Macquarie Infrastructure Company Posts 2011 Financial Results

Macquarie Infrastructure Company reported financial results for 2011 including $3.16 per share in proportionately combined free cash flow.

In a release on February 22, the Company noted that it generated $3.19 per share in proportionately combined free cash flow in 2010. Excluding the free cash flow generated in connection with the cleanup of the BP oil spill in 2010, the 2011 result reflects an approximately 18 percent year on year increase in proportionately combined free cash flow.

With the continued strong cash generation, MIC's board of directors authorized the payment of a $0.20 per share cash dividend for the fourth quarter of 2011. The dividend will be payable on March 8, to shareholders of record on March 5.

"Our energy-related businesses generally, and The Gas Company in Hawaii in particular, produced very good results for the fourth quarter and full year 2011," said James Hooke, Chief Executive Officer of MIC. "Each of these businesses performed at or above the level of our expectations."

In addition to The Gas Company, MIC's energy-related businesses include a 50.01 percent (controlling) interest in District Energy in Chicago and a 50 percent (unconsolidated) interest in International-Matex Tank Terminals ("IMTT") headquartered in New Orleans. MIC also owns 100 percent of an aviation-related business, Atlantic Aviation, based in Plano, Texas.

"Atlantic Aviation's financial performance outpaced the improvement in industry fundamentals and reflects the operational leverage that exists in that business," Hooke noted. "As a result, Atlantic Aviation's debt levels decreased to the point where we expect the business to pay distributions totaling approximately $25 million to MIC for the fourth quarter of 2011 and the first three quarters of 2012."

Hooke said that he expects MIC's businesses to produce additional free cash flow in the year ahead. "The stable performance and predictable requirements of our businesses provide us with reasonable visibility into their cash generating capacity. As a result, we expect to report proportionately combined free cash flow for the full year 2012 in a range between $3.50 and $3.60 per share," he said.

The estimate assumes that MIC's manager continues to reinvest base management fees in additional shares. Similar reinvestment of base management fees in 2011 enhanced proportionately combined free cash flow by approximately $0.32 per share.

MIC reported consolidated revenue of $988.8 million for 2011 compared with $840.8 million in 2010. The 17.6 percent growth in revenue reflects primarily higher energy commodity prices, such as the cost of jet fuel and gas products that typically are passed through to its customers.

Reported gross profit - defined as revenue less cost of goods sold - removes the volatility in revenue associated with fluctuations in energy costs. MIC's consolidated gross profit totaled $382.6 million in 2011, an increase of 3.3 percent over 2010. The year on year growth is the result of increases in the volume of product sold, combined with a modest increase in margins on those sales.

MIC's net income from continuing operations, after tax, was $28.9 million and $10.0 million for years ended December 31, 2011 and 2010, respectively. The increase reflects primarily improved operating results generally, lower interest expense and net gains on derivatives (interest rate hedges), partially offset by lower net income generated by its investment in IMTT. The reduced interest expense stems from Atlantic Aviation having paid down a portion of its long term debt during the year.

IMTT's net income declined on lower revenue from its environmental emergency response services subsidiary. The environmental emergency response business generated unusually large revenues in 2010 as a result of its involvement in the clean-up of the BP oil spill on the Gulf of Mexico.

MIC utilized a portion of its accumulated net operating loss carry forwards (NOL) to offset its consolidated federal income tax liability for 2011, other than an Alternative Minimum Tax payment of less than $250,000. At year-end MIC's remaining federal NOL balance was $135.2 million. The Company expects utilization of this NOL balance will offset any current federal income tax liability, other than an Alternative Minimum Tax, through the 2013 tax year.

MIC reports EBITDA excluding non-cash items on a consolidated and operating segment basis and reconciles each to consolidated net income (loss) from continuing operations. EBITDA excluding non-cash items is a measure relied upon by management in evaluating the performance of its businesses and investments. EBITDA excluding non-cash items is defined as earnings before interest, taxes, depreciation and amortization and non-cash items, which include impairments, gains and losses on derivatives and adjustments for certain other items reflected in the statement of operations.

