Macquarie Infrastructure Holdings, LLC
Q2 2016 Earnings Call Transcript

Published: 2 Aug 2016

[Operator:]

Good day and welcome to the Macquarie Infrastructure Corporation Second Quarter 2016 Earnings Conference Call. Today’s call 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, Valessa and thank you and welcome once again to Macquarie Infrastructure Corporation’s earnings conference call, this one covering the second quarter of 2016. Our call today is being webcast and is open to the media. In addition to discussing our quarterly and annual financial performance on this call, we published a press release summarizing the results and filed a 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 use 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 information purposes and is not a solicitation of an offer to buy or sell any security or instrument. This presentation contains forward-looking statements. And 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 to those of you participating in our earnings conference call this morning. MIC's results for the second quarter and year-to-date periods were consistent with our expectations. On the back of these results we've been able to increase our dividend in line with our guidance. Further, we are able to announce some new bolt on acquisitions and growth capital projects that should all else remaining equal enable MIC to continue to grow free cash flow in 2017 and 2018. Along with the improved operating results in the second quarter, we made great progress in filling the growth pipeline helping ensure continued growth and cash generation over the next two years. Our key reporting metric proportionately combined free cash flow increased to more than $126 million up 8.8% compared with the underlying result for the second quarter in 2015. That translates into $1.57 in free cash flow per share. The result was consistent with both our expectations for the period and guidance for the full year. In presenting our results we have and expect to continue to focus on free cash flow a non-GAAP when measuring and managing our performance. For the avoidance of any doubt we do not use free cash flow as a measure of liquidity and don’t believe you should either. We consistently reviewed free cash flow as a measure of performance. Therefore we believe that dividing 126.3 million in free cash flow generated in the quarter by 80.37 million weighted average shares outstanding and providing you with a resulting $1.57 in free cash flow as a per share figure is sensible. I'm pleased that we reported a 5.1% improvement in gross profit what we generally view as the topline for the businesses during the quarter. Excluding non-cash, primarily mark to market changes in the value of propane hedges in Hawaii the growth in gross profit was just over 3% consistent with commentary provided during our Inventory Day with respect to organic growth rates. Expenses remained under control and queued us IMTT in particular for continuing to drive efficiency. We incurred some unusual and but expected expenses in the quarter. First, we incurred upfront cost related to the implementation of our shared services strategy. Second, however results of actively pursuing a number of acquisitions of late, we incurred due diligence costs. And third, we incurred legal expenses associated with our involvement in the process relating to the proposed merger now ended between Hawaiian Electric and NextEra. Given that the sum of the shared services, legal and transaction costs was not material, we don't believe they weren't breaking out in any detail. Consistent with the growth in cash generation overall, the MIC Board has authorized the payment of a dividend of about $1.25 per share in cash for the second quarter, up 12.6% on the distribution for the same period in 2015. Including the dividend for the second quarter, consistent with our target of distribution of between 75% and 85%, we will have distributed 75.6% of our free cash flow per share generated in the first half of 2016. Based on the performance our business is through the first seven months of the year, I am pleased to reaffirm our dividend growth guidance for 2016 and an estimated cash payout of between $5 and $5.10 per share for the calendar year. In addition, to deploying approximately $61 million in growth capital projects and bolt on acquisitions during the quarter, our backlog increased as well. At the end of the second quarter, our backlog of approved projects totaled roughly $370 million, up 85% from the $200 million we reported at the end of the first quarter. The largest component of the increase was the addition of BEC 2, following the approval by the MIC board of the next phase of that project. Turning to our consolidated results for the quarter, revenue was down year-on-year in the second quarter. The decline in the price of jet fuel distributed by Atlantic Aviation and the naphtha gas feedstocks and propane, distributed by Hawaii Gas, both related to the year-over-year fall in the price of crude oil was the primary factor. The average wholesale price of a gallon of jet fuel was down roughly 27% in the second quarter of 2016, compared with 2015. The fluctuations in the price of jet fuel, up or down, are passed through the consumers, while Atlantic works to maintain and where possible increase its dollar based margins on fuel sites. In short, a decline in revenue this quarter is not an indication of a reduction of volume or margin at Atlantic. The absence of any meaningful contribution from IMTT's OMI subsidiary also had an adverse impact on revenue in the quarter. A low level of spill response activity resulted in a negative contribution to IMTT’s overall results. Nevertheless, consolidated gross profit increased year-over-year on