a6485029.htm
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, 2010
 
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 o 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 o
 
Accelerated Filer x
 
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 45,715,448 limited liability company interests without par value outstanding at November 2, 2010.
 
 
 

 
 
MACQUARIE INFRASTRUCTURE COMPANY LLC
 
TABLE OF CONTENTS
 
   
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PART II. OTHER INFORMATION
   
  
 
   
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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.
 
 

 
 
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 the Company should be read in conjunction with the consolidated condensed financial statements and the notes to those statements included elsewhere herein.
 
We own, operate and invest in a diversified group of infrastructure businesses that provide basic services, such as chilled water for building cooling and gas utility services to businesses and individuals primarily in the U.S. The businesses we own and operate are energy-related businesses consisting of: a 50% interest in IMTT, The Gas Company, and our controlling interest in District Energy; and 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.
 
Distributions
 
We believe we achieved prudent levels of cash reserves at both our holding company and operating companies. In addition, our results of operations and balance sheet have improved sufficiently, along with improved capital market conditions, to give us confidence in our ability to refinance our debt on or before maturity. The precise timing and amount of any distribution will be based on the continued stable performance of the Company’s businesses, the outcome of the budgeting process currently underway and the economic conditions prevailing at the time of any authorization. Management believes that any distribution would be characterized as a dividend for tax purposes rather than as a return of capital.
 
Continuing Operations
 
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.
 
The results of Atlantic Aviation have been negatively affected since mid-2008 by the slower economy and declining general aviation activity levels through mid-2009. However, general aviation activity levels stabilized in the second half of 2009 and showed year on year growth in December 2009 and through the third quarter of 2010. This stabilization, combined with expense reduction efforts, results in an improving outlook for the business.
 
We will continue to apply excess cash flow generated by Atlantic Aviation to the reduction of that business’ term loan principal, consistent with the amendments to the debt facility that we agreed to in February 2009. Such repayments enhance our ability to successfully refinance this debt when it matures in 2014.
 
Discontinued Operations
 
On June 2, 2010, we concluded the sale in bankruptcy of an airport parking business (‘‘Parking Company of America Airports’’ or ‘‘PCAA’’), resulting in a pre-tax gain of $130.3 million, of which $76.5 million related to the forgiveness of debt, and the elimination of $201.0 million of current debt from liabilities from our consolidated condensed balance sheet. The results of operations from this business and the gain from the bankruptcy sale are separately reported as a discontinued operations in the Company’s consolidated condensed financial statements. This business is no longer a reportable segment. As a part of the bankruptcy sale process, substantially all of the cash proceeds were used to pay the creditors of this business and were not paid to us. We received $602,000 from the PCAA bankruptcy estate for expenses paid on behalf of PCAA during its operations. See Note 5, ‘‘Discontinued Operations’’, in our consolidated condensed financial statements in Part I of this Form 10-Q for financial information and further discussions.
 
MIC had continued to guarantee one lease of its formerly owned airport parking business. This guarantee has been terminated in consideration of $1.2 million to be paid by the Company over three years, of which $930,000 will be reimbursed by the new owners of the business.
 
 
1

 
MIC Inc. Revolving Credit Facility
 
Until March 31, 2010, the Company had a revolving credit facility provided by various financial institutions, including entities within the Macquarie Group. The facility was repaid in full in December 2009 and no amounts were outstanding under the revolving credit facility as of December 31, 2009 or at the facility’s maturity on March 31, 2010.
 
Income Taxes
 
We file a consolidated federal income tax return that includes the taxable income of all our businesses, except IMTT and District Energy, which file separate income tax returns. We will include in our taxable income the taxable portion of any distributions from those businesses, which qualify for the 80% dividends received deduction.
 
As a result of available federal net operating loss carryforwards, we do not expect to have consolidated regular federal taxable income or regular federal tax payments at least through the 2012 tax year. The cash state and local taxes paid by our individual businesses are discussed in the sections entitled ‘‘Income Taxes’’ for each of our individual businesses.
 
Results of Operations
 
Consolidated
 
Key Factors Affecting Operating Results
 
strong performance in our energy-related businesses reflecting:
increase in revenue and gross profit from IMTT spill response activity in the Gulf Coast;
increases in average storage rates and storage capacity at IMTT;
increase in underlying margins and flat volumes at The Gas Company; and
increase in gross profit at District Energy driven by higher average temperatures and a net increase in contracted capacity from new customers.
contribution from Atlantic Aviation reflecting:
higher general aviation fuel volumes;
cost reductions; and
lower interest expense as a result of the early repayment of the outstanding term loan debt; partially offset by
a decrease in non-fuel revenue, primarily driven by lower tie-down and miscellaneous fixed base operation related services.
 
