Historical Distributions
Since January 1, 2021, MIH has paid or declared the following distributions:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Declared | | Period Covered | | $ per unit | | Record Date | | Payable Date | | |
| September 23, 2021 | | (1) | | $ | 37.386817 | | | October 4, 2021 | | October 7, 2021 | | |
| December 23, 2020 | | (2) | | 11.00 | | | January 5, 2021 | | January 8, 2021 | | |
| | | | | | | | | | |
___________
(1)One-time distribution declared and paid out of the proceeds from the AA Transaction. Units of MIH traded with "due-bills" attached through October 7, 2021 and traded ex-distribution on October 8, 2021.
(2)Special dividend declared and paid out of the proceeds from the IMTT Transaction. Units of MIH traded with “due-bills” attached through January 8, 2021 and traded ex-dividend on January 11, 2021.
In addition to the cash distributions paid to unitholders noted above, as part of the reorganization, the entity holding the businesses comprising our MIC Hawaii segment was distributed to and became a direct subsidiary of MIH. For tax purposes, the distribution was deemed to be a sale and unitholders were deemed to have received a distribution of the fair value of the equity of MIC Hawaii, subsequently determined to equate to $3.70 per unit.
As a result of the completion of and distribution of certain proceeds from the AA Transaction in September 2021 and the signing of the Merger Agreement in June 2021, we do not expect to pay further distributions.
Results of Operations
Our business includes Hawaii Gas and smaller operations collectively engaged in efforts to reduce the cost and improve the reliability and sustainability of energy in Hawaii. We generate revenue primarily from the provision of gas to commercial, residential, and governmental customers and the generation of power.
Our financial performance is a function of the number of customers served, their consumption of energy and the prices achieved on sales by each of Hawaii Gas’s utility and non-utility operations and under power purchase agreements. The amount of gas consumed is positively correlated with visitor arrivals and general economic activity over the long term. Consumption trends and prices are a function of, among other factors, energy efficiency, weather, the range of competitive energy sources, and commodity input costs.
We continue to closely monitor the effects of COVID-19 and are actively managing our response by placing a priority on the health and safety of our employees and their families, contractors, customers, and the broader communities in which our business operates. Our business' operations are classified as providers of essential services, are fully operational, and are adhering to pandemic response plans and are following guidance from the Centers for Disease Control and Prevention ("CDC") as well as federal, state, and local governments with respect to conducting operations safely.
In addition to standard operating procedures designed to maintain safe operations, we have implemented additional measures including: (i) a transitional return to office policy for those who were working from home; (ii) enhanced cleaning and disinfecting of facilities; (iii) limited interactions between employees and customers through social distancing; (iv) use of personal protective equipment by employees; and (v) education of customers on alternative payment and customer care options as a means of limiting interactions with employees. Management is engaged in ongoing communications with employees, customers, vendors, lenders, and other stakeholders apprising them of the business' response to the pandemic. We believe our staff and customers of our business can access our facilities safely and in compliance with relevant directives.
Visitor arrivals to Hawaii, the primary driver of increases in demand for gas in Hawaii, improved sequentially in the first quarter of 2022, which we believe reflects increased visitor confidence levels due to the availability of COVID-19 vaccines and a relatively low level of infections in the islands. The rate of recovery in the number of visitors to Hawaii in the future remains uncertain. COVID-19 continues to negatively affect the performance of the Hawaii businesses, although the effects have diminished relative to this time last year. The additional easing of travel restrictions this quarter has resulted in an increase in economic activity and the number of primarily domestic visitors to Hawaii, but not to pre-COVID-19 levels. A significant surge in COVID-19 rates could negatively impact the number of visitors to Hawaii, which would adversely impact our operating results.
Trends in the number of visitors to Hawaii and demand for gas were positive in the first quarter, although our financial performance continues to lag pre-COVID-19 periods. The number of visitors to Hawaii increased to 2.0 million for the quarter ended March 31, 2022, from 847,000 for the quarter ended March 31, 2021. The resulting improvement in hotel occupancy, restaurants patronage, and use of commercial laundry services contributed to an increase in gas consumption of 11% during the quarter ended March 31, 2022, versus the comparable period in 2021. The number of visitors to Hawaii was lower by 21% in the quarter ended March 31, 2022, and overall gas consumption was lower by 13% versus the pre-COVID-19 comparable period in 2019.
The wholesale cost of LPG increased by approximately 38% from December 2021 to March 2022. We enter into commodity hedges to mitigate the medium to longer term impact of rising costs. In any given quarter, the effective cost of LPG to Hawaii Gas will depend on both the total volume hedged and the wholesale cost of LPG during that time. The percentage of our expected LPG purchases that is hedged varies over time based on our assessment of the potential volatility in LPG costs and the duration and cost of the hedges. We pass some of our increased LPG cost through to customers in our regulated business through the fuel adjustment clause mechanism. In addition, as has been the case from time to time historically, we may pass some or all of the increased cost of LPG through to our customers in our unregulated business subject to competitive dynamics in Hawaii's energy market.
Rising inflation rates have not had a substantial impact on our financial performance to date, but may have an impact on our financial performance in the future as our ability to pass on an increase in costs is not entirely within our control.
Results of Operations – (continued)
Our consolidated results of operations are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Quarter Ended March 31, | | Change
Favorable/(Unfavorable) |
| | | | | | | | | 2022 | | 2021 | | $ | | % |
| | | | | | | | | ($ In Thousands, Except Unit and Per Unit Data) (Unaudited) |
| Revenue | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Product revenue | | | | | | | | | $ | 68,681 | | | $ | 54,587 | | | 14,094 | | | 26 | |
| Total revenue | | | | | | | | | 68,681 | | | 54,587 | | | 14,094 | | | 26 | |
| Costs and expenses | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Cost of product sales | | | | | | | | | 40,004 | | | 34,756 | | | (5,248) | | | (15) | |
| Selling, general and administrative | | | | | | | | | 8,381 | | | 11,582 | | | 3,201 | | | 28 | |
| Disposition payment to Manager | | | | | | | | | — | | | 19 | | | 19 | | | 100 | |
| Total Selling, general and administrative | | | | | | | | | 8,381 | | | 11,601 | | | 3,220 | | | 28 | |
| Fees to Manager - related party | | | | | | | | | 800 | | | 5,552 | | | 4,752 | | | 86 | |
| Depreciation and amortization | | | | | | | | | 3,781 | | | 3,748 | | | (33) | | | (1) | |
| Total operating expenses | | | | | | | | | 52,966 | | | 55,657 | | | 2,691 | | | 5 | |
| Operating income (loss) | | | | | | | | | 15,715 | | | (1,070) | | | 16,785 | | | NM |
| Other income (expense) | | | | | | | | | | | | | | | |
| Interest income | | | | | | | | | 7 | | | 3 | | | 4 | | | 133 | |
Interest expense(1) | | | | | | | | | (38) | | | (7,049) | | | 7,011 | | | 99 | |
| Other income (expense), net | | | | | | | | | 418 | | | (336) | | | 754 | | | NM |
| Net income (loss) from continuing operations before income taxes | | | | | | | | | 16,102 | | | (8,452) | | | 24,554 | | | NM |
| (Provision) benefit for income taxes | | | | | | | | | (4,656) | | | 2,182 | | | (6,838) | | | NM |
| Net income (loss) from continuing operations | | | | | | | | | 11,446 | | | (6,270) | | | 17,716 | | | NM |
| | | | | | | | | | | | | | | |
| Discontinued Operations | | | | | | | | | | | | | | | |
| Net income from discontinued operations before income taxes | | | | | | | | | — | | | 27,615 | | | (27,615) | | | (100) | |
| Provision for income taxes | | | | | | | | | — | | | (7,548) | | | 7,548 | | | 100 | |
| Net income from discontinued operations | | | | | | | | | — | | | 20,067 | | | (20,067) | | | (100) | |
| Net income | | | | | | | | | 11,446 | | | 13,797 | | | (2,351) | | | (17) | |
| | | | | | | | | | | | | | | |
| Net income (loss) from continuing operations | | | | | | | | | 11,446 | | | (6,270) | | | 17,716 | | | NM |
| Less: net income attributable to noncontrolling interests | | | | | | | | | 304 | | | 597 | | | 293 | | | 49 | |
| Net income (loss) from continuing operations attributable to MIH | | | | | | | | | 11,142 | | | (6,867) | | | 18,009 | | | NM |
| Net income from discontinued operations | | | | | | | | | — | | | 20,067 | | | (20,067) | | | (100) | |
| | | | | | | | | | | | | | | |
| Net income from discontinued operations attributable to MIH | | | | | | | | | — | | | 20,067 | | | (20,067) | | | (100) | |
| Net income attributable to MIH | | | | | | | | | $ | 11,142 | | | $ | 13,200 | | | (2,058) | | | (16) | |
| | | | | | | | | | | | | | | |
| Basic income (loss) per unit from continuing operations attributable to MIH | | | | | | | | | $ | 0.13 | | | $ | (0.08) | | | 0.21 | | | NM |
| Basic income per unit from discontinued operations attributable to MIH | | | | | | | | | — | | | 0.23 | | | (0.23) | | | (100) | |
| Basic income per unit attributable to MIH | | | | | | | | | $ | 0.13 | | | $ | 0.15 | | | (0.02) | | | (13) | |
| Weighted average number of units outstanding: basic | | | | | | | | | 88,494,560 | | | 87,411,455 | | | 1,083,105 | | | 1 | |
___________
NM — Not meaningful.
Results of Operations – (continued)
(1)Interest expense includes non-cash gains on derivative instruments of $489,000 and $283,000 for the quarters ended March 31, 2022, and 2021 respectively.
Revenue
We generate most of our revenue from the sale of gas. Accordingly, revenue can fluctuate based on the wholesale cost of gas and/or feedstock and may not reflect our ability to effectively manage the amount of gas sold and the margins achieved on those sales. For example, an increase in revenue may be attributable to an increase in the wholesale cost of feedstock and not an increase in the amount of gas sold or margin achieved. Conversely, a decline in revenue may be attributable to a decrease in the wholesale cost of gas and not a reduction in the amount of gas sold or margin achieved.
Consolidated revenues increased for the quarter ended March 31, 2022, compared with the quarter ended March 31, 2021, both as a result of the higher wholesale cost of products sold and an increase in the amount of gas sold. The increases reflect i) higher feedstock costs passed through to utility customers and increases in LPG prices charged to certain of our non-utility customers; and ii) increased consumption by commercial and industrial customers as a result of an increase in the number of visitors to Hawaii as Hawaii recovers from the impact of COVID-19.
Cost of Product Sales
Consolidated cost of product sales increased for the quarter ended March 31, 2022 compared with the quarter ended March 31, 2021 primarily due to increases in the volume and cost of gas sold partially offset by a $10.6 million non-cash mark-to-market adjustment to the value of the commodity hedge contracts for the quarter ended March 31, 2022, compared with $1.1 million for the quarter ended March 31, 2021. The change in the non-cash mark-to-market adjustment of the value of the commodity hedges during the quarter ended March 31, 2022, primarily reflects the increase in the forecasted wholesale cost of LPG through the quarter.
As noted above, we use commodity hedges to reduce the financial risks of commodity price fluctuations associated with wholesale LPG purchases. We have entered into hedges with varying maturities through September 2024 and with respect to a varying percentage of our expected LPG purchases over that time.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased for the quarter ended March 31, 2022 compared with the quarter ended March 31, 2021, primarily due to lower transaction costs partially offset by increases in salaries and benefits and higher insurance costs.
