ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations of Macquarie Infrastructure Holdings, LLC should be read in conjunction with the consolidated financial statements and the notes to those statements included elsewhere herein.
Recent Developments
HPUC Integrated Resource Plan Order
As anticipated, in January 2022, the HPUC issued an order requiring us to develop an Integrated Resource Plan ("IRP") in accordance with the HPUC’s Framework for Integrated Resource Planning and to file an IRP Report and Action Plan in the first quarter of 2023. The IRP will set out how we intend to meet near- and long-term energy objectives and satisfy customer needs consistent with the State’s energy policies and our goals of doing so in a safe, reliable, and cost-effective manner. We are currently reviewing the order. Under the Framework, we are entitled to recover all appropriate and reasonable integrated resource planning and implementation costs, as approved by the HPUC.
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 we operate. 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) work from home and related travel policies; (ii) enhanced cleaning and disinfecting of facilities; (iii) limited interactions between employees and customers through social distancing; (iv) mandated 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 fourth quarter of 2021 as increased visitor confidence levels due to the availability of COVID-19 vaccines and a relatively low level of infections in the islands combined to create an attractive environment for visitors from the U.S. mainland. 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 easing of travel restrictions 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 fourth quarter of 2021, although our financial performance continues to be adversely affected relative to pre-COVID-19 periods. The number of visitors to Hawaii increased to 1.9 million and 6.8 million for the quarter and year ended December 31, 2021, respectively, from 497,000 and 2.7 million for the quarter and year ended December 31, 2020, respectively. The resulting improvement in hotel occupancy, restaurants patronage, and use of commercial laundry services contributed to an increase in gas consumption of 29% and 21% during the quarter and year ended December 31, 2021, respectively, versus the comparable periods in 2020. The number of visitors to Hawaii was lower by 25% and 35% in the quarter and year ended December 31, 2021, respectively, and overall gas consumption was lower by 6% and 11% versus the comparable periods in 2019. The rate of recovery in the number of visitors to Hawaii in the future remains uncertain and a significant surge in COVID-19 cases could negatively impact Hawaii tourism.
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Results of Operations — (continued)
The wholesale cost of LPG increased by approximately 60% between December 2020 and December 2021. We enter into commodity hedges to mitigate the medium to longer term impact of rising costs. 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.
Results of Operations: 2020 vs. 2019
During the quarter ended September 30, 2021, Atlantic Aviation was classified as a discontinued operation and eliminated as a reportable segment. All periods reported herein reflect this change. For additional information, see Note 4, “Discontinued Operations and Dispositions”, in our consolidated financial statements in "Financial Statements and Supplementary Data" in Part II, Item 8, of this Form 10-K.
Unless specified below, for a comparison and discussion of our consolidated and operating businesses' results of operations for 2020 compared with 2019, see "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7, in our Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the U.S. Securities and Exchange Commission on February 17, 2021.
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Results of Operations — (continued)
Results of Operations: 2021 vs. 2020
Our consolidated results of operations for 2021 compared with 2020 are as follows:
Year Ended
December 31,
Change
Favorable/(Unfavorable)
($ in Thousands, Except Unit and Per Unit Data) (Unaudited)
Revenue
Product revenue
Total revenue
Costs and expenses
Cost of product sales
Selling, general and administrative
Disposition payment to manager
Total Selling, general and administrative
Fees to Manager - related party
Depreciation and amortization
Total operating expenses
Operating loss
Other income (expense)
Interest income
Interest expense (1)
Other income (expense), net
Net loss from continuing operations before income taxes
Benefit (provision) for income taxes
Net loss from continuing operations
Discontinued Operations
Net income (loss) from discontinued operations before income taxes
Provision for income taxes
Net income (loss) from discontinued operations
Net income (loss)
Net loss from continuing operations
Less: net income attributable to noncontrolling interests
Net loss from continuing operations attributable to MIH
Net income (loss) from discontinued operations
Net income (loss) from discontinued operations attributable
to MIH
Net income (loss) attributable to MIH
Basic loss per unit from continuing operations attributable to MIH
Basic income (loss) per unit from discontinued operations attributable
to MIH
Basic income (loss) per unit attributable to MIH
Weighted average number of units outstanding: basic
NM — Not meaningful
(1) Interest expense includes non-cash gains on derivative instruments of $333,000 in 2021 and non-cash losses on derivative instruments of $912,000 in 2020.