 
2

 
 
Results of Operations: Consolidated - (continued)
 
Our consolidated results of operations are as follows:
 
   
Quarter Ended
September 30,
 
Change
(from 2009 to 2010)
Favorable/(Unfavorable)
 
Nine Months Ended
September 30,
 
Change
(from 2009 to 2010)
Favorable/(Unfavorable)
 
   
2010
 
2009 (1)
   $   %     2010     2009(1)    $   %  
   
($ in Thousands) (Unaudited)
 
                                       
Revenue
                                     
Revenue from product sales
  $ 129,217   $ 103,017     26,200   25.4   $ 374,412   $ 281,639     92,773   32.9  
Revenue from product sales - utility
    28,232     26,056     2,176   8.4     83,517     67,637     15,880   23.5  
Service revenue
    54,598     55,299     (701 ) (1.3 )   157,598     163,603     (6,005 ) (3.7 )
Financing and equipment lease income
    1,251     1,190     61   5.1     3,767     3,587     180   5.0  
Total revenue 
    213,298     185,562     27,736   14.9     619,294     516,466     102,828   19.9  
                                               
Costs and expenses
                                             
Cost of product sales
    78,843     61,923     (16,920 ) (27.3 )   235,784     162,334     (73,450 ) (45.2 )
Cost of product sales - utility
    22,467     20,088     (2,379 ) (11.8 )   66,931     52,024     (14,907 ) (28.7 )
Cost of services
    16,625     13,460     (3,165 ) (23.5 )   41,088     35,600     (5,488 ) (15.4 )
   Gross profit
    95,363     90,091     5,272   5.9     275,491     266,508     8,983   3.4  
                                               
Selling, general and administrative
    50,486     50,054     (432 ) (0.9 )   150,742     154,922     4,180   2.7  
Fees to manager - related party
    2,380     1,639     (741 ) (45.2 )   6,837     2,952     (3,885 ) (131.6 )
Goodwill impairment
    -     -     -   -     -     71,200     71,200  
NM
 
Depreciation
    6,973     7,177     204   2.8     21,897     29,597     7,700   26.0  
Amortization of intangibles
    8,743     9,126     383   4.2     26,154     51,923     25,769   49.6  
                                               
Total operating expenses 
    68,582     67,996     (586 ) (0.9 )   205,630     310,594     104,964   33.8  
                                               
Operating income (loss)
    26,781     22,095     4,686   21.2     69,861     (44,086 )   113,947  
NM
 
                                               
Other income (expense)
                                             
Interest income
    2     7     (5 ) (71.4 )   22     108     (86 ) (79.6 )
Interest expense (2)
    (24,844 )   (39,308 )   14,464   36.8     (98,505 )   (74,977 )   (23,528 ) (31.4 )
Equity in earnings and amortization
                                             
  charges of investees
    7,804     1,178     6,626  
NM
    19,171     16,655     2,516   15.1  
Loss on derivative instruments
    -     -     -   -     -     (25,238 )   25,238  
NM
 
Other income, net
    1,269     296     973  
NM
    821     1,146     (325 ) (28.4 )
                                               
Net income (loss) from continuing operations before income taxes
    11,012     (15,732 )   26,744   170.0     (8,630 )   (126,392 )   117,762   93.2  
(Provision) benefit for income taxes
    (2,036 )   (984 )   (1,052 ) (106.9 )   12,541     36,403     (23,862 ) (65.5 )
                                               
Net income (loss) from continuing operations
  $ 8,976   $ (16,716 )   25,692   153.7   $ 3,911   $ (89,989 )   93,900   104.3  
Net (loss) income from discontinued operations, net of taxes
    -     (1,680 )   1,680  
NM
    81,199     (11,263 )   92,462  
NM
 
Net income (loss)
  $ 8,976   $ (18,396 )   27,372   148.8   $ 85,110   $ (101,252 )   186,362   184.1  
  Less: net income (loss) attributable to noncontrolling interests
    34     (48 )   (82 ) (170.8 )   (1,317 )   (920 )   397   43.2  
Net income (loss) attributable to MIC LLC
  $ 8,942   $ (18,348 )   27,290   148.7   $ 86,427   $ (100,332 )   186,759   186.1  
 
___________________
                                                             
NM - Not meaningful
                                       
(1) Reclassified to conform to current period presentation.
 
(2) Interest expense includes non-cash losses on derivative instruments of $3.8 million and $35.5 million for the quarter and nine months ended September 30, 2010, respectively, and non-cash losses of $17.9 million and $4.8 million for the quarter and nine months ended September 30, 2009, respectively.
 
 
Gross Profit
 
Consolidated gross profit increased reflecting improved results for fuel-related services at Atlantic Aviation and at our energy-related businesses generally, offset by a decrease in non-fuel gross profit from Atlantic Aviation.
 
Selling, General and Administrative Expenses
 
Selling, general and administrative expenses for the nine months ended September 30, 2010 decreased primarily as a result of cost reduction efforts at Atlantic Aviation, offset by increases in our corporate segment for the quarter ended September 30, 2010 and our consolidated energy-related businesses for the quarter and nine months ended September 30, 2010.
 
Fees to Manager
 
Base fees to our Manager increased due to higher market capitalization. Our Manager elected to reinvest its first quarter 2010 base management fees in additional LLC interests. LLC interests for the first quarter of 2010 were issued to our Manager during the second quarter of 2010. The base management fee for the second quarter of 2010 was paid in cash to our Manager during the third quarter of 2010.  The base management fee in the amount of $2.4 million for the third quarter 2010 will be paid in cash to our Manager during the fourth quarter of 2010.
 
 
3

 
Results of Operations: Consolidated - (continued)
 
Goodwill Impairment
 
During the first six months of 2009, we recognized goodwill impairment charges of $71.2 million at Atlantic Aviation. There were no impairment charges in 2010.
 
Depreciation
 
The decrease in depreciation reflects non-cash asset impairment charges of $7.5 million recorded during the first six months of 2009 at Atlantic Aviation.  There were no impairment charges in 2010.
 
Amortization of Intangibles
 
The decrease in amortization of intangibles expense reflects non-cash asset impairment charges of $23.3 million recorded by Atlantic Aviation during the first six months of 2009. The impairments reduced the amortizable balance and the amount of amortization expense in 2010.
 
