periods, IMTT’s overall performance is discussed below, rather than IMTT’s contribution to our consolidated results.

Key Factors Affecting Operating Results To Date:

terminal gross profit increased principally due to an increase in average tank rental rates and fuel cost savings; partially offset by
higher repairs and maintenance costs; and
a decrease in environmental response service gross profit, principally due to a lower level of spill response activity.

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Energy-Related Business: IMTT – (continued)

               
  Quarter Ended September 30,       Nine Months Ended September 30,  
     2012   2011   Change Favorable/(Unfavorable)   2012   2011   Change Favorable/(Unfavorable)
     $   $   $   %   $   $   $   %
     ($ In Thousands) (Unaudited)
Revenue
                                                                       
Terminal revenue     111,532       102,794       8,738       8.5       332,316       310,245       22,071       7.1  
Environmental response revenue     7,069       11,775       (4,706 )      (40.0 )      18,052       22,105       (4,053 )      (18.3 ) 
Total revenue     118,601       114,569       4,032       3.5       350,368       332,350       18,018       5.4  
Costs and expenses
                                                                       
Terminal operating costs     49,509       46,289       (3,220 )      (7.0 )      141,886       140,459       (1,427 )      (1.0 ) 
Environmental response operating costs     5,913       7,288       1,375       18.9       15,515       16,031       516       3.2  
Total operating costs     55,422       53,577       (1,845 )      (3.4 )      157,401       156,490       (911 )      (0.6 ) 
Terminal gross profit     62,023       56,505       5,518       9.8       190,430       169,786       20,644       12.2  
Environmental response gross profit     1,156       4,487       (3,331 )      (74.2 )      2,537       6,074       (3,537 )      (58.2 ) 
Gross profit     63,179       60,992       2,187       3.6       192,967       175,860       17,107       9.7  
General and administrative expenses     7,605       7,995       390       4.9       22,405       23,575       1,170       5.0  
Depreciation and amortization     16,992       16,052       (940 )      (5.9 )      51,016       48,087       (2,929 )      (6.1 ) 
Operating income     38,582       36,945       1,637       4.4       119,546       104,198       15,348       14.7  
Interest expense, net(1)     (10,533 )      (24,319 )      13,786       56.7       (28,914 )      (45,313 )      16,399       36.2  
Other income     417       94       323       NM       1,680       1,214       466       38.4  
Provision for income taxes     (11,631 )      (5,537 )      (6,094 )      (110.1 )      (37,867 )      (24,984 )      (12,883 )      (51.6 ) 
Noncontrolling interest     (451 )      94       (545 )      NM       (636 )      185       (821 )      NM  
Net income     16,384       7,277       9,107       125.1       53,809       35,300       18,509       52.4  
Reconciliation of net income to EBITDA excluding non-cash items:
                                                                       
Net income     16,384       7,277                         53,809       35,300                    
Interest expense, net(1)     10,533       24,319                         28,914       45,313                    
Provision for income taxes     11,631       5,537                         37,867       24,984                    
Depreciation and amortization     16,992       16,052                         51,016       48,087                    
Other non-cash expense (income)     369       (102 )                     647       (156 )                
EBITDA excluding non-cash items     55,909       53,083       2,826       5.3       172,253       153,528       18,725       12.2  
EBITDA excluding non-cash items     55,909       53,083                         172,253       153,528                    
Interest expense, net(1)     (10,533 )      (24,319 )                        (28,914 )      (45,313 )                   
Adjustments to derivative instruments recorded in interest expense(1)     461       15,345                         98       18,653                    
Amortization of debt financing costs(1)     805       808                         2,419       2,426                    
Provision for income taxes, net of changes in deferred taxes     (5,962 )      (6,181 )                        (14,565 )      (13,765 )                   
Changes in working capital     5,382       (17,621 )                  17,680       (30,468 )             
Cash provided by operating activities     46,062       21,115                         148,971       85,061                    
Changes in working capital     (5,382 )      17,621                         (17,680 )      30,468                    
Maintenance capital expenditures     (15,303 )      (14,539 )                     (30,756 )      (36,058 )                
Free cash flow     25,377       24,197       1,180       4.9       100,535       79,471       21,064       26.5  

NM — Not meaningful

(1) Interest expense, net, includes adjustments to derivative instruments and non-cash amortization of deferred financing fees.

