Macquarie Infrastructure Holdings, LLC
Q4 2016 Earnings Call Transcript

Published: 22 Feb 2017

[Operator:]

Good day, and welcome to the Macquarie Infrastructure Corporation Fourth Quarter and Full-Year 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 Brain, and welcome once again to Macquarie Infrastructure Corporation's earnings conference call, this one covering the fourth quarter and full-year 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 of 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, Mr. James Hooke.

[James Hooke:]

Thank you, Jay, and thank you to those of you participating in our earnings conference call this morning. We're pleased to report our results for 2016 and free cash flow per share growth in excess of 10%. From where we sit today we see a good continuation of growth in 2017. And based upon the projects and initiatives we have coming online later this year and early in 2018 we believe that the rate of growth in 2018 may well be better than 2017. So our focus in 2017 will be on delivering those 2017 results and filling out our growth agenda for 2017 and 2020. Lest we get ahead of ourselves let's first look at the 2016 results. Our fourth quarter and full year 2016 results were marginally better than we forecasted in November. The better than expected performance in December allowed us to fund additional items among them a voluntary pension contribution at Hawaii Gas that positioned the company well in 2017. Importantly, we were able to fund these additional items and to live up and overall result that was consistent without full year guidance and supportive of a dividend increase again in the fourth quarter. Cash generation continued to be strong. Adjusted free cash flow was up 26.3% in the fourth quarter and 14.5% for the full year on a nominal basis versus our results in 2015. However the figure that we look at and the one we believe matters the most is not the nominal increase but the real increase calculated on a per share basis. On that basis the increase in adjusted free cash flow generated in 2016 was 10.5% over 2015. As we said we would at the end of the third quarter, we did exclude two items in calculating adjusted free cash flow. We believe these help all of us to better understand the ongoing cash generating capacity of our businesses. Our adjusted free cash flow excludes $17.8 million of interest rate swap rate costs and the $8.6 million costs associated with the purchase of a five-year LIBOR cap at the debt at Atlantic Aviation. Neither of these items is reflective of the operating performance of Atlantic Aviation nor for that matter is the $48.2 million of mark to market gains on the value of hedges we also booked during the period. They all show up in the GAAP financials but not in our adjusted free cash flow. The growth in adjusted free cash flow in 2016 actually includes absorbing the impact of $7.5 million of combined voluntary pension contribution and costs associated with planning and preparation related to our shared services functionality. Said differently, we delivered 510 million of adjusted free cash flow or $6.31 per share and we made a pension contribution and we funded the planning of our shared services initiative. In 2017, we expect to exclude costs related to the implementation of shared services from our calculation of adjusted pre-cash flow where those are non-recurring. The obvious example would be severance benefits associated with workforce reductions. The 3.5 million pension contribution has value, both the employees of Hawaii Gas and for MIC. Making the contribution at this point was optimal in light of the rate case that Hawaii Gas expects to file later this year. For the period 2007 through 2016, the compound average annual growth rate in MIC’s adjusted free cash flow has been 13.3% per year and, yes, that reflects the impact of all these settled in shares during that period. With the improvement in cash generation, our Board has authorized a cash dividend for the fourth quarter of a $1.31 per share. That represents a 13.9% increase over the divined paid for the fourth quarter of 2015. In aggregate, we will have distributed a total of more than $411 million dollars or $5.05 per share in cash for the full year. The $5.05 per share is both the midpoint of our guidance for 2016 and in line with the guidance we provided in early 2015 for an average of 14% per year increases in our cash dividend in each of 2015 and 2016. The distribution of $5.05 per share also equates to a payout of 80% of our adjusted free cash flow. Again, the mid-point of what we said was the target range of 75% to 85%. Expressed as a coverage ratio, our distribution was 1.25 times cover. So what was it that drove the results? Atlanta Aviation performed well on the basis of continued increases in flight activity and solid growth in fuel sales stemming from that flight activity. Contributions from sites built or acquired in both 2015 and 2016 were all positives as well. Industry wide