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, 2013

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 53,469,879 LLC Interests without par value outstanding at October 25, 2013.

 

 


 
 

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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     40  
Controls and Procedures     40  
Consolidated Condensed Balance Sheets as of September 30, 2013 (Unaudited) and December 31, 2012     41  
Consolidated Condensed Statements of Operations for the Quarters and Nine Months Ended September 30, 2013 and 2012 (Unaudited)     42  
Consolidated Condensed Statements of Comprehensive Income for the Quarters and Nine Months Ended September 30, 2013 and 2012 (Unaudited)     43  
Consolidated Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2013 and 2012 (Unaudited)     44  
Notes to Consolidated Condensed Financial Statements (Unaudited)     46  
PART II. OTHER INFORMATION
 

Item 1.

Legal Proceedings

    69  

Item 1A.

Risk Factors

    69  

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

    70  

Item 3.

Defaults Upon Senior Securities

    70  

Item 4.

Mine Safety Disclosures

    70  

Item 5.

Other Information

    70  

Item 6.

Exhibits

    70  
 

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, 2012. 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 Securities and Exchange Commission (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 gas utility services to businesses and individuals primarily in the U.S. The businesses we own and operate include:

International Matex Tank Terminals or “IMTT”: a 50% interest in a bulk liquid storage terminal business, which provides bulk liquid storage and handling services at ten marine terminals in the United States and two in Canada and is one of the largest participants in this industry in the U.S., based on storage capacity;
Hawaii Gas: a full-service gas energy company processing and distributing gas products and providing related services in Hawaii;
District Energy: a 50.01% controlling interest in a district energy business, which operates one of the largest district cooling systems in the U.S., serving various customers in Chicago, Illinois and Las Vegas, Nevada;
Atlantic Aviation: an airport services business providing products and services, including fuel and aircraft hangaring/parking, to owners and operators of general aviation aircraft at 62 airports in the U.S.; and
MIC Solar: interests in five contracted solar power generation facilities located in the southwest U.S. that are expected to have an aggregate generating capacity of 57 megawatts of wholesale electricity to utilities and a U.S. Air Force base.

Our infrastructure businesses generally operate in sectors with limited direct 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.

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At IMTT, we focus on the amount of liquid storage capacity 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. Capacity utilization is expected to decrease modestly during 2013 compared with 2012 as a result of certain large storage tanks being taken out of service for cleaning and inspection. The decrease associated with this activity is expected to be partially offset by the commissioning of new storage capacity currently under construction.

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 gas sales 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 levied on the utility portion of the business, although we do not intend to pursue any significant rate case in 2013. The pricing of non-utility gas is adjusted to reflect changes in the cost of the product and costs associated with delivering it to customers. In addition to the existing utility and non-utility operations, Hawaii Gas is advancing initiatives related to the distribution of Liquefied Natural Gas, or LNG.

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. Financial results are subject to slight variation based on the extent to which the temperatures and humidity in Chicago are above or below historic norms.

We expect to continue to invest in contracted power businesses and to date have invested in five solar power generating facilities. We have developed a pipeline of similar investment opportunities and believe that we could potentially deploy additional capital in this segment over the upcoming twelve to eighteen months.

IMTT, Hawaii Gas, District Energy and MIC Solar are largely resistant to economic downturns, primarily due to the contracted or utility-like nature of their revenues. The results for these businesses also reflect the essential services they provide and the contractual or regulatory ability to pass most cost increases through to customers. We believe these businesses are characteristically 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 Fixed Base Operations (“FBOs”). The number of general aviation flight movements has improved consistently since the first quarter of 2009. We believe that the level of flight activity will continue to increase during the remainder of 2013, subject to continued economic expansion in the United States.

Improvement in the level of general aviation flight activity in the U.S., along with the refinancing of the long-term debt at Atlantic Aviation in the second quarter of 2013, has resulted in an increase in the amount of distributable cash flow generated by the business. We believe that the reduction in leverage at Atlantic Aviation will support ongoing distributions from the business to MIC and, subject to additional improvement in the macro-economic backdrop and continued improvement in the operating performance of our businesses, growth in those distributions over time.

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Dividends

Since January 1, 2012, MIC has paid or declared the following dividends:

       
Declared   Period Covered   $ per LLC Interest   Record Date   Payable Date
October 25, 2013     Third quarter 2013     $ 0.875       November 11, 2013       November 14, 2013  
July 29, 2013     Second quarter 2013     $ 0.875       August 12, 2013       August 15, 2013  
April 26, 2013     First quarter 2013     $ 0.6875       May 13, 2013       May 16, 2013  
December 12, 2012     Fourth quarter 2012     $ 0.6875       December 24, 2012       December 28, 2012  
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 01, 2012     Fourth quarter 2011     $ 0.20       March 05, 2012       March 08, 2012  

Our Board has previously expressed its intent to distribute a significant portion of the Free Cash Flow generated by our proportionately owned businesses in the form of a quarterly cash dividend to our shareholders. Free Cash Flow includes cash generated by our businesses after cash payment for interest, taxes, maintenance capital expenditures and excludes changes in working capital. The payment of a quarterly cash dividend of $0.875 per share for the quarter ended September 30, 2013 is being paid out of Free Cash Flow generated by certain of our operating entities, supplemented by cash on hand at MIC. Each of IMTT, Atlantic Aviation, Hawaii Gas and MIC Solar can distribute cash to MIC. Cash generated at District Energy is being used to reduce debt principal in that business until the long-term debt of the business has been refinanced. We expect to commence a refinancing of District Energy in late 2013, subject to market conditions. We do not believe that our inability to make distributions at this time from District Energy impacts the sustainability of our quarterly cash dividend.

In determining whether to change the amount of the dividend, our Board will take into account such matters as the state of the capital markets and general business conditions, the Company’s financial condition, results of operations, capital requirements and any contractual, legal and regulatory restrictions on the payment of dividends by the Company to its shareholders or by its subsidiaries to the Company, and any other factors that it deems relevant. In particular, each of the Company’s businesses and investments has debt commitments and restrictive covenants, which must be satisfied before any of them can make distributions to the Company. Any or all of these factors could affect both the timing and amount, if any, of future dividends.

We view MIC as a total return investment opportunity. Consistent with that view, we believe that over time we will distribute cash equal to approximately 80% to 85% of the Free Cash Flow (in proportion to our equity interest) generated by our businesses, subject to their continued stable performance and prevailing economic conditions. See “Results of Operations — Consolidated: Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) excluding non-cash items and Free Cash Flow” and “Summary of Our Proportionately Combined Results” for further discussions on Free Cash Flow and our proportionately combined financial measures in Part I of this Form 10-Q.