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Energy-Related Business: IMTT – (continued)

Revenue and Gross Profit

The increase in terminal revenue primarily reflects growth in storage revenue. Storage revenue grew due to an increase in average rental rates of 9.2% and 6.9% for the quarter and nine months ended September 30, 2012, respectively, as compared with the quarter and nine months ended September 30, 2011. MIC believes that full year average storage rates will increase for 2012 compared with 2011 by between 6.5% and 7.5%.

Capacity utilization was 93.3% and 94.5% for the quarter and nine months ended September 30, 2012, respectively, compared with 94.1% and 94.0% for the quarter and nine months ended September 30, 2011, respectively, due to the timing of tanks taken out of service for cleaning and inspection during 2012 as compared with 2011. MIC believes the full year capacity utilization will be at 2011 levels.

Terminal operating costs were higher for the quarter and nine months ended September 30, 2012 as compared with the quarter and nine months ended September 30, 2011 primarily due to higher repairs and maintenance as a result of Hurricane Isaac and higher labor costs. In addition, terminal operating costs for the nine months ended September 30, 2012 reflected higher real estate taxes, partially offset by lower fuel costs, reflecting a lower cost of natural gas.

Gross profit from environmental response services decreased with a lower level of spill response activity during the quarter and nine months ended September 30, 2012 as compared with the quarter and nine months ended September 30, 2011.

General and Administrative Expenses

General and administrative expenses decreased for the quarter and nine months ended September 30, 2012 as compared with the quarter and nine months ended September 30, 2011 primarily due to reclassification of loan commitment fees to interest expense.

Terminal EBITDA

Terminal EBITDA, which excludes environmental response services, for the quarter and nine months ended September 30, 2012 increased by 11.4% and 14.5%, respectively, as compared to the quarter and nine months ended September 30, 2011.

Depreciation and Amortization

Depreciation and amortization expense increased for the quarter and nine months ended September 30, 2012 as compared with the quarter and nine months ended September 30, 2011 as IMTT placed capital assets in service, resulting in higher asset balances.

Interest Expense, Net

Interest expense, net, includes non-cash losses of $5.1 million and $14.3 million on derivative instruments for the quarter and nine months ended September 30, 2012, respectively, and non-cash losses on derivative instruments of $20.0 million and $32.9 million for the quarter and nine months ended September 30, 2011, respectively. Excluding the non-cash losses on derivative instruments, interest expense increased primarily due to the increase in outstanding debt balance for the period. Cash interest paid was $9.0 million and $25.7 million for the quarter and nine months ended September 30, 2012, respectively, and $8.7 million and $25.5 million for the quarter and nine months ended September 30, 2011, respectively.

Income Taxes

The business files a consolidated federal income tax return and state income tax returns in the states in which IMTT operates.

For the year ending December 31, 2012, IMTT expects to pay $14.5 million of federal income taxes and $6.0 million of state income taxes. IMTT’s actual federal tax liability could be higher or lower depending on the value of capital assets placed in service during the year and the extent to which IMTT is able to realize the benefits of bonus depreciation on those assets. The “Provision for income taxes, net of changes in deferred taxes” of $14.6 million for the nine months ended September 30, 2012 in the table above, includes $10.3 million of federal income taxes and $4.3 million of state income taxes.

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Energy-Related Business: IMTT – (continued)

For 2011, IMTT recorded $28.9 million of federal income tax expense and $5.9 million of state income tax expense. IMTT made federal tax payments related to 2011 of $7.7 million and state tax payments of $4.7 million. The federal income tax expense exceeded the cash taxes primarily due to the benefit of accelerated tax depreciation, which is discussed below.