Interest Expense and Loss on Derivative Instruments
 
Interest expense includes non-cash losses on derivative instruments of $3.8 million and $35.5 million for the quarter and nine months ended September 30, 2010, respectively, and non-cash losses on derivative instruments of $17.9 million and $4.8 million for the quarter and nine months ended September 30, 2009, respectively.
 
The change in the non-cash losses on derivatives recorded both in interest expense and in loss on derivative instruments is attributable to the change in fair value of interest rate swaps, interest rate swap breaks related to the pay down of debt at Atlantic Aviation and includes the reclassification of amounts from accumulated other comprehensive loss into earnings, as Atlantic Aviation pays down its debt more quickly than anticipated.
 
Excluding the portion related to non-cash losses on derivatives, interest expense decreased due to a $128.0 million reduction of term loan debt at Atlantic Aviation and the repayment in the full amount of the outstanding balance of $66.4 million of MIC holding company debt during December 2009.
 
Equity in Earnings and Amortization Charges of Investees
 
Our equity in the earnings of IMTT increased reflecting our share of the improved operating results of the business and by our share of non-cash derivative gains for the nine months ended September 30, 2009, offset by our share of non-cash derivative losses for 2010 and the quarter ended September 30, 2009.
 
Income Taxes
 
For 2010, we expect to report a consolidated federal net operating loss, for which we will record a deferred tax benefit, and we expect to pay a nominal federal Alternative Minimum Tax.
 
As we own less than 80% of IMTT and District Energy, these businesses are not included in our consolidated federal tax return. These businesses file separate consolidated income tax returns, and we include the dividends received from IMTT and District Energy in our consolidated income tax return. Further, we expect that any dividends from IMTT and District Energy in 2010 will be treated as taxable dividends, which qualify for the 80% Dividends Received Deduction (DRD).
 
 
4

 
Results of Operations: Consolidated - (continued)
 
The following table reconciles our net loss from continuing operations before income taxes and noncontrolling interests to our taxable loss for the nine months ended September 30, 2010 
($ in millions):
 
Net loss from continuing operations before income taxes and noncontrolling interests
  $ (8.6 )
Adjustments for less than 80% owned businesses
    (17.2 )
State income taxes
    1.3  
Other adjustments
    (0.4 )
Taxable loss for the nine months ended September 30, 2010
  $ (24.9 )
         
Accordingly, our tax benefit for the nine months ended September 30, 2010 is as follows ($ in millions):
 
         
Federal tax benefit at 35% on the tax loss for the nine months ended September 30, 2010
  $ 8.7  
Reduction in valuation allowance (discussed below)
    2.6  
State income tax benefit
    1.2  
Total tax benefit
  $ 12.5  
 
In determining the effective tax rate for the nine months ended September 30, 2009, we excluded the write-down to fair value of certain assets from ordinary income. Further, approximately $53.4 million of the write-down was attributable to goodwill and was a permanent book-tax difference, for which no tax benefit was recognized.
 
Valuation allowance:
 
As discussed in Note 18, ‘‘Income Taxes’’ in our consolidated financial statements, in Part II, Item 8 of our Form 10-K for 2009, from the date of sale of the noncontrolling interest in District Energy and onwards, we evaluate the need for a valuation allowance against our deferred tax assets without taking into consideration the deferred tax liabilities of District Energy. As of December 31, 2009, our valuation allowance was approximately $20.6 million.
 
During the nine months ended September 30, 2010, we reduced the valuation allowance to approximately $8.0 million, resulting in a decrease of $12.6 million. Of this decrease, $2.6 million has been recorded as part of benefit for income taxes included in continuing operations on the consolidated condensed statements of operations. The remaining balance of the decrease of $10.0 million is included in net income from discontinued operations.
 
In calculating our consolidated state income tax provision, we have provided a valuation allowance for certain state income tax NOL carryforwards, the utilization of which is not assured beyond a reasonable doubt. In addition, we expect to incur certain expenses that will not be deductible in determining state taxable income. Accordingly, these expenses have also been excluded in determining our state income tax expense.
 
Discontinued Operations
 
On June 2, 2010, we concluded the sale in bankruptcy of PCAA, resulting in a pre-tax gain of $130.3 million, of which $76.5 million related to the forgiveness of debt. The results of operations from this business and the gain from the bankruptcy sale are separately reported as a discontinued operations in our consolidated condensed financial statements and prior comparable periods have been restated to conform to the current period presentation. See Note 5, ‘‘Discontinued Operations’’, in our consolidated condensed financial statements in Part I of this Form 10-Q for financial information and further discussions.
 
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) excluding non-cash items and Free Cash Flow
 
In accordance with GAAP, we have disclosed EBITDA excluding non-cash items for our Company and each of our operating segments in Note 12, ‘‘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 noncash 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.
 
 
5

 
Results of Operations: Consolidated - (continued)
 
We also disclose Free Cash Flow, as defined by us, as a means of assessing the amount of cash generated by our businesses and supplementing other information provided in accordance with GAAP. We define Free Cash Flow as cash from operating activities, less maintenance capital expenditures and changes in working capital. Working capital movements are excluded on the basis that these are largely timing differences in payables and receivables, and are therefore not reflective of our ability to generate cash.
 
We believe that reporting Free Cash Flow will provide our investors with additional insight into our future ability to deploy cash, as GAAP metrics such as net income and cash from operating activities do not reflect all of the items that our management considers in estimating the amount of cash generated by our operating entities. In this Quarterly Report on Form 10-Q, we have disclosed Free Cash Flow for our consolidated results and for each of our operating segments.
 