We further believe that the growth characteristics of our businesses will cause our distributable cash flow per share to grow at a high single-digit rate annually over the medium term, again subject to the continued stable performance of our businesses. From 2007 through 2012, our proportionately combined Free Cash Flow per share grew at a compound annual rate of 12.5% per year. We believe that our quarterly cash dividend, combined with the potential for capital appreciation stemming from the growth of each of our businesses, supports our view of the Company as a total return investment opportunity.

MIC Solar

Beginning with the reporting of our financial results for the third quarter of 2013, MIC Solar constitutes a reportable segment under U.S. GAAP. Accordingly, the results of operations of MIC Solar have been reported separately for the quarter and nine months ended September 30, 2013. For the quarter ended December 31, 2012 through the quarter ended June 30, 2013, results for MIC Solar were reported as a

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component of our Corporate and Other segment. With the filing of our financial results on Form 10-Q for the third quarter of 2013, the Corporate and Other segment results have been restated for those periods to exclude MIC Solar.

Second Amended and Restated Management Service Agreement

On September 30, 2013, Macquarie Infrastructure Company LLC entered into a Second Amended and Restated Management Services Agreement (the “Amended Agreement”), among the Company, Macquarie Infrastructure Company Inc. and Macquarie Infrastructure Management (USA) Inc. (the “Manager”). The amendments to the agreement revise the payment mechanics related to the base management fee payable by the Company to the Manager, and align the share price used to calculate the base management fee with the share price at which the Manager may reinvest the base management fee in LLC Interests. Effective October 1, 2013, pursuant to the Amended Agreement, base management fees will be calculated and payable monthly rather than quarterly. Performance fees will continue to be calculated and, if generated, paid quarterly. No substantive changes to the formulas or methodology used to calculate the amount of the base management or performance fees that may be due to the Manager were made. The Amended Agreement also makes certain non-substantive changes to eliminate parties and provisions that are no longer relevant.

Atlantic Aviation Refinancing

On May 31, 2013, Atlantic Aviation entered into a credit agreement (the “AA Credit Agreement”) that provides the business with a seven-year, $465.0 million senior secured first lien term loan facility and a five-year, $70.0 million senior secured first lien revolving credit facility. Proceeds of the term loan facility, together with proceeds from the equity offering discussed below and cash on hand, were used to repay all of the amounts outstanding under Atlantic Aviation’s then existing credit agreement dated September 27, 2007.

The AA Credit Agreement also provides for an uncommitted incremental facility that permits Atlantic Aviation, subject to certain conditions, to increase the term loan facility by up to $50.0 million plus an additional amount if certain senior secured leverage ratio requirements are maintained. For a description of the material terms of Atlantic Aviation’s credit facilities, see Note 7, “Long-Term Debt”, in Part I of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2013.

MIC Equity Offering

On May 8, 2013, the Company completed an underwritten public offering and sale of 3,756,500 LLC Interests pursuant to the shelf. On May 16, 2013, the Company sold an additional 133,375 LLC Interests in this offering pursuant to the exercise of the underwriters’ over-allotment option. The Company received proceeds from the offering of $217.8 million, net of underwriting fees and expenses.

Shelf Registration Statement and MIC Direct

On April 8, 2013, the Company filed an automatic shelf registration statement on Form S-3 (“shelf”) with the Securities and Exchange Commission to issue and sell an indeterminate amount of its LLC Interests and debt securities in one or more future offerings. Along with the shelf, the Company filed a prospectus supplement with respect to a dividend reinvestment/direct stock purchase program named “MIC Direct”. The prospectus supplement relates to the issuance of up to 1.0 million additional LLC Interests to participants in MIC Direct. The Company may also choose to fill requests for reinvestment of dividends or share purchases through MIC Direct via open market purchases.

Income Taxes

We file a consolidated federal income tax return that includes the taxable income of Hawaii Gas, Atlantic Aviation and our allocated share of the taxable income from MIC Solar, which is treated as a partnership for tax purposes. IMTT and District Energy file separate federal income tax returns.

As a result of having federal net operating loss, or NOL, carryforwards, we do not expect to make regular federal tax payments until 2016. However, we expect to pay an Alternative Minimum Tax of approximately $201,000 for 2013. In addition, we expect District Energy to pay an Alternative Minimum Tax of approximately $114,000. We expect that the Alternative Minimum Tax paid for 2013 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.

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Pursuant to 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 as if they were not part of the MIC consolidated federal income tax return.

American Taxpayer Relief Act of 2012

In January of 2013, the American Taxpayer Relief Act of 2012 (the “2012 Tax Act”) was signed. The 2012 Tax Act extends the period over which the 50% bonus depreciation provided for in the Tax Relief, Unemployment Insurance Reauthorization Act of 2010 (the “2010 Tax Act”) applies to include 2013. The Company expects to take the bonus depreciation provision into consideration when evaluating its maintenance and growth capital expenditure plans for the remainder of 2013.

Results of Operations

Consolidated

Key Factors Affecting Operating Results:

an increase in terminal revenue and capacity at IMTT;
lower interest expense driven by lower average cost of debt and reduced debt levels primarily at Atlantic Aviation; and
improved gross profit at Atlantic Aviation; partially offset by
performance fees incurred in 2013

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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)
     2013   2012   $   %   2013   2012   $   %
     ($ In Thousands) (Unaudited)
Revenue
                                                                       
Revenue from product sales   $ 172,169     $ 166,385       5,784       3.5     $ 513,465     $ 508,468       4,997       1.0  
Revenue from product
sales – utility
    32,981       35,535       (2,554 )      (7.2 )      104,095       110,656       (6,561 )      (5.9 ) 
Service revenue     57,752       56,214       1,538       2.7       160,153       160,053       100       0.1  
Financing and equipment lease income     817       1,119       (302 )      (27.0 )      2,779       3,448       (669 )      (19.4 ) 
Total revenue     263,719       259,253       4,466       1.7       780,492       782,625       (2,133 )      (0.3 ) 
Costs and expenses
                                                                       