domestic general aviation flight activity, the primary driver of Atlantic’s results increased by approximately 2% in the fourth quarter and by 1.7% for the full year. Based on data reported by the FAA. Gross margin generated by Atlantic Aviation increased by 8.3% and 6.4% in the fourth quarter and full year periods respectively. The four times outperformance of Atlantic gross profit relative to flight activity is a function of four items. Firstly, market share growth, Atlantic is doing a better job of competing for business on the airports at which there is a competitor, which we believe is clear evidence of a network effect. Second, increases in the size of the average flying, the increases are more than offsetting engine efficiency by the way. Third, fuel margin growth, a small but important part of the overall growth in gross margin. And fourth, acquisitions and fuel farm and hangar construction. Atlantic’s EBITDA increased by 10.5% on the improvement in operating results including the contribution from acquisitions and investments. EBITDA margin which we view as EBITDA divided gross margin increased to 51.6% in 2016 from 49.6% in 2015. To be fair, a small portion of the improvement in EBITDA imagine was a result of Atlantic benefiting from shared services and having certain functions performed by IMTT during the year. With the implementation of shared services in 2017 we will transfer the pricing in place to appropriately allocate these costs in the future. For reporting purposes, we have allocated the interest associated with the holding company convertible notes issued in October of 2016 to Atlantic Aviation. Given that these were issued as an alternative to operating company level debt, it made sense to show the cost at that level. It is shown on a separate line in the reconciliation to adjusted free cash flow. Excluding the swap breakage and cap costs in the fourth quarter 2016, Atlantic’s free cash flow increased by nearly 22% year-on-year even with the addition of the interest on the convertible notes. Trading at Atlantic through the first month and a half of the year it has been in line with our expectations. It's been a good ski season in the Intermountain West and the generally improving macroeconomic conditions are conducive to strong GA flight activity. Taking a look at contracted power. We required a growth in revenue and EBITDA for the segment in both the fourth quarter and the full year 2016 periods. The renewable portion of contracted power was particularly strong given the increase in both wind and solar resources in 2016 versus 2015. The addition of one quarter of contribution from BEC helped drive improvement in the full year results. Modest topline growth at BEC in the fourth quarter was augmented by effective expense management that saw EBITDA expand by approximately 19% versus the fourth quarter in 2015. Reported free cash flow growth from contracted power is not particularly meaningful given the swap breakage and transaction related costs flowing through the results in 2015. Adjusted for the breakage costs and deal costs, underlying growth in segment free cash flow was up approximately 44% in 2016 versus 2015. Results across the existing assets to-date in 2017 have been consistent with 2016. More important however it is the progress we're making with the construction of additional contracted power assets in Bayonne. First, the gas lateral connecting BEC with the Spectra Pipeline has been built. Final connections, clean up and kissing activities are underway. And we expect to have access to the additional lower cost gas supply by April. The BEC II project is continuing in line with the overall timeline. At this point we anticipate reaching COD with the additional generating capacity about one-year from now. At IMTT, improvement in performance where utilization remained very strong was constrained by the negative contribution from its OMI oil cleanup subsidiary. Storage prices were stable with pricing on renewal stepping up in line with inflation. Utilization remained at the high end of historically normal level at 96.4% at year end. The insurance recoveries we mentioned in our third quarter call flowed primarily through IMTT standalone results. Adjusting for those you could calculate a year on year increase in EBITDA excluding noncash items of about 2%. As it had been through the third quarter, the IMTT result for the fourth quarter was adversely affected by negative EBITDA generated by OMI. This is the case of a small subsidiary having an outsized impact on one line item. In a normal year, OMI represents only about 2% of IMTT's revenue. Excluding the impact of insurance recoveries and OMI, EBITDA at IMTT would have increased by approximately 4%. So the core operations of the business improved in line with our expectations. Headline free cash flow increased by nearly 23% at IMTT, impressive, but that reflects the impact of swap rate costs in 2015. Removing those and making same adjustments for insurance recoveries