Macquarie Infrastructure Holdings, LLC
Q2 2017 Earnings Call Transcript

Published: 3 Aug 2017

[Operator:]

Good day and welcome to the Macquarie Infrastructure Corporation’s Second Quarter 2017 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Jay Davis, Managing Director, Investor Relations. Please go ahead, sir.

[Jay Davis:]

Thank you and welcome once again to Macquarie Infrastructure Corporation’s earnings conference call, this one covering the second quarter of 2017. Our call today is being webcast and is open to the media. In addition to discussing our quarterly financial performance on this call, we’ve published a press release summarizing the results and filed the financial report on Form 10-Q with the Securities and Exchange Commission. These materials were released last evening and copies may be downloaded from our website at www.macquarie.com/mic. Before turning the proceedings over to Macquarie Infrastructure Corporation’s Chief Executive Officer James Hooke, let me remind you that this presentation is proprietary and all rights are reserved. Any recording, rebroadcast or other reuse of this presentation in whole or in part without the prior written consent of Macquarie Infrastructure Corporation is prohibited. This presentation is based on information generally available to the public and does not contain any material, non-public information. The presentation has been prepared solely for informational purposes and is not a solicitation of an offer to buy or sell any security or instrument. This presentation contains forward-looking statements. We may, in some cases, use words that convey uncertainty of future events or outcomes to identify these forward-looking statements. Forward-looking statements in this presentation are subject to a number of risks and uncertainties. A description of known risks that could cause our actual results to differ appears under the caption Risk Factors in our Form 10-K. Our actual results, performance, prospects or opportunities could differ materially from those expressed in or implied by the forward-looking statements. Additional risks, of which we are not currently aware, could also cause our actual results to differ. The forward-looking events discussed in this presentation may not occur. These forward-looking statements are made as of the date of this presentation. We undertake no obligation to publicly update or revise any forward-looking statements after the completion of this presentation whether as a result of new information, future events or otherwise except as required by law. With that, it is my pleasure to introduce Macquarie Infrastructure Corporation’s Chief Executive Officer, James Hooke.

[James Hooke:]