Cost of product sales     113,974       111,677       (2,297 )      (2.1 )      340,122       346,778       6,656       1.9  
Cost of product sales – utility     28,142       31,001       2,859       9.2       89,095       94,497       5,402       5.7  
Cost of services     13,584       15,044       1,460       9.7       37,030       41,489       4,459       10.7  
Gross profit     108,019       101,531       6,488       6.4       314,245       299,861       14,384       4.8  
Selling, general and administrative     53,669       51,571       (2,098 )      (4.1 )      154,998       157,301       2,303       1.5  
Fees to manager-related party     15,242       29,353       14,111       48.1       76,912       39,108       (37,804 )      (96.7 ) 
Depreciation     10,039       7,596       (2,443 )      (32.2 )      28,730       22,704       (6,026 )      (26.5 ) 
Amortization of intangibles     8,618       8,800       182       2.1       25,866       25,892       26       0.1  
Loss from customer contract termination                             1,626             (1,626 )      NM  
Loss (gain) on disposal of assets     50       (1,706 )      (1,756 )      (102.9 )      226       (1,379 )      (1,605 )      (116.4 ) 
Total operating expenses     87,618       95,614       7,996       8.4       288,358       243,626       (44,732 )      (18.4 ) 
Operating income     20,401       5,917       14,484       NM       25,887       56,235       (30,348 )      (54.0 ) 
Other income (expense)
                                                                       
Interest income     39       110       (71 )      (64.5 )      182       116       66       56.9  
Interest expense(1)     (15,767 )      (15,144 )      (623 )      (4.1 )      (31,190 )      (39,076 )      7,886       20.2  
Loss on extinguishment of debt                             (2,472 )            (2,472 )      NM  
Equity in earnings and amortization charges of investee     8,576       6,989       1,587       22.7       30,327       23,295       7,032       30.2  
Other income, net     829       249       580       NM       514       245       269       109.8  
Net income (loss) before income taxes     14,078       (1,879 )      15,957       NM       23,248       40,815       (17,567 )      (43.0 ) 
(Provision) benefit for income
taxes
    (5,829 )      1,758       (7,587 )      NM       (9,241 )      (14,698 )      5,457       37.1  
Net income (loss)   $ 8,249     $ (121 )      8,370       NM     $ 14,007     $ 26,117       (12,110 )      (46.4 ) 
Less: net (loss) income attributable to noncontrolling interests     (2,158 )      1,758       3,916       NM       (1,423 )      2,766       4,189       151.4  
Net income (loss) attributable to MIC LLC   $ 10,407     $ (1,879 )      12,286       NM     $ 15,430     $ 23,351       (7,921 )      (33.9 ) 

NM — Not meaningful

(1) Interest expense includes losses on derivative instruments of $8.0 million and $9.6 million for the quarter and nine months ended September 30, 2013, respectively. For the quarter and nine months ended September 30, 2012, interest expense includes losses on derivative instruments of $9.4 million and $20.3 million, respectively.

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Results of Operations: Consolidated – (continued)

Gross Profit

Consolidated gross profit increased in the quarter and nine months ended September 30, 2013 compared with the quarter and nine months ended September 30, 2012 reflecting improved results at Atlantic Aviation and the contribution from our MIC Solar business (which did not exist in 2012). This increase was partially offset by a reduction in cooling consumption gross profit at District Energy during the periods.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased for the quarter ended September 30, 2013 compared with the quarter ended September 30, 2012 primarily as a result of transactional costs incurred at MIC Solar for two projects that were acquired during the quarter and a project that was acquired in October of 2013.

Selling, general and administrative expenses decreased for the nine months ended September 30, 2013 compared with nine months ended September 30, 2012 primarily as a result of lower legal fees at the MIC holding company level, most significantly those incurred in connection with the arbitration and related matters involving MIC and its IMTT co-investor incurred during the nine months ended September 30, 2012, partially offset by transactional costs incurred at MIC Solar primarily for two projects that were acquired during the quarter and a project that was acquired in October of 2013 and severance costs at Hawaii Gas.

Fees to Manager

Our Manager is entitled to a base management fee based primarily on our market capitalization, and potentially 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, 2013, we incurred base management fees of $8.3 million and $23.5 million, respectively, and performance fees of $6.9 million and $53.4 million, respectively, payable to our Manager. Our Manager elected to reinvest the base management fees and performance fees in additional LLC interests. For the quarter and nine months ended September 30, 2012, we incurred base management fees of $5.8 million and $15.6 million, respectively, and performance fees of $23.5 million for the quarter ended September 30, 2012 payable to our Manager.

The unpaid portion of the base management fees and performance 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
2013 Activities:
                                   
Third quarter 2013   $ 8,336     $ 6,906       (1)       (1)  
Second quarter 2013     8,053       24,440       603,936       September 04, 2013  
First quarter 2013     7,135       22,042       522,638       June 05, 2013  
2012 Activities:
                                   
Fourth quarter 2012   $ 6,299     $ 43,820       980,384       March 20, 2013  
Third quarter 2012     5,844       23,509       695,068       December 05, 2012  
Second quarter 2012     4,760             113,847       August 30, 2012  
First quarter 2012     4,995             147,682       May 31, 2012  

(1) LLC interests for the third quarter of 2013 base management and performance fee will be issued to the Manager during the fourth quarter of 2013.

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Results of Operations: Consolidated – (continued)

Depreciation

Depreciation expense increased for the quarter and nine months ended September 30, 2013 compared with the quarter and nine months ended September 30, 2012 primarily as a result of the depreciation from the two MIC Solar projects that are operational.

Interest Expense and Loss on Derivative Instruments

Interest expense includes losses on derivative instruments of $8.0 million and $9.6 million for the quarter and nine months ended September 30, 2013, respectively, and losses on derivative instruments of $9.4 million and $20.3 million for the quarter and nine months ended September 30, 2012, respectively. Losses on derivatives recorded in interest expense are attributable to the change in fair value of interest rate instruments and include the reclassification of amounts from accumulated other comprehensive loss into earnings. Excluding the derivative adjustments and interest rate swap breakage fees at Atlantic Aviation and Hawaii Gas, interest expense decreased primarily due to the expiration of an unfavorable interest rate swap at Atlantic Aviation in October of 2012 and lower principal balance on the term loan debt.

Equity in Earnings and Amortization Charges of Investee

The increase in equity in earnings for the quarter ended September 30, 2013 reflects lower derivative losses and our share of the improved operating results for the quarter ended September 30, 2013 compared with the quarter ended September 30, 2012 from IMTT.

The increase in equity in earnings for the nine months ended September 30, 2013 reflects our share of the derivative gains for the nine months ended September 30, 2013 compared with our share of the derivative losses for the nine months ended September 30, 2012 and our share of the improved operating results from IMTT.

Income Taxes

We file a consolidated federal income tax return that includes the taxable income of Hawaii Gas, Atlantic Aviation and our allocated share of the taxable income from MIC Solar, which is treated as a partnership for tax purposes. IMTT and District Energy file separate federal income tax returns. As we own less than 80% of these businesses, they are not included in our consolidated federal tax return.