Fees to Manager
Our Manager is entitled to a monthly base management fee based on our market capitalization and potentially a quarterly performance fee based on our total return relative to a U.S. utilities index. For the quarter ended March 31, 2022, we incurred base management fees of $800,000 compared with $5.6 million for the quarter ended March 31, 2021. The decrease in base management fees reflects a reduction in our average market capitalization primarily due to the AA Transaction and the decrease in our average holding company cash balance during the quarter ended March 31, 2022. No performance fees were incurred in either the current or prior comparable period. The unpaid portion of base management fees and performance fees, if any, at the end of each reporting period is included in the line item Due to Manager-related party in our consolidated condensed balance sheets.
In accordance with the Management Services Agreement, our Manager elected to reinvest any fees to which it was entitled in new primary units in the periods shown below and has currently elected to reinvest future base management fees and performance fees, if any, in new primary units.
| | | | | | | | | | | | | | | | | | | | | | | |
| Period | | Base Management
Fee Amount
($ in Thousands) | | Performance
Fee Amount
($ in Thousands) | | Units
Issued |
| 2022 Activities: | | | | | | | |
| | | | | | | |
| | | | | | | |
| First quarter 2022 | | $ | 800 | | | $ | — | | | 219,026 | | (1) |
| | | | | | | |
| 2021 Activities: | | | | | | | |
| Fourth quarter 2021 | | $ | 1,056 | | | $ | — | | | 217,273 | | |
| Third quarter 2021 | | 7,698 | | | — | | | 195,556 | | |
| Second quarter 2021 | | 7,551 | | | — | | | 214,040 | | |
| First quarter 2021 | | 5,552 | | | — | | | 176,296 | | |
Results of Operations – (continued)
___________
(1)Our Manager elected to reinvest all monthly base management fees for the quarter ended March 31, 2022 in new primary units. We issued 219,026 units for the quarter ended March 31, 2022, including 73,653 units that were issued in April 2022.
Interest Expense, net, and Gains on Derivative Instruments
Interest expense includes non-cash gains on derivative instruments of $489,000 for the quarter ended March 31, 2022, compared with non-cash gains of $283,000 for the quarter ended March 31, 2021, and the amortization of debt financing costs. Gains on derivatives recorded in interest expense are attributable to the change in fair value of interest rate hedges. For the quarter ended March 31, 2021, interest expense also includes non-cash write-offs of debt financing costs of $4.3 million related to the repurchase of our 2.00% Convertible Senior Notes and the cancellation of our holding company revolving credit facility.
Excluding the non-cash adjustments and write-offs, cash interest expense totaled $486,000 for the quarter ended March 31, 2022, and $3.3 million for the quarter ended March 31, 2021. The decrease in cash interest expense primarily reflects a lower weighted average debt balance.
Discontinued Operations
For the quarter ended March 31, 2021, discontinued operations reflects the operating results of the businesses sold as part of the AA Transaction. The AA Transaction closed on September 23, 2021.
Income Taxes
MIH is a limited liability company classified as a partnership for tax purposes. Taxable income or losses reported by MIH will be passed-through to the unitholders and reported on a Schedule K-1. MIH does not pay federal or state income tax.
Our intermediate holding company is organized as a limited liability company and classified as a corporation for tax purposes. The intermediate holding company will file a consolidated federal income tax return for periods after the reorganization. The intermediate holding company will continue to file a combined Hawaii state income tax return. The current tax expense for the quarter ended March 31, 2022 of $3.0 million consists of federal income tax of $2.2 million and state income tax of $725,000.
Results of Operations – (continued)
Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") excluding non-cash items and Free Cash Flow
In addition to our results under U.S. GAAP, we use the non-GAAP measures EBITDA excluding non-cash items and Free Cash Flow to assess the performance and prospects of our business.
We measure EBITDA excluding non-cash items as it reflects our businesses’ ability to effectively manage the amount of products sold, the operating margin earned on those transactions, and the management of operating expenses independent of our capitalization and tax position.
We believe investors use EBITDA excluding non-cash items primarily as a measure of our operating performance and to make comparisons with the operating performance of other businesses whose depreciation and amortization expense may vary from ours, particularly where acquisitions and other non-operating factors are involved. We define EBITDA excluding non-cash items as net income (loss) or earnings — the most comparable GAAP measure — before interest, taxes, depreciation and amortization, and non-cash items including impairments, unrealized derivative gains and losses, adjustments for other non-cash items, and pension expense reflected in the statements of income (loss). Other non-cash items, net, excludes the adjustment to bad debt expense related to the specific reserve component, net of recoveries. EBITDA excluding non-cash items also excludes base management fees and performance fees, if any, whether paid in cash or units.
We define Free Cash Flow as cash from operating activities — the most comparable GAAP measure — less maintenance capital expenditures and adjusted for changes in working capital.
We use Free Cash Flow as a measure of our ability to fund acquisitions, invest in growth projects, reduce or repay indebtedness, and/or return capital to unitholders. GAAP metrics such as net income (loss) do not provide us with the same level of visibility into our performance and prospects as a result of: (i) the capital intensive nature of our businesses and the generation of non-cash depreciation and amortization; (ii) units issued to our Manager under the Management Services Agreement; (iii) the ability of our subsidiaries to defer all or a portion of current federal income taxes; (iv) non-cash mark-to-market adjustment of the value of derivative instruments; (v) gains (losses) related to the write-off or disposal of assets or liabilities; (vi) non-cash compensation expense incurred in relation to the incentive plans for senior management of our operating businesses; and (vii) pension expenses. Pension expenses primarily consist of interest expense, expected return on plan assets, and amortization of actuarial and performance gains and losses. Any cash contributions to pension plans are reflected as a reduction to Free Cash Flow and are not included in pension expense. We believe that external consumers of our financial statements, including investors and research analysts, could use Free Cash Flow to assess the Company's ability to fund acquisitions, invest in growth projects, reduce or repay indebtedness, and/or return capital to unitholders.
We believe that both EBITDA excluding non-cash items and Free Cash Flow support a more complete and accurate understanding of the financial and operating performance of our Company than would otherwise be achieved using GAAP results alone.
Free Cash Flow does not take into consideration required payments on indebtedness and other fixed obligations or other cash items that are excluded from our definition of Free Cash Flow. We note that Free Cash Flow may be calculated differently by other companies thereby limiting its usefulness as a comparative measure. Free Cash Flow should be used as a supplemental measure to help understand our financial performance and not in lieu of our financial results reported under GAAP.
Classification of Maintenance Capital Expenditures and Growth Capital Expenditures
We categorize capital expenditures as either maintenance capital expenditures or growth capital expenditures. As neither maintenance capital expenditure nor growth capital expenditure is a GAAP term, we have adopted a framework to categorize specific capital expenditures. In broad terms, maintenance capital expenditures primarily maintain our businesses at current levels of operations, capability, profitability or cash flow, while growth capital expenditures primarily provide new or enhanced levels of operations, capability, profitability or cash flow. We consider various factors in determining whether a specific capital expenditure will be classified as maintenance or growth.
We do not bifurcate specific capital expenditures into maintenance and growth components. Each discrete capital expenditure is considered within the above framework and the entire capital expenditure is classified as either maintenance or growth.
Results of Operations – (continued)
A reconciliation of net income (loss) from continuing operations to EBITDA excluding non-cash items from continuing operations and a reconciliation from cash used in operating activities from continuing operations to Free Cash Flow from continuing operations, on a consolidated basis, is provided below.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Quarter Ended March 31, | | Change
Favorable/(Unfavorable) |
| | | | | | | | | 2022 | | 2021 | | $ | | % |
| | | | | | | | | | | | | | | |
| | | | | | | | | ($ In Thousands) (Unaudited) |
| Net income (loss) from continuing operations | | | | | | | | | $ | 11,446 | | | $ | (6,270) | | | | | |
Interest expense, net(1) | | | | | | | | | 31 | | | 7,046 | | | | | |
| Provision (benefit) for income taxes | | | | | | | | | 4,656 | | | (2,182) | | | | | |
| Depreciation and amortization | | | | | | | | | 3,781 | | | 3,748 | | | | | |
| Fees to Manager - related party | | | | | | | | | 800 | | | 5,552 | | | | | |
Other non-cash income, net(2) | | | | | | | | | (10,294) | | | (31) | | | | | |
EBITDA excluding non-cash items - continuing operations | | | | | | | | | $ | 10,420 | | | $ | 7,863 | | | 2,557 | | | 33 | |
| | | | | | | | | | | | | | | |
EBITDA excluding non-cash items - continuing operations | | | | | | | | | $ | 10,420 | | | $ | 7,863 | | | | | |
Interest expense, net(1) | | | | | | | | | (31) | | | (7,046) | | | | | |
Non-cash interest expense, net(1) | | | | | | | | | (455) | | | 3,758 | | | | | |
| (Provision) benefit for current income taxes | | | | | | | | | (2,960) | | | 1,848 | | | | | |
| Changes in working capital | | | | | | | | | (11,505) | | | (19,365) | | | | | |
| Cash used in operating activities - continuing operations | | | | | | | | | (4,531) | | | (12,942) | | | | | |
| Changes in working capital | | | | | | | | | 11,505 | | | 19,365 | | | | | |
| Maintenance capital expenditures | | | | | | | | | (2,482) | | | (1,114) | | | | | |
| Free cash flow - continuing operations | | | | | | | | | $ | 4,492 | | | $ | 5,309 | | | (817) | | | (15) | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
___________
(1) Interest expense, net, includes non-cash adjustments to derivative instruments and non-cash amortization of debt financing costs. For the quarter ended March 31, 2021, interest expense also includes non-cash write-offs of debt financing costs related to the repurchase of our 2.00% Convertible Senior Notes.
(2) Other non-cash income, net, includes primarily non-cash mark-to-market adjustment of the value of the commodity hedge contracts, non-cash compensation expense incurred in relation to the incentive plans for senior management of our operating businesses, and non-cash gains (losses) related to the write-off or disposal of assets or liabilities. Other non-cash income, net, excludes the adjustment to bad debt expense related to the specific reserve component, net of recoveries, for which this adjustment is reported in working capital in the above table. See “Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") excluding non-cash items and Free Cash Flow” above for further discussion.
Liquidity and Capital Resources
General
Cash requirements of our business generally include normal operating expenses, debt service, debt principal payments, and capital expenditures.
We may from time to time seek to purchase or retire our outstanding debt in open market purchases, privately negotiated transactions or otherwise. Such repurchases, if any, could be material and will depend on market conditions, our liquidity needs, and other factors.
2.00% Convertible Senior Notes
On February 17, 2021, we initiated a tender offer for any and all of our 2.00% Convertible Senior Notes ("Notes") outstanding. On March 16, 2021, we repurchased $358.6 million in aggregate principal amount of the Notes in the tender offer. During the second quarter of 2021, we repurchased an additional $9.9 million of Notes in the open market and reduced the outstanding balance to $34.0 million. On September 23, 2021, we initiated an offer to repurchase any and all Notes outstanding and on October 22, 2021, we repurchased $26.9 million in aggregate principal amount of the Notes outstanding. On March 31, 2022, we had $6.8 million of the 2.00% Convertible Senior Notes outstanding.
Hawaii Gas Senior Secured Notes
On April 19, 2021, Hawaii Gas fully repaid all of its $100.0 million senior secured notes outstanding and incurred a $4.7 million 'make-whole' payment.
Ongoing Operations
We currently expect to service and/or repay our debts, make required tax payments, fund maintenance capital expenditures, and deploy growth capital during 2022 using cash generated from operations and cash on hand.