Thank you, Jay, and thank you once again to those of you participating in our earnings conference calls this morning. MIC’s financial results for the second quarter in 2017 were characterized by stable operations generally and improved cash generation overall. Our financial results continue to track towards our guidance the double-digit growth in free cash flow calculated on a fair share basis and support our expected 10% increase in cash dividends for the full-year. Nominal adjusted free cash flow increased by a 11.7% and 8.9% on a per share basis. As noted in the flash notes overnight, MIC’s results were a bit noisy, we would agree. That noise is largely from activities that will be positive for MIC over the near-term, with the acquisitions and capital deployment across multiple segments. There are probably few quarters during my tenure in which we have achieved more. Relative to consensus expectations, our results were broadly in line, slightly below on the EBITDA line, slightly ahead on the adjusted free cash flow. The modest rate in adjusted free cash flow is partly a function of lower than anticipated spending on maintenance CapEx projects in the period. From our perspective, Atlantic Aviation and the renewable portion, power portion of our Contracted Power business outperformed our expectations. IMTT met our expectations, and MIC Hawaii and BEC slightly underperformed. We’ve also reiterated our 2017 and 2018 guidance with respect to growth in cash generation and a 2017 dividend increase. In addition to the operating performance, we’ve had a good quarter from a growth CapEx perspective. A portion of our anticipated growth in cash generation is expected to be driven by our effective deployment of growth capital. In June, we increased our forecast of deployment of growth capital in 2017 to approximately $500 million, up from $400 million I had mentioned during our conference call in May. I’m pleased with the progress we’re making on the capital deployment front and the quality transactions we were able to announce today. As a consequence, we are again revising our guidance for growth capital deployment in 2017 higher once again, this time to between $600 million and $650 million for the 2017 year. The acquisition of Epic Midstream by IMTT will provide important benefits to both our bulk liquid terminalling business and MIC as a whole. Perhaps more importantly, Epic will greatly expand IMTT’s involvement in storage and handling of jet fuel. As a subsidiary of IMTT, Epic not only opens IMTT up to relationships and opportunities related to that product, but introduces the business to a significant new customer in an affiliate of the Department of Defense. Several of Epic’s seven terminals provide support to this agency. In addition, the acquisition extends the IMTT brand into new markets, including the strategically important port of Savannah. Approximately two-thirds of Epic’s 3.1 million barrels of capacity is located in Savannah. The Port of Savannah is an important link in the distribution chain for petroleum and chemical products into and out of the region. It’s worth noting the nexus of several efforts that we have had underway in the jet fuel space. With the acquisition of Epic, IMTT has expanded into storage and handling of jet fuel. Atlantic Aviation is, of course, involved in jet fuel distribution, primarily on the retail side of the equation within wholesale context, where it operates airport fuel funds also. And recall that late last year, we acquired a team focused on developing jet fuel storage and logistics projects. The aim of that team is to bridge the gap between IMTT and Atlantic, leveraging the capabilities of both in the development of jet fuel projects on airports on which we already operate and in new markets. In short, the pieces have been put in place to capitalize on the expertise and experience that exists across our business and to integrate those operations into one focused on jet fuel. We’re very pleased to have entered into an agreement to acquire Epic Midstream and expect the transaction will close in the third quarter. In terms of its impact on MIC, the transaction has been structured in such a way that is expected to be mildly accretive through our free cash flow in 2018. The second transaction we’re announcing involves a new and exciting joint venture. We formed a new business entity together with Intersect Power for the development and operation of solar power generation and power storage facilities. The leadership at Intersect comprises former senior members of the team at Recurrent Energy. Working together with Recurrent for nearly a decade, this group was responsible for the successful development of more than 2 gigawatts of solar generation. We anticipate supporting venture with up to $130 million – $135 million of equity, contingent equity and access to credit facilities. Those resources will be committed over time not all at once and utterly on the back of proven success and progress. MIC will fund the Intersect operations and development of a pipeline of approximately 700 megawatts of projects currently under evaluation in California and Texas. We estimate the first of these could be generating power in early 2019. As I have described to you previously, competition for operating renewable power – operating renewable power generation facilities has been intense, and finding attractive investments at reasonable rates of return has been a challenge. By forming this new venture, we position ourselves to add substantially to our clean power portfolio without having to participate in auction processes. You’ll also notice, we disclosed a third transaction in our 10-Q in the subsequent events section. This is another accretive somewhat sizable bolt-on acquisition in a segment in which we already operate. We expect to close the transaction in the third quarter subject to the receipt of requisite approvals. Given the terms of the purchase agreement, I’m unable to say anymore about the transaction at this time. So to-date in 2017, including the pending acquisition of Epic, we deployed or committed to deploy approximately $450 million in growth CapEx. A portion of the growth CapEx deployment has been on projects that were part of our $300 million backlog at the start of this year. Although, we’ve completed some of those projects, our backlog remains approximately $280 million. Based on the projects currently under review, we’re amending our growth CapEx deployment guidance, and now expect that we will invest between $600 million and $650 million across projects in various smaller acquisitions this year. We noted in May that the volume and velocity of opportunities, both bolt-on acquisitions and organic growth CapEx opportunities had increased noticeably. We’re now seeing the impact of some of those on our businesses. That increased volume and velocity of opportunities continues. We’re in the fortunate position of being able to pursue the best of these opportunities. Knowing that it should be clear that the size of the share issuance in the Epic transaction is a matter of managing our overall capitalization, not just the capitalization of that particular transaction. The combination of retained capital plus the issuance of the new shares together with the drawings on available credit facilities enable us to maintain our strong balance sheet and ensure we don’t have an equity overhead. Let’s move to an overview of the results from our existing businesses in the quarter. Similar to the first quarter, our financial results for the second quarter included strong performance by Atlantic Aviation. This was driven by consistent increases in general aviation flight activity and trends that we have identified previously, including larger planes and effective margin management. Atlantic also benefited from acquisitions of quality additional size over the past year. The renewable portion of contracted power rebounded nicely in the second quarter and including sites acquired over the past year contributed to a substantial growth in segment contribution. Broadly speaking, solar and wind resources returned to historically normal levels. The contribution from the thermal portion of Contracted Power BEC was smaller this year on basis of lower capacity prices we discussed with you in May. In addition, the absolute amount of power dispatch was down year-on-year related to both weather and disruptions caused by construction of new capabilities, more on that in a moment. IMTT and our MIC Hawaii businesses delivered results in line with expectations, excluding an adjustment for the reported non-cash charge in the value of commodity hedges at Hawaii Gas. And as anticipated, Hawaii Gas filed a general rate case earlier this week, seeking $15 million in additional annual utility revenue. As noted above, nominal adjusted free cash flow increased by 11.7% and 8.9% on a per share basis. We made two adjustments to our report results to arrive at our adjusted EBITDA and adjusted free cash flow figures. We believe these provide additional clarity with respect to the recurring cash generation capacity of our businesses. The first adjustment is one we had previously flagged, namely the exclusion of non-recurring expenses incurred in implementing our shared service initiative, these totaled $3.1 million in the second quarter and were again comprised of primarily severance and consulting costs. Year-to-date, these items have totaled $5.4 million. The second adjustment is an outgrowth of the substantially increased level of investment and acquisition activity. Deal costs, including those related to some of the transactions I’ve already mentioned totaled $4.9 million in the second quarter. Here again, looking at our results excluding these, as we’ve done with substantial transactions historically, provides better visibility into the recurring cash generation capacity of the enterprise. Another factor in the increase in deal costs was our involvement in the process related to the lease of Westchester County Airport in White Plains, New York. For now, our work is being completed. We’ve put our best foot forward and submitted what we feel is a very attractive offer to manage the airport pursuant to a 40-year lease. If selected as the preferred bidder, we could assume responsibility for the operation of the airport early next year. With the improvement in cash generation and in line