MIC believes that EBITDA excluding non-cash items provides additional insight into the performance of its operating businesses, relative to each other and to similar businesses, without regard to capital structure, and their ability to service or reduce debt, fund capital expenditures and/or support distributions to the holding company.

MIC also reports free cash flow, as defined below, on both a consolidated and operating segment basis as a means of assessing the amount of cash generated by its businesses and as a supplement to other information provided in accordance with GAAP, and reconciles each to cash from operating activities. MIC believes that reporting free cash flow provides additional insight into its ability to deploy cash as GAAP measures, such as net income and cash from operating activities, do not reflect all of the items that management considers in estimating the amount of cash generated by its operating businesses.

MIC defines free cash flow as cash from operating activities, less maintenance capital expenditures and changes in working capital. Working capital movements are excluded on the basis that these are largely timing differences in payables and receivables, and are therefore not reflective of MIC's ability to generate cash.

MIC notes that free cash flow does not fully reflect its ability to freely deploy generated cash, as it does not reflect required principal payments on indebtedness, payments of dividends, potential growth capital expenditures and other fixed obligations or the other cash items excluded when calculating free cash flow. Free cash flow may be calculated differently by other companies which limits its usefulness as a comparative measure. Free cash flow, as defined by MIC, should be used as a supplemental measure and not in lieu of financial results reported under GAAP.

MIC has a 50 percent equity interest in IMTT, an independent bulk liquid storage terminal businesses in the U.S. IMTT owns and operates 10 marine storage terminals in the U.S. and is the part owner and operator of two terminals in Canada. The terminals store and handle a variety of petroleum grades, chemicals and vegetable and animal oils. To aid in meaningful analysis of the performance of IMTT across periods, the table and discussion below refers to results for 100 percent of the business, not just MIC's 50 percent interest.

In addition to its liquid storage and related services business, IMTT also owns and operates an environmental emergency response, industrial, waste transportation and disposal services business known as OMI Environmental Solutions ("OMI"). OMI generated significant revenue and EBITDA for IMTT in 2010 as a result of its participation in the clean-up of the BP oil spill in the Gulf of Mexico. Contributions from OMI to IMTT's financial results in 2011 returned to historic levels and were not material to the business' overall results.

Terminal gross profit (excludes OMI) increased 12.6 percent in 2011 compared with 2010. The improvement was driven by a 13.3 percent increase in average storage rental rates and a slight increase in storage utilization from 93.6 percent to 94.3 percent.

IMTT generated free cash flow of $108.6 million in 2011, the majority of which was used to reduce debt facility balances.

Maintenance and environmental capital expenditures totaled $57.3 million in 2011, an increase of 27.3 percent compared with 2010. MIC forecasts maintenance and environmental capital expenditures to be approximately $50.0 million in 2012.

Each of MIC's businesses, including IMTT, deployed an above average amount of capital during the year to take advantage of the tax incentives created under the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. The legislation provided for 100 percent tax depreciation of capital projects completed in 2011. Currently, this same legislation provides for 50 percent tax depreciation of capital projects completed in 2012.

President Obama's proposed budget for 2012 includes an extension of the 100 percent tax depreciation for certain fixed assets. There is some congressional support for this proposal, although there can be no certainty that any extension will be approved. Such approval, if made, may result in MIC accelerating a portion of its business' maintenance capital expenditures into 2012 in order to capture the associated tax benefit.

IMTT continues to grow via the construction of additional tank storage capacity. In 2011 the business deployed approximately $72.9 million in construction of new or refurbishment of existing tanks. IMTT has $241.2 million of growth projects underway of which a total of $77.6 million has already been spent. The business expects the projects to generate an aggregate $41.2 million in gross profit and EBITDA.

IMTT had $639.8 million of debt outstanding at December 31, 2011 including $28.7 million in shareholder loans. The weighted average cost of the debt, including the cost of interest rate hedges and letter of credit fees, was 5.05 percent.