Debt
On March 31, 2022, our consolidated debt outstanding totaled $99.2 million. We had access to an undrawn revolving credit facility of $60.0 million. The ratio of net debt/EBITDA excluding non-cash items for our continuing operations was 1.7x on March 31, 2022.
The following table shows our debt obligations on April 29, 2022 ($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | |
| | Debt | | Weighted Average Remaining Life
(in years) | | Balance Outstanding | | Weighted Average Rate(1) |
| | 2.00% Convertible Senior Notes | | 1.4 | | | $ | 6,821 | | | 2.00 | % |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | Term Loan- Hawaii Gas | | 1.8 | | | 80,000 | | | 2.05 | % |
| | Term Loan- Solar facilities in Hawaii(2) | | 4.2 | | | 12,424 | | | 3.38 | % |
| | Total(3) | | 2.1 | | | $ | 99,245 | | | 2.21 | % |
___________
(1)Reflects annualized interest rate on all facilities including interest rate hedges.
(2)The weighted average remaining life does not reflect the scheduled amortization on these facilities.
(3)Hawaii Gas also has a $60.0 million revolving credit facility that was undrawn.
We generally capitalize our business in part using floating rate debt with medium-term maturities. We have in the past also used longer dated private placement debt and other forms of capital including bond or hybrid debt instruments to capitalize our business. Except for the 2.00% Convertible Senior Notes, our debt facilities are non-recourse to the Company.
For a description of the material terms of MIH and its businesses' debt facilities, see Note 9, “Long-Term Debt”, in Part II, Item 8, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
Analysis of Consolidated Historical Cash Flows from Continuing Operations
The following section discusses our sources and uses of cash from continuing operations. All intercompany activities such as corporate allocations, capital contributions, and distributions have been excluded from the table as these transactions are eliminated on consolidation.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| ($ In Thousands) | Quarter Ended March 31, | Change
Favorable/(Unfavorable) |
| 2022 | | 2021 | |
| $ | | $ | | $ | | % |
| Cash used in operating activities | | (4,531) | | (12,942) | | 8,411 | | | 65 | |
| Cash used in investing activities | | (4,891) | | (3,324) | | (1,567) | | | (47) | |
| Cash used in financing activities | | (274) | | (1,319,824) | | 1,319,550 | | | 100 | |
Operating Activities from Continuing Operations
Cash provided by (used in) operating activities is generally comprised of EBITDA excluding non-cash items (as defined by us), less cash interest, cash taxes, and pension payments, and changes in working capital. See “Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations” for discussions around the components of EBITDA excluding non-cash items from continuing operations on a consolidated basis.
The decrease in consolidated cash used in operating activities for the quarter ended March 31, 2022 compared with the quarter ended March 31, 2021 was primarily due to:
•an absence of payment of transaction costs during 2022;
•a favorable change to accounts receivable and inventory resulting from improved collection and lower inventory levels during 2022; and
•a decrease in cash interest expense; partially offset by
•timing of prepaid expenses, primarily related to insurance premiums.
Investing Activities from Continuing Operations
Cash provided by investing activities includes proceeds from divestitures of businesses and disposal of fixed assets. Cash used in investing activities includes acquisitions of businesses and capital expenditures.
The increase in cash used in investing activities for the quarter ended March 31, 2022 compared with the quarter ended March 31, 2021 is primarily attributable to higher capital expenditures.
Financing Activities from Continuing Operations
Cash provided by financing activities includes new equity and debt issuances. Cash used in financing activities includes distributions to our unitholders and the repayment of debt principal balances.
The decrease in cash used in financing activities for the quarter ended March 31, 2022 compared with the quarter ended March 31, 2021 is primarily attributable to the absence of special dividend paid in January 2021 from the IMTT Transaction and the repurchase of our 2.00% Convertible Senior Notes in March 2021.
Commitments and Contingencies
On March 31, 2022, there were no material changes in our commitments and contingencies compared with those on December 31, 2021. On March 31, 2022, we did not have any material purchase obligations. For a discussion of our other future obligations, due by period, under the various contractual obligations, off-balance sheet arrangements, and commitments, see “Liquidity and Capital Resources — Commitments and Contingencies” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on February 22, 2022.
On March 31, 2022, we did not have any material reserves for contingencies. We have other contingencies occurring in the normal course of business, including pending legal and administrative proceedings that are not reflected at this time as they are not ascertainable.
Our sources of cash to meet these obligations include:
•cash on hand;
•cash generated from our operations (see “Operating Activities” in “Liquidity and Capital Resources”); and
•cash available from our undrawn credit facility (see “Financing Activities” in “Liquidity and Capital Resources”).
Critical Accounting Policies and Estimates
For critical accounting policies and estimates, see “Critical Accounting Policies and Estimates” in Part II, Item 7 and Note 2, “Summary of Significant Accounting Policies”, in Part II, Item 8 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, and see Note 2, “Basis of Presentation”, in our Notes to Consolidated Condensed Financial Statements in Part I of this Form 10-Q for recently issued accounting standards. Our critical accounting policies and estimates have not changed materially from the description contained in our Annual Report.
Quantitative and Qualitative Disclosures About Market Risk
For quantitative and qualitative disclosures about market risk, see Part II, Item 7A “Quantitative and Qualitative Disclosures about Market Risk” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. Our exposure to market risk has not changed materially since February 22, 2022, the filing date for our Annual Report on Form 10-K.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the direction and with the participation of our Chief Executive Officer and Chief Financial Officer, we evaluated our disclosure controls and procedures (as such term is defined under Rule 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this report. The purpose of disclosure controls is to ensure that information required to be disclosed in our reports filed with or submitted to the SEC under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls are also designed to ensure that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of March 31, 2022.
Changes in Internal Control Over Financial Reporting
There have not been any changes in our internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) that occurred during the quarter ended March 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
MACQUARIE INFRASTRUCTURE HOLDINGS, LLC
CONSOLIDATED CONDENSED BALANCE SHEETS
($ in Thousands, Except Unit Data)
| | | | | | | | | | | | | | |
| March 31,
2022 | | December 31, 2021 | | | |
| (Unaudited) | | | | | |
| ASSETS | | | | | | |
| Current assets: | | | | | | |
| Cash and cash equivalents | $ | 37,589 | | | $ | 47,259 | | | | |
| Restricted cash | 1,025 | | | 1,051 | | | | |
| Accounts receivable, net of allowance for doubtful accounts | 27,422 | | | 27,824 | | | | |
| Inventories | 12,175 | | | 11,658 | | | | |
| Prepaid expenses | 7,491 | | | 1,813 | | | | |
| | | | | | |
| Fair value of derivative instruments | 8,344 | | | 909 | | | | |
| Other current assets | 5,547 | | | 2,255 | | | | |
| | | | | | |
| Total current assets | 99,593 | | | 92,769 | | | | |
| Property, equipment, land, and leasehold improvements, net | 298,746 | | | 297,190 | | | | |
| Operating lease assets, net | 12,186 | | | 12,591 | | | | |
| | | | | | |
| Goodwill | 120,193 | | | 120,193 | | | | |
| Intangible assets, net | 4,392 | | | 4,498 | | | | |
| Fair value of derivative instruments | 4,078 | | | 470 | | | | |
| Other noncurrent assets | 8,458 | | | 8,740 | | | | |
| Total assets | $ | 547,646 | | | $ | 536,451 | | | | |
| LIABILITIES AND UNITHOLDERS’ EQUITY | | | | | | |
| Current liabilities: | | | | | | |
| Due to Manager-related party | $ | 274 | | | $ | 260 | | | | |
| Accounts payable | 7,214 | | | 6,169 | | | | |
| Accrued expenses | 13,476 | | | 18,449 | | | | |
| Current portion of long-term debt | 1,118 | | | 1,107 | | | | |
| | | | | | |
| Operating lease liabilities - current | 1,800 | | | 1,794 | | | | |
| | | | | | |
| | | | | | |
| Other current liabilities | 6,820 | | | 5,223 | | | | |
| | | | | | |
| Total current liabilities | 30,702 | | | 33,002 | | | | |
| Long-term debt, net of current portion | 97,443 | | | 97,655 | | | | |
| Deferred income taxes | 40,236 | | | 38,540 | | | | |
| Operating lease liabilities - noncurrent | 10,365 | | | 10,810 | | | | |
| Other noncurrent liabilities | 53,049 | | | 53,062 | | | | |
| Total liabilities | 231,795 | | | 233,069 | | | | |
| Commitments and contingencies | — | | | — | | | | |
See accompanying notes to the consolidated condensed financial statements.
13
MACQUARIE INFRASTRUCTURE HOLDINGS, LLC
CONSOLIDATED CONDENSED BALANCE SHEETS – (continued)
($ in Thousands, Except Unit Data)
| | | | | | | | | | | | | | |
| March 31,
2022 | | December 31, 2021 | | | |
| (Unaudited) | | | | | |
Unitholders’ equity(1): | | | | | | |
| | | | | | |
Common units paid in capital (500,000,000 authorized; 88,805,519 units issued and outstanding on March 31, 2022 and 88,343,762 units issued and outstanding on December 31, 2021) | $ | 194,494 | | | $ | 193,471 | | | | |
| Accumulated other comprehensive loss | (5,106) | | | (5,106) | | | | |
| Retained earnings | 117,681 | | | 106,539 | | | | |
| Total unitholders’ equity | 307,069 | | | 294,904 | | | | |
| Noncontrolling interests | 8,782 | | | 8,478 | | | | |
| Total equity | 315,851 | | | 303,382 | | | | |
| Total liabilities and equity | $ | 547,646 | | | $ | 536,451 | | | | |
___________
(1)The Company is authorized to issue 100,000,000 preferred units. On March 31, 2022 and December 31, 2021, no preferred units were issued or outstanding. The Company had 100 special units issued and outstanding to its Manager on March 31, 2022 and December 31, 2021, respectively.
See accompanying notes to the consolidated condensed financial statements.
14
MACQUARIE INFRASTRUCTURE HOLDINGS, LLC
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (LOSS)
(Unaudited)
($ in Thousands, Except Unit and Per Unit Data)
| | | | | | | | | | | | | | | |
| | | | | Quarter Ended March 31, |
| | | | | 2022 | | 2021 |
| Revenue | | | | | | | |
| | | | | | | |
| Product revenue | | | | | $ | 68,681 | | | $ | 54,587 | |
| Total revenue | | | | | 68,681 | | | 54,587 | |
| Costs and expenses | | | | | | | |
| | | | | | | |
| Cost of product sales | | | | | 40,004 | | | 34,756 | |
| Selling, general and administrative | | | | | 8,381 | | | 11,582 | |
| Disposition payment to Manager | | | | | — | | | 19 | |
| Total Selling, general and administrative | | | | | 8,381 | | | 11,601 | |
| Fees to Manager - related party | | | | | 800 | | | 5,552 | |
| Depreciation | | | | | 3,675 | | | 3,642 | |
| Amortization of intangibles | | | | | 106 | | | 106 | |
| Total operating expenses | | | | | 52,966 | | | 55,657 | |
| Operating income (loss) | | | | | 15,715 | | | (1,070) | |
| Other income (expense) | | | | | | | |
| Interest income | | | | | 7 | | | 3 | |
Interest expense(1) | | | | | (38) | | | (7,049) | |
| Other income (expense), net | | | | | 418 | | | (336) | |
| Net income (loss) from continuing operations before income taxes | | | | | 16,102 | | | (8,452) | |
| (Provision) benefit for income taxes | | | | | (4,656) | | | 2,182 | |
| Net income (loss) from continuing operations | | | | | 11,446 | | | (6,270) | |
| | | | | | | |
Discontinued Operations(2) | | | | | | | |
| Net income from discontinued operations before income taxes | | | | | — | | | 27,615 | |
| Provision for income taxes | | | | | — | | | (7,548) | |
| Net income from discontinued operations | | | | | — | | | 20,067 | |
| Net income | | | | | 11,446 | | | 13,797 | |
| | | | | | | |
| Net income (loss) from continuing operations | | | | | 11,446 | | | (6,270) | |
| Less: net income attributable to noncontrolling interests | | | | | 304 | | | 597 | |
| Net income (loss) from continuing operations attributable to MIH | | | | | 11,142 | | | (6,867) | |
| Net income from discontinued operations | | | | | — | | | 20,067 | |
| | | | | | | |
| Net income from discontinued operations attributable to MIH | | | | | — | | | 20,067 | |
| Net income attributable to MIH | | | | | $ | 11,142 | | | $ | 13,200 | |
See accompanying notes to the consolidated condensed financial statements.