and OMI, free cash flow generated by IMTT grew by approximately 8.6% in 2016. Qualitatively, contracts for storage and service at IMTT continue to renew for slightly longer duration than they had been early in 2016. The non-renewal of some longer dated contacts for rail service we have discussed previously resulted in an average remaining contract life of approximately 2.3 years at year end. Trading through the first month and a half of the year has been in line with our expectations. In addition we've seen an acceleration in the number and quality of discussions we're having about growth CapEx projects for IMTT. Along with the impact of capital deployment, we expect improvement in the financial performance of IMTT in 2017 as a result of the implementation of our shared service initiative. Some of you have heard about the development of additional storage capacity on the lower Mississippi. The most recent market entrant is the development at Mt. Airy in Louisiana called Pin Oaks. Pin Oaks is situated on land between our operations at [indiscernible]. Development of additional capacity in the region is not news, over the past decade bulk liquid storage capacity throughout Louisiana has increased by nearly 50%. That includes additions to existing captive operations such as the refineries. IMTT has also increased its capacity over that time, quite cost effectively as a result of being able to leverage its existing pipe, pump, dock, fire suppression, and water treatment infrastructure. We don't see Pin Oaks as an imminent threat for a number of reasons. First it's small. Second it has questionable permits and maybe it will have two docks versus IMTT’s 30 docks. The limited number of docks is not insignificant, it e restricts both the type of product moving in and out of the facility and the number of turns through the tanks in a given period. But let me be perfectly clear, would it be better for us if additional capacity weren’t developed on the Lower Mississippi. Yes. Does the development of an additional 2.5 million barrels of capacity sit high on the list of things I'm most concerned about? No. At MIC Hawaii the substantial growth in segment gross margin reflects the impact of businesses acquired in the third quarter of 2016 together with a 3.6% increase in the volume of gas sold by Hawaii Gas. The headline increase in gross margin of 27.6% for the full year also includes unrealized gains on commodity hedges. Excluding these non-cash gains, gross margin would have increased by 5.6%. Segment expenses were higher as a result of the acquisitions, but reported EBITDA increased by 7.5% in the fourth quarter and by 4.5% in the year despite these increases. Reported free cash flow at MIC Hawaii declined in both the quarter and year-to-date periods primarily as a result of an increased provision for income taxes and the contribution to the Hawaii pension plan. The majority of the segment tax provision about 85% is attributable to the federal component that is offset in consolidation. One additional note on capital management last night we finalized the exercise of an option to extend the tenor of our bank debt at Hawaii Gas by one year. The $80 million facility now which matures in February 2022. Trading at MIC Hawaii for the first month and a half of the year has been in line with our expectations. We're pleased with the performance of our recent investments in the segment, [indiscernible] solar is performing consistent with our expectations and the team at Critchfield have uncovered a number of additional opportunities that we are exploring. Stepping back from a segment level, aggregate cash interest expense was lower as a result of a reduction in interest rates overall primarily in connection with the refinancing of Atlantic Aviation. Cash interest in our calculation of adjusted free cash flow excludes the Atlantic related swap breakage and rate cap costs. I would add that we have now successfully refinanced all the long-term debt at our businesses. The weighted average remaining life of our debt facilities is close to seven years and our nearest debt maturity is over three years away. Going forward we will be opportunistic with respect to any additional hedging. But I do not expect that we will incur significant refinancing costs over the near term. Cash taxes specifically state taxes were higher 2016 compared with 2015. The increase in those taxes was the result of the overall improved performance of the business and the absence of performance fees that had created a tax shield in 2015. We filed a consolidated federal income tax return and at present don’t expect to incur a material federal tax liability until at least 2019. We expect that our existing net operating loss carryforwards will shield any otherwise taxable income from federal taxes at least through that point. At December 31, 2016 our NOL balance was approximately $400 million. Investors have asked us what do the tax law changes being talked about in Washington mean for