with our continued good prospects, the MIC Board has authorized a cash dividend for the second quarter of $1.38 per share. That represents a 10.4% increase over the dividend paid for the second quarter in 2016 and is consistent with our guidance for 2017. The dividend will be payable on August 17 to shareholders of record on August 14. Including the second quarter results, our payout ratio, that is the aggregate dividends divided by aggregate adjusted free cash flow was 80.7% on a trailing 12 month basis. The ratio varies quarter-to-quarter, but that figure is pretty much in the middle of a long-term target for a payout of 75% to 85% of adjusted free cash flow. Our financial performance during the quarter reflects the effective execution of our strategy, namely of driving operating improvements and deploying available resources in the continued growth of MIC. For those of you with a few more minutes to spare, I’ll discuss our existing businesses at a more granular level. At IMTT, for the most part, IMTT’s operating results for the second quarter were a case of steady as she goes. Our aversion to the main and storage utilization, stable pricing and one small construction project termination that resulted in recognition of some deferred revenue. These were partially offset by modest increases in repair and maintenance costs and the absence of the insurance receivable we’ve had this time last year. Reported free cash flow increased by over 16% at IMTT, driven by the improvement in EBITDA and a decrease in maintenance capital expenditures. As a consequence of two quarters of lower than anticipated expenditures, we now believe that the business will deploy between $25 million and $30 million of maintenance capital in 2017. Trading at IMTT to-date in the third quarter has been consistent with that over the first six months of the year. We’re looking forward to adding the team from Epic and their relationships to that at IMTT. Unless you think we’re done after Epic, we still have a pipeline of projects at IMTT with an aggregate value of approximately $500 million under review. At Atlantic Aviation. Atlantic Aviation performed well on the basis of continued increases in general aviation flight activity. The FAA reported overall growth in quarterly flight activity compared with 2016 of approximately 3.7% in the second quarter versus the same period last year. Effective management of the existing operations together with contributions from acquisitions, both this year and last, generated growth in EBITDA and free cash flow at Atlantic at rates well in excess of this fundamental driver. Bolt-on acquisitions are an important part of the growth story for Atlantic, and we continue to find good opportunities to acquire and/or develop additional sites. We have a pipeline of opportunities with a value well in excess of $200 million under review. On top of bolt-on acquisitions, we’ve reached substantial completion of major upgrades at Atlantic facilities in Houston, at Houston Hobby and at Portland, and new hangars in Charleston, Rifle and Sun Valley. Trading at Atlantic through the first part of the third quarter has been consistent with the half-year results for the business. Continued increases in flight activity together with contributions from acquisitions and ongoing execution of effective marketing initiatives are driving attractive growth in cash generation. At Contracted Power, after starting the year below historical average levels, both solar and wind resources rebounded to levels via long-term averages during the second quarter. Combined, the resource factor for the quarter was 99% of the long-term average. As we’ve said reportedly, over a reasonable period of time, renewable resources will tend to revert to the main. The acquisition of the Red Hills solar facility last year was also positive for the renewables portion of the segment. Red Hills has provided our renewable portion with a nice boost from a financial performance perspective. The segment results reflects a reduced contribution from BEC this year versus last. The reduction was a consequence of both the lower than anticipated capacity price in Zone J that we had previously – that we discussed previously and lower utilization rates generally as a result of relatively mild weather. These results – the impact of these results for the 37.5% of the facility operating on a merchant basis, north of 62.5% that is subject to a tolling agreement. A third factor at BEC was our own construction of new capability. Work on the gas lateral and additional services in support of grid recovery, which is now complete had an adverse impact on the performance of both the merchant and the total portion of the operation. The commissioning and testing of the gas lateral mid-BEC was not available to generate electricity for a meaningful amount of time during the quarter, due to scheduled outages. The reduction in capacity rates is something we flagged in our makewhole. Although, the rates for the summer strip that were announced in March were higher than last year, the month ahead market has been down versus last year. Most facilities, including BEC don’t bid into the entire summer, but do participate in the shorter duration options. Weather-wise April and may, both saw fewer heating degree days relative to both prior year and the long-term average. In other words, it was warm, but not hot, and we didn’t have to heat our homes and our offices as much this year. The opposite was true in June. The number of cooling degree days that is on which we ran air conditioners was just average this year. Put these together with the capacity prices and you get a list on exciting performance. So what do we see driving improved performance of BEC going forward? Low capacity prices are likely to drive marginal, although, less efficient peaking capacity out of the market. When that occurs, capacity prices are likely to rise. Second, as we’ve seen with the renewables and utilization rates and commodity prices in other parts of our business, weather tends to revert to the main. And lastly, our construction projects will be completed. In spite of the noise around BEC, proportionally combined free cash flow generated by all the Contracted Power segments increased by approximately 16% for the second quarter in 2016. Further improvement in Contracted Power going forward is expected to be driven in part by the deal flow from our two renewable development partners, one in wind and the other in solar. One of these projects, a solar project coming out of the relationship with the developer we struck last year is expected to drive segment EBITDA and cash flow toward our 2017 targets. I mentioned that project last quarter and it is now on track to achieve commercial operations in the fourth quarter of this year. Not only will this project generate additional EBITDA, but it will provide a tax benefit in the form of an offset to our projected alternative minimum tax. At MIC Hawaii, segment results overall reflected revenue growth, increased gas sales and contribution from acquisitions. Notwithstanding these improvements, headline gross margin decreased in the quarter and year-to-date periods in 2017, as a result of unrealized losses on commodity hedges. Results for the prior comparable periods include unrealized on commodity hedges. Eliminating these non-cash movements in both periods shows gross margin increasing by a little more than 5% in the second quarter. Declines in EBITDA and free cash flow in a quarter reflect higher general and administrative expenses largely related to acquired businesses. Trading in the third quarter has been in line with our expectations, including with the benefit of acquisitions concluded in the past 12 months across each of the MIC Hawaii businesses. Following the quarter-end, Hawaii Gas filed a general rate case with the PUC at Hawaii. The rate case is the first such filing since 2008 and request an increase in the annual regulated revenue of $15 million. The actual amount awarded could be different and the cash flow impact of any increase will be reduced by taxes. Visibility into the timing and the outcome of the rate case is not perfect. We expected an interim decision could be made by the middle of next year. That is what we are assuming in our models. At a corporate level, the implementation of our shared service initiative is proceeding in a manner consistent with our overall plan. The new facility is open, certain personnel are being relocated, and the focus now is on integrating the target support services. Keep in mind that the savings will not be spread evenly, or even proportionately across our businesses. Some businesses may simply benefit from an improvement in service level. We remain confident in our ability to reduce our base line general and administrative expenses by at least $12 million to $15 million per year in 2018. For modeling purposes, make your life easy by treating the implementation costs as equal to the underlying savings in 2017. We don’t expect to incur meaningful implementation costs in 2018. In summary, MIC’s results for the second quarter were consistent with our expectations and guidance. We remain on track to deliver growth in cash generation between 10% and 15% on a per share basis and reiterate our guidance around both for that for 2017 and 2018 and an expected increase in our dividend of 10% for 2017. We will distribute a cash dividend of $1.38 per share on August 2017, a 10.4% increase over the cash distributed at this time last year. Our dividend has now been increased each quarter for 16 consecutive quarters. In addition to the stable performance of our existing businesses, we are pleased to be complementing and completing investments and acquisitions in quality firms that we expect will contribute meaningfully to our financial results in the future. In particular, we’re pleased to enter into agreement to acquire Epic Midstream and to form the joint venture with Intersect Power. Today, we have completed or committed to complete growth investments in small acquisitions with an aggregate value of approximately $450 million. Based on those deployments, we have revised our growth CapEx deployment upwards to between $600 million to $650 million for the year. With that, I’ll wrap up the prepared portion of our call and turn the proceedings over to our operator who will open the phone lines for your questions.