A significant difference between IMTT’s book and federal taxable income relates to depreciation of terminalling fixed assets. For book purposes, these fixed assets are depreciated primarily over 15 to 30 years using the straight-line method of depreciation. For federal income tax purposes, these fixed assets are depreciated primarily over 5 to 15 years using accelerated methods. Most terminalling fixed assets placed in service in 2010, 2011 and 2012 did or should qualify for the federal 50% or 100% tax depreciation, except assets placed in service in Louisiana and financed with GO Zone Bonds. A significant portion of Louisiana terminalling fixed assets constructed since Hurricane Katrina were financed with Gulf Opportunity Zone Bonds (“GO Zone Bonds”). GO Zone Bond financed assets are depreciated, for tax purposes, primarily over 9 to 20 years using the straight-line depreciation method. Most of the states in which the business operates do not allow the use of the federal tax depreciation calculation methods.

Hawaii Gas

Key Factors Affecting Operating Results To Date:

an increase in non-utility contribution margin driven by margin management; partially offset by
higher operating costs primarily due to an increase in costs related to the LNG initiative, overtime, medical and benefits costs.

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Energy-Related Business: Hawaii Gas – (continued)

               
  Quarter Ended September 30,       Nine Months Ended September 30,  
     2012   2011   Change Favorable/(Unfavorable)   2012   2011   Change Favorable/(Unfavorable)
     $   $   $   %   $   $   $   %
     ($ In Thousands) (Unaudited)
Contribution margin
                                                                       
Revenue – non-utility     26,894       28,056       (1,162 )      (4.1 )      88,271       82,342       5,929       7.2  
Cost of revenue – non-utility     11,393       15,041       3,648       24.3       40,520       45,413       4,893       10.8  
Contribution margin – non-utility     15,501       13,015       2,486       19.1       47,751       36,929       10,822       29.3  
Revenue – utility     35,535       35,088       447       1.3       110,656       105,782       4,874       4.6  
Cost of revenue – utility     26,202       25,547       (655 )      (2.6 )      81,568       76,758       (4,810 )      (6.3 ) 
Contribution margin - utility     9,333       9,541       (208 )      (2.2 )      29,088       29,024       64       0.2  
Total contribution margin     24,834       22,556       2,278       10.1       76,839       65,953       10,886       16.5  
Production     2,819       1,867       (952 )      (51.0 )      6,952       5,321       (1,631 )      (30.7 ) 
Transmission and distribution     5,339       5,009       (330 )      (6.6 )      16,436       14,428       (2,008 )      (13.9 ) 
Gross profit     16,676       15,680       996       6.4       53,451       46,204       7,247       15.7  
Selling, general and administrative expenses     4,760       4,414       (346 )      (7.8 )      14,575       12,672       (1,903 )      (15.0 ) 
Depreciation and amortization     1,965       1,843       (122 )      (6.6 )      5,808       5,418       (390 )      (7.2 ) 
Operating income     9,951       9,423       528       5.6       33,068       28,114       4,954       17.6  
Interest expense, net(1)     (5,695 )      (2,415 )      (3,280 )      (135.8 )      (9,102 )      (7,912 )      (1,190 )      (15.0 ) 
Other (expense) income     (153 )      70       (223 )      NM       (285 )      (209 )      (76 )      (36.4 ) 
Provision for income taxes     (1,631 )      (2,689 )      1,058       39.3       (9,343 )      (7,901 )      (1,442 )      (18.3 ) 
Net income(2)     2,472       4,389       (1,917 )      (43.7 )      14,338       12,092       2,246       18.6  
Reconciliation of net income to EBITDA excluding non-cash items:
                                                                       
Net income(2)     2,472       4,389                         14,338       12,092                    
Interest expense, net(1)     5,695       2,415                         9,102       7,912                    
Provision for income taxes     1,631       2,689                         9,343       7,901                    
Depreciation and amortization     1,965       1,843                         5,808       5,418                    
Other non-cash expenses     869       736                      2,671       1,918                 
EBITDA excluding non-cash items     12,632       12,072       560       4.6       41,262       35,241       6,021       17.1  
EBITDA excluding non-cash items     12,632       12,072                         41,262       35,241                    
Interest expense, net(1)     (5,695 )      (2,415 )                        (9,102 )      (7,912 )                   
Interest rate swap breakage fees(1)     (8,701 )                              (8,701 )                         
Adjustments to derivative instruments recorded in interest expense(1)     4,386       35                         3,089       932                    
Amortization of debt financing costs(1)     507       119                         746       358                    
Provision for income taxes, net of changes in deferred taxes     (1,513 )      (562 )                  (5,888 )      (4,107 )             
Changes in working capital     4,822       (1,030 )                  1,117       (7,479 )             
Cash provided by operating activities     6,438       8,219                         22,523       17,033                    
Changes in working capital     (4,822 )      1,030                         (1,117 )      7,479                    
Maintenance capital expenditures     (2,056 )      (2,368 )                     (5,241 )      (6,288 )                
Free cash flow     (440 )      6,881       (7,321 )      (106.4 )      16,165       18,224       (2,059 )      (11.3 ) 