We note that Free Cash Flow does not fully reflect our ability to freely deploy generated cash, as it does not reflect required payments to be made on our indebtedness, pay dividends and other fixed obligations or the other cash items excluded when calculating Free Cash Flow. We also note that Free Cash Flow may be calculated in a different manner by other companies, which limits its usefulness as a comparative measure. Therefore, our Free Cash Flow should be used as a supplemental measure and not in lieu of our financial results reported under GAAP.
 
In the quarter and nine months ended September 30, 2009, we disclosed EBITDA excluding only non-cash gains (losses) on derivative instruments. The following tables, reflecting results of operations for the consolidated group and for our businesses for the quarter and nine months ended September 30, 2009, have been conformed to current periods’ presentation reflecting EBITDA excluding all non-cash items and Free Cash Flow.
 
A reconciliation of net income (loss) attributable to MIC LLC from continuing operations to free cash flow from continuing operations, on a consolidated basis, is provided below:
 
 
6

 
 
Results of Operations: Consolidated - (continued)
 
 
Quarter Ended
September 30,
 
Change
(from 2009 to 2010)
Favorable/(Unfavorable)
 
Nine Months Ended
September 30,
 
Change
(from 2009 to 2010)
Favorable/(Unfavorable)
 
 
2010
   
2009 (1)
   $   %     2010     2009(1)    $   %  
   
($ in Thousands) (Unaudited)
   
Net income (loss) attributable to MIC LLC from continuing operations (2)
  $ 8,942     $ (16,890 )         $ 5,364   $ (90,504 )        
Interest expense, net (3)
    24,842       39,301             98,483     74,869          
Provision (benefit) for income taxes
    2,036       984             (12,541 )   (36,403 )        
Depreciation (4)
    6,973       7,177             21,897     29,597          
Depreciation - cost of services (4)
    1,639       1,541             4,910     4,506          
Amortization of intangibles (5)
    8,743       9,126             26,154     51,923          
Goodwill impairment
    -       -             -     71,200          
Loss on derivative instruments
    -       -             -     25,238          
Equity in earnings and amortization
                                           
  charges of investees (6)
    2,196       (1,178 )           (4,171 )   (9,655 )        
Base management fees settled in LLC interests
    -       1,639             2,189     2,490          
Other non-cash expense, net
    902       991             1,672     1,069          
EBITDA excluding non-cash items from continuing operations
  $ 56,273     $ 42,691     13,582   31.8   $ 143,957   $ 124,330     19,627   15.8  
                                                 
EBITDA excluding non-cash items from continuing operations
  $ 56,273     $ 42,691             $ 143,957   $ 124,330            
Interest expense, net (3)
    (24,842 )     (39,301 )             (98,483 )   (74,869 )          
Interest rate swap breakage fees (3)
    (1,484 )     (1,185 )             (4,689 )   (7,862 )          
Non-cash derivative losses recorded in interest expense (3)
    5,307       19,047               40,186     12,659            
    Amortization of debt financing costs (3)
    1,043       1,310               3,299     3,824            
Equipment lease receivables, net
    751       651               2,202     2,058            
Provision/benefit for income taxes, net of changes in deferred taxes
    325       (126 )             (1,144 )   (870 )          
Changes in working capital
    963       1,295               (5,346 )   4,874            
Cash provided by operating activities
    38,336       24,382               79,982     64,144            
Changes in working capital
    (963 )     (1,295 )             5,346     (4,874 )          
Maintenance capital expenditures
    (3,053 )     (2,749 )             (6,802 )   (5,984 )          
Free cash flow from continuing operations
  $ 34,320     $ 20,338     13,982   68.7   $ 78,526   $ 53,286     25,240   47.4  
                                                 
 
___________________
 
(1) Reclassified to conform to current period presentation.
 
(2) Net income (loss) attributable to MIC LLC from continuing operations excludes net income attributable to noncontrolling interests of $34,000 and net loss attributable to noncontrolling interests of $1.453 million for the quarter and nine months ended September 30, 2010, respectively, and net income attributable to noncontrolling interests of $174,000 and $515,000 for the quarter and nine months ended September 30, 2009, respectively.
 
(3) Interest expense, net, includes non-cash losses on derivative instruments, non-cash amortization of deferred financing fees and interest rate swap breakage fees.
 
(4) Depreciation - cost of services includes depreciation expense for District Energy, which is reported in cost of services in our consolidated condensed statements of operations. Depreciation and Depreciation - cost of services does not include acquisition-related step-up depreciation expense of $1.7 million for each quarter in connection with our investment in IMTT, which is reported in equity in earnings and amortization charges of investees in our consolidated condensed statements of operations.
 
(5) Amortization of intangibles does not include acquisition-related step-up amortization expense of $283,000 for each quarter related to intangible assets in connection with our investment in IMTT, which is reported in equity in earnings and amortization charges of investees in our consolidated condensed statements of operations.
 
(6) Equity in earnings and amortization charges of investees in the above table includes our 50% share of IMTT's earnings, offset by distributions we received only up to our share of the earnings recorded.
 
                                               
 
7

 
 
Energy-Related Businesses
 
IMTT
 
We account for our 50% interest in this business under the equity method. We recognized income of $19.2 million in our consolidated results for the nine months ended September 30, 2010. This includes our 50% share of IMTT’s net income, equal to $22.7 million for the period, offset by $3.5 million of acquisition-related step up depreciation and amortization expense (net of taxes). For the nine months ended September 30, 2009, we recognized income of $16.7 million in our consolidated results. This included our 50% share of IMTT’s net income, equal to $20.2 million for the period, offset by $3.5 million of acquisition-related step-up depreciation and amortization expense (net of taxes).
 