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Results of Operations — (continued)
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 gas 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.
Revenue increased for 2021 compared with 2020 primarily as a result of an increase in the amount of gas sold. The increase in the amount of gas sold reflects increased consumption by commercial and industrial customers driven by an increase in the number of visitors to Hawaii and increased commercial activity as Hawaii recovers from the impact of COVID-19.
Cost of Services and Product Sales
Cost of product sales increased for 2021 compared with 2020 primarily as a result of increases in the cost of gas sold. The increase in cost of product sales was partially offset by favorable mark-to-market adjustments of the value of commodity hedge contracts for wholesale LPG.
We recorded favorable adjustments of $437,000 and $7.3 million in the mark-to-market adjustment of the value of the commodity hedge contracts for 2021 and 2020, respectively. The change in the mark-to-market adjustment of the value of the commodity hedges during 2021 primarily reflects higher forecast wholesale cost of LPG relative to the hedged cost.
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 May 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 increased for 2021 compared with 2020 primarily as a result of (i) a disposition payment of $228.6 million paid to our Manager in connection with the AA Transaction, (ii) higher transaction costs; (iii) increases in salaries and benefits; and (iv) 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 2021 and 2020, we incurred base management fees of $21.9 million and $21.1 million, respectively. The increase in base management fees reflects an increase in our average market capitalization and the decrease in our average holding company cash balance during 2021. No performance fees were incurred in either the current or prior comparable periods. The unpaid portion of base management fees and performance fees, if any, at the end of each reporting period is included in the line item Due to Manager-related party in our consolidated balance sheets.
In accordance with the Management Services Agreement, our Manager elected to reinvest any fees to which it was entitled in new primary units in all of the periods shown below and has currently elected to reinvest future base management fees and performance fees, if any, in new primary units.
Period
Base Management
Fee Amount
($ in Thousands)
Performance
Fee Amount
($ in Thousands)
Units
Issued
2021 Activities:
Fourth quarter 2021
Third quarter 2021
Second quarter 2021
First quarter 2021
2020 Activities:
Fourth quarter 2020
Third quarter 2020
Second quarter 2020
First quarter 2020
(1) Our Manager elected to reinvest all of the monthly base management fees for the quarter ended December 31, 2021 in new primary units. We issued 217,273 units for the quarter ended December 31, 2021, including 72,323 units that were issued in January 2022 for the December 2021 monthly base management fee.
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Results of Operations — (continued)
Interest Expense, net, and Gains (Losses) on Derivative Instruments
Interest expense includes non-cash gains on derivative instruments of $333,000 in 2021 and non-cash losses of $912,000 for 2020, and the amortization of debt financing costs and debt discounts. Gains (losses) on derivatives recorded in interest expense are attributable to the change in fair value of interest rate hedges. For 2021, interest expense also includes non-cash write-offs of debt financing costs of $4.8 million related to the repurchase of our 2.00% Convertible Senior Notes, the cancellation of our holding company revolving credit facility, and the full repayment of $100.0 million of senior secured notes at Hawaii Gas.
Excluding the non-cash adjustments and write-offs, cash interest expense totaled $10.0 million and $14.5 million in 2021 and 2020, respectively. The decrease in cash interest expense primarily reflects a lower weighted average debt balance, partially offset by a $4.7 million 'make-whole' payment related to the full repayment of $100.0 million of senior secured notes at Hawaii Gas in April 2021.
Discontinued Operations
For 2021 and 2020, discontinued operations reflects the operating results of the businesses sold as part of the AA Transaction. The AA Transaction closed on September 23, 2021. For 2020, discontinued operations also reflects the operating results of IMTT. The IMTT Transaction closed on December 23, 2020.
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. As a partnership, MIH itself will not pay income tax on the gain from the AA Transaction.
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.
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.
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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 or services provided, 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 operations. 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 our 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 business 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.
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Results of Operations — (continued)
A reconciliation of net 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.