15
MACQUARIE INFRASTRUCTURE HOLDINGS, LLC
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (LOSS) – (continued)
(Unaudited)
($ in Thousands, Except Unit and Per Unit Data)
| | | | | | | | | | | | | | | |
| | | | | Quarter Ended March 31, |
| | | | | 2022 | | 2021 |
| Basic income (loss) per unit from continuing operations attributable to MIH | | | | | $ | 0.13 | | | $ | (0.08) | |
| Basic income per unit from discontinued operations attributable to MIH | | | | | — | | | 0.23 | |
| Basic income per unit attributable to MIH | | | | | $ | 0.13 | | | $ | 0.15 | |
| Weighted average number of units outstanding: basic | | | | | 88,494,560 | | | 87,411,455 | |
| | | | | | | |
| Diluted income (loss) per unit from continuing operations attributable to MIH | | | | | $ | 0.12 | | | $ | (0.08) | |
| Diluted income per unit from discontinued operations attributable to MIH | | | | | — | | | 0.23 | |
| Diluted income per unit attributable to MIH | | | | | $ | 0.12 | | | $ | 0.15 | |
| Weighted average number of units outstanding: diluted | | | | | 89,860,394 | | | 87,411,455 | |
| | | | | | | |
___________
(1)Interest expense includes non-cash gains on derivative instruments of $489,000 and $283,000 for the quarters ended March 31, 2022 and 2021, respectively.
(2)See Note 4, “Discontinued Operations and Dispositions”, for further discussions on businesses classified as held for sale.
See accompanying notes to the consolidated condensed financial statements.
16
MACQUARIE INFRASTRUCTURE HOLDINGS, LLC
CONSOLIDATED CONDENSED STATEMENTS OF UNITHOLDERS’ EQUITY
(Unaudited)
($ in Thousands, Except Unit Data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| In Units | | | | Common Units
Paid In
Capital | | Accumulated
Other
Comprehensive
Loss | | Retained
Earnings | | Total
Unitholders’
Equity | | Noncontrolling
Interests | | Total
Equity |
| Special
Units | | Common Units(1) | | |
| Balance on December 31, 2021 | 100 | | | 88,343,762 | | | | | $ | 193,471 | | | $ | (5,106) | | | $ | 106,539 | | | $ | 294,904 | | | $ | 8,478 | | | $ | 303,382 | |
| Issuance of units to Manager | — | | | 217,696 | | | | | 787 | | | — | | | — | | | 787 | | | — | | | 787 | |
Units vested under compensation plans(2) | — | | | 356,124 | | | | | — | | | — | | | — | | | — | | | — | | | — | |
Units withheld for taxes on vested stock(2) | — | | | (112,063) | | | | | — | | | — | | | — | | | — | | | — | | | — | |
| Unit-based compensation expense | — | | | — | | | | | 236 | | | — | | | — | | | 236 | | | — | | | 236 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Comprehensive income, net of taxes | — | | | — | | | | | — | | | — | | | 11,142 | | | 11,142 | | | 304 | | | 11,446 | |
| Balance on March 31, 2022 | $ | 100 | | | 88,805,519 | | | | | $ | 194,494 | | | $ | (5,106) | | | $ | 117,681 | | | $ | 307,069 | | | $ | 8,782 | | | $ | 315,851 | |
| | | | | | | | | | | | | | | | | |
| Balance on December 31, 2020 | 100 | | | 87,361,929 | | | | | $ | 178,062 | | | $ | (6,175) | | | $ | 713,129 | | | $ | 885,016 | | | $ | 8,290 | | | $ | 893,306 | |
| Issuance of units to Manager | — | | | 142,936 | | | | | 4,650 | | | — | | | — | | | 4,650 | | | — | | | 4,650 | |
Units vested under compensation plans(2) | — | | | 952 | | | | | — | | | — | | | — | | | — | | | — | | | — | |
Units withheld for taxes on vested stock(2) | — | | | (365) | | | | | — | | | — | | | — | | | — | | | — | | | — | |
| Unit-based compensation expense | — | | | — | | | | | 2,175 | | | — | | | — | | | 2,175 | | | — | | | 2,175 | |
Impact of ASU No. 2020-06 adoption, net of taxes(3) | — | | | — | | | | | (14,121) | | | — | | | 6,962 | | | (7,159) | | | — | | | (7,159) | |
| Comprehensive income, net of taxes | — | | | — | | | | | — | | | — | | | 13,200 | | | 13,200 | | | 597 | | | 13,797 | |
| Balance on March 31, 2021 | 100 | | | 87,505,452 | | | | | $ | 170,766 | | | $ | (6,175) | | | $ | 733,291 | | | $ | 897,882 | | | $ | 8,887 | | | $ | 906,769 | |
| | | | | | | | | | | | | | | | | |
___________
(1)The Company is authorized to issue 500,000,000 common units.
(2)Units vested and issued under the 2016 Omnibus Employee Incentive Plan and 2014 Independent Directors' Equity Plan. Under the 2016 Omnibus Employee Incentive Plan, units are withheld for the employee portion of taxes on vested awards and are available for future grants. See Note 10, "Unitholders' Equity", for further discussions.
(3)On January 1, 2021, the Company adopted ASU No. 2020-06, Debt - Debt with Conversion and Other Options, using the modified retrospective method and made an adjustment to the beginning balance to Retained Earnings of $7.0 million, net of taxes. See Note 8, “Long-Term Debt”, for further discussions.
See accompanying notes to the consolidated condensed financial statements.
17
MACQUARIE INFRASTRUCTURE HOLDINGS, LLC
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
($ in Thousands)
| | | | | | | | | | | |
| Quarter Ended March 31, |
| 2022 | | 2021 |
| Operating activities | | | |
| Net income (loss) from continuing operations | $ | 11,446 | | | $ | (6,270) | |
Adjustments to reconcile net income (loss) to net cash used in operating activities from
continuing operations: | | | |
| Depreciation | 3,675 | | | 3,642 | |
| Amortization of intangibles | 106 | | | 106 | |
| | | |
| Amortization of debt financing costs | 73 | | | 4,084 | |
| Adjustments to derivative instruments | (11,164) | | | (1,459) | |
| Fees to Manager - related party | 800 | | | 5,552 | |
| Deferred taxes | 1,696 | | | (334) | |
| Other non-cash expense, net | 389 | | | 1,133 | |
| Changes in other assets and liabilities, net of acquisitions: | | | |
| Accounts receivable | 192 | | | (1,897) | |
| Inventories | (347) | | | (1,497) | |
| Prepaid expenses and other current assets | (9,058) | | | (2,653) | |
| | | |
| Accounts payable and accrued expenses | (4,068) | | | (7,507) | |
| Income taxes payable | 2,878 | | | (2,332) | |
| Other, net | (1,149) | | | (3,510) | |
| Net cash used in operating activities from continuing operations | (4,531) | | | (12,942) | |
| Investing activities | | | |
| | | |
| Purchases of property and equipment | (5,033) | | | (3,339) | |
| | | |
| | | |
| | | |
| Other, net | 142 | | | 15 | |
| Net cash used in investing activities from continuing operations | (4,891) | | | (3,324) | |
| Financing activities | | | |
| | | |
| Payment of long-term debt | (274) | | | (358,843) | |
| Distributions paid to common unitholders | — | | | (960,981) | |
| | | |
| | | |
| Net cash used in financing activities from continuing operations | (274) | | | (1,319,824) | |
| Net change in cash, cash equivalents, and restricted cash from continuing operations | (9,696) | | | (1,336,090) | |
See accompanying notes to the consolidated condensed financial statements.
18
MACQUARIE INFRASTRUCTURE HOLDINGS, LLC
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS – (continued)
(Unaudited)
($ in Thousands)
| | | | | | | | | | | |
| Quarter Ended March 31, |
| 2022 | | 2021 |
| Cash flows provided by (used in) discontinued operations: | | | |
| Net cash provided by operating activities | $ | — | | | $ | 52,935 | |
| Net cash used in investing activities | — | | | (12,515) | |
| Net cash used in financing activities | — | | | (2,562) | |
| Net cash provided by discontinued operations | — | | | 37,858 | |
| | | |
| Net change in cash, cash equivalents, and restricted cash | (9,696) | | | (1,298,232) | |
| Cash, cash equivalents, and restricted cash, beginning of period | 48,310 | | | 1,839,220 | |
| Cash, cash equivalents, and restricted cash, end of period | $ | 38,614 | | | $ | 540,988 | |
| | | |
| Supplemental disclosures of cash flow information: | | | |
| Non-cash investing and financing activities: | | | |
| Accrued purchases of property and equipment from continuing operations | $ | 743 | | | $ | 237 | |
| Accrued purchases of property and equipment from discontinued operations | — | | | 3,665 | |
| | | |
Leased assets obtained in exchange for new operating lease liabilities from
discontinued operations | — | | 787 |
| | | |
| Taxes received, net, from continuing operations | — | | (755) |
| Taxes paid, net, from discontinued operations | — | | 1,415 |
| Interest paid, net, from continuing operations | 471 | | 6,761 |
| Interest paid, net, from discontinued operations | — | | | 9,809 | |
The following table provides a reconciliation of cash, cash equivalents, and restricted cash from both continuing and discontinued operations reported within the consolidated condensed balance sheets that is presented in the consolidated condensed statements of cash flows:
| | | | | | | | | | | |
| As of March 31, |
| 2022 | | 2021 |
| Cash and cash equivalents | $ | 37,589 | | | $ | 192,842 | |
| Restricted cash - current | 1,025 | | | 1,085 | |
| Cash, cash equivalents, and restricted cash included in assets held for sale | — | | | 347,061 | |
Total of cash, cash equivalents, and restricted cash shown in the consolidated
condensed statement of cash flows | $ | 38,614 | | | $ | 540,988 | |
See accompanying notes to the consolidated condensed financial statements.
19
MACQUARIE INFRASTRUCTURE HOLDINGS, LLC
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Organization and Description of Business
Macquarie Infrastructure Holdings, LLC ("MIH") is a Delaware limited liability company formed on February 5, 2021, and the registrant since September 22, 2021. MIH is the successor to Macquarie Infrastructure Corporation ("MIC"), a Delaware corporation formed on May 21, 2015. MIC’s predecessor, Macquarie Infrastructure Company LLC, was formed on April 13, 2004. Except as otherwise specified, all references in this Form 10-Q to “MIH” or the "Company" refers to Macquarie Infrastructure Holdings, LLC and its subsidiaries, or as necessary when referring to previous reporting periods or the period prior to September 22, 2021, MIC and its subsidiaries.