For 2013, we expect any federal income tax due to be fully offset by our NOL carryforwards. At December 31, 2012, our federal NOL balance was $192.2 million. This balance excludes the NOL carryforwards of District Energy (see District Energy — Income Taxes below), of $9.8 million at December 31, 2012. We expect to pay a Federal Alternative Minimum Tax of approximately $201,000 and District Energy to pay a Federal Alternative Minimum Tax of approximately $114,000 for 2013.

For 2013, we expect our federal and state income taxes to be approximately $19.3 million, or 40.12% of net income before taxes, of which $5.3 million relates to state and local income taxes. As discussed below, the provision for state and local income taxes includes a valuation allowance of approximately $2.6 million for the use of certain state NOL carryforwards. 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.

In calculating our consolidated state income tax provision, we have provided a valuation allowance for certain state income tax NOL carryforwards, the utilization of which is not assured beyond a reasonable doubt. In addition, we expect to incur certain expenses that will not be deductible in determining state taxable income. Accordingly, these expenses have also been excluded in determining our state income tax expense.

We expect our valuation allowance to increase by approximately $2.9 million in 2013. The increase in valuation allowance in 2012 for state NOLs was $3.0 million.

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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 10, “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 to similar businesses without regard to their capital structure, and to 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, which includes cash paid for interest and taxes, 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 and other fixed obligations or the other cash items excluded when calculating Free Cash Flow. We also note that Free Cash Flow may be calculated in a different manner by other companies, which limits its usefulness as a comparative measure. Therefore, our Free Cash Flow should be used as a supplemental measure and not in lieu of our financial results reported under GAAP.

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Results of Operations: Consolidated – (continued)

A reconciliation of net income (loss) 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)
     2013   2012   $   %   2013   2012   $   %
     ($ In Thousands) (Unaudited)
Net income (loss) attributable to MIC LLC(1)   $ 10,407     $ (1,879 )                      $ 15,430     $ 23,351                    
Interest expense, net(2)     15,728       15,034                         31,008       38,960                    
Provision (benefit) for income taxes     5,829       (1,758 )                        9,241       14,698                    
Depreciation(3)     10,039       7,596                         28,730       22,704                    
Depreciation – cost of services(3)     1,620       1,685                         5,021       5,036                    
Amortization of intangibles(4)     8,618       8,800                         25,866       25,892                    
Loss from customer contract termination                                   1,626                          
Loss on extinguishment of debt                                   2,434                          
(Gain) loss on disposal of assets           (1,850 )                        106       (1,803 )                   
Equity in earnings and amortization charges of
investee(5)
    2,570                               (11,302 )                         
Base management fees to be settled/settled in LLC interests     8,336       5,844                         23,524       15,599                    
Performance fees to be
settled/settled in LLC interests
    6,906       23,509                         53,388       23,509                    
Other non-cash (income) expense, net     (1,340 )      2,695                      (1,969 )      5,420                 
EBITDA excluding non-cash
items
  $ 68,713     $ 59,676       9,037       15.1     $ 183,103     $ 173,366       9,737       5.6  
EBITDA excluding non-cash
items
  $ 68,713     $ 59,676                       $ 183,103     $ 173,366                    
Interest expense, net(2)     (15,728 )      (15,034 )                        (31,008 )      (38,960 )                   
Interest rate swap breakage fees – Hawaii Gas(2)           (8,701 )                              (8,701 )                   
Interest rate swap breakage fees – Atlantic Aviation(2)           (95 )                              (595 )                   
Adjustments to derivative instruments recorded in interest expense(2)     4,449       (1,770 )                        1,160       (14,384 )                   
Amortization of debt financing costs(2)     995       1,347                         2,892       3,290                    
Cash distributions received in excess of equity in earnings and amortization charges of
investee(6)
                                        54,625                    
Equipment lease receivables, net     740       885                         2,814       2,595                    
Provision/benefit for income taxes, net of changes in deferred
taxes
    (799 )      (1,913 )                        (2,674 )      (4,239 )                   
Changes in working capital     (7,707 )      5,357                   (28,527 )      (2,414 )             
Cash provided by operating activities     50,663       39,752                         127,760       164,583                    
Changes in working capital     7,707       (5,357 )                        28,527       2,414                    
Maintenance capital expenditures     (3,889 )      (5,371 )                     (10,897 )      (13,832 )                
Free cash flow   $ 54,481     $ 29,024       25,457       87.7     $ 145,390     $ 153,165       (7,775 )      (5.1 ) 

(1) Net income (loss) attributable to MIC LLC excludes net loss attributable to noncontrolling interests of $2.2 million and $1.4 million for the quarter and nine months ended September 30, 2013, respectively, and 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.

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Results of Operations: Consolidated – (continued)

(2) Interest expense, net, includes adjustment to derivative instruments, non-cash amortization of deferred financing fees and interest rate swap breakage fees at Hawaii Gas and Atlantic Aviation.
(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 quarters and nine months ended September 30, 2013 and 2012, 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 quarters and nine months ended September 30, 2013 and 2012, 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, 2013, we recognized equity in earnings and amortization charges of investee income of $8.6 million and $30.3 million, respectively, in the consolidated condensed statements of operations, which was offset by the cash distributions received of $19.0 million during the nine months ended September 30, 2013. 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 statements of operations, which was fully offset by the cash distributions received during 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 income (loss) attributable to MIC LLC to EBITDA excluding non-cash items above. The cumulative allocation of the $128.8 million distributions received during nine months 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 on investment, on the consolidated condensed statements of cash flows.

IMTT

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

Key Factors Affecting Operating Results:

terminal gross profit increased principally due to increase in tank capacity, revenue from ancillary services and tank storage rates; partially offset by
the planned reduction in tank utilization as a result of tank cleaning and inspection; and
partially insurable casualty losses related to Hurricane Sandy.