IMTT declared and paid dividends of $15.0 million to each of its shareholders during the nine months ended September 30, 2010. Distributions from IMTT, to the degree classified as taxable dividends and not a return of capital for income tax purposes, are expected to qualify for the federal dividends received deduction. Therefore, 80% of any dividend is excluded in calculating our consolidated federal taxable income. Any distributions classified as a return of capital for income tax purposes will reduce our tax basis in IMTT.
 
To enable meaningful analysis of IMTT’s performance across periods, IMTT’s overall performance is discussed below, rather than IMTT’s contribution to our consolidated results.
 
Key Factors Affecting Operating Results
 
environmental response service revenue and gross profit increased principally due to spill response work and other activities related to the oil spill in the Gulf of Mexico; and
terminal revenue and gross profit increased principally due to:
increases in average tank rental rates; and
increase in volume of storage under contract.
 
 
8

 
 
Energy-Related Business: IMTT - (continued)
 
   
Quarter Ended
September 30,
     
Nine Months Ended
September 30,
     
     
2010
   
2009 (1)
 
Change
Favorable/(Unfavorable)
   
2010
   
2009 (1)
 
Change
Favorable/(Unfavorable)
 
   
 $
 
$
 
$
 
%
   $  
$
 
$
 
%
 
    ($ In Thousands) (Unaudited)  
Revenue
                                 
Terminal revenue
    91,825     80,962     10,863     13.4     278,122     242,524     35,598     14.7  
Environmental response revenue
    90,377     4,206     86,171  
NM
    169,353     11,421     157,932  
NM
 
Total revenue
    182,202     85,168     97,034     113.9     447,475     253,945     193,530     76.2  
                                                   
Costs and expenses
                                                 
Terminal operating costs
    42,300     38,114     (4,186 )   (11.0 )   124,846     114,577     (10,269 )   (9.0 )
Environmental response operating costs
    58,728     3,829     (54,899 )
NM
    108,199     11,759     (96,440 )
NM
 
Total operating costs
    101,028     41,943     (59,085 )   (140.9 )   233,045     126,336     (106,709 )   (84.5 )
                                                   
Terminal gross profit
    49,525     42,848     6,677     15.6     153,276     127,947     25,329     19.8  
Environmental response gross profit
    31,649     377     31,272  
NM
    61,154     (338 )   61,492  
NM
 
Gross profit
    81,174     43,225     37,949     87.8     214,430     127,609     86,821     68.0  
                                                   
General and administrative expenses
    10,839     6,653     (4,186 )   (62.9 )   29,802     19,220     (10,582 )   (55.1 )
Depreciation and amortization
    16,602     13,457     (3,145 )   (23.4 )   46,136     39,735     (6,401 )   (16.1 )
Operating income
    53,733     23,115     30,618     132.5     138,492     68,654     69,838     101.7  
                                                   
Interest expense, net (2)
    (20,586 )   (15,452 )   (5,134 )   (33.2 )   (58,485 )   (4,842 )   (53,643 )
NM
 
Other income
    220     340     (120 )   (35.3 )   1,581     172     1,409  
NM
 
Unrealized gains on derivative instruments
    -     -     -     -     -     3,306     (3,306 )
NM
 
Provision for income taxes
    (15,546 )   (3,137 )   (12,409 )
NM
    (35,902 )   (27,035 )   (8,867 )   (32.8 )
Noncontrolling interests
    153     (145 )   298  
NM
    (247 )   152     (399 )
NM
 
Net income
    17,974     4,721     13,253  
NM
    45,439     40,407     5,032     12.5  
                                                   
Reconciliation of net income to EBITDA excluding non-cash items:
             
Net income
    17,974     4,721                 45,439     40,407              
Interest expense, net (2)
    20,586     15,452                 58,485     4,842              
Provision for income taxes
    15,546     3,137                 35,902     27,035              
Depreciation and amortization
    16,602     13,457                 46,136     39,735              
Unrealized gains on derivative instruments
    -     -                 -     (3,306 )            
Other non-cash (income) expenses
    (518 )   378                 (273 )   (291 )            
EBITDA excluding non-cash items
    70,190     37,145     33,045     89.0     185,689     108,422     77,267     71.3  
                                                   
EBITDA excluding non-cash items
    70,190     37,145                 185,689     108,422              
Interest expense, net (2)
    (20,586 )   (15,452 )               (58,485 )   (4,842 )            
Non-cash derivative losses (gains) recorded in interest expense(2)
    11,041     8,074                 33,094     (17,148 )            
Amortization of debt financing costs (2)
    618     118                 1,328     353              
Provision for income taxes, net of changes in deferred taxes
    (6,580 )   (1,020 )               (10,812 )   (2,567 )            
Changes in working capital
    7,761     (3,030 )               (19,693 )   8,453              
Cash provided by operating activities
    62,444     25,835                 131,121     92,671              
Changes in working capital
    (7,761 )   3,030                 19,693     (8,453 )            
Maintenance capital expenditures
    (10,138 )   (10,183 )               (29,169 )   (26,864 )            
Free cash flow
    44,545     18,682     25,863     138.4     121,645     57,354     64,291     112.1  
 
___________________
                               
NM - Not meaningful
                               
(1) Reclassified to conform to current period presentation.
(2) Interest expense, net, includes non-cash gains (losses) on derivative instruments and non-cash amortization of deferred financing fees.
 