[Operator:]

Thank you. [Operator Instructions] And our first question will come from the line of Jeremy Tonet with JPMorgan. Your line is now open.

[Unidentified Analyst:]

Good morning. This is Bill on from Jeremy. Can you share anymore color on the Epic process and whether that was auction or non-auction?

[James Hooke:]

So Epic is a facility that we’ve been in discussions with for sometime. They – I think, they ran a process some point in late 2015 that put Epic on our radar screen. We didn’t participate to the culmination of that process, but got to understand the business and they then pulled that process in 2015 and decided that I would continue and will be a part. Earlier in 2017 we revisited them, once of the reasons we didn’t proceed in 2015 in the way that we had thought was that we weren’t ready yet to take on that level of jet fuel exposure. We haven’t – we didn’t have as much capability sets we would like. By the time we got to the middle of – early part of 2017 and we had more capability in the jet fuel space, we went back to them and engaged in a sort of a exclusive bilateral process with them. So, on the one hand we could say it was a bilateral process, on the other hand they have previously run a process that didn’t go anywhere that was the way they came on our radar screen, but that’s the sort of chronology of what happened in terms of how we got to know them, how we got to learn about their businesses. So, this is a process in some way that our view of them and interaction with them is going on for over a couple of years that’s probably what sets the first time in the IMTT space we’ve engaged in a courtship process that’s taken that long. It’s also the first bolt-on acquisition IMTT has done since 2007, so we don’t have many data points. It’s not unfrequented in the, say, what we do in the Atlantic space that we initially see a site, meet some people, kind of agree on terms, they go away do some work on their business and have their view, and then we come back to them. So, some people have said was it an option, other said was it a bilateral process, it hardly give you a sort of simple answer that depends on what timeframe you look. I think the one thing I would say is that, we’re pleased that the transaction is immediately accretive, this is not one of those transactions where we have to say to you, we’re going to buy this business and it could be accretive in 2020 if we spent the whole bunch of money and the things go right. This is immediately accretive to us and it also brings as well with assets it brings some capability set along to us, so that’s the process.

[Unidentified Analyst:]

Great, thanks. And then just one IMTT, with utilization falling to 94% on the tank repairs and inspections, would that have been relatively flat adjusting out those tanks? Were there any commodity driven factors that would cause a decline in utilization?

[James Hooke:]

No, no. The totality of the change in utilization was driven by tanks offline, tank cleaning and inspection, but the other thing – so there is no – well, there is nothing – there is no other commodity noise or other noise or counterparty issues there, it’s purely that. The one thing I’d say and we spoke about this is a lot in the previous earnings call and the one before that, we’ve always said these things would revert to the historical mean and it’s sort of reverting to the historical mean, that’s also the historical mean in terms of tank cleaning and inspection.

[Unidentified Analyst:]

Great, thanks for taking my questions.

[James Hooke:]

Thanks, Bill.

[Operator:]

Thank you. And the next question will come from the line of Ian Zaffino with Oppenheimer, your line is now open.

[Ian Zaffino:]

Hi, great, thank you very much. Congratulations on increasing the capital deployment budgets. I guess my question would be, as you look at maybe the potential of a fifth vertical, maybe getting into some of these other larger deals, would that then be in addition to that or you maybe just looking at that as – or is that included in that $600 million number now?

[James Hooke:]

No, that is not included. All the $600 million – to $650 million is premised upon is the amount that we’ve spend to-date, plus the two acquisitions that we announced as subsequent events actually closing and we’re hardly confident both of them closing and the only other amount is the growth CapEx, the actual construction projects that we’ve committed to and are already underway and in our pipeline, there is no incremental M&A that’s small or large in that number, so to the extent that we buy anything more whether it’s small or large that will push that number up.

[Ian Zaffino:]

Okay, and on the JV, is there a pipeline that they have out there? Kind of what’s your acquisition criterion? Whether or not you accept things that they have in the pipeline? And what type of returns are you kind of targeting and maybe give us an idea of what your discipline level will be?