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Results of Operations: IMTT – (continued)

               
  Quarter Ended September 30,   Change Favorable/(Unfavorable)   Nine Months Ended September 30,   Change Favorable/(Unfavorable)
     2013   2012   2013   2012
     $   $   $   %   $   $   $   %
     ($ In Thousands) (Unaudited)
Revenue
                                                                       
Terminal revenue     120,560       111,532       9,028       8.1       361,412       332,316       29,096       8.8  
Environmental response revenue     5,887       7,069       (1,182 )      (16.7 )      22,341       18,052       4,289       23.8  
Total revenue     126,447       118,601       7,846       6.6       383,753       350,368       33,385       9.5  
Costs and expenses
                                                                       
Terminal operating costs     50,371       49,509       (862 )      (1.7 )      145,581       141,886       (3,695 )      (2.6 ) 
Environmental response operating costs     5,201       5,913       712       12.0       18,661       15,515       (3,146 )      (20.3 ) 
Total operating costs     55,572       55,422       (150 )      (0.3 )      164,242       157,401       (6,841 )      (4.3 ) 
Terminal gross profit     70,189       62,023       8,166       13.2       215,831       190,430       25,401       13.3  
Environmental response gross profit     686       1,156       (470 )      (40.7 )      3,680       2,537       1,143       45.1  
Gross profit     70,875       63,179       7,696       12.2       219,511       192,967       26,544       13.8  
General and administrative expenses     8,084       7,605       (479 )      (6.3 )      24,420       22,405       (2,015 )      (9.0 ) 
Depreciation and amortization     19,051       16,992       (2,059 )      (12.1 )      56,109       51,016       (5,093 )      (10.0 ) 
Casualty losses, net(1)     200             (200 )      NM       6,700             (6,700 )      NM  
Operating income     43,540       38,582       4,958       12.9       132,282       119,546       12,736       10.7  
Interest expense, net(2)     (9,376 )      (10,533 )      1,157       11.0       (17,099 )      (28,914 )      11,815       40.9  
Other income     620       417       203       48.7       1,804       1,680       124       7.4  
Provision for income taxes     (15,181 )      (11,631 )      (3,550 )      (30.5 )      (48,894 )      (37,867 )      (11,027 )      (29.1 ) 
Noncontrolling interest     (44 )      (451 )      407       90.2       (220 )      (636 )      416       65.4  
Net income     19,559       16,384       3,175       19.4       67,873       53,809       14,064       26.1  
Reconciliation of net income to EBITDA excluding non-cash items:
                                                                       
Net income     19,559       16,384                         67,873       53,809                    
Interest expense, net(2)     9,376       10,533                         17,099       28,914                    
Provision for income taxes     15,181       11,631                         48,894       37,867                    
Depreciation and amortization     19,051       16,992                         56,109       51,016                    
Casualty losses, net(1)     200                               6,700                          
Other non-cash expenses     253       369                      429       647                 
EBITDA excluding non-cash
items
    63,620       55,909       7,711       13.8       197,104       172,253       24,851       14.4  
EBITDA excluding non-cash
items
    63,620       55,909                         197,104       172,253                    
Interest expense, net(2)     (9,376 )      (10,533 )                        (17,099 )      (28,914 )                   
Adjustments to derivative instruments recorded in interest expense(2)     (1,768 )      461                         (15,784 )      98                    
Amortization of debt financing costs(2)     824       805                         1,990       2,419                    
Provision for income taxes, net of changes in deferred taxes     (5,624 )      (5,962 )                        (13,847 )      (14,565 )                   
Changes in working capital     9,119       5,382                   4,035       17,680              
Cash provided by operating activities     56,795       46,062                         156,399       148,971                    
Changes in working capital     (9,119 )      (5,382 )                        (4,035 )      (17,680 )                   
Maintenance capital expenditures(3)     (14,514 )      (15,303 )                     (60,513 )      (30,756 )                
Free cash flow     33,162       25,377       7,785       30.7       91,851       100,535       (8,684 )      (8.6 ) 

NM — Not meaningful

(1) Casualty losses, net, includes $2.5 million and $1.5 million related to the quarters ended December 31, 2012 and March 31, 2013, respectively, which were recorded in terminal operating costs in those periods. These amounts have been included in the nine months ended September 30, 2013.
(2) Interest expense, net, includes adjustments to derivative instruments and non-cash amortization of deferred financing fees.

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Results of Operations: IMTT – (continued)

(3) Maintenance capital expenditures includes a reclassification from growth capital expenditures in the quarters ended December 31, 2012 and March 31, 2013 of $1.2 million and $509,000, respectively. These amounts have been included in the nine months ended September 30, 2013. The classification of capital expenditures as either growth or maintenance is the subject of ongoing review and discussions between MIC and its co-investor in IMTT.

Revenue and Gross Profit

Historically, storage rates have generally included the provision of some level of ancillary services. More recently, IMTT’s customer contracts have unbundled a number of these services, adding or increasing separate fees for ancillary services. As such, MIC believes that terminal revenue is becoming a more relevant metric for analyzing IMTT’s performance than storage rates.

Terminal revenue increased 8.1% and 8.8% for the quarter and nine months ended September 30, 2013 as compared with 8.5% and 7.1% for the quarter and nine months ended September 30, 2012, respectively. While average storage rental rates increased by 2.1% and 5.1% for the quarter and nine months ended September 30, 2013, respectively, as compared with 9.2% and 6.9% for the quarter and nine months ended September 30, 2012, respectively, revenue from ancillary services increased 19.4% and 15.1% for the quarter and nine months ended September 30, 2013, respectively, as compared with 4.7% and 3.2% for the quarter and nine months ended September 30, 2012, respectively. Ancillary services include product transfer (throughout), blending and charges for the use of certain infrastructure.

Average storage capacity increased by 1.1 million barrels and 1.2 million barrels for the quarter and nine months ended September 30, 2013, respectively, as compared with the quarter and nine months ended September 30, 2012 as a result of the completion of various growth capital projects. As expected, capacity utilization declined to 92.9% and 92.8% for the quarter and nine months ended September 30, 2013, respectively, from 93.3% and 94.5% for the quarter and nine months ended September 30, 2012, respectively, due to the timing and increased size of tanks currently out of service for cleaning and inspection and conversion to alternate product services. As of September 30, 2013, two 500,000 barrel tanks at St. Rose were out of service for planned cleaning and inspection. One of those tanks was returned to service in October of 2013.

Terminal operating costs were higher for the quarter and nine months ended September 30, 2013 as compared with the quarter and nine months ended September 30, 2012, primarily due to higher labor costs and increased fuel costs from product heating (which are offset in revenue), partially offset by lower repairs and maintenance costs.

General and Administrative Expense

General and administrative expenses increased for the quarter and nine months ended September 30, 2013 compared with the quarter and nine months ended September 30, 2012 primarily due to higher labor and healthcare costs.

Depreciation and Amortization

Depreciation and amortization expense increased for the quarter and nine months ended September 30, 2013 compared with the quarter and nine months ended September 30, 2012, primarily due to additional capital assets placed in service, resulting in higher asset balances.

Casualty Losses, Net

During the quarter and nine months ended September 30, 2013, casualty losses, net, were recorded as a result of fixed asset write-offs associated with Hurricane Sandy, net of insurance recoveries.