improvements in the performance of Atlantic Aviation and better performance by the assets in our CP&E segment in particular. Proportionately combined EBITDA, excluding non-cash items, rose 4% compared with the second quarter in 2015. Excluding the negative EBITDA contribution from OMI, proportionately combined EBITDA would have increased by 6.9%. In other words, core operating performance for the period was just fine. The items between EBITDA and free cash flow netted to an increase in proportionately combined free cash flow of 8.8% for the quarter, reflecting a reduction in interest expense, primarily as a result of the weak capitalization of BEC, a decrease in maintenance capital expenditures overall, partially offset by an increase in cash taxes, primarily as a result of not reporting a performance fee and having the benefits associated with the deductibility of such expense. The increase in cash taxes was primarily state taxes. We expect federal income taxes, other than AMT, to be offset by holding company NOLs. With that, I’ll add a bit of color on the performance of each of our segments in the quarter. At IMTT, storage prices were stable, utilization rates remained at the high-end of historically normal levels at 96.3% and expenses, including direct expenses, were well-controlled. The biggest factor in the reported results for IMTT was the ongoing absence of any contribution from OMI. More than 100% of the year-on-year decline in revenue can be attributed to the lack of any meaningful revenue from OMI. Three successive quarters of soft performance by OMI does beg the question, what are you going to do about it. Although contributions from OMI have been variable and in some years like 2010 significant, it's not an inherently bad business. To increase visibility into the performance of IMTT’s terminal operations, we may return to breaking out OMI as a separate component. OMI, notwithstanding IMTT EBITDA, increased 1% as a result of a reduction in expenses and the slight improvement in gross profit. Reported free cash flow increased 96.4%, but that reflects the impact of swap rate fees in 2015. Excluding the effect of the swap rate costs, free cash flow decreased by 4.2%. Removing the impact of OMI, IMTT’s core business would have generated a year-on-year increase in EBITDA and free cash flow of 7.1% and 3.1% respectively. The year-on-year growth in free cash flow reflects primarily the impact of the timing of maintenance CapEx in 2015 and 2016. We deployed very little at IMTT in the first half of 2015. At Atlantic aviation, industrywide general aviation activity, flight activity, increased by slightly less than 1% in the second quarter and 1.4% on a year-to-date basis. Decreases in international flight activity were more than offset by improvement in the much more important domestic flight activity category. Atlantic Aviation's gross profit rose 6.9% in the quarter, driven by a 4.8% improvement in the same store results. The sequential improvement in results reflects in part the impact of the NHL and NBA play-offs. It was great to have FBOs in Cleveland, Pittsburgh and San Jose. Atlantics’ FBO at Louisville, Kentucky posted strong results in connection with the Kentucky Derby as well. Pleasingly, Atlantic has been awarded a 10-year lease extension with two additional five-year options to continue to operate at Louisville, the number 68 general aviation airport in the US. Fuel gross profit, ancillary services and hangar rental increases all contributed to the positive result. EBITDA increased by better than 10% on the improved operating results including the contribution from acquisitions over the prior 12 months. Free cash flow increased by 18.4% versus the second quarter in 2015. The increase in free cash flow would largely a function of the reduction in maintenance capital expenditures from the intentionally elevated levels last year. At CP&E, the second quarter of 2016 was the first to include a prior comparable period for BEC, the improvement in performance reflects an increase in utilization that more than offset the lower capacity prices in effect this year. Remember, that the lower capacity prices in effect this year, remember that the lower capcity prices only have a negative impact on revenue generated by the 37% of the business that sells power on a merchant basis. The renewables portion of the CP&E segment continued to benefit from improvement in the availability of wind and solar resources in the second quarter. These factors contributed to an increase in CP&E’s segment gross profit of almost 5% year-on-year. Headline EBITDA increased by 57.5% as a result of the topline growth and the absence of transaction-related expenses of $8.4 million in the second quarter of 2015. Excluding the impact of transaction-related expenses EBITDA increased by 1.7%. Free cash flow growth in CP&E reflects the reduction in expense, lower interest as the result of the recapitalization of BEC and improvements in gross profit. Segment free cash flow increased fourfold versus the second quarter in 2015. At Hawaii Gas, Hawaii Gas delivered approximately 2% more gas in the second quarter this year than in the prior comparable period. Reported gross profit increased substantially more than the increase in sales driven by a favorable mark to market on the value of propane hedges during the quarter. Excluding those non-cash gains, gross profits were lower by approximately 2% reflecting a more competitive energy landscape. EBITDA at Hawaii Gas was flat versus the second quarter in 2015 due to a reduction in expenses that offset the lower gross profit. Free cash flow declined by approximately 13% versus the second quarter in 2015, primarily as a result of an increase in the provisions of taxes partially offset by a reduction