NM — Not meaningful

(1) Interest expense, net, includes adjustments to derivative instruments, non-cash amortization of deferred financing fees and interest rate swap breakage fees.
(2) Corporate allocation expense, intercompany fees and the tax effect have been excluded from the above table as they are eliminated on consolidation at the MIC Inc. level.

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Energy-Related Business: Hawaii Gas – (continued)

Management believes that the presentation and analysis of contribution margin, a non-GAAP performance measure, is meaningful to understanding the business’ performance under both a utility rate structure and a non-utility unregulated pricing structure. Regulation of the utility portion of Hawaii Gas’s operations provides for the pass through of increases or decreases in feedstock costs to customers. Changes in the cost of Liquefied Petroleum Gas, or LPG, distributed to non-utility customers can be recovered in pricing, subject to competitive conditions.

Contribution margin should not be considered an alternative to revenue, gross profit, operating income, or net income, determined in accordance with U.S. GAAP. A reconciliation of contribution margin to gross profit is presented in the above table. The business calculates contribution margin as revenue less direct costs of revenue other than production and transmission and distribution costs. Other companies may calculate contribution margin differently or may use different metrics and, therefore, the contribution margin presented for Hawaii Gas is not necessarily comparable with metrics of other companies.

Contribution Margin and Operating Income

Non-utility contribution margin improved as the result of margin management and input cost reduction. The volume of gas sold in the non-utility business decreased by 1.4% for the quarter ended September 30, 2012 compared to the quarter ended September 30, 2011 impacted by an unplanned shutdown of a commercial customer’s operation. The volume of gas sold in the non-utility business increased by 5.1% for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011.

Utility contribution margin was lower for the quarter ended September 30, 2012 impacted by higher transportation costs. Utility contribution margin was slightly higher for the nine months ended September 30, 2012 driven by a 1.9% increase in the volume of gas sold.

As previously noted, in January of 2012, Tesoro announced plans to consider selling all of its operations in Hawaii, including its refinery on Oahu. The Tesoro refinery currently supplies Hawaii Gas with naphtha, which it converts into Synthetic Natural Gas, or SNG, for its Oahu utility business. As Hawaii Gas had been concerned about its ability to rely upon the Tesoro facility in the long-term for its supply of naphtha, it has been actively evaluating alternatives for some time in the event that the facility closes or limits supply. The alternatives include some combination of: extended usage of the backup utility propane air unit; importation of naphtha; sourcing of naphtha from the Chevron refinery; and the importation of Liquefied Natural Gas, or LNG. Hawaii Gas believes that it will be able to supply Oahu utility customers with gas irrespective of whether the Tesoro refinery continues to operate.

Hawaii Gas is developing strategies related to the importation and distribution of LNG and has placed orders for equipment to import LNG in small scale from the west coast of North America as an emergency backup feedstock. Hawaii Gas filed an application in August of 2012 with the Federal Energy Regulatory Commission (FERC) for authorization to import LNG in small scale as an emergency backup feedstock. Subject to FERC approval, this small scale importation of LNG is expected to be underway in late 2012 or early 2013.

Production, transmission and distribution and selling, general and administrative expenses are composed primarily of labor related expenses and professional fees. On a combined basis, these costs were higher for the quarter and nine months ended September 30, 2012 compared with the quarter and nine months ended September 30, 2011 reflecting higher operating costs primarily due to an increase in costs related to overtime and medical and benefits costs. In addition, the increases for the quarter and nine months ended September 30, 2012 include costs related to strategic initiatives for LNG importation and corporate rebranding.