Interest Expense, Net

Interest expense includes losses on derivative instruments of $2.9 million for the quarter ended September 30, 2013 and gains on derivative instruments of $2.2 million for the nine months ended September 30, 2013. For the quarter and nine months ended September 30, 2012, interest expense included losses on derivative instruments of $5.2 million and $14.3 million, respectively. Excluding the derivative adjustments, interest expense increased primarily due to higher debt balances.

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Results of Operations: IMTT – (continued)

Cash interest paid totaled $12.5 million and $30.6 million for the quarter and nine months ended September 30, 2013, respectively, and $9.0 million and $25.7 million for the quarter and nine months ended September 30, 2012, respectively.

Income Taxes

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

For the year ending December 31, 2013, IMTT expects to pay $13.0 million of federal income taxes and $5.6 million of state income taxes. IMTT’s actual federal tax liability could be higher or lower depending on the cost and timing of the 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 $13.8 million for the nine months ended September 30, 2013 in the table above, includes $9.7 million of federal income taxes and $4.1 million of state income taxes.

For the full year 2012, IMTT recorded $40.8 million of federal income tax expense and $10.5 million of state income tax expense. This includes $13.4 million and $4.5 million of current federal and state income taxes, respectively. The federal income tax expense exceeded the cash taxes primarily due to the benefit of accelerated tax depreciation, as 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 between 2010 through 2013 did or should qualify for the federal 50% or 100% bonus tax depreciation, except assets placed in service in Louisiana and financed with Gulf Opportunity Zone Bonds (“GO Zone Bonds”). A significant portion of Louisiana terminalling fixed assets constructed since Hurricane Katrina was 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 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

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, as determined in accordance with U.S. GAAP. A reconciliation of contribution margin to gross profit is presented in the below 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.

Key Factors Affecting Operating Results:

an increase in non-utility contribution margin per therm; partially offset by
an increase in mechanical integrity expense and catalyst costs at the SNG plant; and
severance costs.

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Results of Operations: Hawaii Gas – (continued)

               
  Quarter Ended September 30,   Change Favorable/(Unfavorable)   Nine Months Ended September 30,   Change Favorable/(Unfavorable)
     2013   2012   2013   2012
     $   $   $   %   $   $   $   %
     ($ In Thousands) (Unaudited)
Contribution margin
                                                                       
Revenue – non-utility     28,488       26,894       1,594       5.9       88,993       88,271       722       0.8  
Cost of revenue – non-utility     12,838       11,393       (1,445 )      (12.7 )      39,525       40,520       995       2.5  
Contribution margin –  non-utility     15,650       15,501       149       1.0       49,468       47,751       1,717       3.6  
Revenue – utility     32,981       35,535       (2,554 )      (7.2 )      104,095       110,656       (6,561 )      (5.9 ) 
Cost of revenue – utility     23,534       26,202       2,668       10.2       74,914       81,568       6,654       8.2  
Contribution margin – utility     9,447       9,333       114       1.2       29,181       29,088       93       0.3  
Total contribution margin     25,097       24,834       263       1.1       78,649       76,839       1,810       2.4  
Production     2,737       2,819       82       2.9       8,119       6,952       (1,167 )      (16.8 ) 
Transmission and distribution(1)     5,121       5,339       218       4.1       15,727       16,436       709       4.3  
Gross profit     17,239       16,676       563       3.4       54,803       53,451       1,352       2.5  
Selling, general and administrative expenses     4,818       4,760       (58 )      (1.2 )      16,139       14,575       (1,564 )      (10.7 ) 
Depreciation and amortization     2,160       1,965       (195 )      (9.9 )      6,508       5,808       (700 )      (12.1 ) 
Operating income     10,261       9,951       310       3.1       32,156       33,068       (912 )      (2.8 ) 
Interest expense, net(2)     (2,097 )      (5,695 )      3,598       63.2       (5,040 )      (9,102 )      4,062       44.6  
Other expense     (146 )      (153 )      7       4.6       (251 )      (285 )      34       11.9  
Provision for income taxes     (3,191 )      (1,631 )      (1,560 )      (95.6 )      (10,669 )      (9,343 )      (1,326 )      (14.2 ) 
Net income(3)     4,827       2,472       2,355       95.3       16,196       14,338       1,858       13.0  
Reconciliation of net income to EBITDA excluding non-cash items:
                                                                       
Net income(3)     4,827       2,472                         16,196       14,338                    
Interest expense, net(2)     2,097       5,695                         5,040       9,102                    
Provision for income taxes     3,191       1,631                         10,669       9,343                    
Depreciation and amortization     2,160       1,965                         6,508       5,808                    
Other non-cash expenses(1)     604       869                      1,592       2,671                 
EBITDA excluding non-cash
items
    12,879       12,632       247       2.0       40,005       41,262       (1,257 )      (3.0 ) 
EBITDA excluding non-cash items     12,879       12,632                         40,005       41,262                    
Interest expense, net(2)     (2,097 )      (5,695 )                        (5,040 )      (9,102 )                   
Interest rate swap breakage
fees(2)
          (8,701 )                              (8,701 )                   
Adjustments to derivative instruments recorded in interest expense(2)     269       4,386                         (426 )      3,089                    
Amortization of debt financing costs(2)     113       507                         342       746                    
Provision for income taxes, net of changes in deferred taxes     (94 )      (1,513 )                        (3,961 )      (5,888 )                   
Changes in working capital     (3,023 )      4,822                   (3,810 )      1,117              
Cash provided by operating activities     8,047       6,438                         27,110       22,523                    
Changes in working capital     3,023       (4,822 )                        3,810       (1,117 )                   
Maintenance capital expenditures     (1,916 )      (2,056 )                     (5,337 )      (5,241 )                
Free cash flow     9,154       (440 )      9,594       NM       25,583       16,165       9,418       58.3  

NM — Not meaningful

(1) For the nine months ended September 30, 2013, transmission and distribution includes non-cash income of $489,000 for asset retirement obligation credit. This non-cash income is excluded when calculating EBITDA excluding non-cash items.
(2) Interest expense, net, includes adjustments to derivative instruments, non-cash amortization of deferred financing fees and interest rate swap breakage fees.
(3) 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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Results of Operations: Hawaii Gas – (continued)

Contribution Margin and Operating Income

Non-utility volume increased by 1.9% for the quarter driven by customer gains partially offset by a significant customer being offline during the quarter ended September 30, 2013. The year to date volume declined by 0.4% due to this significant customer being offline and a reduction in average customer inventory in the first half of 2013 that accompanied the closure of the Tesoro refinery. Changes in average customer inventory were not a factor in the third quarter of 2013. Non-utility contribution margin increased for the quarter and nine months ended September 30, 2013 as the result of margin management.