MIH is externally managed by Macquarie Infrastructure Management (USA) Inc. (the "Manager"), pursuant to the terms of a Management Services Agreement, subject to the oversight and supervision of the Board. Six of the eight members of the Board, and all members of each of the Company's Audit, Compensation, and Nominating and Governance Committees, are independent and have no affiliation with Macquarie. The Manager is a member of the Macquarie Group of companies comprising Macquarie Group Limited and its subsidiaries and affiliates worldwide. Macquarie Group Limited is headquartered in Australia and is listed on the Australian Securities Exchange.
The Company provides products to corporations, government agencies, and individual customers in Hawaii. The Company's operations comprise an energy company that processes and distributes gas and provides related services, Hawaii Gas, and several smaller operations collectively engaged in efforts to reduce the cost and improve the reliability and sustainability of energy in Hawaii.
In October 2019, along with actively managing its existing portfolio of businesses, the Board resolved to pursue strategic alternatives including potentially a sale of the Company or its then three operating businesses as a means of unlocking additional value for equity holders. In December 2020, we completed the sale of IMTT ("IMTT Transaction").
On June 7, 2021, the Company entered into an agreement for the sale of its Atlantic Aviation business to KKR Apple Bidco, LLC (“Purchaser”), a Delaware limited liability company controlled by funds affiliated with Kohlberg Kravis Roberts & Co. L.P. (“KKR”), for $4.475 billion including cash and the assumption of debt and other transaction and reorganization related obligations (the "AA Transaction").
On June 14, 2021, the Company entered into a merger agreement (the "Merger Agreement") with AMF Hawaii Holdings, LLC ("AMF Parent"), a Delaware limited liability company affiliated with Argo Infrastructure Partners, LP ("Argo"), and AMF Hawaii Merger Sub, LLC ("AMF Merger Sub"), a recently formed Delaware limited liability company and wholly-owned direct subsidiary of AMF Parent. The Merger Agreement provides that AMF Merger Sub will be merged with and into MIH (the "Merger"), with MIH surviving the Merger as a wholly owned subsidiary of AMF Parent. Upon the completion of the Merger, each of the MIH common units (excluding common units held by AMF Parent or AMF Merger Sub or common units held by MIH in treasury and common units held by any subsidiary of MIH or AMF Parent (other than AMF Merger Sub)), will be converted into the right to receive $3.83 in cash, without interest; or, if the Merger is consummated after July 1, 2022, then each such unit will be converted into the right to receive $4.11 in cash, without interest.
Under the terms of the Merger Agreement, at closing, AMF Parent will pay the merger consideration to unitholders, and fund transaction costs and fund a disposition payment to MIH’s Manager of $81.7 million if the Merger closes on or before July 1, 2022 or $56.7 million if the Merger closes after this date.
On September 21, 2021, the Company conducted a Special Meeting of Shareholders during which shareholders voted on and approved the AA Transaction and the Merger. As a result of the approval, MIH classified its Atlantic Aviation business as a discontinued operation and eliminated it as a reportable segment. All prior periods reported herein reflect this change.
On September 22, 2021, shareholders of Macquarie Infrastructure Corporation became unitholders of Macquarie Infrastructure Holdings, LLC, a limited liability company treated as a partnership for tax purposes, on a one-for-one basis without an exchange of certificates. Commencing September 23, 2021, units of Macquarie Infrastructure Holdings, LLC traded on the New York Stock Exchange ("NYSE") under the same symbol (NYSE: MIC) and with the same CUSIP number (55608B105) as previously associated with shares of Macquarie Infrastructure Corporation.
As part of the reorganization, the entity holding the businesses comprising MIC's MIC Hawaii segment was distributed to and became a direct subsidiary of Macquarie Infrastructure Holdings, LLC. For tax purposes, the distribution was deemed to be a sale of MIC Hawaii by MIC and unitholders were deemed to have received a distribution of the fair market value of the equity of that segment, subsequently determined to equate to $3.70 per unit.
MACQUARIE INFRASTRUCTURE HOLDINGS, LLC
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Organization and Description of Business – (continued)
On September 23, 2021, MIH completed the AA Transaction, and received $3.525 billion at the closing. The MIH Board elected to return certain proceeds from the AA Transaction to unitholders, declaring a one-time distribution of $37.386817 per common unit of the Company, paid on October 7, 2021 to unitholders of record as of the close of trading on October 4, 2021. The Company's common units traded with due-bills attached from October 1, 2021 through October 7, 2021 pursuant to relevant NYSE rules. In addition, MIH made a disposition payment to the Manager of $228.6 million. See Note 4, “Discontinued Operations and Dispositions” for further information.
The Merger is expected to be completed in the first half of 2022 subject to the approval by the Hawaii Public Utilities Commission ("HPUC") and the satisfaction of customary closing conditions for this type of transaction. Upon the closing of the Merger, the Company will no longer be a publicly traded entity.
2. Basis of Presentation
The unaudited consolidated condensed financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") in the U.S. and in accordance with the instructions for Form 10-Q and Article 10 of Regulation S-X for interim financial information. Certain information or footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") for interim financial reporting. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.
The consolidated balance sheet on December 31, 2021 has been derived from audited financial statements but does not include all the information and notes required by GAAP for complete financial statements. Certain reclassifications were made to the consolidated financial statements for the prior period to conform to current period presentation.
The interim financial information contained herein should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2021 included in the Company's Annual Report on Form 10-K, as filed with the SEC on February 22, 2022. Operating results for the quarter ended March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022 or for any future interim periods.
Use of Estimates
The preparation of unaudited consolidated condensed financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures related thereto at the date of the unaudited consolidated condensed financial statements and the reported amounts of revenue and expenses during the reporting period. Management evaluates these estimates and assumptions on an ongoing basis.
Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the unaudited interim consolidated condensed financial statements, which management considered in formulating its estimate, could change in the near term due to one or more future confirming events. Accordingly, the actual results could differ significantly from estimates.
Financial Instruments
The Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, and variable-rate senior debt, are carried at cost, which approximates their fair value because of either the short-term maturity or competitive interest rates assigned to these financial instruments. The fair values of the Company’s other debt instruments fall within level 1 or level 2 of the fair value hierarchy.
The Company considers all highly liquid investments, including commercial paper issued by counterparties with Standard & Poor's rating of A1+ or higher, with maturity of three months or less when purchased to be cash and cash equivalents. The Company did not have any investments in commercial paper on March 31, 2022 or December 31, 2021.
MACQUARIE INFRASTRUCTURE HOLDINGS, LLC
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
2. Basis of Presentation – (continued)
Income Taxes
MIH is a limited liability company treated as a partnership for tax purposes. Taxable income/losses reported by MIH are passed-through to the unitholders and reported on a Schedule K-1. MIH does not pay federal or state income tax.
The subsidiaries of the Company are owned by an intermediate holding company organized as a limited liability company and classified as a corporation for tax purposes. The intermediate holding company files a consolidated federal income tax return and a combined Hawaii state income tax return.
Recently Issued Accounting Standards
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of Effects of Reference Rate Reform on Financial Reporting, which provides practical expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The expedients and exceptions provided by the amendments in this update apply only to contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate ("LIBOR") or another reference rate expected to be discontinued as a result of reference rate reform. In January 2021, the FASB also issued ASU No. 2021-01, Reference Rate Reform (Topic 848): Scope, which clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. These amendments are elective and apply to all entities that have derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. These amendments are not applicable to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022. ASU No. 2020-04 and ASU No. 2021-01 are effective as of March 12, 2020 and through December 31, 2022, and may be applied to contract modifications and hedging relationships from the beginning of an interim period that includes or is subsequent to March 12, 2020. The Company is currently evaluating the impact of adoption on its financial statements and related disclosures.
3. Impact of COVID-19
Visitor arrivals to Hawaii, the primary driver of increases in demand for gas in Hawaii, improved sequentially in the first quarter of 2022, which we believe reflects increased visitor confidence levels due to the availability of COVID-19 vaccines and a relatively low level of infections in the islands. The rate of recovery in the number of visitors to Hawaii in the future remains uncertain. COVID-19 continues to negatively affect the performance of the MIC Hawaii businesses, although the effects have diminished relative to this time last year. The additional easing of travel restrictions this quarter has resulted in an increase in economic activity and the number of primarily domestic visitors to Hawaii, but not to pre-COVID-19 levels. A significant surge in COVID-19 rates could negatively impact the number of visitors to Hawaii.
Trends in the number of visitors to Hawaii and demand for gas were positive in the first quarter, although the financial performance of the Company continues to lag pre-COVID-19 periods. The number of visitors to Hawaii increased to 2.0 million for the quarter ended March 31, 2022, from 847,000 for the quarter ended March 31, 2021. The resulting improvement in hotel occupancy, restaurants patronage, and use of commercial laundry services contributed to an increase in gas consumption of 11% during the quarter ended March 31, 2022, versus the comparable period in 2021. The number of visitors to Hawaii was lower by 21% in the quarter ended March 31, 2022, and overall gas consumption was lower by 13% versus the comparable pre-COVID-19 period in 2019.
4. Discontinued Operations and Dispositions
The Company accounts for disposals that represent a strategic shift that should have or will have a major effect on operations as discontinued operations in the consolidated condensed statements of income (loss) commencing in the period in which the business or group of businesses meets the criteria of a discontinued operation. These results include any gain or loss recognized on disposal or adjustment of the carrying amount to fair value less cost to sell.
AA Transaction
On September 23, 2021, MIH completed the AA Transaction for $4.475 billion including cash and the assumption of debt and other transaction and reorganization related obligations. The Company received $3.525 billion from KKR at the closing of the AA Transaction.
The MIH Board elected to return certain proceeds from the AA Transaction to unitholders in a one-time distribution, after a disposition payment by MIH to the Manager of $228.6 million. The Board declared a one-time distribution of $37.386817 per common unit of the Company, paid on October 7, 2021 to unitholders of record as of the close of trading on October 4, 2021.
MACQUARIE INFRASTRUCTURE HOLDINGS, LLC
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
4. Discontinued Operations and Dispositions – (continued)
The sale of Atlantic Aviation was part of the Company's efforts to unlock value for its unitholders. On September 21, 2021, the unitholders of MIC approved the AA Transaction at the Special Meeting and therefore the Company determined that each of the criteria to be classified as held for sale under ASC 205-20, Presentation of Financial Statements — Discontinued Operations, had been met as it relates to Atlantic Aviation. It was additionally determined that the sale of Atlantic Aviation is considered a strategic shift for the Company that will have a major effect on operations. Accordingly, Atlantic Aviation was classified as a discontinued operation and the Atlantic Aviation segment was eliminated. All prior periods have been restated to reflect these changes.
The Company recognized a book gain on sale of approximately $2.95 billion as a result of the AA Transaction. The Company incurred $50.2 million in transaction costs and a disposition payment of $228.6 million to its Manager, both of which were included in Selling, general and administrative expenses in the consolidated condensed statement of income (loss).