in maintenance capital expenditures and interest expense. The majority of the tax increase is attributable to the federal component and expected to be offset in consolidation with the application of the MIC level NOLs. Excluding the federal component, free cash flow was flat year-on-year. A number of you have asked about the Hawaiian Public Utilities Commission vote to dismiss NextEra’s application to acquire Hawaiian Electric. We don't foresee any meaningful impact on the operations or performance of the Hawaii Gas as a result of the decision. We expect that Hawaii Gas will continue to fulfill its mission of providing lower cost, clean and reliable energy to its customers. I will now turn to growth capital deployment in the quarter and prospectively. Last evening we signed an agreement to acquire a business in Hawaii, Critchfield Pacific. Critchfield is a design build mechanical contractor based in Honolulu focused on energy efficiency. The acquisition will provide MIC with not only another source of EBITDA and incremental free cash flow but also with additional engineering and energy services capabilities to assist customers in reducing their energy footprint. Critchfield Pacific President Ron Swenson has described his role as helping clients understand the sustainability is both cost effective and the right thing to do. We agree completely and look forward to supporting Critchfield as they partner with the customers and the state in pursuit of Hawaii's clean energy goals. The acquisition of Critchfield is consistent with our views on the border opportunity in Hawaii and our efforts to deliver lower cost cleaner and more reliable energy. Lowering energy costs in Hawaii starts with switching -- with fuel switching and energy efficiency projects. We’re replacing up to 30% of Hawaii Gas’ needs of the naphtha feedstock with more economical and less price volatile and cleaner LNG. We’re investing in a number of renewable projects, which provide a natural hedge against rising oil prices. And with Critchfield, we have the expertise to partner with a range of stakeholders on energy efficiency projects that drive significant cost savings. In addition to lowering energy costs, we’re investing in cleaner forms of energy. In July, the Waihonu solar facility on Oahu achieved commercial operations and are currently ceding power to the grid. This project was a collaborative effort amongst Hawaiian Electric, our local developer, Alexander & Baldwin, who provided tax equity and Bank of Hawaii who provided project finance. Last week, Hawaii Gas was awarded the contract from the city and county of Honolulu for the sale of biogas from the city's wastewater treatment facility. Historically, the methane produced at this facility was flared and the opportunity to use this renewable energy source was lost. Thanks to the forward-thinking city leaders in Honolulu, this will no longer be the case. Instead, the gas collection system will be rerouted in to Hawaii Gas’ existing pipeline network where the energy will be put to productive use, serving utility gas customers. The agreement is subject to approval by the Hawaiian PUC. If approved, we would expect the associated assets to become part of the Hawaii Gas rate base. The addition of Critchfield and Waihonu means that we are likely to make a change to our segment reporting in the coming quarter. Rather than report the results of Hawaii Gas as a separate segment, we will combine all of our Hawaii businesses into a single segment. The business will continue to be managed by separate local teams. Hawaii Gas, the Waihonu solar facilities and now Critchfield will form a single reporting segment, consistent with the way we are managing that portion of the business namely on a regional basis and our strategy in the region. For those of you who may have thought that the only option available to us in Hawaii was a hang around strategy with respect to large-scale LNG, it should be clear that this is not the case. Including our solar development, the renewable gas project, the investment in small-scale LNG, the acquisition of Critchfield and other projects underway, we will look committed more than $60 million in growth projects and acquisitions in Hawaii over the last year. As we identify additional opportunities in Hawaii to deploy capital in line with our strategy, lowering costs, providing cleaner energy alternatives and enhancing reliability, we will move quickly to add them to our business. As many of you will have seen in our filing and press release, our backlog of growth projects now includes BEC 2. The 130 megawatt expansion of the Bayonne Energy Centre. The MIC Board approved the next phase of investment in the power generation project on July 28, following receipt of the regulatory approvals needed prior to the commencement of construction. Subject to meeting all the construction timelines objectives, we expect that the project will be online in early 2018. Given that we expect a larger portion of the expenditures related to BEC 2 to be made in 2017, if we also complete a normal level of smaller projects and bolt-ons, our investment and growth for the coming year would be approximately $350 million. And for those of you who may have been thinking that 2017 was a bit of a gap year in terms of growth and cash generation, I suggest that we have both filled the gap and with the approval of BEC 2, created visibility into continued growth through 2018. Our focus is, to a large extent on 2019 and beyond at this point. During our Investor Day in May, I mentioned that we expected to increase our rate of deployment of growth capital. I said that we expected to increase our investment in growth projects and bolt-on acquisitions from approximately $250 million per year to approximately $350 