Year Ended
December 31,
Change
Favorable/(Unfavorable)
($ In Thousands) (Unaudted)
Net loss from continuing operations
Interest expense, net (1)
(Benefit) provision for income taxes
Depreciation and amortization
Fees to Manager- related party
Other non-cash expense (income), net (2)
EBITDA excluding non-cash items - continuing operations
EBITDA excluding non-cash items - continuing operations
Interest expense, net (1)
Non-cash interest expense, net (1)
Benefit (provision) for current income taxes (3)
Changes in working capital
Cash used in operating activities - continuing operations
Changes in working capital
Maintenance capital expenditures
Free cash flow - continuing operations
NM — Not meaningful
(1) Interest expense, net, includes non-cash adjustments to derivative instruments, non-cash amortization of debt financing costs, and non-cash amortization of debt discounts related to our 2.00% Convertible Senior Notes. For the year ended December 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 and the full repayment of $100.0 million of senior secured notes at Hawaii Gas. In connection with the repayment of the Hawaii Gas $100.0 million senior secured notes, the Company paid a $4.7 million 'make-whole' payment.
(2) Other non-cash expense (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 expense (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.
(3) Current income taxes in 2021 includes a $7.4 million benefit for income taxes that will be utilized by discontinued operations as a result of the reorganization.
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Liquidity and Capital Resources
General
Cash requirements of our business includes primarily 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, 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 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 December 31, 2021, we had $6.8 million of 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 December 31 2021 our consolidated debt outstanding totaled $99.5 million. We had access to an undrawn revolving credit facility of $60.0 million. The ratio of net debt/EBITDA excluding non-cash items for our continuing operations was 1.33x on December 31, 2021.
The following table shows our debt obligations from continuing operations on February 18, 2022 ($ in thousands):
Debt
Weighted
Average
Remaining Life
(in years)
Balance
Outstanding
Weighted
Average Rate (1)
2.00% Convertible Senior Notes
Term Loan- Hawaii Gas
Term Loan- Solar facilities in Hawaii (2)
Total (3)
(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 $60.0 million revolving credit facility that was undrawn.
We generally capitalize our business in part using floating rate debt with medium-term maturities. We have in the past also used longer dated private placement debt and other forms of capital including bond or hybrid debt instruments to capitalize our business. Except for the 2.00% Convertible Senior Notes, our debt facilities are non-recourse to the Company.
COMMITMENTS AND CONTINGENCIES
The following table summarizes our future obligations for continuing operations, by period due, as of December 31, 2021, under our various contractual obligations and commitments. We had no other off-balance sheet arrangements at that date or currently.
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Liquidity and Capital Resources — (continued)
Payments Due by Period
Total
Less than
One Year
1 – 3 Years
3 – 5 Years
More than
5 Years
($ In Thousands)
Long-term debt (1)
Interest obligations (2)
Operating lease obligations (3)
Pension and post-retirement benefit obligations (4)
Purchase commitments
Service commitments
Total contractual cash obligations (5)(6)
(1) The long-term debt represents the consolidated principal obligations to various lenders. The primary debt facilities are subject to certain covenants, the violation of which could result in acceleration of the maturity dates. For a description of the material terms, see Note 9, “Long-Term Debt”, in our consolidated financial statements in “Financial Statements and Supplementary Data” in Part II, Item 8, of this Form 10-K.
(2) The variable rate portion on the interest obligation on long-term debt was calculated using the three-months LIBOR forward spot rate on December 31, 2021.
(3) This represents the aggregate minimum annual rent required to be paid under non-cancellable operating leases with terms in excess of one year. See Note 5, "Leases", in our consolidated financial statements in “Financial Statements and Supplementary Data” in Part II, Item 8, of this Form 10-K for further discussion.
(4) The pension and post-retirement benefit obligation represents actuarial forecasts of required payments for the next ten years.
(5) The above table does not reflect certain long-term obligations for which we are unable to estimate the period in which the obligation will be incurred.
(6) The above table does not reflect certain expenses that we may incur dependent on the outcome of our pursuit of strategic alternatives. These include payments to our Manager calculated in accordance with the Disposition Agreement, fees to financial advisors and other professional services providers, and transaction related payments to our employees.
In addition to these commitments and contingencies, we typically incur capital expenditures on a regular basis. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Classification of Maintenance Capital Expenditures and Growth Capital Expenditures ” and “Investing Activities” below for further discussion of growth capital expenditures. Maintenance capital expenditures are discussed above in “Results of Operations.”