MIC. Our glib answer to that question is to say that we will tell you what tax reform means to MIC when we know which version of tax reform will be implemented. The less glib answer is that we're cautiously optimistic as to what tax reform may mean. Of the potential changes being discussed there are three items that seem to be most likely to have any impact on MIC given how we operate. These are expensing of capital expenditures, deductibility of interest expense and corporate rates generally. Now if capital expenditures were expensed and interest expense deductions were eliminated those two matters should have a net positive impact on our tax position, although the devil will be in the detail. Our roughly $100 million of currently deductible interest expense plus the depreciation associated with approximately $350 million in CapEx provided less than the tax benefit associated with expensing of all of what we expect to be more than $400 million of total growth and maintenance CapEx. In effect these two features would likely see MIC generate additional NOLs that would push the date at which we would become a federal tax payer even further into the future. This result makes no assumption as to whether the dedication of existing interest payments are grandfathered in, in any way. Moreover, the proposed changes include removal of any limits over the period over which NOLs can be used. Clearly generation of a tax penalty turns around at some point. When we ultimately have a federal income tax liability, the benefit of the proposed overall lower corporate rate would be an obvious positive relative to the current rules. We've modeled various scenarios and concluded that these three aspects of the proposed law changes are a net positive or at worst a net neutral to MIC over the medium term. There is a fourth aspect of tax reform that could have a positive impact on MIC though not on our current operations. If the rules are amended to provide for the tax effective repatriation of cash from offshore investments, it may well make investing in non-US opportunities a more attractive option for MIC. Focusing a gain on 2016, maintenance capital expenditures came in slightly about our estimates. We recorded $58 million in maintenance CapEx for the year compared with our guidance of $55 million, pretty close overall. A portion of our maintenance capital expenditures about 13.9 million for the year were offset by insurance recoveries. We published supplemental materials regarding maintenance CapEx earlier this month. The key elements of those from my point of view are firstly that we would like roughly 70% of our maintenance CapEx to be plan and 30% to be reactive. At those levels we believe we're optimizing budgeting procurement and human resource management opportunities. However, we haven't achieved those levels of performance as of yet. So there's more work to be done. Our focus is not just on how much we're spending on maintenance but on how much value we're getting for that spent. Second, we evaluate our maintenance CapEx and benchmark to the best of our ability, our spending versus other industry participants both currently and historically. Those inputs clearly indicate that at today’s levels how spending is consistent with if not above others. And third, is not and in all likelihood won't ever be, anything other than a coincidental correlation between our maintenance spending and the GAAP depreciable life of our assets. This is particularly the case at IMTT, as a result of the step up in our basis in half of the assets of the business in 2014. Collectively growth capital deployments for the full year totaled more than $335 million. Better than our estimate in November and a level that provides us with a high degree of confidence in our ability to achieve deployments of approximately $350 million in 2017. Some of the deployments in 2016 occurred late in the year. The Red Hills solar facility closed at year end as did the acquisition of additional FBO assets at Stewart Airport. And we put capital to work in two development opportunities late last quarter as well. First, we acquired a business that develops jet fuel storage and handling facilities. This group seeks to leverage their experience, expertise and relationships in mainstream, commercial and engineering roles with existing capabilities across MIC. Still early days, we think this will be a good fit for MIC. Second, we also made an investment in a renewable energy development company. In effect, we have provided capital to the firm, we earn a return on that capital and have right of first offer on any of the projects they develop. We expect to enter into an agreement to acquire our first facility, a small solar operation in the next week or so. So in 2016, we added a lot of capability to MIC. When the year started, we had development and construction capability at IMTT and BEC. During 2016, we added that functionality to all of our businesses. In addition to jet fuel storage development