[James Hooke:]

Sure. So it’s a good question. I think that the team that we – the former accounts in the Intersect team are a great team of developers with a proven track record. When you say what’s in the pipeline with any solar developer by diligence enough and met with enough that effectively, the answer to that is highly subjective depending on what we call an actual project versus what we call an idea for our project, which is what you – versus what we call an idea – to have an idea for our project. So these guys have $700 million pipeline of things that they are looking at and trying to progress that goal across a different scale. We’re essentially funding the development and we’ll make all the development gain unlike the other partner we have in the wind space, where we get a share of the development proceeds. We get the development gain, which we share with the management team who are there, but we’re not getting just a sort of subset of that, we’re getting predominance of that. The amount of development gain will then depend on, okay, what price to those assets sell for. One option is that, we like to sell them and we will – that we would – if we think the price is high, we will sell them to a third-party to pay the very high price, and we’ll receive a sort of nice double-digit IRR. The alternative is, because someone will buy them on the sort of mid single-digit IRRs of those operating assets trading in today. The alternative is that, we well keep them and we won’t sell them. And if we keep them and we don’t sell them, we will get a blended sort of a nice blended IRR between effectively the development and the ongoing ownership of those. Put simply, we’re not going to invest in solar projects to earn and operate at that mid single-digit that sort of 6%, 7% IRR, because we don’t think it’s a useful use of shareholders funds, and we can generate a sort of closer to 10% IRR on 20-year contracted facilities, then that’s a better profile. And if we can generate in excess of that by just developing and selling down, we’ll do that. So I think, that 700 megawatt pipeline, that is not $700 million, it’s 700 megawatt pipeline. So we will – I don’t think there’s any chance that we will own all of that, because I think there will be people who are prepared to buy at much higher prices once assets are completed than we think they would. Conversely, I think, there could be some projects that when we look at the blended return, we’d like to – we’d like to keep for ourselves. And it maybe that we – with some of the projects we develop, we keep a portion of them, say, 50% portion and then sell down a portion, or it maybe sell them down in its entirety. As with the wind developer that we’ve got, I think, we’re going to be opportunistic there as to how much we sell and how much we keep recognizing that anything that we develop and keep will effectively have a nice blended double-digit IRR, anything we sell down will be less than that. So I hope that gives you some sort of shape. And we have really great alignment with – in both cases, we’re close to wind developer we probably would end into Intersect Power that they’re philosophically aligned. which is, if these are good assets and we’re diving in the long-term, we should keep them. If they would move to someone else, because I got a lower cost of capital or different outlook, we should sell them.

[Ian Zaffino:]

Okay, great. That’s very helpful. Thanks for all the detail.

[James Hooke:]

Thanks, Ian.

[Operator:]

Thank you. And the next question will come from the line of Tristan Richardson with SunTrust. Your line is now open.

[Tristan Richardson:]

Hey, good morning, James.

[James Hooke:]

Hi, Tristan.

[Tristan Richardson:]

Just curious on the Epic transaction. When you think about the organic opportunity set of this asset relative to the IMTT assets, I mean, would you say that they’re consistent, or is there perhaps more opportunity for further capital deployment once the acquisition is closed or pretty consistent with the base business?

[James Hooke:]

So, I would say, look, from 50,000 feet pretty consistent. There are some specific opportunities at Epic that, if I look at, I can see at Savanna, there’s a – there’s real estate to add considerable capacity, which we would be very interested in doing. At some of their other facilities, there’s already some projects that the management team have identified, where they’d like to either capacity or capability that gives the chance to grow the – continue to grow the business. So in that sense we’re pretty excited about what our opportunities will be to deploy on the real-estate that we are acquiring as part of the Epic transaction. Having said that, I’m also excited about some of opportunities to deploy capital on existing IMTT real estate. So, I’d say, there is good opportunities at both. I think the incremental set of opportunities that this gives us is, I said of both relationships and capability around jet fuel, that I think will add incremental opportunities for us across the country. So, yes, on the real estate we’re buying is opportunity to deploy more capital and it’s all in the sort of same sorts of things that IMTT does in terms of the engineering capability requirement to design and build those things, but I also think, from a capability perspective that’s there. But we really do like the Port of Savannah as a market and so especially there, I think there are some things that we have in mind that we’d like to do as well.

[Tristan Richardson:]

Okay, that’s helpful. And then just on 2017, when we think about capital deployment to-date to namely the FPO transaction, organic CapEx in the first half and Epic, you know, it does seem like deployment at least to-date is skewed somewhat towards IMTT mostly as a result of Epic, but just curious, when you look at the $600 million to $650 million for the year, does Epic still sort of skew the annual deployment in 2017 towards IMTT or should we expect in the second half some of that to even out?

[James Hooke:]

Yes, so I think you should probably expect it to even out, I think the one thing I’d say is, Epic is probably, is a $171,000, $500,000 of that $600 million to $650 million BEC II is a large component, there is a fair bit we are doing in the aviation space and as you’ve seen in the renewables space there is other stuff going on. So I think at the end of the year I wouldn’t have expected it to be skewed to IMTT. In fact I would have thought when we get to the end of the year you sort of said IMTT is around 45% of our business. I thought you’d think at all be materially over 45% of that $600 million and in fact it will be under 45% of that. So, I don’t think you’re seeing us skew it one way or the other. It probably looks high at the moment because of the sort of lumpiness of timing. There is another transaction we’ve disclosed, but we can’t discuss that will balance that out, so I don’t think at the end of the year it will look like, unless we [ph] clearly – we haven’t added anything – in terms of those Epic growth CapEx potential opportunities, none of that is in the $600 million to $650 million. So, if there is any growth CapEx to be deployed at Epic, we’ll make that decision definitely upon really integrating that in our business, so I don’t think you should – it’s not like Epic was $170,000 and then there is growth CapEx at Epic, any growth CapEx at Epic we’ll look at separately.