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 6.8% and 8.3% during the quarter and nine months ended September 30, 2010, respectively, and an increase in storage capacity mainly attributable to certain expansion projects at IMTT’s Louisiana facilities.
 
Capacity utilization decreased from 93.7% during the quarter ended September 30, 2009 to 93.0% during the quarter ended September 30, 2010, and increased from 93.8% during the nine months ended September 30, 2009 to 94.6% during the nine months ended September 30, 2010. Demand for bulk liquid storage generally remains strong; however, utilization rates are expected to remain at approximately 93.0% over the balance of 2010, as certain tanks have been taken out of service for inspection, repairs and maintenance. IMTT expects utilization rates to return to the somewhat higher historical levels in early 2011.
 
 
9

 
Energy-Related Business: IMTT - (continued)
 
Terminal operating costs increased during the nine months ended September 30, 2010 primarily as a result of an increase in salaries and wages and higher repairs and maintenance.
 
Revenue and gross profit from environmental response services increased substantially during 2010 primarily due to the increase in spill response activities following the April 20, 2010 oil spill in the Gulf of Mexico and the January 2010 fuel oil spill on the Texas coast near Port Arthur. The business is not aware of any reliable estimate of how long clean-up efforts in the Gulf will continue and the business is unable to estimate the extent to which it will continue to provide environmental response services for this spill.  However, beginning in October 2010, BP began to scale back Oil Mop’s involvement in the Gulf clean-up and, consequently, Oil Mop’s contribution in the fourth quarter of 2010 will be materially less than it was in the second and third quarters of 2010. At this time, we anticipate that Oil Mop's contribution to revenue and gross profit will return to historical levels in early 2011.
 
General and Administrative Expenses
 
General and administrative expenses for the quarter and year to date periods increased primarily due to the increase in environmental response services activity compared with the prior comparable periods. The increase reflects a year to date $9.6 million increase from the environmental response service business,  primarily related to cash and accrued bonuses and sales commissions relating to the environmental response services.
 
Depreciation and Amortization
 
Depreciation and amortization expense increased as IMTT completed several major expansion projects, resulting in higher asset balances.
 
Interest Expense, Net
 
Interest expense, net, includes non-cash losses on derivative instruments of $11.0 million and $33.1 million for the quarter and nine months ended September 30, 2010, respectively, and non-cash losses of $8.1 million and non-cash gains of $17.1 million for the quarter and nine months ended September 30, 2009, respectively.
 
Cash interest paid was $9.1 million and $25.0 million for the quarter and nine months ended September 30, 2010, respectively, and $7.9 million and $22.1 million for the quarter and nine months ended September 30, 2009, respectively.
 
Income Taxes
 
IMTT expects to pay approximately $15.0 million to $20.0 million in federal and state income taxes in 2010 depending upon the amount of capital expenditures ultimately placed in service and eligible for tax depreciation in 2010.  For the nine months ended September 30, 2010, IMTT recorded $4.8 million of current federal income tax expense and $6.0 million of current state income tax expense.  At December 31, 2009, IMTT had a federal net operating loss of $50.5 million, of which $5.8 million was carried back to and used in year 2008 and $44.7 million was carried forward to and will be fully used in 2010.
 
A significant difference between the IMTT’s book and federal taxable income relates to depreciation of terminalling fixed assets. For book purposes, these fixed assets are depreciated primarily over 15 to 30 years using the straight-line method of depreciation.  For federal income tax purposes, these fixed assets are depreciated primarily over 5 to 15 years using accelerated methods. Most terminalling fixed assets placed in service in 2010 qualify for the federal 50% bonus depreciation, except assets placed in service in Louisiana financed with GO Zone Bonds. A significant portion of Louisiana terminalling fixed assets constructed since Hurricane Katrina are or will be financed with GO Zone Bonds. GO Zone Bond financed assets are depreciated primarily over 9 to 20 years using the straight-line depreciation method. Most of the states in which the business operates allow the use of the federal depreciation calculation methods. Louisiana is the only state where the business operates that allows the 50% bonus depreciation deduction (on qualifying fixed assets not financed with GO Zone Bonds).
 
The Gas Company
 
Key Factors Affecting Operating Results
 
  utility rate increase effective June 11, 2009;
•   effective non-utility margin management; and
•   increased salary and employment costs.
 
 
10

 
Energy-Related Business: The Gas Company - (continued)
 
   
Quarter Ended
September 30,
           
Nine Months Ended
September 30,
         
     
2010
     
2009 (1)
 
Change
Favorable/(Unfavorable)
     
2010
   
2009 (1)
 
Change
Favorable/(Unfavorable)
 
     $      $    $   %      $    $    $   %  
     ($ In Thousands) (Unaudited)  
Contribution margin
                                     