capability, we added renewable power development capability and mechanical contracting capability in Hawaii. We start 2017 in the happy position of being able to develop and construct EBITDA at all of our businesses. In growing our EBITDA in the years ahead, we are now agnostic as to whether we build it or we buy it. We believe this dual capability will serve us well in the years ahead, especially during periods when asset prices are higher than we may wish to pay. Having this capability is one of the reasons our growth CapEx backlog has and we believe will continue to expand. Add to this the ability to integrate acquisitions faster and more effectively as a result of the implementation of shared services and you have a powerful one two punch when it comes to driving growth. Looking ahead and on the subject of guidance in particular. On Friday, February 3, we published our initial estimate, regarding out 2017 performance. To summarize those, we continue to expect that adjusted free cash flow will grow at a rate of between 10% and 15% per year and we are now confident enough in our prospects that our guidance now covers each of 2017 and 2018. As I mentioned, when we talk about growth in cash generation, we are talking about our results on a per share basis. In essence, this is a reaffirmation of the guidance we delivered at our Investor Day in May of 2016. As we did then, we continue to expect approximately two-thirds of the 10% to 15% increase in cash generation to come from our existing businesses and approximately one-third to come from the deployment of growth capital. As I mentioned, we expect growth capital deployments in 2017 to total $350 million. At the start of the year, our backlog of approved growth projects alone was approximately 300 million. In addition to the projected backlog, we would expect to invest an additional approximately $100 million involved on acquisitions. Bolt-ons tend to be acquisitions such as additional FBOs by Atlantic or small solar facilities by Contracted Power. We believe our investment in the development companies will help us deploy capital in bolt-on opportunities and as I’ve said in the past, we typically have six to ten conversations underway at any point regarding investments on the part of Atlantic Aviation. Given the opportunity set in front of us today, we could well exceed our capital deployment target of $350 million in 2017. And we're in a fortunate position of having the balance sheet capacity to facilitate these investments. On the back of the expected increases in free cash flow, we are also providing initial guidance for growth in our quarterly distributions of 10% in 2017. That means two things. First, to the extent free cash flow grows at a range above 10% and the dividend increase is a constant at 10%, our payout ratio will be more conservative that it was in 2016. Said differently, our dividend coverage ratio will improve in that scenario. Again to the extent that our free cash flow is above 10%, we will have the ability to fund a larger percentage of our growth projects with retained capital rather than drawing on credit facilities. That would improve our leverage metrics all else being equal. It does not mean that we need to retain capital in order to fund growth, certainly not with $1.4 billion of available credit. For the conspiracy theorists amongst you, the only thing you should read between the lines in our guidance is that we may be able to deploy more than $350 million on attractive growth projects. Let me be crystal clear on this point. We expect free cash flow generated by our businesses to increase at a rate of between 10% and 15%, not just 10%. From a policy standpoint, however, with a target dividend increase of 10%, our coverage and potentially our leverage metrics both improved to the extent that free cash flow growth is at the higher end of the range versus the lower end of the range. In summary, MIC’s results for the fourth quarter and the full year were consistent with our expectations and reflecting of our guidance for both adjusted free cash flow and dividend growth. Top line growth, revenue or in certain instances gross margin was consistent with the 2% to 3% range implied in our free cash flow guidance. Reported cost reductions were consistent with our guidance as well, but were obscured in part in 2016 by the costs associated with planning related to our shared services initiatives. Growth capital deployments in 2016 were ahead of plan, both in terms of the amount and the type of opportunities we were able to find. Importantly, our backlog is strong and we are confident in our ability to deliver or exceed 350 million of additional deployments in 2017. On the strength of our results for the fourth quarter, the MIC board authorized a dividend of $1.31 per share, up 13.9% on that distributed for the fourth quarter of 2015. We expect to continue the upward trend in distributions with growth of 10% in 2017. 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:]