We also have other contingencies, including pending or threatened legal and administrative proceedings that are not reflected above as amounts at this time are not ascertainable. See “Legal Proceedings” in Part I, Item 3.
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 undrawn credit facilities (see “Financing Activities” in “Liquidity and Capital Resources”).
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Liquidity and Capital Resources — (continued)
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 tables as these transactions are eliminated on consolidation.
Year Ended
December 31,
Change
Favorable/(Unfavorable)
($ In Thousands)
Cash used in operating activities
Cash used in investing activities
Cash used in financing activities
NM — Not meaningful
Historical Cash Flows: 2020 vs. 2019
During the quarter ended September 30, 2021, Atlantic Aviation was classified as a discontinued operation and eliminated as a reportable segment. All periods reported herein reflect this change. For additional information, se e Note 4, “Discontinued Operations and Dispositions”, in our consolidated financial statements in "Financial Statements and Supplementary Data" in Part II, Item 8, of this Form 10-K.
For a comparison and discussion of our consolidated liquidity and capital resources and our cash flow activities for 2020 compared with 2019, see "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7, in our Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the U.S. Securities and Exchange Commission on February 17, 2021.
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 on a consolidated basis.
The increase in consolidated cash used in operating activities in 2021 compared with 2020 was primarily due to:
• a decrease in EBITDA excluding non-cash items, primarily due to the disposition payment and transaction costs incurred and paid during 2021;
• an unfavorable change to accounts receivable and inventory and favorable change to accounts payable resulting from the decline in business activity and cost of gas from the impact of COVID-19 during 2020; partially offset by
• an increase in benefit for current taxes;
• a decrease in cash interest expense.
We believe our operating activities overall provide a source of sustainable and stable cash flows over the long-term as a result of:
• consistent customer demand driven by the basic nature of the products sold;
• our strong competitive position due to factors including:
◦ high initial development and construction costs;
◦ difficulty in obtaining suitable land on which to operate;
◦ government franchise, leases, or customer contracts;
◦ required government approvals, which may be difficult or time-consuming to obtain;
◦ lack of immediate cost-effective alternatives for the products sold; and
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Liquidity and Capital Resources — (continued)
• product pricing that we expect will keep pace with cost increases as a result of the basic nature of the products sold.
Investing Activities from Continuing Operations
Cash provided by investing activities include proceeds from divestitures of businesses and disposal of fixed assets. Cash used in investing activities include acquisitions of businesses in new and existing segments and capital expenditures.
The decrease in cash used in investing activities for 2021 compared with 2020 is primarily attributable to lower 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 paid to our equityholders and the repayment of debt principal.
The increase in cash used in financing activities for 2021 compared with 2020 is primarily attributable to a special dividend of $11.00 per unit declared and paid out of the proceeds from the IMTT Transaction in January 2021, a one-time distribution of $37.386817 per unit declared and paid out of the proceeds from the AA Transaction in October 2021, repurchase of a portion of our 2.00% Convertible Senior Notes outstanding, and the full repayment of $100.0 million senior secured notes at Hawaii Gas.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our financial statements requires management to make estimates and judgments that affect the amounts reported in the financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ from these estimates under different assumptions and judgments and uncertainties, and potentially could result in materially different results under different conditions. Our critical accounting policies and estimates are discussed below. These estimates and policies are consistent with the estimates and accounting policies followed by the businesses we own and operate.
Business Combinations
Our acquisitions of businesses that we control are accounted for under the purchase method of accounting. The amounts assigned to the identifiable assets acquired and liabilities assumed in connection with acquisitions are based on estimated fair values as of the date of the acquisition, with the remainder, if any, recorded as goodwill. The fair values are determined by our management, taking into consideration information supplied by the management of acquired entities and other relevant information. Such information includes valuations supplied by independent appraisal experts for significant business combinations. The valuations are generally based upon future cash flow projections for the acquired assets, discounted to a present value. The determination of fair values requires significant judgment both by management and outside experts engaged to assist in this process.
Goodwill, Intangible Assets and Property, Plant and Equipment
Significant assets acquired in connection with our acquisition of businesses include contractual arrangements, customer relationships, non-compete agreements, trademarks, property and equipment, and goodwill.
Goodwill and Trademarks
Trademarks are generally considered to be indefinite life intangibles. Trademarks and goodwill are not amortized in most circumstances although it may be appropriate to amortize some trademarks. We are required to perform annual impairment reviews (or more frequently in certain circumstances) for unamortized intangible assets.