Revenue - utility
    28,232       26,056     2,176     8.4       83,517     67,637     15,880     23.5  
Cost of revenue - utility
    18,904       16,535     (2,369 )   (14.3 )     56,178     41,865     (14,313 )   (34.2 )
Contribution margin - utility
    9,328       9,521     (193 )   (2.0 )     27,339     25,772     1,567     6.1  
Revenue - non-utility
    23,214       18,680     4,534     24.3       72,760     58,145     14,615     25.1  
Cost of revenue - non-utility
    11,179       8,952     (2,227 )   (24.9 )     37,024     26,569     (10,455 )   (39.4 )
Contribution margin - non-utility
    12,035       9,728     2,307     23.7       35,736     31,576     4,160     13.2  
Total contribution margin
    21,363       19,249     2,114     11.0       63,075     57,348     5,727     10.0  
Production
    1,718       1,684     (34 )   (2.0 )     5,126     4,778     (348 )   (7.3 )
Transmission and distribution
    4,919       5,003     84     1.7       15,050     14,375     (675 )   (4.7 )
Gross profit
    14,726       12,562     2,164     17.2       42,899     38,195     4,704     12.3  
Selling, general and administrative expenses
    4,259       4,212     (47 )   (1.1 )     12,557     12,057     (500 )   (4.1 )
Depreciation and amortization
    1,492       1,713     221     12.9       4,926     5,135     209     4.1  
Operating income
    8,975       6,637     2,338     35.2       25,416     21,003     4,413     21.0  
Interest expense, net (2)
    (5,047 )     (5,406 )   359     6.6       (15,780 )   (6,774 )   (9,006 )   (132.9 )
Other income (expense)
    1       (91 )   92     101.1       (10 )   (216 )   206     95.4  
Unrealized losses on derivative instruments
    -       -     -     -       -     (327 )   327  
NM
 
Provision for income taxes
    (1,538 )     (446 )   (1,092 )
NM
      (3,769 )   (5,359 )   1,590     29.7  
Net income (3)
    2,391       694     1,697  
NM
      5,857     8,327     (2,470 )   (29.7 )
                                                       
Reconciliation of net income to EBITDA excluding non-cash items:
                                 
Net income (3)
    2,391       694                   5,857     8,327              
Interest expense, net (2)
    5,047       5,406                   15,780     6,774              
Provision for income taxes
    1,538       446                   3,769     5,359              
Depreciation and amortization
    1,492       1,713                   4,926     5,135              
Unrealized losses on derivative instruments
    -       -                   -     327              
Other non-cash expenses
    534       510                   1,599     1,525              
EBITDA excluding non-cash items
    11,002       8,769     2,233     25.5       31,931     27,447     4,484     16.3  
                                                       
EBITDA excluding non-cash items
    11,002       8,769                   31,931     27,447              
Interest expense, net (2)
    (5,047 )     (5,406 )                 (15,780 )   (6,774 )            
Non-cash derivative losses recorded in interest expense(2)
2,734       3,194                   8,945     65              
Amortization of debt financing costs (2)
    120       119                   359     358              
Provision for income taxes, net of changes in deferred taxes
    1,478       (579 )                 (1,276 )   (2,697 )            
Changes in working capital
    1,483       (1,451 )                 (1,320 )   (1,922 )            
Cash provided by operating activities
    11,770       4,646                   22,859     16,477              
Changes in working capital
    (1,483 )     1,451                   1,320     1,922              
Maintenance capital expenditures
    (1,030 )     (676 )                 (2,008 )   (1,757 )            
Free cash flow
    9,257       5,421     3,836     70.8       22,171     16,642     5,529     33.2  
                                                       
___________________
                                                               
NM - Not meaningful
                                                               
(1) Reclassified to conform to current period presentation. For the quarter and nine months ended September 30, 2010, payroll taxes and certain employee welfare and benefit costs that were previously recorded in selling, general and administrative costs were reclassified to production, transmission and distribution and other income (expense) where the costs were incurred. Accordingly, the quarter and nine months ended September 30, 2009 were restated to reflect this change.
 
(2) Interest expense, net, includes non-cash losses on derivative instruments and non-cash amortization of deferred financing fees.
 
(3) Corporate allocation expense, other intercompany fees and the federal tax effect have been excluded from the above table as they are eliminated on consolidation at the MIC Inc. level.
 
                                                                 
 
 
11

 
Energy-Related Business: The Gas Company - (continued)
 
Contribution Margin and Operating Income
 
Regulation of the utility portion of The Gas Company’s operations provides for the automatic pass through of increases or decreases in feedstock costs to utility customers. Changes in the cost of propane distributed to non-utility customers can be recovered in pricing, subject to competitive conditions generally.
 
Utility contribution margin was lower for the quarter ended September 30, 2010 due to lower margin per therm. The lower margin per therm primarily resulted from the timing of fuel adjustment charge reconciliations and the implementation of the final rate case order, largely offset by a 4.4% increase in utility gas sold as a result of improved tourism and economic activity.
 
Utility contribution margin was higher for the nine months ended September 30, 2010 due to implementation of the rate increase from June 11, 2009, partially offset by slightly lower sales volume during the first half of 2010.    The Gas Company recently renegotiated its synthetic natural gas, or SNG, feedstock contract with Tesoro. The contract is subject to approval by the Hawaii Public Utilities Commission (HPUC). The changes in cost of feedstock are passed through to consumers via the fuel adjustment charge mechanism and have no impact on utility contribution margin.
 
Non-utility contribution margin was higher as a result of effective margin management activities and higher volume compared to 2009. Sales volume was approximately 5.0% and 1.6% higher for the quarter and nine month periods.  The Gas Company recently renegotiated its liquefied petroleum gas, or LPG, supply contracts which increased the amount of locally supplied propane. We expect an overall decrease in supply costs.
 
Increased production costs primarily reflected higher electricity costs. Transmission and distribution costs were higher primarily due to increased wage and benefit costs as well as higher repair and maintenance costs. Selling, general and administrative costs were higher primarily due to personnel costs and insurance costs.
 