[Operator Instructions] Our first question comes from the line of Jeremy Tonet from JPMorgan. Sir, your line is now open.

[Jeremy Tonet:]

Good morning. As part of the savings from the shared cost savings that you talked about that you all can implement, would you be able to provide any more detail as far as the scale or how big that opportunity set could be relative to your EBITDA?

[James Hooke:]

Sure. I think if you look at that, we think that that will probably be in the $12 million to $15 million a year basis on a run rate basis once it's fully implemented. We've started the implementation already. We had an arrangement announcements that we made to our employees early in January. We’ve announced that that shared services facility will be in Plano, Texas where Atlantic is located and we've already commenced the headcount reduction associated with that. I expect to continue to implement that during the year. We've made progress on some procurement initiatives. And so once that's implemented, I think we would expect between $12 million and $15 million at least of savings.

[Jeremy Tonet:]

Great. Thanks for that. And when you’ve talked about the potential for 2018 to maybe be even better than 2017, is that with regards to the base business performance or is that more just the growth opportunity sets really starting to pick up and that drives better growth potential there and do you see a need for equity in the future, given the larger growth CapEx plans that you foresee.

[James Hooke:]

Sure. So I think in terms of why 2018 improves a little, it is a function of both, I guess the operations of the existing businesses and the capital deployment. I think 2018 will be the first full year benefit where we have a full year benefit of shared services initiatives, because we will be in implementation phase this year. There's some other stuff that we're doing on the cost side that we think will deliver. And then if you look at the other initiatives, the Spectra gas lateral pipeline that we have coming online in 2017, we will only get a partial year benefit of this year. We’ll get the full year benefit in 2018. Specifically, in that winter quarter, just January through March quarter, we suspect will be bigger there. I think in relation to BEC II, that comes online. Hawaii Gas’s rate case, we won’t see any benefit to that, which I guess is underlying existing business growth until 2018 and then we’ll get, I don't even think we'll get a full-year benefit of that in ’18, but we'll get some benefit and then I think in ’19, we get a benefit. So I think in reality, as with everything we do, it's going to be a mixture of growth initiatives and organic growth initiatives or organic free cash flow growth that drives that with 2017. But where we sit with 2018 today, we can just see that benefit from the rate case, the benefit from the Spectra gas pipeline, the benefit from shared services and the benefit from BEC 2 coming online, none of which we achieve any of those in 2017. So that's why we say all else being equal from what we see, that looks a bit more of a tailwind for ’18. In relation to capital, the answer is no, I don't expect -- I think we've said consistently that if we wanted to do a sizable transformative acquisition, we probably need capital for that. That's not on our radar screen at this point in time, especially given our current cost of capital. But I think for the growth initiatives in terms of funding that 350 or in excess of 350, we can do without raising additional capital from both the debt capacity we have available and from that 20% to 25% of free cash flow that we're not distributing that we can then reinvest in to business. So I think we can do it without having any capital overhang. But I also think that most of those initiatives that I've just described are already fully funded effectively. We've already got the cash earmarked to them from existing facilities.

[Jeremy Tonet:]

Great. And then just one last one, as far as you think about M&A, I was just wondering if you could walk across your verticals where you see better opportunities emerging today.

[James Hooke:]

Yes. As I said a fair bit of time on the call, we’re a little more focused at the moment on building and buying, given where we see the prices are at. And so in the jet fuel space, we will continue to look to buy FBOs and we're in discussion with about five or six of those at any one point in time. So I think you'll see bolt-ons there, but I think you're probably seeing more activity in terms of us looking to build out jet fuel storage and handling capability. In Contracted Power, we're much more inclined to look at the development opportunities we have ourselves, whether that be in Chesapeake with BEC 2 or elsewhere on the Bayonne peninsula and in the renewables space, partnering with developers there to develop projects, probably more than in the M&A space. So there probably will be single bolt-on solar opportunities that we look at, but they will all be things that have wrinkles on them. In the case of MIC Hawaii, it’s nothing on the M&A. We’re looking at anything in Hawaii, but to be honest, we can tick the box that we look at acquisitions there. We look pretty quickly, but yes, we tick the box. And then in the case of IMTT, Midstream still seems expensive would be the overall view that we would have, where we still see the ability to build EBITDA at IMTT as being much more attractive than Bayonne EBITDA. So we're still looking, but we don't have money burning a hole in our pocket. I would say in relation to IMTT the thing that’s pleasing is the number of discussions we're having with people about returning to growth CapEx opportunities. I think there, the in-house engineering team are doing more design and proposals and initial design work for customers than we've seen for a period of time. So that’s pretty pleasing, but I think M&A landscape will always be opportunistic, will always be looking, but I don't think any of the growth that we've talked about is premised on it other than to some extent doing bolt-on FBOs at Atlantic Aviation and whilst I guess that technically ticks the box of M&A, if we put that in our own minds in a slightly different bucket, because we're always able to deliver bolt-on acquisitions in the FBO space.

[Operator:]

Our next question comes from the line of Ian Zaffino from Oppenheimer. Sir, your line is now open.