million per year. We continue to expect that we will deploy approximately $250 million on growth capital expenditure in 2016 in a combination of projects and bolt-on acquisitions. In the second quarter, we completed more than $61 million of growth projects. Through the first half of the year, that means that we have put roughly $123 million to work across all of our businesses and we remain on track with respect to the full-year target. It remains an important part of the MIC story that we I don't need to access capital markets to fund the $350 million per year of growth projects. We believe retained capital and drawings on existing credit facilities will be sufficient. Importantly, assuming we deploy capital effectively, our leverage should remain at the level that preserves our investment grade credit rating. Shifting from growth to maintenance CapEx, we deployed a total of $9.8 million in the second quarter, with a little over $20 million spent year-to-date. We are broadly on track with respect of our guidance for approximately $55 million of expenditures across all of our businesses in 2016. We’ve spent more at IMTT less at Atlantic Aviation at this point last year, but pretty much what we expected to spend in both cases. We’ve also moved forward with the implementation of our shared services initiative. We’ve appointed project leads at each of the major work streams, consolidated the role of CFO across IMTT and Atlantic Aviation, commenced the standardization of accounting systems across our businesses, implemented a common human information system at IMTT in Atlantic Aviation which we will next role out in Hawaii and in sourced the asset management function at BEC. We’re also seeing a greater degree of cross business cooperation in disciplines including safety and engineering. I expect the latter to be enhanced with the acquisition of Critchfield. Regarding performance fees, although an investment in MIC has produced a better than 10% total return year-to-date, the Company's benchmark has been on its head. At the end of last week, the MIC US utilities index was up more than 22% year-to-date. In terms of share price, if the index flattened where it is today, shares of MIC would have to be trading at almost $100 for our performance fee to be generated. Independent of the movement in the index, a high watermark, the minimum share price would need to be for performance fee to be generated is over $86 per share. We've received a number of calls on the subject of base and performance fees, to help address some of those, we’ve created a summary of the fee structure and posted that together with a few examples of the fee mechanics on our website. It’s just a summary and the Management Services agreement remains the defining document. You can find the fee primer under the events and presentations tab on our website. In addition to the primer on fees, we plan to post additional materials including a paper on environmental, social and governance matters at MIC. Presentations highlighting individual businesses and others as may be appropriate. In addition to being useful to those of you on this call, we believe that these materials will be an effective addition to our marketing efforts. We have been and will continue to be actively managed and/or actively engaged with investors and potential investors regarding the merits of inventing in MIC. As a management team, we spend a considerable amount of time meeting with investors speaking at conferences and promoting the company. In the past quarter alone, we were involved in more than 220 one-on-one interactions with investors as well as numerous group events including our Investor Day. The outreach is important not only because we believe in the value of investment opportunity - of our investment opportunity and we want others to benefit from that opportunity but because it’s part of our obligation to you that we attempt to maintain full and fair value of our securities at all times. We are pleased with our share price has been moving in a positive direction since our last update along with much of the market. For MIC, the upward trend is consistent with the growing amounts of cash generated by our businesses, a trend that is underpinned by their essential services nature. In summary, MIC’s results for the second quarter were reflective of that stable essential services nature of our businesses. There were small variations in performance based on things like the softness of OMI’s results but these were more than offset by increased contributions from Atlantic Aviation and the businesses in the CP&E segment. The overall consistency is evidence of the benefit of having a diversified portfolio of businesses. On the strength of the aggregate result, the MIC board has authorized a dividend for the second quarter of $1.25 per share for a 12.6% increase in over that distributed for the second quarter of 2015. Our focus on deployment of capital into attractive growth opportunities saw our backlog grow to approximately $370 million. We are pleased with the economics underpinning these transactions and confident in our ability to execute them successfully. In addition, we look forward to the contribution from the newest business in the MIC portfolio, Critchfield Pacific in Hawaii. Our balance sheet remains healthy and we have no material near-term refinancing needs. Aggregate leverage is within our target range and consistent with what we believe will enable us to maintain our investment grade credit rating. On the ground at our operating companies, trading through the first few weeks of the third quarter has been consistent with our expectations. 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 comes from the line of Jeremy Tonet with JPMorgan. Your line is now open.