Summarized financial information for discontinued operations included in the Company's consolidated condensed statement of income (loss) related to the Atlantic Aviation business for the quarter ended March 31, 2021 is as follows ($ in thousands):
| | | | | | | | | | | | | | |
| | | | | | Quarter Ended
March 31, |
| | | | | | | | | | 2021 |
| Service revenue | | | | | | | | | | $ | 209,604 | |
| Cost of services | | | | | | | | | | (82,233) |
| Selling, general and administrative expenses | | | | | | | | | | (65,411) |
| Depreciation and amortization | | | | | | | | | | (23,771) |
| Interest expense, net | | | | | | | | | | (11,412) |
| | | | | | | | | | |
| Other income, net | | | | | | | | | | 838 |
| Net income from discontinued operations before income taxes | | | | | | | | | | $ | 27,615 | |
| Provision for income taxes | | | | | | | | | | (7,548) |
| Net income from discontinued operations | | | | | | | | | | $ | 20,067 | |
| | | | | | | | | | |
| | | | | | | | | | |
MACQUARIE INFRASTRUCTURE HOLDINGS, LLC
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
5. Income per Unit
Following is a reconciliation of the basic and diluted income (loss) per unit computations ($ in thousands, except unit and per unit data):
| | | | | | | | | | | | | | | |
| | | Quarter Ended March 31, |
| | | | | 2022 | | 2021 |
| Numerator: | | | | | | | |
| Net income (loss) from continuing operations attributable to MIH | | | | | $ | 11,142 | | | $ | (6,867) | |
Interest expense attributable to 2.00% Convertible Senior Notes, net of taxes | | | | | 27 | | — |
| Diluted net income (loss) from continuing operations attributable to MIH | | | | | $ | 11,169 | | | $ | (6,867) | |
| Basic and diluted net income from discontinued operations attributable to MIH | | | | | $ | — | | | $ | 20,067 | |
| Denominator: | | | | | | | |
| Weighted average number of units outstanding: basic | | | | | 88,494,560 | | | 87,411,455 | |
Dilutive effect of restricted stock unit grants(1) | | | | | 254,541 | | — |
| | | | | | | |
Dilutive effect of 2.00% Convertible Senior Notes | | | | | 1,111,293 | | | — |
| Weighted average number of units outstanding: diluted | | | | | 89,860,394 | | | 87,411,455 | |
___________
(1) Dilutive effect of restricted stock unit grants includes grants to certain employees of the Company's operating businesses under the 2016 Omnibus Employee Incentive Plan.
| | | | | | | | | | | | | | | |
| | | Quarter Ended March 31, |
| | | | | 2022 | | 2021 |
| Income per unit: | | | | | | | |
| Basic income (loss) per unit from continuing operations attributable to MIH | | | | | $ | 0.13 | | | $ | (0.08) | |
| Basic income per unit from discontinued operations attributable to MIH | | | | | — | | | 0.23 |
| Basic income per unit attributable to MIH | | | | | $ | 0.13 | | | $ | 0.15 | |
| | | | | | | |
| Diluted income (loss) per unit from continuing operations attributable to MIH | | | | | $ | 0.12 | | | $ | (0.08) | |
| Diluted income per unit from discontinued operations attributable to MIH | | | | | — | | | 0.23 |
| Diluted income per unit attributable to MIH | | | | | $ | 0.12 | | | $ | 0.15 | |
The following represents the weighted average potential dilutive units of common units that were excluded from the diluted income per unit calculation:
| | | | | | | | | | | | | | | |
| | | Quarter Ended March 31, |
| | | | | 2022 | | 2021 |
| Restricted unit grants | | | | | — | | | 83,843 | |
| | | | | | | |
2.00% Convertible Senior Notes(1) | | | | | — | | | 4,175,825 | |
| Total | | | | | — | | | 4,259,668 | |
| | | | | | | |
___________
(1)During the quarter ended March 31, 2021, the Company repurchased $358.6 million in aggregate principal amount of its 2.00% Convertible Senior Notes ("Notes"). For the quarter ended March 31, 2021, the weighted average units reflect the “if-converted” dilutive impact to common units for the repurchased Notes for the period that the Notes were outstanding and the impact of the increase to the conversion rate following the special dividend pertaining to the IMTT Transaction paid on January 8, 2021. See Note 8, “Long-Term Debt”, for further discussion.
MACQUARIE INFRASTRUCTURE HOLDINGS, LLC
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
6. Property, Equipment, Land, and Leasehold Improvements
Property, equipment, land, and leasehold improvements on March 31, 2022 and December 31, 2021 consisted of the following ($ in thousands):
| | | | | | | | | | | |
| March 31,
2022 | | December 31, 2021 |
| Land | $ | 10,710 | | | $ | 10,710 | |
| Buildings | 4,533 | | | 4,427 | |
| Leasehold and land improvements | 20,098 | | | 20,003 | |
| Machinery and equipment | 378,948 | | | 376,924 | |
| Furniture and fixtures | 3,740 | | | 3,740 | |
| Construction in progress | 14,216 | | | 11,313 | |
| 432,245 | | | 427,117 | |
| Less: accumulated depreciation | (133,499) | | | (129,927) | |
| Property, equipment, land, and leasehold improvements, net | $ | 298,746 | | | $ | 297,190 | |
7. Intangible Assets and Goodwill
Intangible assets on March 31, 2022 and December 31, 2021 consisted of the following ($ in thousands):
| | | | | | | | | | | |
| March 31,
2022 | | December 31, 2021 |
| | | |
| | | |
| Customer relationships | $ | 7,400 | | | $ | 7,400 | |
| Trade names | 8,500 | | | 8,500 | |
| Leasehold rights | 100 | | | 100 | |
| | | |
| 16,000 | | | 16,000 | |
| Less: accumulated amortization | (11,608) | | | (11,502) | |
| Intangible assets, net | $ | 4,392 | | | $ | 4,498 | |
The Company tests for goodwill impairment annually on October 1 of each year and between annual tests if a triggering event indicates the possibility of impairment. With the signing of the Merger, the Company evaluates goodwill for impairment having regard to the Merger transaction value. Goodwill acquired in business combinations, net of disposals was $120.2 million on March 31, 2022 and December 31, 2021, respectively. See Note 1, "Organization and Description of Business" for discussions on the Merger. There were no triggering events that indicated impairment for the quarter ended March 31, 2022.
MACQUARIE INFRASTRUCTURE HOLDINGS, LLC
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
8. Long-Term Debt
On March 31, 2022 and December 31, 2021, the Company’s consolidated long-term debt balance comprised the following ($ in thousands):
| | | | | | | | | | | |
| March 31,
2022 | | December 31, 2021 |
| | | |
| Term Loan - Hawaii Gas | $ | 80,000 | | | $ | 80,000 | |
| Term Loan - Solar Facilities in Hawaii | 12,424 | | | 12,698 | |
2.00% Convertible Senior Notes | 6,821 | | | 6,821 | |
| Total | 99,245 | | | 99,519 | |
| Current portion | (1,118) | | | (1,107) | |
| Long-term portion | 98,127 | | | 98,412 | |
Unamortized debt financing costs(1) | (684) | | | (757) | |
| Long-term portion less unamortized debt discount and debt financing costs | $ | 97,443 | | | $ | 97,655 | |
___________
(1)The weighted average remaining life of the debt financing costs on March 31, 2022 was 2.7 years.
2.00% Convertible Senior Notes due October 2023 (2.00% Convertible Senior Notes)
In October 2016, the Company completed an underwritten public offering of a seven year, $402.5 million aggregate principal amount of 2.00% Convertible Senior Notes. The Notes are convertible, at the holder’s option, only upon satisfaction of one or more conditions set forth in the indenture governing the Notes. Upon conversion, the Company will pay or deliver, as the case may be, cash, common units of Company, or a combination thereof, at the Company’s election.
The $402.5 million of 2.00% Convertible Senior Notes had an initial value of the principal amount recorded as a liability of $375.8 million, using an effective interest rate of 3.1%. The remaining $26.7 million of principal amount was allocated to the conversion feature and recorded in Common Units Paid in Capital. This amount represents a discount to the debt to be amortized through interest expense using the effective interest method through maturity. The Company also recorded $11.2 million in debt financing costs from the issuance of the 2.00% Convertible Senior Notes, of which $744,000 was recorded as equity issuance costs as a component of Unitholders’ Equity.
On January 1, 2021, the Company adopted ASU 2020-06 under the modified retrospective method. ASU 2020-06 removes the accounting for cash conversion feature of the Notes such that the Notes would only be classified as a liability. The adoption of ASU 2020-06 resulted in the reversal of the initial equity component recorded of $26.7 million and made an adjustment to the beginning balance to Retained Earnings of $7.0 million primarily for the reversal of the amortization of debt discount taken through that date, net of taxes.
During 2021, the Company repurchased $395.7 million in aggregate principal amount of the 2.00% Convertible Senior Notes, of which $358.6 million and $26.9 million were repurchased in tender offers on March 16, 2021 and October 22, 2021, respectively. In connection with the repurchases, the Company incurred $1.2 million of transaction costs and wrote-off $3.7 million of debt financing costs recorded in Selling, general and administrative expenses and Interest expense, respectively, in the consolidated condensed statements of income (loss).
On March 31, 2022 and December 31, 2021, the outstanding balance of the 2.00% Convertible Senior Notes was $6.8 million. On March 31, 2022 and December 31, 2021, the fair value of the 2.00% Convertible Senior Notes was approximately $6.6 million and $6.8 million, respectively. The conversion rate was 162.9223 common units per $1,000 principal amount on March 31, 2022.
MACQUARIE INFRASTRUCTURE HOLDINGS, LLC
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
8. Long-Term Debt – (continued)
Interest expense related to the 2.00% Convertible Senior Notes consisted of the following ($ in thousands):
| | | | | | | | | | | | | | | |
| | | |
| | | | | Quarter Ended March 31, |
| | | | | 2022 | | 2021 |
| Contractual interest expense | | | | | $ | 34 | | | $ | 1,754 | |
| | | | | | | |
| Amortization of debt financing cost | | | | | — | | | 345 | |
| Write-off of debt financing cost | | | | | — | | | 3,644 | |
| Total interest expense | | | | | $ | 34 | | | $ | 5,743 | |
Hawaii Gas
On April 19, 2021, Hawaii Gas fully repaid all of its $100.0 million senior secured notes outstanding and incurred a $4.7 million 'make-whole' payment and wrote-off $154,000 of debt financing costs both recorded in Interest expense in the consolidated condensed statements of income (loss).
On March 31, 2022 and December 31, 2021, Hawaii Gas had an $80.0 million term loan outstanding and a $60.0 million revolving credit facility that was undrawn. During the quarter ended June 30, 2021, Hawaii Gas extended the maturity on its term loan and revolving credit facility from February 2023 to February 2024.
9. Derivative Instruments and Hedging Activities
Interest Rate Contracts
The Company has in place variable-rate debt. Management believes that it is prudent to limit the variability of a portion of the business’ interest payments and the business entered into interest rate swap agreements to manage fluctuations in cash flows resulting from interest rate risk on a portion of its variable-rate debt. Interest rate swaps change the variable-rate cash flow exposure on the debt obligations to fixed cash flows. Under the terms of the interest rate swaps, the Company receives variable rate interest payments and makes fixed rate interest payments, thereby creating the equivalent of fixed-rate debt for the portion of the debt that is swapped.
The Company does not use hedge accounting. All movements in the fair value of the interest rate derivatives are recorded directly through earnings.
Commodity Price Contracts
The risks associated with fluctuations in the prices that Hawaii Gas pays for liquefied petroleum gas ("LPG") is principally a result of market forces reflecting changes in supply and demand for LPG and other energy commodities. Hawaii Gas’ gross margin (revenue less cost of product sales excluding depreciation and amortization) is sensitive to changes in LPG supply costs and Hawaii Gas may not always be able to pass through cost increases fully or on a timely basis, particularly when product costs rise rapidly. To reduce its exposure to volatility in the business’ LPG wholesale market price, Hawaii Gas has used and expects to continue to use over-the-counter commodity derivative instruments. Hawaii Gas does not use commodity derivative instruments for speculative or trading purposes. Over-the-counter derivative instruments used by Hawaii Gas to hedge a portion of forecasted purchases of LPG are generally settled at expiration of the contract. On March 31, 2022, Hawaii Gas had 61.7 million gallons of LPG hedged through September 2024.