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Energy-Related Business: Hawaii Gas – (continued)

Interest Expense, Net

Interest expense, net, includes non-cash losses on derivative instruments of $5.1 million and $7.3 million for the quarter and nine months ended September 30, 2012, respectively, and non-cash losses on derivative instruments of $1.9 million and $6.4 million for the quarter and nine months ended September 30, 2011, respectively. Excluding the non-cash losses on derivative instruments, interest expense was lower for the quarter ended September 30, 2012 compared to the quarter ended September 30, 2011 primarily due to the refinancing of debt in August of 2012 on more favorable terms.

During the quarter ended September 30, 2012, Hawaii Gas paid $8.7 million in interest rate swap breakage fees in relation to the refinance of the business’ long-term debt facilities. Excluding cash paid for interest rate swap breakage fees, cash interest paid was $1.0 million and $5.5 million for the quarter and nine months ended September 30, 2012, respectively, compared with $2.2 million and $6.5 million for the quarter and nine months ended September 30, 2011, respectively.

Income Taxes

Income from Hawaii Gas is included in our consolidated federal income tax return, and is subject to Hawaii state income taxes. The tax expense in the table above includes both state taxes and the portion of the consolidated federal tax liability attributable to the business. For the year ending December 31, 2012, the business expects to pay cash state income taxes of approximately $1.5 million, for which a provision of $1.1 million was recorded for the nine months ended September 30, 2012. The “Provision for income taxes, net of changes in deferred taxes” of $5.9 million for the nine months ended September 30, 2012 in the above table, includes $4.8 million of federal income taxes payable to MIC for the nine months ended September 30, 2012. Any current federal income tax liability is expected to be offset in consolidation by the application of NOLs.

The business’ federal taxable income differs from book income primarily as a result of differences in the depreciation of fixed assets. The state of Hawaii does not allow the federal bonus depreciation deduction of 100% for 2011 or 50% for 2012 in determining state taxable income.

District Energy

Customers of District Energy pay two charges to receive chilled water services: a fixed charge based on contracted capacity and a variable charge based on the consumption of chilled water. Capacity charges are typically adjusted annually at a fixed rate or are indexed to the Consumer Price Index (CPI). The terms of the business’ customer contracts provide for the pass through of increases or decreases in electricity costs, the largest component of the business’ direct expenses.

The financial results discussed below reflect 100% of District Energy’s performance during the periods presented below.

Key Factors Affecting Operating Results To Date:

an increase in consumption revenue, net of electricity costs, driven by warmer average temperatures; and
an increase in capacity revenue from new customers and annual inflation-linked increases in contract capacity rates.

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TABLE OF CONTENTS

Energy-Related Business: District Energy – (continued)

               
  Quarter Ended September 30,     Nine Months Ended September 30,  
     2012   2011   Change Favorable/(Unfavorable)   2012   2011   Change Favorable/(Unfavorable)
     $   $   $   %   $   $   $   %
     ($ In Thousands) (Unaudited)
Cooling capacity revenue     5,613       5,523       90       1.6       16,675       16,282       393       2.4  
Cooling consumption revenue     10,490       11,091       (601 )      (5.4 )      20,853       19,445       1,408       7.2  
Other revenue     702       688       14       2.0       2,023       2,281       (258 )      (11.3 ) 
Finance lease revenue     1,119       1,236       (117 )      (9.5 )      3,448       3,784       (336 )      (8.9 ) 
Total revenue     17,924       18,538       (614 )      (3.3 )      42,999       41,792       1,207       2.9  
Direct expenses – electricity     5,901       6,697       796       11.9       12,587       12,318       (269 )      (2.2 ) 
Direct expenses – other(1)     5,237       5,056       (181 )      (3.6 )      14,866       15,246       380       2.5  
Direct expenses – total     11,138       11,753       615       5.2       27,453       27,564       111       0.4  
Gross profit     6,786       6,785       1       0.0       15,546       14,228       1,318       9.3  
Selling, general and administrative expenses     823       764       (59 )      (7.7 )      2,675       2,449       (226 )      (9.2 ) 
Amortization of intangibles     345       345                   1,027       1,023       (4 )      (0.4 ) 
Operating income     5,618       5,676       (58 )      (1.0 )      11,844       10,756       1,088       10.1  
Interest expense, net(2)     (2,065 )      (4,566 )      2,501       54.8       (6,521 )      (11,750 )      5,229       44.5  
Other income     436       1,201       (765 )      (63.7 )      568       1,312       (744 )      (56.7 ) 
(Provision) benefit for income taxes     (1,560 )      (865 )      (695 )      (80.3 )      (2,171 )      132       (2,303 )      NM  
Noncontrolling interest     (203 )      (212 )      9       4.2       (622 )      (638 )      16       2.5  
Net income (loss)     2,226       1,234       992       80.4       3,098       (188 )      3,286       NM  
Reconciliation of net income (loss) to EBITDA excluding non-cash items:
                                                                       