ASU No. 2011-08, Intangibles — Goodwill and Other (Topic 350) : Testing Goodwill for Impairment , permits an entity to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test, as discussed below. If an entity concludes it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it need not perform the two-step impairment test.
ASU No. 2017-04, Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, simplifies the measurement of goodwill and no longer requires an entity to perform a hypothetical purchase price allocation when computing the estimated fair value to measure goodwill impairment. Instead, impairment will be assessed by quantifying the difference between the fair value of a reporting unit and its carrying amount. An impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value, on condition that the charge doesn’t exceed the total amount of goodwill allocated to that reporting unit.
If an entity concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, or if there is a triggering event that indicates impairment, the entity needs to perform a quantitative impairment test. This requires management to make judgments in determining what assumptions to use in the calculation. The first step is to determine the estimated fair value of each reporting unit with goodwill.
The Company estimates the fair value by estimating the present value of the future discounted cash flows or value expected to be realized in a third-party sale. If the recorded net assets are less than the estimated fair value, then no impairment is indicated. If the recorded amount of goodwill exceeds the estimated fair value, an impairment charge is recorded for the excess.
The impairment test for trademarks, which are not amortized, requires the determination of the fair value of such assets. If the fair value of the trademarks is less than their carrying value, an impairment loss is recognized in an amount equal to the difference. We cannot predict the occurrence of certain future events that might adversely affect the reported value of goodwill and/or intangible assets. Such events include, but are not limited to, the potential failure to complete the Merger, strategic decisions made in response to economic and competitive conditions, the impact of the economic environment on our customer base, or a material negative change in relationship with significant customers.
We test for goodwill impairment on October 1 of each year and between annual tests if a triggering event indicates the possibility of an impairment. We monitor changing business conditions as well as industry and economic factors, among others, for events which could trigger the need for an interim impairment analysis. With the signing of the Merger, the Company will evaluate goodwill for impairment having regard to the Merger transaction value. On December 31, 2021, there were no new triggering events that indicated impairment.
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Property, Plant and Equipment and Intangible Assets
Property and equipment is initially stated at cost. Depreciation of property and equipment is computed using the straight-line method over the estimated useful lives of the property and equipment after consideration of historical results and anticipated results based on our current plans. Our estimated useful lives represent the period the asset remains in service assuming normal routine maintenance. We review the estimated useful lives assigned to property and equipment when our business experience suggests that they do not properly reflect the consumption of economic benefits embodied in the property and equipment nor result in the appropriate matching of cost against revenue. Factors that lead to such a conclusion may include physical observation of asset usage, examination of realized gains and losses on asset disposals, and consideration of market trends such as technological obsolescence or change in market demand.
Significant intangibles, including contractual arrangements, customer relationships, non-compete agreements, and technology are amortized using the straight-line method over the estimated useful lives of the intangible asset after consideration of historical results and anticipated results based on our current plans.
We perform impairment reviews of property and equipment and intangibles subject to amortization when events or circumstances indicate that fair value of the assets are less than their carrying amount and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets. In this circumstance, the impairment charge is determined based upon the amount by which the net book value of the assets exceeds their fair market value. Any impairment is measured by comparing the fair value of the asset to its carrying value.
The estimated fair value of property and equipment and intangible assets is determined by our management and is generally based upon future cash flow projections for the acquired assets, discounted to present value. We use outside valuation experts when management considers that it is appropriate to do so.
We test for goodwill and indefinite-lived intangible assets annually as of October 1 or when there is an indicator of impairment. See Note 7, “Property, Equipment, Land and Leasehold Improvements”, and Note 8, “Intangible Assets and Goodwill”, in our consolidated financial statements in “Financial Statements and Supplementary Data” in Part II, Item 8, of this Form 10-K for financial information and further discussion.
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Accounting Policies, Accounting Changes, and Future Application of Accounting Standards
See Note 2, “Summary of Significant Accounting Policies”, in our consolidated financial statements in “Financial Statements and Supplementary Data” in Part II, Item 8, of this Form 10-K for financial information and further discussion and for a summary of the Company’s significant accounting policies, including a discussion of recently adopted and issued accounting pronouncements.