[Tristan Richardson:]

That’s surely helpful, thank you. And then just one from me. Just curious in terms of longer term beyond 2017, I know at analyst day a couple of years ago, when you think about the $650 million in 2017, that looks quite a bit different from you guys have talked about in terms of a long-term target of capital deployment and totally understanding that it’s probably a confluence of opportunities that occurred all at once, but curious how you think about long-term capital deployment and how that relates to sort of the retained cash flow implied by the long-term payout ratio target of 75% to 80%?

[James Hooke:]

Sure. Look, I think, when we had our Investor Day in 2016, we said we were hoping to make $350 million, the new $250 million was sort of cash for the year, which was historically we’ve done $250 million a year in growth CapEx over the proceeding almost a decade and we said, now we’ve got some things right, we thought we could nudge that that up for $350 million. As it churns out in our first year of that target of $350 million, we’ve kind of well blown through it to $600 million to $650 million and maybe the potentially through a little more who knows. I’d say, when I look at the amount of deal flow and from bolt-on acquisitions and I look at the number of growth CapEx opportunities. I’m very, very comfortable with that 350 target, and if there’s anything, I think, we’d probably move through to a position where we’re screening a lot more opportunities. So then there becomes a question for us, which is, okay, companies can only grow according to their sort of their ability to execute that growth. And that execution of growth has two components to it. One is management bandwidth and the second is viability of capital. I think on the management bandwidth perspective, we’re in a great position. And the reason, I say, we’re in a great position is, in four businesses that we have, we can actually grow on four different fronts. So the – whilst the IMTT team will have a bandwidth in integrating Epic, they will have the bandwidth required to execute on the joint venture with Intersect Power has nothing to do with the bandwidth at IMTT. So participating in four sectors gives us more bandwidth. The second is, the sort of the relationship we have with Macquarie, who are essentially the external manager give us a lot more bandwidth. But the example I give there is, it’s clear that we did on Westchester airport, no decision is being made on Westchester airport. So we have no idea whether we’re being successful there or not. But one thing I’d say there though is, we would not have been able to safely and prudently bid for a commercial airport if we didn’t have access to whole Macquarie’s capability in the airport space to the idea of Macquarie’s run airports around the world. And so if would have bid on Westchester airport without that capability just as MIC with the Atlantic management team doing it, it wouldn’t be the sort of thing we do, because it will be too risky. Similarly expanding thermal power, we have access to a capability set that allows us to do that. But if were just MIC, we wouldn’t have. And in renewable power development, we wouldn’t have renewable power development capability if we were just a standalone group. So I think, the relationship with Macquarie gives us a lot more bandwidth, but also gives us a lot more capability to explore a lot more sectors. The second part of your question is, what’s our sort of capital availability and how much can we afford to do in terms of growth CapEx? I think, the answer is, we can – I think, we showed a clear path as to how we could fund $350 million to $400 million a year fairly easily wind retained earnings and the balance sheet capacity that we have. I think, what we’ve also shown in the case of Epic is that, if we want to get it to $650 million, we then have to have access to more capital. In this case, we have access to more capital in the $125 million that we’ve raised through the transaction. But I do think there will be a lot of opportunities. And so then if there’s a lot of opportunities and you have the management bandwidth, the way you think through the rest of it is, if I don’t have access to capital, because I don’t like the price at which I’m issuing capital, or I don’t like or the market is closed, then I effectively increase my hurdle rate materially and I end up doing one in 10 of the projects that I see. And if do have access to capital, then maybe I end up doing two in 10 of those projects. So it’s a – to some extent, it’s an [indiscernible] process, which is – if the cost of capital is too high to do the projects, we won’t do the projects. If the cost of capital is more reasonable, we’ll do more projects. And so I think, the clear path is, we can easily get to $350 million or $400 million, but the velocity of deal flows that we’re seeing are great. It also names, however, from our perspective that like there was no point in doing Epic if it wasn’t going to be accretive. If it’s not accretive, we just wouldn’t – we wouldn’t have done it. There’s a lot of midstream opportunities we’ve seen that haven’t been accretive. And so we would love the asset. We would have loved to do them, but they haven’t been accretive, so there’s no point in doing them. So, I think, from where we sit today, the opportunities that’s flying at us. And I think on the last earnings call, we said, we’ve never been busier in terms of building opportunities and there was a lot of flow. And I could – you could almost hear people joined on the call, which is I read fascinating that sort of what people say until they’ve actually done some deals. We’ve now started a quarter in which we did three deals. So I still see opportunities flying at us and we’re sort of building them, but it allows us to aggressively pick and choose which we want to.

[Tristan Richardson:]

Okay. And that’s helpful. And I guess, just to follow on that. It’s – so we shouldn’t necessarily expect modify or think about your retained cash flow of either as a percent of capital deployment opportunities or said in another way adjusting payout ratio to more internally fund?

[James Hooke:]

No, well, let me do the classic answer here, which is like. We haven’t turned our mind to that. Having said that, I know politicians say all the time, you know I haven’t turned my mind, so that then turnaround and do something differently. We never turned our minds for that, I don’t think it’s likely that you’ll see us lurch in one direction or another direction and make substantial capital management or capital planning changes, because we’re just not lurching kind of people, will we think about it? Will it influence whether we go from 80 or 75 or 75 or 70 probably, but I don’t think you are going to see any radical change in what we do. We just not – we’re not lurching kind of people. Anyone who has seen me knows what – it takes a while for an aircraft carrier to turn and we have more aircraft carrier size human beings, so I don’t think we will suddenly say here is a great set of opportunities, we’re going to massively reduce the payout ratio and start growing the dividend, because there is a massive set of opportunities. I think you’ll see steady as she goes with minor – reserving rights to do minor tweaks at the side, but I don’t want people to, when he said minor teaks, does that mean he is going to take the payout ratio to 60% next quarter? No, like it just means that we’ll try and do what’s sensible, but we will always be a business that’s baked around a fundamental part of the total return being paid on current yield and current distribution that’s the kind of company we are, so.