Net income (loss)     2,226       1,234                         3,098       (188 )                   
Interest expense, net(2)     2,065       4,566                         6,521       11,750                    
Provision (benefit) for income taxes     1,560       865                         2,171       (132 )                   
Depreciation(1)     1,685       1,664                         5,036       4,969                    
Amortization of intangibles     345       345                         1,027       1,023                    
Other non-cash expenses     156       313                      425       651                 
EBITDA excluding non-cash items     8,037       8,987       (950 )      (10.6 )      18,278       18,073       205       1.1  
EBITDA excluding non-cash items     8,037       8,987                         18,278       18,073                    
Interest expense, net(2)     (2,065 )      (4,566 )                        (6,521 )      (11,750 )                   
Adjustments to derivative instruments recorded in interest expense(2)     (589 )      1,865                         (1,458 )      3,808                    
Amortization of debt financing costs(2)     177       171                         522       511                    
Equipment lease receivable, net     885       778                         2,595       2,271                    
Provision/benefit for income taxes, net of changes in deferred taxes     (619 )      (1,277 )                        (892 )      (1,092 )                   
Changes in working capital     419       (789 )                  (1,453 )      (608 )             
Cash provided by operating activities     6,245       5,169                         11,071       11,213                    
Changes in working capital     (419 )      789                         1,453       608                    
Maintenance capital expenditures     (478 )      (164 )                     (642 )      (289 )                
Free cash flow     5,348       5,794       (446 )      (7.7 )      11,882       11,532       350       3.0  

NM — Not meaningful

(1) Includes depreciation expense of $1.7 million and $5.0 million for the quarter and nine months ended September 30, 2012, respectively, and $1.7 million and $5.0 million for the quarter and nine months ended September 30, 2011, respectively.
(2) Interest expense, net, includes adjustments to derivative instruments and non-cash amortization of deferred financing fees.

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Energy-Related Business: District Energy – (continued)

Gross Profit

Gross profit increased primarily due to warmer average temperatures during the quarter and nine months ended September 30, 2012 compared with quarter and nine months ended September 30, 2011 resulting in higher consumption revenue, net of electricity costs. Additionally, cooling capacity revenue increased from new customers and annual inflation-related increases in contract capacity rates in accordance with customer contract terms. Other direct expenses increased for the quarter and decreased for the nine months ended September 30, 2012 due to the timing of system maintenance work.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased for the quarter and nine months ended September 30, 2012 compared with quarter and nine months ended September 30, 2011 primarily due to higher legal fees.

Other Income

Other income decreased for the quarter and nine months ended September 30, 2012 compared with quarter and nine months ended September 30, 2011 due to lower payments received under agreements to manage the business’ energy consumption during periods of peak demand on the Illinois electricity grid.

Interest Expense, Net

Interest expense, net, includes non-cash losses on derivative instruments of $1.2 million and $3.8 million for the quarter and nine months ended September 30, 2012, respectively, and non-cash losses on derivative instruments of $3.7 million and $9.3 million for the quarter and nine months ended September 30, 2011, respectively. Excluding the non-cash losses on derivative instruments, interest expense was slightly higher for the nine months ended September 30, 2012.

Cash interest paid was $2.5 million and $7.5 million for the quarter and nine months ended September 30, 2012, respectively, and $2.5 million and $7.5 million for the quarter and nine months ended September 30, 2011, respectively.