[Jeremy Tonet:]

Good morning. I was wondering for BEC, if you could talk to us a bit as far as thinking about the summer and it seems like it's been pretty warm and how we should think about that as far as what that means for the result and kind of, is there any way to think about heating degree days and kind of sensitizing that to what your results could be?

[James Hooke:]

So, you’re right that the summer has been hot and humid. And as pleasant as that has been in New York to sit through, it has brought a smile to our face in terms of the dispatch frequency with which BEC is being dispatched. I think at this point, we haven't got in to sort of guidance on a day-by-day or heating day or cooling day or wet-bulb temperate adjusted figure, but I do think it's fair to say that the environment here has been pleasing. I think if you look at the results for BEC, you also was that two degree in June, where we saw an interesting third quarter where April -- start of April was probably slightly colder than normal and June was slightly warmer than normal. And so, notwithstanding that there was a capacity price reduction in the back end of the second half, actually, we lifted the operating performance coming out of BEC, precisely because the heat in June saw it dispatched more frequently than had previously been the case and that offset any capacity price reduction, but I think as with other businesses we have, we see Hawaii has a degree of climate exposure in terms of the volume there, Atlantic aviation, the amount of severity of the winter drives the DI’s activity in relation to IMTT, the severity for winter drives that. So I think that, notwithstanding that, we’re pretty used to dealing with the seasonality across our businesses, but we were pleased that at BEC, gross profit was up about 6%. I think that really did help us during the second quarter and hopefully the mugginess of the third quarter will continue as someone who is about to take a holiday and get out of this part of the world, I really hope it cranks up pretty severely, probably Wednesday morning if that would be a good time for it to crank up.

[Jeremy Tonet:]

Great, thanks for that. And as far as additional power opportunities, congratulations on BEC 2, but if we think about other opportunities to expand in power PJM markets or other areas, could you just update us there as far as how you see the opportunity set developing?

[James Hooke:]

Sure. So as people may be aware, we’re in the queue in PJM for two other power developments. One is for potentially a gigawatt at Bayonne and the other is for potentially another gigawatt in the Chesapeake area. Getting into the queue in many ways is the easy part of the process, because really all you have to do is file a document, we filed the document and so kudos to the team who managed the paperwork on that, but I think in terms of the actual process, we’re doing a lot of exploratory diligence on what the market in Chesapeake needs and can sustain and similarly what the market in the New York, New Jersey region needs and can sustain. I think in that regard, we’re probably slightly further ahead in our analysis in the Chesapeake region and recall as with those, the reason we’re pursuing both of those opportunities is in both cases, we have some real estate that is appropriately zoned that is not being used for anything else at the moment. That real estate is immediately proximate to gas transmission pipelines that would supply those pipelines. And in both cases that real estate is also immediately adjacent to existing electricity transmission cables that would take the electricity produced. So in both cases, we've got a relatively unique real estate footprint that allows us pursue those options, but until we can see a path to a contracted revenue stream whether it's to contacted to buy the power plant or contacted to buy the electricity, we’ll keep in the exploratory base, there is a good chance with those developments that we sort of develop them on our real estate and then sell most or all of them and retain either carried interest or an ongoing interest in the real estate on which that site existed. So there is a lot of good work being done there, I think in relation to BEC 2, downside for the team and I’ve been mentioning this so many times that we were going to do it, is that people lose sight of the fact that we got this fully permitted, we got EPC contract, it negotiated fully wrapped EPC contracts, we got all the zoning and permitting conducted in under a year start to finish and to get a power plant expansion permitted and approved in that time in this part of the world is a great outcome. So I think from the time we set our mind for something if you good idea to pursue, we have the execution capability to get that done very rapidly. Admittedly the guy who was running BEC project it ended up putting him in hospital but that was the shoulder reconstruction surgery, so I’m not sure that I could find that we worked him into a hospital bed but we will no doubt claim that, but I do think we have good execution capability.

[Jeremy Tonet:]

And just with regards to M&A, I was wondering if you could dive in a bit more as far as how you see things developing maybe not just on the midstream or utility side but also on the aviation side, I think in Analyst Day you talked a bit about doing more there if you could just update us on your thoughts.