Financial Statement Location Disclosure for Derivative Instruments
The Company measures derivative instruments at fair value using the income approach which discounts the future net cash settlements expected under the derivative contracts to a present value. These valuations use primarily observable (level 2) inputs, including contractual terms, interest rates, and yield curves observable at commonly quoted intervals.
MACQUARIE INFRASTRUCTURE HOLDINGS, LLC
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
9. Derivative Instruments and Hedging Activities – (continued)
The Company’s fair value measurements of its derivative instruments and the related location of the assets and liabilities within the consolidated condensed balance sheets on March 31, 2022 and December 31, 2021 were ($ in thousands):
| | | | | | | | | | | | |
| | Assets (Liabilities) at Fair Value |
| Balance Sheet Classification | | March 31,
2022 | | December 31, 2021 |
| Fair value of derivative instruments - other current assets | | $ | 8,344 | | | $ | 909 | |
| Fair value of derivative instruments - other noncurrent assets | | 4,078 | | | 470 | |
| Total derivative contracts - assets | | $ | 12,422 | | | $ | 1,379 | |
| | | | |
| Fair value of derivative instruments - other current liabilities | | $ | — | | | $ | (122) | |
| | | | |
| Total derivative contracts – liabilities | | $ | — | | | $ | (122) | |
The Company’s hedging activities for the quarters ended March 31, 2022 and 2021 and the related location within the consolidated condensed statements of income (loss) were ($ in thousands):
| | | | | | | | | | | | | | | | |
| Income Statement Classification | | | | | | Gain Recognized for the Quarters Ended March 31, |
| | | |
| | | | | 2022 | | 2021 |
| | | | | | | | |
| Interest expense - interest rate swaps | | | | | | $ | 489 | | | $ | 283 | |
| Cost of product sales - commodity swaps | | | | | | 12,928 | | | 1,626 | |
| Total | | | | | | $ | 13,417 | | | $ | 1,909 | |
All of the Company's derivative instruments are collateralized by the assets of the respective businesses.
10. Unitholders' Equity
2014 Independent Directors' Equity Plan ("2014 Plan")
On May 14, 2020, the Company granted its independent directors a total of 32,112 director share units with a grant date fair value of $27.43 per share. During the quarter ended March 31, 2021, the Company granted an additional 12,024 director share units to preserve the economic value of the unvested director share units after giving effect to the special dividend made in connection with the IMTT Transaction. These director share units vested on May 11, 2021, the day immediately preceding the 2021 Annual Meeting of Shareholders.
On May 19, 2021, the Company granted its independent directors a total of 25,974 director share units with a grant date fair value of $34.90 per share. These director share units fully vested on September 23, 2021, as a result of the AA Transaction, which constituted a change in control as defined in the 2014 Plan. Compensation expenses related to the director share units was $225,000 for the quarter ended March 31, 2021.
Short-Term Incentive Plan ("STIP") for MIH Operating Businesses — Restricted Stock Units ("RSUs")
The Company has a STIP to provide cash and stock-based incentives to eligible employees of its operating businesses under the Company’s 2016 Omnibus Employee Incentive Plan ("2016 Plan"). In general, the cash component comprises 75% of any incentive award and is paid in a lump-sum. The remaining 25% of any incentive award is in the form of RSUs representing an interest in the common units of the Company. RSUs are granted following assessment of performance against Key Performance Indicators post the one-year performance period and vest in two equal annual installments following the grant date.
MACQUARIE INFRASTRUCTURE HOLDINGS, LLC
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
10. Unitholders’ Equity – (continued)
The following sets forth unvested STIP RSU grants through March 31, 2022:
| | | | | | | | | | | |
| STIP Grants |
| Number of RSUs
(in units) | | Weighted Average Grant-Date Fair Value
(per unit) |
| Unvested balance on December 31, 2020 | 34,627 | | | $ | 24.50 | |
Granted(1) | 286,013 | | | 4.89 | |
| Forfeited | (215) | | | 24.92 | |
Vested(2) | (68,776) | | | 31.03 | |
| Unvested balance on December 31, 2021 | 251,649 | | | $ | 2.49 | |
| Granted | 79,670 | | 3.74 | |
| Forfeited | (2,603) | | 2.16 | |
Vested(3) | (158,844) | | | 2.30 | |
| Unvested balance on March 31, 2022 | 169,872 | | $ | 3.26 | |
___________
(1)During the quarter ended March 31, 2021, the Company granted an additional 12,614 RSUs to preserve the economic value of the unvested RSUs after giving effect to the special dividend made in connection with the IMTT Transaction. During the
quarter ended December 31, 2021, the Company granted an additional 228,943 RSUs to preserve the economic value of the
unvested RSUs after giving effect to the one-time distribution made in connection with the AA Transaction.
(2)As a result of the AA Transaction, the Company's Compensation Committee and Board approved the accelerated vesting of the STIP RSU grants for former eligible employees of Atlantic Aviation and MIC Global Services ("MGS"). These RSUs were fully vested on September 23, 2021.
(3)Units related to RSUs vested on March 31, 2022 were issued in April 2022.
On March 31, 2022, the grant date fair value of the unvested awards was $554,000 and is expected to be recognized over a weighted-average period of 1.0 years. Compensation expense related to the STIP RSUs were $354,000 for the quarter ended March 31, 2022, compared with $309,000 (which includes the former eligible participants of Atlantic Aviation and MGS) for the quarter ended March 31, 2021.
From time to time, the Company may issue RSUs to reward or retain employees, or to attract new employees, or for other reasons by providing special grants of RSUs. Vesting dates and terms can vary for each award at the discretion of the Company.
The following sets forth unvested Special RSU grants through March 31, 2022:
| | | | | | | | | | | |
| Special RSU Grants |
| Number of RSUs
(in units) | | Weighted Average Grant-Date Fair Value
(per unit) |
| Unvested balance on December 31, 2020 | 4,967 | | | $ | 40.30 | |
Granted(1) | 1,860 | | | — | |
| Vested | (6,827) | | | 29.32 | |
| Unvested balance on December 31, 2021 | — | | | $ | — | |
| | | |
| | | |
| | | |
| | | |
___________
(1)During the quarter ended March 31, 2021, the Company granted an additional 1,860 RSUs to preserve the economic value of the unvested RSUs after giving effect to the special dividend made in connection with the IMTT Transaction.
Compensation expense related to the Special RSU grants was $200,000 for the quarter ended March 31, 2021.
MACQUARIE INFRASTRUCTURE HOLDINGS, LLC
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
10. Unitholders’ Equity – (continued)
Long-Term Incentive Plan ("LTIP") for MIH Operating Businesses — Performance Stock Units ("PSUs")
The Company has a LTIP pursuant to which it makes stock-based incentive awards to eligible employees of its operating businesses. The awards take the form of PSUs convertible into common units of the Company as authorized under its 2016 Plan. The number of PSUs a participant may be awarded reflects a target level of performance by the participant. The participant may be awarded more (over performance limit) or less (threshold limit) than the target number of PSUs based on their achievements relative to Key Performance Indicators during the three-year performance period. Following finalization of the participant’s performance review, generally at the end of the third year of the program, the Company awards the PSUs.
The following sets forth unvested LTIP PSU grants through March 31, 2022 at the target level of performance:
| | | | | | | | | | | |
| LTIP Grants (at Target) |
| Number of PSUs
(in units) | | Weighted Average Grant-Date Fair Value
(per unit) |
| Unvested balance on December 31, 2020 | 71,521 | | | $ | 39.47 | |
Granted(1) | 1,205,242 | | 5.73 | |
Forfeited(2) | (86,384) | | 31.39 | |
Vested(2) | (135,493) | | 37.93 | |
| Unvested balance on December 31, 2021 | 1,054,886 | | $ | 2.76 | |
| Granted | 199,016 | | | 3.74 | |
| | | |
| Vested | (356,124) | | | 2.60 | |
| Unvested balance on March 31, 2022 | 897,778 | | $ | 3.04 | |
___________
(1)During the quarter ended March 31, 2021, the Company granted an additional 26,004 PSUs to preserve the economic value of the unvested PSUs after giving effect to the special dividend made in connection with the IMTT Transaction. During the quarter ended December 31, 2021, the Company granted an additional 959,700 PSUs to preserve the economic value of the unvested PSUs after giving effect to the one-time distribution made in connection with the AA Transaction.
(2)As a result of the AA Transaction, the Company's Compensation Committee and Board approved the accelerated vesting of the LTIP PSU grants for former eligible employees of Atlantic Aviation and MGS. These PSUs were fully vested on September 23, 2021.
As of March 31, 2022, depending upon actual performance, the number of PSUs to be issued will vary from zero to 1,571,112, net of forfeitures. On March 31, 2022, the grant date fair value of the unvested awards was $2.7 million, reflecting target performance by all participants. On March 31, 2022, the unrecognized compensation cost related to unvested PSU awards was $897,000 at target level performance and is expected to be recognized over a weighted-average period of 1.6 years. Compensation expense related to the LTIP PSUs was $298,000 for the quarter ended March 31, 2022, compared with $1.5 million (which includes the former eligible participants of Atlantic Aviation and MGS) for the quarter ended March 31, 2021.
Accumulated Other Comprehensive Loss, net of taxes
The following represents the changes and balances to the components of accumulated other comprehensive loss, net of taxes, for the quarter ended March 31, 2022 and 2021 ($ in thousands):
| | | | | | | | | | | | | |
| Post-Retirement Benefit Plans, net of taxes | | | | Total Unitholders’ Accumulated Other Comprehensive Loss, net of taxes |
| Balance on December 31, 2020 | $ | (6,175) | | | | | $ | (6,175) | |
| | | | | |
| | | | | |
| Balance on March 31, 2021 | $ | (6,175) | | | | | $ | (6,175) | |
| | | | | |
| Balance on December 31, 2021 | $ | (5,106) | | | | | $ | (5,106) | |
| | | | | |
| | | | | |
| | | | | |
| Balance on March 31, 2022 | $ | (5,106) | | | | | $ | (5,106) | |
| | | | | |
MACQUARIE INFRASTRUCTURE HOLDINGS, LLC
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
11. Revenue Recognition
The Company's business comprises: (i) Hawaii Gas, Hawaii’s only government-franchised gas utility and an unregulated LPG distribution business providing gas and related services to industrial, commercial, residential, and governmental customers; (ii) controlling interests in two solar facilities on Oahu, and (iii) smaller projects collectively engaged in efforts to reduce the cost and improve the reliability and sustainability of energy in Hawaii.
Revenue from Hawaii Gas is generated from the distribution and sales of synthetic natural gas ("SNG"), LPG, liquefied natural gas ("LNG"), and renewable natural gas ("RNG"). Revenue is primarily a function of the amount of product consumed by customers and the price per British Thermal Unit or gallon charged to customers. Revenue levels, without organic growth, will generally track global commodity prices, namely petroleum and natural gas, as its products are derived from these commodities.
Revenue from Hawaii Gas is recorded in product revenue. Hawaii Gas recognizes revenue when products are delivered. Sales of gas to customers are billed on a monthly-cycle basis. Earned but unbilled revenue is accrued and included in accounts receivable and revenue. This is based on the amount of gas that has been delivered but not billed to customers from the latest meter reading or billed delivery date to the end of an accounting period. The related costs are charged to expense.