The business' debt agreement (primary facility) contains a covenant that limits IMTT's ratio of debt to EBITDA to not more than 4.75 times. At December 31, 2011 the ratio was 2.70 times and the business had undrawn capacity on its existing debt facility of $669.9 million. All but $75.0 million of the $1,100.0 million revolving credit facility matures in June 2014. The facility contains no restrictions on the payment of dividends provided that the borrower is not in default.

Distribution of cash flows from IMTT is governed by a Shareholders' Agreement between MIC and its co-investor in the business. The co-investor has refused to vote in favor of distributing certain of these funds and the Company believes that such refusal violates the Shareholders' Agreement.

MIC has been unable to resolve this dispute with the co-investor regarding distributions, despite efforts to do so in accordance with the Shareholders' Agreement. Accordingly, on April 18, 2011, MIC initiated formal arbitration proceedings with the co-investor under the auspices of the American Arbitration Association. MIC believes the defenses and claims of the co-investor are without merit. MIC currently expects a decision by the arbitrators in the first quarter of 2012, or soon after.

The Gas Company is the owner and operator of the only regulated ("utility") gas processing and pipeline transmission and distribution network on the islands of Hawaii. The business is also the owner and operator of the largest unregulated ("non-utility") gas distribution operation on the islands.

The Gas Company's financial results for 2011 reflect a recovery in the Hawaiian economy, and the tourism industry in particular, that drove a 2.1 percent increase in the demand for gas products across both the utility and non-utility portions of the business.

Aggregate gross profit - revenue less the cost of feedstock, production and transmission, and distribution - grew by 7.1 percent in 2011 compared with 2010. EBITDA excluding non-cash items and free cash flow increased by 10.3 percent and 13.4 percent, respectively.

The Gas Company generated $28.5 million in free cash flow in 2011. The majority of the free cash flow was distributed to MIC.

The Gas Company had $170.0 million of debt outstanding at December 31, 2011 including $160.0 million in term loan facilities and $10.0 million in a revolving credit facility. The weighted average cost of the debt, including the cost of interest rate hedges, was 5.16 percent. The Gas Company's primary debt facilities mature in June 2013 although a refinancing of these facilities may be undertaken in 2012 subject to debt market conditions.

MIC's District Energy business produces chilled water that it distributes via underground pipelines to buildings in downtown Chicago. The cold energy is used in air conditioning and process cooling applications. The business also operates a site-specific facility in Las Vegas, Nevada that supplies both cooling and heating services to a resort/casino complex, a condominium and a shopping mall.

MIC has a 50.01 percent interest in District Energy and consolidates its financial results with those of The Gas Company and Atlantic Aviation. The business is not a part of MIC's consolidated tax group.

The gross profit produced by District Energy declined 11.1 percent in 2011 compared with 2010. The decrease reflects a reduction in finance lease revenue partially offset by higher capacity revenue on contractual rate increases and the addition of new customers. The decrease in finance lease revenue of $2.9 million includes a $2.5 million re-class of previously booked lease principal to lease interest in 2010 and the decline in interest as the lease amortizes. Lease principal payments received increased by a approximately $350,000 and were recorded in the statement of cash flows.

Effective management of operating expenses, combined with lower real estate taxes, resulted in flat EBITDA excluding non-cash items and a modest 1.5 percent decline in free cash flow generated by District Energy.

Free cash flow generated by District Energy in 2011 totaled $14.3 million with 50.01 percent or $7.1 million paid as a distribution to MIC.

District Energy had $170.0 million of debt outstanding at December 31, 2011 including a $150.0 million term loan facility and a $20.0 million capital expenditure facility. The weighted average cost of the debt, including the cost of interest rate hedges and letter of credit fees, was 5.5 percent. Both of the business' debt facilities mature in September 2014. Commencing with the third quarter 2012, per the terms of its loan agreement, District Energy expects to direct all free cash flow to the pre-payment of the principal balance on its term loan facility.

Atlantic Aviation owns and operates a network of fixed base operations (FBOs) located at 65 airports in the U.S. FBOs provide primarily fuel, terminal services, and aircraft hangar services to owners and operators of private (general aviation) jet aircraft.