Income Taxes

District Energy files a separate federal income tax return and a separate Illinois state income tax return. As of December 31, 2011, the business had approximately $16.4 million in federal NOL carryforwards available to offset positive taxable income and $23.1 million in Illinois state NOL carryforwards, for which utilization is deferred until 2015. For 2012, District Energy expects to pay a federal Alternative Minimum Tax of approximately $161,000 and state income taxes of approximately $845,000. For the nine months ended September 30, 2012, a federal and state income tax expense of $892,000 was recorded and is reflected in the “Provision/benefit for income taxes, net of changes in deferred taxes” in the above table. The business does not expect to pay regular federal income taxes in 2012 or 2013 due to the utilization of NOL carryforwards.

Aviation-Related Business

Atlantic Aviation

Key Factors Affecting Operating Results To Date:

higher volume of general aviation (“GA”) fuel sold and higher weighted average GA fuel margins, partially offset by reduced de-icing revenue; and
lower cash interest expense driven by reduced debt levels.

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Aviation-Related Business: Atlantic Aviation – (continued)

               
  Quarter Ended September 30,     Nine Months Ended September 30,  
     2012   2011   Change Favorable/(Unfavorable)   2012   2011   Change Favorable/(Unfavorable)
     $   $   $   %   $   $   $   %
     ($ In Thousands) (Unaudited)
Revenue
                                                                       
Fuel revenue     139,491       131,778       7,713       5.9       420,197       392,138       28,059       7.2  
Non-fuel revenue     39,409       38,118       1,291       3.4       120,502       116,582       3,920       3.4  
Total revenue     178,900       169,896       9,004       5.3       540,699       508,720       31,979       6.3  
Cost of revenue                                                                        
Cost of revenue – fuel     96,925       89,217       (7,708 )      (8.6 )      295,800       270,949       (24,851 )      (9.2 ) 
Cost of revenue – non-fuel     3,906       4,108       202       4.9       14,036       13,141       (895 )      (6.8 ) 
Total cost of revenue     100,831       93,325       (7,506 )      (8.0 )      309,836       284,090       (25,746 )      (9.1 ) 
Fuel gross profit     42,566       42,561       5       0.0       124,397       121,189       3,208       2.6  
Non-fuel gross profit     35,503       34,010       1,493       4.4       106,466       103,441       3,025       2.9  
Gross profit     78,069       76,571       1,498       2.0       230,863       224,630       6,233       2.8  
Selling, general and administrative expenses     43,983       43,430       (553 )      (1.3 )      130,830       130,105       (725 )      (0.6 ) 
Depreciation and amortization     14,086       16,521       2,435       14.7       41,761       52,864       11,103       21.0  
(Gain) loss on disposal of assets     (1,706 )      518       2,224       NM       (1,379 )      1,743       3,122       179.1  
Operating income     21,706       16,102       5,604       34.8       59,651       39,918       19,733       49.4  
Interest expense, net(1)     (7,381 )      (7,655 )      274       3.6       (23,448 )      (29,209 )      5,761       19.7  
Other (expense) income     (10 )      (18 )      8       44.4       38       (195 )      233       119.5  
Provision for income taxes     (6,531 )      (3,396 )      (3,135 )      (92.3 )      (15,815 )      (4,236 )      (11,579 )      NM  
Net income(2)     7,784       5,033       2,751       54.7       20,426       6,278       14,148       NM  
Reconciliation of net income to EBITDA excluding non-cash items:
                                                              
Net income     7,784       5,033                         20,426       6,278                    
Interest expense, net(1)     7,381       7,655                         23,448       29,209                    
Provision for income taxes     6,531       3,396                         15,815       4,236                    
Depreciation and amortization     14,086       16,521                         41,761       52,864                    
(Gain) loss on disposal of assets     (1,850 )      (204 )                        (1,803 )      949                    
Other non-cash (income) expenses     (39 )      207                      (268 )      310                 
EBITDA excluding non-cash items     33,893       32,608       1,285       3.9       99,379       93,846       5,533       5.9  
EBITDA excluding non-cash items     33,893       32,608                         99,379       93,846                    
Interest expense, net(1)