[James Hooke:]

Sure. I think as I've said before, we are interested in pursuing M&A opportunities across all four business sectors that we are in and with the acquisition we announced on this call for the deal signed with Critchfield Pacific, we even pulled off an M&A bolt on opportunity in Hawaii. I think the Critchfield opportunity and some of the others we are looking in the Atlantic FBO environment where we’re looking at bolt-on FBOs. Our good script to that typically we - I find smaller deals with good management teams or good assets more attractive than the sort of bigger six-year bank led investment banking led deals. And I think Critchfield will be emblematic of that. We remain on the lookout and have diligence solar and renewable developers with a view to adding that capability to our pipeline, we’re in discussions with several FBOs about bolt-on acquisitions there and so I think the ability of the team to sort of execute on those and integrate those is pretty well established now. I think in the it midstream space there are individual assets that are now coming up for sale, they seem to be pretty vanilla option processes, so either with the person with the lower cost of capital or synergy will win, we are obviously participating in those processes to see if we can be that winner partly in some scenarios where we may have synergy values certainly not in the scenarios where it’s just a lower cost of capital true-up. But I think one of the things that you will see is there was an increase in costs in this quarter of due diligence that didn't just relate to Critchfield it related to some other transactions that we are looking at. I hope that some of transaction come over the line, on the other hand I probably hope all of them don’t because I think there is no point in doing due diligence if you end up having 100% success rate. The whole purpose of due diligence is to see if you want to buy the asset but there is some sort of, there is some due diligence costs that we’ve expanded I think will drive future return on investment with closed transaction but it hasn't today. So we’ve been busy looking at things, the things I remain most excited about though are the small transactions that bring asset or capabilities that are complementary to the assets and capabilities we've got and I think with the Hawaii deal, we’ve done that, but we also continue at IMTT to look at construction opportunities on our existing real estate of new capability for customers, Atlantic is also looking at new hangar development opportunities and fuel farm opportunities, I think there will probably be some new hangar projects announced. I think TT will probably announce some new construction projects. So, I think, as well as the bolt-on M&A, the continued build-out of what we already have is also there. I think the teams, I think I’m pleased with the amount of capital we deployed this quarter and the backlog that we expanded and the team are pretty busy on all of that.

[Jeremy Tonet:]

Great, thanks. And then just one last one if I could, with the NextEra deal not going through, just wondering it seems like that was holding up some of your initiatives there, if you could just update us as far as what you could do now that maybe you couldn’t do before?

[James Hooke:]

Yes, sure. So I think one of the issues that we had always flagged was that we wanted that to clear out of the way before we proceeded with a rate case. And so we’re pleased that that's now out of the way and to do it. The other issue in terms of timing of rate case that we obviously need to factor in is the expenditure and implementation of the 30% LNG project and now the wastewater treatment project where we will be taking the -- putting all of that in to rate base. As soon as we get the capital deployed on those projects, both the wastewater treatment plant and the 30% LNG, then I think, we will go in and file for a rate case. If you ask me the next, which is the logical follow-up question of how long will that take you, the management team there will say, we will do it in superhuman time, also, you're not doing it fast enough, and so there will be the usual tension of how fast can we deploy the capital, partly the benefit of deploying the capital is it produces savings for customers in Hawaii. So we should do that, but we need to do it prudently and safely. So we will do that. And as soon as that capitals deploy, you will see us file for a rate case. I think we will probably have some better timing visibility on that in the backend of this year, but that hurdle that we were sort of waiting to clear there in terms of the NextEra deal, that’s now clear and so the ability to flick the switch on that now really rests with us and that's going to be a function of how fast we get that 30% LNG developed and how far we get the gas lateral pipeline connected to take the wastewater treatment gas that was currently being fled. So I do think there is upside there, in terms of, that’s sort of further growth that I think we will factor in, but I think with what we've done with some of the transactions and growth capital we’ve announced today, I think the imperative of that being there in 2017 is probably a little less.

[Jeremy Tonet:]

Great, thank you for all that. That's it for me.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from the line of Ian Zaffino with Oppenheimer. Your line is now open.

[Ian Zaffino:]

Hi, great. Thank you very much. James, I know at the beginning of the call, you mentioned that you are going to be able to grow free cash flow next year. I think you said because of acquisitions, just give us a little bit more clarity on that, maybe what you think the organic component will be, maybe what you think the M&A component will be, and as you look at kind of free cash flow, how do we think about how it keeps pace with the growth of your dividend? Thanks.