The volume of gas sold by the utility business increased by 0.1% and 0.3% for the quarter and nine months ended September 30, 2013, respectively, compared with the quarter and nine months ended September 30, 2012. Utility contribution margin remained essentially unchanged for the nine months ended September 30, 2013 compared with the nine months ended September 30, 2012.

In July of 2013, Hawaii Gas and Tesoro Hawaii entered into a new naphtha feedstock agreement for the period from October 1, 2013 through March 31, 2014. On September 26, 2013, Tesoro announced the sale of its interest in Tesoro Hawaii to Par Petroleum Corporation, which assumed the agreement. On September 18, 2013, Hawaii Gas received interim approval from the Hawaii Public Utilities Commission, or HPUC, to pass any change in the cost of feedstock through to customers via its fuel adjustment mechanism and expects to receive a final decision before the end of the year.

The fuel supply situation in Hawaii continues to be unpredictable driven partially by the closure and then restart of the Tesoro refinery under new ownership. The instability in the local supply of LPG has resulted in the need for Hawaii Gas to import a larger percentage of LPG. Hawaii Gas expects that continued instability could cause increased volatility in non-utility contribution margin and exaggerate movements in working capital over the medium term. The business is constructing additional LPG storage facilities that it believes will mitigate a portion of the volatility associated with the fuel supply instability.

Hawaii Gas continues to move forward with initiatives that will allow it to use LNG as a back-up fuel to serve its customers. On August 12, 2013, Hawaii Gas filed an application with the HPUC for approval to use LNG as a back-up to its regulated synthetic natural gas, or SNG, system and expects a decision before the end of the year. Hawaii Gas has equipment and supply arrangements in place and will implement its initiative, subject to approval from the HPUC.

Production, transmission and distribution and selling, general and administrative expenses comprise primarily labor related expenses and professional fees. Collectively, these costs were lower for the quarter ended September 30, 2013 compared with the quarter ended September 30, 2012. The decrease is primarily due to lower costs associated with the LNG initiatives. These costs were higher for the nine months ended September 30, 2013 compared with the nine months ended September 30, 2012 primarily due to severance costs, mechanical integrity expense and catalyst costs at the SNG plant, costs associated with the LNG initiatives, salaries and wages and an increase in marketing and advertising.

Interest Expense, Net

Interest expense includes losses on derivative instruments of $875,000 and $1.4 million for the quarter and nine months ended September 30, 2013, respectively, and losses on derivative instruments of $5.1 million and $7.3 million for the quarter and nine months ended September 30, 2012, respectively. 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 the derivative adjustments and cash paid for interest rate swap breakage fees during 2012, interest expense decreased for the quarter and nine months ended September 30, 2013 compared with the quarter and nine months ended September 30, 2012 due to lower interest rates resulting from refinancing of Hawaii Gas’ long-term debt that occurred in August of 2012.

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Results of Operations: Hawaii Gas – (continued)

Cash interest paid totaled $2.8 million and $6.2 million for the quarter and nine months ended September 30, 2013, respectively, and $1.0 million and $5.5 million excluding cash paid for interest rate swap breakage fees for the quarter and nine months ended September 30, 2012, respectively. The increase in cash interest paid for the comparable periods is attributable to the timing of the interest payments made under the debt facility outstanding prior to the August of 2012 refinancing, compared with the new debt facility outstanding following the completion of the August of 2012 refinancing.

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 ended December 31, 2013, the business expects to pay state income taxes of approximately $1.1 million. The “Provision for income taxes, net of changes in deferred taxes” of $4.0 million for the nine months ended September 30, 2013 in the above table, includes $3.3 million of federal income taxes payable to MIC and $631,000 of state income taxes. 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 50% for 2012 and 2013 in determining state taxable income.

District Energy

Revenue at District Energy is comprised of two charges paid by customers receiving 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 based on 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, rather than the results attributable to our 50.01% interest.

Key Factors Affecting Operating Results:

an early contract termination by a Chicago customer; and
a decrease in consumption revenue in the first half of 2013 driven by cooler average temperatures; partially offset by
an increase in capacity revenue from new customers and annual inflation-linked increases in contract capacity rates.

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Results of Operations: District Energy – (continued)

               
  Quarter Ended September 30,   Change
Favorable/
(Unfavorable)
  Nine Months Ended September 30,   Change
Favorable/
(Unfavorable)
     2013   2012   2013   2012
     $   $   $   %   $   $   $   %
     ($ In Thousands) (Unaudited)
Cooling capacity revenue     5,780       5,613       167       3.0       17,197       16,675       522       3.1  
Cooling consumption revenue     9,114       10,490       (1,376 )      (13.1 )      16,282       20,853       (4,571 )      (21.9 ) 
Other revenue     692       702       (10 )      (1.4 )      2,139       2,023       116       5.7  
Finance lease revenue     817       1,119       (302 )      (27.0 )      2,779       3,448       (669 )      (19.4 ) 
Total revenue     16,403       17,924       (1,521 )      (8.5 )      38,397       42,999       (4,602 )      (10.7 ) 
Direct expenses – electricity     5,733       5,901       168       2.8       10,360       12,587       2,227       17.7  
Direct expenses – other(1)     4,787       5,237       450       8.6       14,821       14,866       45       0.3  
Direct expenses – total     10,520       11,138       618       5.5       25,181       27,453       2,272       8.3  
Gross profit     5,883       6,786       (903 )      (13.3 )      13,216       15,546       (2,330 )      (15.0 ) 
Selling, general and administrative expenses     935       823       (112 )      (13.6 )      2,698       2,675       (23 )      (0.9 ) 
Amortization of intangibles     329       345       16       4.6       997       1,027       30       2.9  
Loss from customer contract termination                             1,626             (1,626 )      NM  
Operating income     4,619       5,618       (999 )      (17.8 )      7,895       11,844       (3,949 )      (33.3 ) 
Interest expense, net(2)     (1,275 )      (2,065 )      790       38.3       (3,793 )      (6,521 )      2,728       41.8  
Other income     672       436       236       54.1       803       568       235       41.4  
Provision for income taxes     (1,584 )      (1,560 )      (24 )      (1.5 )      (1,797 )      (2,171 )      374       17.2  
Noncontrolling interest     (174 )      (203 )      29       14.3       (545 )      (622 )      77       12.4  
Net income     2,258       2,226       32       1.4       2,563       3,098       (535 )      (17.3 ) 
Reconciliation of net income to EBITDA excluding non-cash items:
                                                                       