The renewables projects in Hawaii sell substantially all of the electricity generated at a fixed price to primarily electric utility customers pursuant to long-term power purchase agreements ("PPAs") of 20 years. The PPAs are accounted for as operating leases and have no minimum lease payments. Lease income is recorded within product revenue when the electricity is delivered.
Revenue from external customers were ($ in thousands):
| | | | | | | | | | | | | | | |
| | | Quarter Ended March 31, |
| | | | | 2022 | | 2021 |
| Product revenue | | | | | | | |
| Lease | | | | | $ | 1,071 | | | $ | 890 | |
| Gas | | | | | 64,809 | | | 50,751 | |
| Other | | | | | 2,801 | | | 2,946 | |
| Total revenue | | | | | $ | 68,681 | | | $ | 54,587 | |
MACQUARIE INFRASTRUCTURE HOLDINGS, LLC
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
12. Related Party Transactions
Management Services
On March 31, 2022 and December 31, 2021, the Manager held 14,937,119 units and 14,719,423 units, respectively, of the Company’s common units. Pursuant to the terms of the Fourth Amended and Restated Management Agreement ("MSA"), the Manager may sell these units at any time. Under the MSA, the Manager, at its option, may reinvest base management fees and performance fees, if any, in units of the Company. The Manager’s holdings on March 31, 2022 represented 16.82% of the Company's outstanding common units.
Since January 1, 2021, the Company paid the Manager cash dividends and/or distributions on units held for the following periods:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Declared | | Period
Covered | | $
per Unit | | Record
Date | | Payable
Date | | Cash Paid to Manager
($ in thousands) |
| September 23, 2021 | | (1) | | $ | 37.386817 | | | October 4, 2021 | | October 7, 2021 | | $ | 544,841 | |
| December 23, 2020 | | (2) | | 11.00 | | | January 5, 2021 | | January 8, 2021 | | 153,503 | |
| | | | | | | | | | |
___________
(1) One-time distribution declared and paid out of the proceeds from the AA Transaction. Units of MIH traded with "due-bills" attached through October 7, 2021 and traded ex-distribution on October 8, 2021.
(2) Special dividend declared and paid out of the proceeds from the IMTT Transaction. Units of MIH traded with “due-bills” attached through January 8, 2021 and traded ex-dividend on January 11, 2021.
Under the MSA, subject to the oversight and supervision of the Company’s Board, the Manager is responsible for and oversees the management of the Company’s business. In addition, the Manager has the right to appoint the Chairman of the Board, subject to minimum equity ownership, and to assign, or second, to the Company, two of its employees to serve as chief executive officer and chief financial officer of the Company and seconds or makes other personnel available as required.
In accordance with the MSA, the Manager is entitled to a monthly base management fee based primarily on the Company’s market capitalization, and potentially a quarterly performance fee based on total unitholder returns relative to a U.S. utilities index. Currently, the Manager has elected to reinvest future base management fees and performance fees, if any, in additional units. For the quarter ended March 31, 2022, the Company incurred base management fees of $800,000, compared with $5.6 million for the quarter ended March 31, 2021. The Company did not incur any performance fees for the quarters ended March 31, 2022 and 2021.
Effective November 1, 2018, the Manager waived two portions of the base management fee to which it was entitled under the terms of the MSA. In effect, the waivers cap the base management fee at 1% of the Company’s equity market capitalization less any cash balances at the holding company. The waiver applies only to the calculation of the base management fees and not to the remainder of the MSA. The Manager reserves the right to revoke the waivers and revert to the prior terms of the MSA, subject to providing the Company with not less than a one year notice. A revocation of the waiver would not trigger a recapture of previously waived fees. As part of the Disposition Agreement entered into between the Company and its Manager, discussed below, the Manager has agreed not to revoke the waiver during the term of the Disposition Agreement. The amendment to the
Disposition Agreement, described below, provides for the payment of the waived fees upon the consummation of the Merger.
Disposition Agreement
To facilitate sales of its operating businesses, on October 30, 2019, the Company announced that it entered into a Disposition Agreement with its Manager (see Exhibit 10.3 of the Form 10-K filed on February 22, 2022). Outside of the Disposition Agreement, the Company has limited ability to terminate the MSA. The Disposition Agreement provides for the termination of the Company’s external management relationship with its Manager as to any businesses, or substantial portions thereof, that are sold (including if the Company itself is sold). In connection therewith, the Company will make a payment to its Manager of approximately 2.9% to 6.1% of the net proceeds generated in the event of such sales, subject to a minimum amount of payments for all sales in the aggregate in the event of a Qualifying Termination Event ("QTE") of (i) $50.0 million plus (ii) 1.5% multiplied by proceeds in excess of $500.0 million in the aggregate. A QTE means (i) the sale of the Company or (ii) a transaction or series of transactions resulting in a third party or parties acquiring all the assets of the Company. The Disposition Agreement provides that the MSA will terminate upon the occurrence of a QTE or upon mutual agreement of the parties. If the MSA has not been terminated prior to the sixth anniversary of the Disposition Agreement, the Company's Manager and its
MACQUARIE INFRASTRUCTURE HOLDINGS, LLC
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
12. Related Party Transactions - (continued)
independent directors will engage in reasonable, good faith discussions regarding a potential internalization or other framework for a termination of the MSA.
The Disposition Agreement provides that if a QTE occurs on or prior to January 1, 2022 (subject to extension under certain circumstances for up to six months thereafter), then the Company will pay its Manager an additional payment of $25.0 million. The Disposition Agreement further provides that its Manager will receive a make-whole payment following a QTE, to the extent that the aggregate management fees paid to its Manager through the date of the QTE were less than (i) $20.0 million per year for the two years following the date of the Disposition Agreement and (ii) $10.0 million per year for any period thereafter. In addition, following a QTE, the Manager will be paid in cash all accrued and unpaid management fees, including fees of $8.5 million waived in accordance with the Limited Waiver, which waived fees would have been payable through October 31, 2019. The Manager has agreed not to exercise its right to retract the Limited Waiver for periods after October 31, 2019 and prior to the termination of the Disposition Agreement. The Disposition Agreement will terminate on the earlier to occur of (i) the termination of the MSA and (ii) the sixth anniversary of the agreement, subject to extension under certain circumstances if a transaction is pending.
In connection with the IMTT Transaction and pursuant to the Disposition Agreement as amended by the Amendment noted below, the Company deposited a disposition payment of $28.2 million to its Manager in an escrow account in December 2020 and subsequently released the payment from escrow in March 2021.
In connection with the execution of the Merger, and in order to provide AMF Parent with the fixed amount of the Disposition Payment (as defined in the Disposition Agreement) payable to the Manager with respect to the Merger, on June 14, 2021, the Company and the Manager entered into an amendment (the "Amendment") to the Disposition Agreement. The Amendment provides that the Disposition Payment payable to the Manager with respect to the Merger will be $56.7 million (which amount includes the Waived Fees (as defined in the Disposition Agreement)). These amounts were calculated in accordance with the Disposition Agreement dated as of October 30, 2019, do not include the $25.0 million additional payment to the Manager if the final sale of the Company occurs on or prior to July 1, 2022, and assume a closing date of March 31, 2022, for the Merger. The Amendment also provides that the Disposition Payments with respect to the Merger will be paid concurrently with the relevant transaction closing, and that the Company’s MSA with the Manager will terminate concurrent with the closing of the Merger and payment of all amounts payable to the Manager under the Disposition Agreement.
In connection with the AA Transaction and pursuant to the Disposition Agreement, the Company paid the Manager $228.6 million in September 2021 concurrent with the closing of the transaction.
The unpaid portion of the base management fees and performance fees, if any, at the end of each reporting period is included in Due to Manager-related party in the consolidated condensed balance sheets. The following table shows the Manager's reinvestment of its base management fees and performance fees, if any, in units:
| | | | | | | | | | | | | | | | | | | | | |
| Period | | Base Management
Fee Amount
($ in thousands) | | Performance
Fee Amount
($ in thousands) | | Units
Issued |
| 2022 Activities: | | | | | | | |
| First quarter 2022 | | $ | 800 | | | $ | — | | | 219,026 | | (1) |
| | | | | | | |
| 2021 Activities: | | | | | | | |
| Fourth quarter 2021 | | 1,056 | | | — | | | 217,273 | |
| Third quarter 2021 | | 7,698 | | | — | | | 195,556 | |
| Second quarter 2021 | | 7,551 | | | — | | | 214,040 | |
| First quarter 2021 | | 5,552 | | | — | | | 176,296 | |
___________
(1)The Manager elected to reinvest all monthly base management fees for the quarter ended March 31, 2022 in new primary units. The Company issued 219,026 units for the quarter ended March 31, 2022, including 73,653 units that were issued in April 2022.
The Manager is not entitled to any other compensation and all costs incurred by the Manager, including compensation of seconded staff, are paid by the Manager out of its base management fee. However, the Company is responsible for other direct
MACQUARIE INFRASTRUCTURE HOLDINGS, LLC
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
12. Related Party Transactions - (continued)
costs including, but not limited to, expenses incurred in the administration or management of the Company and its subsidiaries, income taxes, audit and legal fees, acquisitions and dispositions, and its compliance with applicable laws and regulations. During the quarter ended March 31, 2022, the Manager charged the Company $1,000 for the reimbursement of out-of-pocket expenses compared with an insiginficant amount for the quarter ended March 31, 2021. The unpaid portion of the out-of-pocket expenses at the end of the reporting period is included in Due to Manager-related party in the consolidated condensed balance sheets. During the quarter ended March 31, 2021, the Company paid $30,000 in legal fees incurred by the the Manager related to certain MIC shareholder litigation. The payment reflects a credit of $30,000 of legal fees incurred by the Manager in 2020.
Macquarie Group - Other Services
The Company uses the resources of the Macquarie Group with respect to a range of advisory, procurement, insurance, hedging, lending, and other services. Engagements involving members of the Macquarie Group are reviewed and approved by the Audit Committee of the Company’s Board. Macquarie Group affiliates are engaged on an arm’s length basis and frequently as a member of a syndicate of providers whose other members establish the terms of the interaction.
Advisory Services
The Macquarie Group, and wholly-owned subsidiaries within the Macquarie Group, including Macquarie Bank Limited ("MBL") and Macquarie Capital (USA) Inc. ("MCUSA") have provided various advisory and other services and incurred expenses in connection with the Company’s equity raising activities, acquisitions, and debt structuring for the Company and its businesses. Underwriting fees are recorded in unitholders’ equity as a direct cost of equity offerings. Advisory fees and out-of-pocket expenses relating to acquisitions are expensed as incurred. Debt arranging fees are deferred and amortized over the term of the credit facility.
Long-Term Debt
The Company had a $600.0 million senior secured revolving credit facility at the holding company level to which Macquarie Capital Funding LLC had a $40.0 million commitment. On January 19, 2021, all commitments on the senior secured revolving credit facility were terminated in accordance with the terms of that agreement. For the quarter ended March 31, 2021, the Company incurred interest expense of $8,000 related to Macquarie Capital Funding LLC’s portion of the senior secured revolving credit facility.
13. Legal Proceedings and Contingencies
The Company and its subsidiaries are subject to legal proceedings arising in the ordinary course of business. In management’s opinion, the Company has adequate legal defenses and/or insurance coverage with respect to the eventuality of such actions and does not believe the outcome of any pending legal proceedings will be material to the Company’s financial position or results of operations.