[James Hooke:]

So I think in terms of taking the backend of the question firstly, I think our free cash flow, our dividend will grow roughly in line with our free cash flow. We’re not looking at making substantial changes one way or the other in the payout ratio. We've sort of indicated that the target payout ratio is 75% to 85%. In any given quarter, really, the fall above that or fall below that, depending on what happens specifically in that quarter, but over the sort of medium term, that would be the payout ratio, we’re at 75.6% for the first half of this year. So we are at the low end of that range. Where you end up in that range is partly a function of the timing of maintenance CapEx during the year, and as we've seen historically at all our businesses that both moves around depending on what's going on with the business but also moves around in terms of our management of that. So I don't think you’ll see I think you’ll see as the free cash flow grows so to the dividend grows and that will grow at a sort of similar rate to each other because we don't intend to change the payout ratio. I think if you look at 2017, it’s probably a little premature for us to provide guidance on where that will be. But I sort of say there is a number of sort of stepping stones in place, there will be the underlying organic growth that the businesses deliver, which will come from both a combination of pricing and volume growth but also come hopefully from some cost management and some good cost management especially on the back end of what we're doing on the shared services side of things taking our cost to try to offset the impact of inflation through a better use of things. In terms of the increments of that we will obviously now have a full year benefit of the Critchfield Pacific deal, my guess is that we’ll close within the next month or two. And so, we’ll get a full-year benefit of that, we’ll get a full year benefit of the FBO acquisitions that we’ve done and that we do that will give us a benefit. We’ll get a full year benefit of things like the Los Angeles hangar, LAX hangar that came online at Atlantic and the CapEx that we’re putting into fuel farms and things there, we’ll get a full year benefit on. We’ll get a full-year benefit on the growth CapEx that IMTT has done, especially with some of the new methanol tanks that are going on at [indiscernible] that will come online, we’ll get a full-year benefit of those. And so I think with the sort of capital that we've deployed already this year, we should get a full-year benefit of that in 2017. And then in - and then whatever capital we deploy in 2017, we’ll get a partial year benefit of that and than in 2018, we should have BEC2 come online at some point in the first half of 2018, obviously the sooner is the better from our perspective and that will give you another step function lift in earnings from that CP&E segment in 2018. So I think with some of the stuff we've done, we’ve sort of created a path to growth in ‘17 and then in 2018 we have that visibility of that new projects coming online in ’18. So if you sort of thing through it, we’ve historically said that you’ll get sort of 2% to 3% lift in free cash flow per share from shared services roughly 4% to 6% from growth, 3% to 5% from organic free cash flow growth and sort of around another percent from capital management and sort of balance sheet initiative that we do and that will give you that sort of 10% to 15% range. Now obviously that's contingent on the macroeconomic environment that there is no external shocks to the economy. There haven't been year-to-date and I think you've sort of scene nice sort of organic growth. The other thing that I’d also say and this is the only part that hope fulfills in that strategy for 2017 is I hope that OMI doesn’t such as much in 2017 as it does in 2016, Jay said I wasn’t allowed to use the term such for OMI because it's a non-GAAP metric but I think everyone understands what it means. And so that has been not only has that driven growth this year that’s actually taken us backward this year and that's a business that happens. We sort of get that but that would be the hope component of the strategy for 2017. I think at our Investor Day I said as well as hard work, you need a little bit of luck and so that would be the one where we’re sort of relying on that. But I think that will give you that range, obviously as we get to the back end of this year, we’ll have better visibility on sort of where we’re at but I think there was some shareholders who were like yeah fantastic I see where the BED2 will drive you growth in 2018 but I don't see what you got in 2017, I think hopefully some of the stuff we've announced today get a fair degree of clarity that we have a bit in 2017.

[Ian Zaffino:]

And then I guess the follow-up question would be, if you say free cash flow is going to be growing in line with the dividend. I guess, we’re looking sort of at 13% growth rate for the dividend this year as per your guidance. Free cash flow in the first half of the year was in the single digits does that now mean that the back half is going to be substantially faster growing or are you going to see an acceleration in the second half of the year and if so, is there anything in particular that you can point to that would indicate that?

[James Hooke:]