Interest Expense, Net
 
Interest expense, net, includes non-cash losses on derivative instruments of $2.7 million and $8.9 million for the quarter and nine months ended September 30, 2010, respectively, and non-cash losses of $3.2 million and $65,000 for the quarter and nine months ended September 30, 2009, respectively. Excluding the non-cash losses on derivative instruments, interest expense was relatively flat.
 
Cash interest paid was $2.1 million and $6.4 million for the quarter and nine months ended September 30, 2010, respectively, and $2.1 million and $6.4 million for the quarter and nine months ended September 30, 2009, respectively.
 
Income Taxes
 
Income from The Gas Company is included in our consolidated federal income tax return, and its income is subject to Hawaii state income taxes. The tax expense in the table above includes both state taxes and the portion of the consolidated federal tax liability attributable to the business. For the year ending December 31, 2010, the business expects to pay state income taxes of approximately $1.2 million, of which $770,000 was recorded during the nine months ended September 30, 2010.
 
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 our customer contracts provide for the pass through of increases or decreases in electricity costs, the largest component of the business’ direct expenses.
 
The financial results discussed below reflect 100% of District Energy’s performance during the quarter.
 
Key Factors Affecting Operating Results
 
an increase in consumption gross profit driven by warmer average temperatures during the second and third quarters of 2010 compared to the comparable period in 2009, resulting in higher ton-hour sales; and
a net increase in contracted capacity revenue from new customers that began service predominantly in the second quarter of 2009, and annual inflation-linked increases in contract capacity rates.
 
 
12

 
Energy-Related Business: District Energy - (continued)
 
   
Quarter Ended
September 30,
     
Nine Months Ended
September 30,
     
   
2010
   
2009 (1)
 
Change
Favorable/(Unfavorable)
 
2010
 
2009 (1)
 
Change
Favorable/(Unfavorable)
 
   
$
   
$
 
$
 
%
 
$
 
$
 
$
 
%
 
   
($ In Thousands) (Unaudited)
 
                                     
Cooling capacity revenue
    5,302       5,224     78     1.5     15,835     15,231     604     4.0  
Cooling consumption revenue
    12,596       9,400     3,196     34.0     21,503     17,130     4,373     25.5  
Other revenue
    823       832     (9 )   (1.1 )   2,490     2,331     159     6.8  
Finance lease revenue
    1,251       1,190     61     5.1     3,767     3,587     180     5.0  
Total revenue
    19,972       16,646     3,326     20.0     43,595     38,279     5,316     13.9  
Direct expenses — electricity
    8,202       5,715     (2,487 )   (43.5 )   14,189     11,103     (3,086 )   (27.8 )
Direct expenses — other (2)
    4,941       4,803     (138 )   (2.9 )   14,878     14,075     (803 )   (5.7 )
Direct expenses — total
    13,143       10,518     (2,625 )   (25.0 )   29,067     25,178     (3,889 )   (15.4 )
Gross profit
    6,829       6,128     701     11.4     14,528     13,101     1,427     10.9  
                                                     
Selling, general and administrative expenses
    793       697     (96 )   (13.8 )   2,350     2,051     (299 )   (14.6 )
Amortization of intangibles
    345       345     -     -     1,023     1,023     -     -  
Operating income
    5,691       5,086     605     11.9     11,155     10,027     1,128     11.2  
Interest expense, net (3)
    (6,862 )     (6,623 )   (239 )   (3.6 )   (20,866 )   (6,850 )   (14,016 )
NM
 
Other income
    1,427       447     980  
NM
    1,536     541     995     183.9  
Unrealized losses on derivative instruments
    -       -     -     -     -     (1,378 )   1,378  
NM
 
(Provision) benefit  for income taxes
    (23 )     500     (523 )   (104.6 )   3,464     (721 )   4,185  
NM
 
Noncontrolling interests
    (198 )     (174 )   (24 )   (13.8 )   (590 )   (515 )   (75 )   (14.6 )
Net income (loss)  (4)
    35       (764 )   799     104.6     (5,301 )   1,104     (6,405 )
NM
 
                                                     
Reconciliation of net income (loss) to EBITDA excluding non-cash items:
                         
Net income (loss) (4)
    35       (764 )               (5,301 )   1,104              
Interest expense, net (3)
    6,862       6,623                 20,866     6,850              
Provision (benefit) for income taxes
    23       (500 )               (3,464 )   721              
Depreciation (2)
    1,639       1,541                 4,910     4,506              
Amortization of intangibles
    345       345                 1,023     1,023              
Unrealized losses on derivative instruments
    -       -                 -     1,378              
Other non-cash expenses
    265       179                 652     455              
EBITDA excluding non-cash items
    9,169       7,424     1,745     23.5     18,686     16,037     2,649     16.5  
                                                     
EBITDA excluding non-cash items
    9,169       7,424                 18,686     16,037              
Interest expense, net (3)
    (6,862 )     (6,623 )               (20,866 )   (6,850 )            
Non-cash derivative losses (gains) recorded in interest expense (3)
    4,180       4,069                 13,006     (739 )            
Amortization of debt financing costs (3)
    171       171                 511     511              
Equipment lease receivable, net
    751       651                 2,202     2,058              
Changes in working capital
    (92 )     (970 )               (3,661 )   (1,454 )            
Cash provided by operating activities
    7,317       4,722                 9,878     9,563              
Changes in working capital
    92       970                 3,661     1,454              
Maintenance capital expenditures
    (249 )     (305 )               (813 )   (664 )            
Free cash flow
    7,160       5,387     1,773     32.9     12,726