Net income     2,258       2,226                         2,563       3,098                    
Interest expense, net(2)     1,275       2,065                         3,793       6,521                    
Provision for income taxes     1,584       1,560                         1,797       2,171                    
Depreciation(1)     1,620       1,685                         5,021       5,036                    
Amortization of intangibles     329       345                         997       1,027                    
Loss from customer contract termination                                   1,626                          
Other non-cash expenses     205       156                      413       425                 
EBITDA excluding non-cash items     7,271       8,037       (766 )      (9.5 )      16,210       18,278       (2,068 )      (11.3 ) 
EBITDA excluding non-cash items     7,271       8,037                         16,210       18,278                    
Interest expense, net(2)     (1,275 )      (2,065 )                        (3,793 )      (6,521 )                   
Adjustments to derivative instruments recorded in interest expense(2)     (1,371 )      (589 )                  (4,018 )      (1,458 )             
Amortization of debt financing costs(2)     177       177                         531       522                    
Equipment lease receivable, net     740       885                         2,814       2,595                    
Provision for income taxes, net of changes in deferred
taxes
    (529 )      (619 )                        (805 )      (892 )                   
Changes in working capital     (192 )      419                   (2,379 )      (1,453 )             
Cash provided by operating activities     4,821       6,245                         8,560       11,071                    
Changes in working capital     192       (419 )                        2,379       1,453                    
Maintenance capital expenditures     (63 )      (478 )                     (312 )      (642 )                
Free cash flow     4,950       5,348       (398 )      (7.4 )      10,627       11,882       (1,255 )      (10.6 ) 

NM — Not meaningful

(1) Includes depreciation expense of $1.6 million and $5.0 million for the quarter and nine months ended September 30, 2013, respectively, and $1.7 million and $5.0 million for the quarter and nine months ended September 30, 2012, respectively.
(2) Interest expense, net, includes adjustments to derivative instruments and non-cash amortization of deferred financing fees.

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Results of Operations: District Energy – (continued)

Gross Profit

Gross profit decreased for the quarter and nine months ended September 30, 2013 compared with the quarter and nine months ended September 30, 2012 primarily as a result of cooler average temperatures for the first half of 2013 and an early customer contract termination, together which resulted in lower consumption revenue. See loss from customer contract termination below.

Conversely, cooling capacity revenue increased with new customers and annual inflation-related increases in contract capacity rates in accordance with customer contract terms.

Selling, General and Administrative Expense

Selling, general and administrative expenses increased for the quarter and nine months ended September 30, 2013 compared with quarter and nine months ended September 30, 2012. The business has incurred higher than normal legal costs for ongoing efforts to recover the unamortized lease principal from the customer contract termination. Legal fees for the quarter ended September 30, 2013 were lower than the quarter ended September 30, 2012, but legal fees for the nine months ended September 30, 2013 were higher than legal fees for the nine months ended September 30, 2012.

Loss From Customer Contract Termination

Effective April 30, 2013, the business no longer provides site specific cooling and heating services to a customer outside downtown Chicago for which revenue, fees and lease payments were being received. The loss of this customer has reduced the business’ cash from operations. The business is continuing its efforts to recover the unamortized lease principal of approximately $8.5 million. Mediation of the dispute is scheduled to occur later in the year.

Interest Expense, Net

Interest expense includes losses on derivative instruments of $469,000 and $1.4 million for the quarter and nine months ended September 30, 2013, respectively, and losses on derivative instruments of $1.2 million and $3.8 million for the quarter and nine months ended September 30, 2012, respectively. Excluding the derivative adjustments, interest expense decreased for the quarter and nine months ended September 30, 2013 compared with the quarter and nine months ended September 30, 2012 due to lower debt balances.

Cash interest paid totaled $2.5 million and $7.3 million for the quarter and nine months ended September 30, 2013, respectively, and $2.5 million and $7.5 million for the quarter and nine months ended September 30, 2012, respectively.

Income Taxes

District Energy files a separate federal income tax return and a separate Illinois state income tax return. As of December 31, 2012, the business had approximately $9.8 million in federal NOL carryforwards available to offset taxable income and $23.3 million in Illinois state NOL carryforwards, for which utilization is deferred until 2015. For 2013, District Energy expects to pay a Federal Alternative Minimum Tax of approximately $114,000 and state income taxes of approximately $600,000. The “Provision for income taxes, net of changes in deferred taxes” of $805,000 for the nine months ended September 30, 2013 in the above table, includes $129,000 of federal income taxes and $676,000 of state income taxes. The business does not expect to pay regular federal income taxes in 2013 due to the utilization of NOL carryforwards.

The business’ federal taxable income differs from book income primarily as a result of differences in the depreciation of fixed assets. The state of Illinois does not allow the federal bonus depreciation deduction of 50% for 2012 and 2013 in determining state taxable income.

Atlantic Aviation

Key Factors Affecting Operating Results:

lower cash interest expense driven by lower average cost of debt and reduced debt levels;
higher fuel gross profit primarily due to higher margin per gallon; and
higher rental and de-icing revenue.

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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)
     2013   2012   2013   2012
     $   $   $   %   $   $   $   %
     ($ In Thousands) (Unaudited)
Revenue
                                                                       
Fuel revenue     141,032       139,491       1,541       1.1       417,305       420,197       (2,892 )      (0.7 ) 
Non-fuel revenue     42,166       39,409       2,757       7.0       124,535       120,502       4,033       3.3  
Total revenue     183,198       178,900       4,298       2.4       541,840       540,699       1,141       0.2  
Cost of revenue
                                                                       
Cost of revenue – fuel     97,050       96,925       (125 )      (0.1 )      289,873       295,800       5,927       2.0  
Cost of revenue – non-fuel     3,503       3,906       403       10.3       11,849       14,036       2,187       15.6  
Total cost of revenue     100,553       100,831       278       0.3       301,722       309,836       8,114       2.6  
Fuel gross profit     43,982       42,566       1,416       3.3       127,432       124,397       3,035       2.4  
Non-fuel gross profit     38,663       35,503       3,160       8.9       112,686       106,466       6,220       5.8  
Gross profit     82,645       78,069       4,576       5.9       240,118       230,863       9,255       4.0  
Selling, general and administrative expenses     44,342       43,983       (359 )      (0.8 )      130,729       130,830       101       0.1  
Depreciation and amortization     14,072       14,086       14       0.1       41,917       41,761       (156 )      (0.4 ) 
Loss (gain) on disposal of assets     50       (1,706 )      (1,756 )      (102.9 )      226       (1,379 )      (1,605 )      (116.4 ) 
Operating income     24,181       21,706       2,475       11.4       67,246       59,651       7,595       12.7  
Interest expense, net(1)     (11,481 )      (7,381 )      (4,100 )      (55.5 )      (20,206 )      (23,448 )