Yes. So I think the answer to that is very definitely yes, Ian. And the reason for that is, if you recall last year, we've spent almost no maintenance CapEx in the first half of the year and we’ve spent an enormous amount in the second half of the year. In fact, you’ll recall that at Atlantic, we did double the rate of maintenance CapEx for the year that we would normally do and the majority of that was back ended last year. This year, and we sort of foreshadowed this and flagged this, the maintenance CapEx, I was going to say, it's frontloaded, it's more evenly distributed this year than it was last year where it was heavily back-ended. So that means that because we did very little in the first half of this year, the year-on-year comps are materially higher and then when we do less in the second half this year, and we did a lot in the second half of last year, the back-end comps become materially easier, just on the back of that maintenance CapEx timing. So even if we do nothing else, all else being equal, the comp becomes easier. I think given the way that we are spending maintenance CapEx this year, that will become probably more emblematic of what we do on a go forward basis. So I don't think we will get into that comp issue again in 2017. There were two reasons for the spending that we did and I just want to be clear, there was a business logic behind what we did in 2015 and there were two components to it. At IMTT, you will recall, we were spending an enormous amount of time, having just acquired that business, rolling out proper maintenance CapEx management processes and systems, and in the first part of the year, many of the projects were sort of put on hold or not hold, delayed by sort of 2 to 3 months, while we put in place those maintenance CapEx management protocols. That was why we did it and then you ended up once those protocols were in place, IMTT sort of caught up at the back end of the year. And then the second was Atlantic Aviation where we were spending a normal amount of what I’d call maintenance CapEx during the first two quarters of the year and then given the outperformance of Atlantic Aviation, we decided that we would spend more maintenance CapEx, given how substantially that business was outperforming because -- essentially because we could. And rather than take all of that upside through to the bottom line, we decided to reinvest a portion of it in maintenance CapEx. So when I say, and that really ramped up in the second half of the year. So when I say we back-ended it last year, there was an industrial logic to why we back ended it. It wasn't like we had to a whim or we were trying to sort of gain systems. This year, the IMTT protocols are in place and IMTT is spending at a normal rate, so you don't have that issue this year and at Atlantic, whilst it’s sort of performing very well again this year, we don't have the same need or desire to sort of double down on the maintenance CapEx that we did last year. So there wasn't a logic to what we did, but yes, the second half has significantly easier comps on maintenance CapEx, which I think if you break it into a quarter-by-quarter basis, you’ll see they’re pretty stark.

[Ian Zaffino:]

Okay, thank you very much.

[Operator:]

Thank you. And our next question comes from the line of Nicholas Chen with Alembic Global Advisors. Your line is now open.

[Nicholas Chen:]

Hey, thanks for taking our question this morning and congrats on a nice quarter. I was hoping you guys could give us an update on the Talen energy plant that we signed in Bayonne during the Investor Day Tour, can you just discuss any potential scenarios and what you might take over that site and does the progress you've made it be easy to change anything there?

[James Hooke:]

So the plant that you're talking about, I’m familiar, is that the western end of the IMTT Bayonne footprint, is a 170 megawatt cogen facility that has a ground lease. Talen is the operator of the plant there and the ground lease expires in 2018. We've indicated that we won't be extending that ground lease. At the moment, as I understand it, Talen is the subject of a take private bid by Riverstone, who were the largest shareholder, we are not in any discussions with Riverstone or Talen. I think the answer is, we’ll just wait till the end of that ground lease and then once it’s expired, resume full site control of the land. I think in terms of -- sort of the work we’re doing at Bayonne, we have the 7,000 foot gas lateral project where we are building and we currently have drilling equipment on site that is building a 7,000 foot gas lateral pot that connects the Spectra pipeline across to BEC. We’re installing Blackstar equipment at BEC as part of this - a new switch yard capability. Then we're going to be adding 130 megawatts that we've just announced there. I think that is sort of or one of the better term on the power side will keep us pretty busy from power construction and development at Bayonne through 2017 and at that point you get into 2018 when the ground lease expires. That is a site that potentially ideally suited to a new gigawatt facility that we've talked about. We're still working through exactly what you would build there, where you would transfer those electrons, so at this point that sort of where it is at. I think given the age of the talent equipment there is probably not much point and it's only got a year left to run or a year and a half to run on its ground lease, if not that probably make that much sense to do anything but that sort of where things are at.

[Nicholas Chen:]

And then just as a final question, it's come up a few times the discussion of lowering the cost of capital on the debt side. Just by looking at corporate structures that are sort of less asset siloed has there been any progress there that we should be aware of?

[James Hooke:]

There hasn't been any progress that you should be - that is visible yet, there is an enormous amount of work going on. CFO is looking at all kinds of interesting opportunities, just keeping him busy, that’s more of watch this space I would say then anything to report as of yet.

[Operator:]

Thank you. And I'm showing no further questions, I would now like to turn the call back over to James Hooke for any further remarks.

[James Hooke:]

Well, thank you everyone for taking the time today. Consistent with our efforts of late to attract additional investment on the part of stable long-term holders, we’ll be on the road participating in a number of roadshows and one or two conferences over the next couple of months, if there is something you think should be introduced at MIC story please tell Jay or Mike and let them know and I’ll add these folks to our outreach. I want to thank all of our management teams at our businesses and at the corporate office here. I want to thank our lenders who are great partners with our businesses and finally I want to welcome the staff and team at Critchfield Pacific, we look forward to a very good relationship over the next decades as we continue to grow our business together in Hawaii. Thank you and have a good day.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This concludes today’s program you may all disconnect, everyone have a great day.