[Tristan Richardson:]

I always appreciate the insight, thank you guys very much.

[James Hooke:]

Thanks.

[Operator:]

Thank you. And your next question comes from the line of Christine Cho with Barclays, your line is now open.

[Christine Cho:]

Good morning everyone. I wanted to start on Epic, could you guys actually talk a little more about – I know that Department of Defense is a customer, but maybe show some more information about the diversity of the customer portfolio? Then also you say it was done at a 11 times pro forma multiple, can you give us an idea of what it was on current multiple and what needs to be done to get to the pro forma multiple?

[James Hooke:]

So, in terms of the pro forma multiple, the best way I would put that is like, you know when I call it like a run rate multiple, that’s what it’s doing, that’s what it’s doing. We need to integrate it and that’s what it is doing today. It’s not like there is a massive amount of capacity that needs to get constructed and then that’s where it’s added. It’s like, with the business they’ve got today, if you take out a couple of accounts, that’s where you come to is the sort of multiple from a sort of run rate. So, we haven’t done anything sexy with the multiple which is, it’s a 11 times, it’s a whole bunch of stuff goes, right. It’s a sort of 11 times, what mixed use EBITDA is going to be? There is a small amount of synergy, but it’s a small business with a small back office, so again, I don’t want to get overly excited about the level of synergy between our business and their business and a large chunk of what they bring to us is capability in the jet fuel space versus the capability that we’ve got in hand, so we got rid of that to realize more synergy. We’d be getting rid of a chunk of the capability which is the very thing we were hiring. So in terms of terminal deals, I would say it’s on the low-end of the – on the low to very low-end of the synergy spectrum, because what we are trying to acquire is some incremental credibility. In terms of the customer mix, I think it doesn’t suddenly get us really long customer. I would say, if you exclude the – any one customer, if you excluding the Defense Department, the list of customers is by and large a list of people with whom – institutions with whom IMTT already has a relationship, albeit not in the sort of product and commodities that is stored at Epic. So, if you go through the IMTT top 20 list or the sort of top 30 list of people to our current or former current customers of IMTT, you see the name, the same names of the counterparties that we are used to dealing with, just we’re not used to dealing with the jet fuel prices or the jet fuel supplies. In terms of concentration risk, I think we called out the Defense Department because you can sort of see that on the defense, some of these are service, air force bases. And so if a say, it’s airport basis, clearly, it’s pretty clear through the counterparty was you noted to be a sort of Internet fault to connect the dots on that. So I think, it’s a very similar sort of type of customer mix to the one that IMTT already has.

[Christine Cho:]

Okay. And then at IMTT that $500 million of projects that are currently in review, can you expand on that like what sort of projects is this and what products?

[James Hooke:]

Yes.

[Christine Cho:]

It doesn’t mostly comprise us?

[James Hooke:]

So it’s – essentially, I would say, 400 of it is construction, so on existing locals. A lot of it is in, I guess, what I would call, to sort of say, some of the key areas and I’m just trying to get if it workout here, we’re likely to say that won’t get the counterparties sort of hesitate. A lot of it’s in the chemical space and a lot of it’s in the – you tell me what category you put ethanol into like I see kind of workout with our ethanols and petroleum products, because it’s blended with petroleum or vegetable animal product like. So there’s ethanol projects, there’s and a lot of chemical projects. And there’s also some projects, where people are looking and building processing units that they would be in one ongoing offtake agreements with us. So I would say, it’s probably not heavily – it’s probably more skewed away from petroleum than IMTT’s existing product mix. But there are also some petroleum-related products in there – we’d sort of probably say, it’s a longer chemical than it is any other subcategory.

[Christine Cho:]

Okay, great. And then you guys continue to increase CapEx and do acquisitions. Is there an update on the timing of when you expect to be a cash tax there?

[James Hooke:]

No, no we’re still – at the moment the NOLs tied us through at least 2019. And as we’ve said historically, we’d be very disappointed if it was 2019. There’s an enormous amount in terms of things like step up in basis on acquisitions and growth capital deployment. There are also some of the renewable projects we’re looking at. Historically, we haven’t done tax equity in those, whether we would do a combination of sponsor equity and tax equity. And by tax equity for those not familiar with this space, that’s essentially taking the tax incentives from renewable projects. Historically, we won’t sell those tax benefits to other investors who could monetize them all. So there’s – we haven’t pushed that data yet, Christine, but there’s a lot of work that we’re doing to make sure that when that theoretical NOL exploration date, because we’ve given you a revised date of when NOL exploration will occur.

[Christine Cho:]

Okay. And then last, accounting question for me. How much was the impact of the termination of the construction project?

[James Hooke:]

So we haven’t broken it out for those who were sort of wondering, where can I find that in the Q, we can’t. The fact that we haven’t broken it up, so therefore, give a fairly brief sense that it wasn’t a meaningful amount of money. I think, the other thing in relation to this is and sort of payments like this that flows through a number of our businesses in different quarters, we have deferred revenue in a lot of our businesses. And every now and then something happens either a customer exists, because they want to get out faster, or they want to change the capability, or in this case, this was a group of people who started trying to build biodiesel plant many, many years ago when biodiesel was a sexy thing to do. If you then sort of test so where is the biodiesel plant, there isn’t one. They never completed. They kept buying a series of small incremental payments to keep the optional item then probably through the town. So we haven’t broken it out, because it’s not, yes, it’s not a meaningful amount of money.