Atlantic Aviation reported an increase in gross profit of 3.5 percent in 2011 compared with 2010. The increase was the result of overall growth in the number of general aviation flight movements in the U.S. which led to a higher volume of fuel sold and, in certain instances, higher margins on those sales. Adjusting for acquisitions and divestitures of certain sites in 2011, the volume of general aviation jet fuel sold increased 5.5 percent and the average margin on those sales increased 2.5 percent.

EBITDA excluding non-cash items generated by Atlantic Aviation increased 7.8 percent and free cash flow grew 27.3 percent to $61.7 million in 2011 versus 2010. $36.2 million of free cash flow was used to repay term loan principal and pay $2.3 million in related swap breakage costs. In February 2012, Atlantic Aviation made an additional prepayment of loan principal in the amount of $6.5 million and incurred $248,000 in swap breakage costs.

Atlantic Aviation completed a number of small acquisitions and divestitures of FBOs during the year. These transactions increased the proportion of airports at which it is the sole provider of FBO services. The transactions, along with a lease extension at an existing facility, increased the weighted average remaining life of all leases in the portfolio to 17.8 years at December 31, 2011 from 16.8 years at December 31, 2010.

Atlantic Aviation had $777.2 million of debt outstanding at December 31, 2011, including balances on term loan and capital expenditure facilities. The business also has a separate $3.4 million facility used to capitalize a single FBO. The weighted average cost of the debt, including the cost of interest rate hedges, was 6.49 percent.

The business' primary debt facilities mature in October 2014, although interest rates hedges covering the majority of the debt expire in October 2012. The expiration of the hedges is expected to reduce the interest expense paid by the business by approximately $30.0 million per year. Management is evaluating hedging strategies for this debt for periods beyond October 2012.

Under the terms of its debt agreement, Atlantic Aviation is required to use its free cash flow to repay debt principal so long as its ratio of debt to EBITDA over a trailing twelve month period is above 6.0 times. As of the end of the fourth quarter of 2011 that ratio fell to 5.98 times and the business is able to pay 50 percent of its free cash flow as a distribution to MIC so long as the ratio remains below 6.0 times. In February 2012, Atlantic Aviation made a distribution to MIC in the amount of $6.5 million representing 50 percent of the free cash flow generated in the fourth quarter of 2011. Regardless of the leverage ratio, the business will again be required to apply all free cash flow to debt repayment beginning with the fourth quarter in 2012 through to the maturity of the debt in 2014.

Management at MIC has provided the following guidance regarding its expectations for the performance of the Company's operating businesses in 2012.

IMTT - MIC expects the business to generate between $220 and $235 million of EBITDA. MIC expects maintenance capital expenditures to be approximately $50 million for the full year. The most significant variable potentially affecting the full year result involves the contract rates achieved on storage contracts that are renewing in 2012. MIC intends to update the market as information on storage contracts renewals becomes available. Additionally the financial results at IMTT are subject to the timing of completion of growth projects currently underway.

The Gas Company - the business is expected to generate between $50 and $55 million of EBITDA. Maintenance capital expenditures are anticipated be approximately $6.7 million for the full year or down by about one third on 2011. Potential upside and downside in the EBITDA forecast includes better than planned improvement in the Hawaiian economy and any unforeseen supply disruption.

District Energy - the business is expected to generate between $21 and $22 million of EBITDA. Maintenance capital expenditures are expected to be approximately $1 million for the full year. Potential upside and downside in the EBITDA forecast includes variations in temperature - either warmer than average or cooler than average - in Chicago.

Atlantic Aviation - the business is expected to generate between $130 and $140 million of EBITDA. Maintenance capital expenditures are expected to be approximately $13.1 million for the full year. Potential upside and downside in the EBITDA forecast includes variation in the planned recovery in general aviation flight activity - either more or fewer take-offs and landings - compared with the business' plan.

The forecast results of the Company's operating businesses, combined with the expenses of the holding company, produce an aggregate range of proportionately combined free cash flow of between $3.50 and $3.60 per share in 2012.

Macquarie Infrastructure Company owns, operates and invests in a diversified group of infrastructure businesses providing basic services to customers in the United States.

More information:

www.macquarie.com/mic

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