[Christine Cho:]

Great. Thank you for the color.

[James Hooke:]

Thank you.

[Operator:]

Thank you. And our next question comes from the line of Nick Chen of Alembic. Your line is now open.

[Nicholas Chen:]

James, thanks for taking our question this morning.

[James Hooke:]

Hi, Nick.

[Nicholas Chen:]

Regarding the Intersect Power JV, I’m just sort of trying to think about further down the road, how should we think about that ownership structure of the share in the relationship? Is it always going to be a JV, or do you have the option to acquire the entire portfolio at some point if you want?

[James Hooke:]

So I think, basically, I think I’m sure it is actually we own like a 100% of it. And the management team in certain thresholds of our earnings at MIC, the management team get tick up on that incremental on are up. And so without specifying what that is like we own a 100% of it. And so another way of doing it, I think, probably the easiest way of doing it is, this is a business we own a 100%, where there’s a management team that have a set of incentives to profitably deploy capital and the more profitably they deploy capital, the more money they make. But they only make money on the deployment of our capital well after we’ve made money. and it’s not on our sort of, okay, if I get money – if I make money on one project and then the next project we flush money, they still get paid. It’s like – they’re kind of – they work for us in a portfolio company that they have an incentive scheme. So prudently deploying capital and not just take potshots, but prudently deploy capital across the whole thing. That gives us we think. And if you said to us, why is it taken us so long to find renewable developers? There’s been a number of reviewable developers who either haven’t wanted that structure or wanted to structure whereby if they win tiles we lose. I think, what we found here was a group of really impressive people who actually could see that, we deal live so long as we were all perfectly aligned. If they execute on their business plan, they will do phenomenally well and we will do so phenomenally well. If they don’t execute on their plan, they want to do phenomenally well. And so, I think, we spent an enormous amount of time trying to meet with people who were trying to be tricksy around the sort of incentive schemes that they want to put in place. And I think the people that we have there, and the reason I don’t think these guys are looking to be tricksy as I think they intend to be here for the long haul. Generally speaking with people, the developers we’ve spoken to have tricksy things assets with and these guys are trying to make money in a year or two and then get out. So that’s what, I think, the best way I think it’s true. So we have a 100%, we don’t have to deploy capital if it’s a stupid idea. We can’t be forced into doing something that’s – we just send them a check and hope for the best. We have very actively involved in the day-to-day governance, but these guys really are the experts in what they’re doing.

[Nicholas Chen:]

Understood, okay. And then just turning back to the Westchester airport opportunity, is this fundamentally different than anything else you guys have done in the Atlantic before in terms of managing the overall operation of the entire airport? And also just trying to get a better understanding of what the economics there would look like in terms of how you get paid and what you’re getting paid for?

[James Hooke:]

Sure. So the answer is, yes, it is very different to what Atlantic does. There’s a subset of what happens with that airport. That is analogous to what Atlantic does, or Atlantic has some exposure to the space. But this involves – involvement with a lot of commercial airlines, it involves that sort of stuff. S, yes, it is different. It’s certainly not different the stuff that same Macquarie group has done elsewhere at places like Bristol airport, Copenhagen airport, Brussels, Sydney airport, Rome airport, Macquarie has an enormous amount of expertise in running airports. And so this is – this is probably more adjacent to that. But closer to on an airport, yes, Atlantic has a capability set around that. I also don’t want to get too far in down to sort of how do you get paid? What’s this – what’s the model out? The reason for that is things have eventually just gone in. We haven’t been selected as the bid out, who knows on this one whether we will be selected on the bid, or there’ll be other airports that come out for privatization that will pursue whether we’re selected in his case. If we’re not, I think, there are other things we’ll pursue. If we are, I think, there are other things that we’ll pursue. So it’s a little early in the dive. But it is, yes, it’s – Atlantic has some useful knowledge and input into this space, but it is not just, say, okay, this is identical to what Atlantic does.

[Nicholas Chen:]

Okay. And then just in terms of the competitive bidding environment, two of the other players in the space?

[James Hooke:]

Probably best. Given the political sensitivity, probably best, we don’t comment on that at this stage.

[Nicholas Chen:]

Understood. Well, thanks so much. That was helpful.

[James Hooke:]

Okay.

[Operator:]

Thank you. This concludes today’s question-and-answer session. I would now like to turn the call back over to Mr. James Hooke, Chief Executive Officer for closing remarks.

[James Hooke:]

Thanks very much. Consistent, ladies and gentlemen, with our efforts to attract additional investors, we’ll on the road, participating in a number of road shows and conferences over the next couple of months. If there’s someone you think we should be introduced to the MIC story, please let Jay or Mike know [ph] and I will talk – add these folks to their outreach. I want to thank you all for your time and your support of MIC. We’re very excited about the amount of capital and the quality of the things we’ve been able to – the amount of capital we deployed and the quality that we’ve been able to get to that capital. And I want to thank the entire team here, obviously, submitting bids or airports, signing different deals and developing joint ventures, whilst at the same time operating our existing businesses is an enormous effort. I’m very lucky that I’ve got a great team of people here in New York and scattered across the country in all of our businesses who pull together to make this possible. Thanks very much and have a good day.