[Ian Zaffino:]

Hey, guys. This is Mark Zhang on for Ian. Thanks for taking my question. So I just want to ask you quickly on the IMTT utilization, as it continues to grow and currently at a historically high level, has your pricing expectations and negotiations for the asset going forward changed incrementally at all? And then following on that, in terms of utilization, you expect it to -- I believe we were back to more historical levels, does that have anything to do with new storage capacity coming on in the South, or is there anything we should keep in mind? Thank you.

[James Hooke:]

Okay. No, it’s good question. So let’s talk about IMTT utilization first. The reason we think it will revert to historically normal levels is because things generally revert to historical normal levels. There's nothing we see coming down the pike that says, this is why we’ll revert to historically normal levels. It's just that eventually things will revert to the mean. So I say that's where it’s at. The one thing to take in line with IMTT utilization increases, part of that is when we acquired the business in 2014, there was a couple of hundred thousand barrels of capacity that have been empty for decades that we took out of that capacity number, because it was one of a better term, pointless capacity. But even adjusting for that, there has been a real increase in utilization. I think that will continue through at least 2017. When will it revert to the historical mean, I've got no idea whether that’s a 2018 it reverts to historical mean or 2025 it reverts to the historical mean, because at the moment we have every incentive to keep those tanks as full as we can and we will. So utilization really is a function of that, but the reason we say it will revert to the mean is because things generally do. In relation to pricing, I think our strategy there remains as we sort of articulated probably for around the last six to nine months is we're more focused on pushing tenor than we are on pushing price step-ups. When we push tenor a little further, we'll then look at pushing price step-ups, but that is to some extent a overall -- that’s my easy 50,000 foot summary of it, with individual customers and individual product categories, we're probably looking at thrice more than we're looking at tenor. The chemical space has a slightly different dynamic playing out to it than the petroleum product space and the vegetable and animal oil space, so we participate in three markets, product wise across 12 geographies, but from a 50,000 foot view, I would say, at this point, we're more focused on tenor than we are on pricing.

[Ian Zaffino:]

Okay, great. That's very helpful. And then just another one, a quick one on BEC. Are you guys thinking about weather impacts to the asset given the milder winter that we've had in the tri-state area?

[James Hooke:]

Yes. So remember with BEC that, five-eighths of that facility is contracted and only three-eighths is merchant. I think it's fair to say, we would love freezing weather. We particularly like volatile weather, because that turns things on. I’d like it to be a little colder than it is. Having said that, one of the things we've discovered from weather related businesses overtime and I’ll hearken back to the statement I made previously is stuff generally reverts to the mean and so I'm sure BEC will revert to the mean. One of the things I’ve also discovered and I’ve only lived in New York 10 years is that when you have a mild February, you sometimes get kicked in the head in March and sometimes even get kicked in the head in April. So, yes, ideally, I'd like it to be a little colder, but I don’t think it’s going to end up really influencing where we come out for the year, because as I said, disappointingly, things revert to the mean overtime. If you look at Q4 EBITDA, Q4 EBITDA wasn’t particularly ferocious from a weather perspective. In fact, weather in Q4 was higher than weather in Q4 of 2015. And yet, we made more EBITDA in Q4 of 16 than we made in Q4 of 15. So I don't want to say it's not -- clearly having said the statement I love it, when it's freezing, we prefer it when it's freezing, but these things are all at the margin.

[Operator:]

Our final question comes from the line of Nicholas Chen from Alembic Global Advisors. Sir, your line is open.

[Nicholas Chen:]

Hi, James. Thanks for taking our questions this morning. Regarding the dialog around the Chesapeake Power project, I know it's a longer-term proposition, but was hoping you could just give some details on how you might look to structure the project and what type of economics would be associated with it?

[James Hooke:]

Yes. So look just to remind people who may not be familiar, we have a IMTT terminal in Chesapeake that has available real estate. It sits immediately next door to a gas pipeline and actually quite close to a second gas pipeline. We have immediate adjacency to transmission capability, so similar to what we looked at in New York, we’re looking at a number of opportunities there. One would be to build and develop a power plant and then sell it to the utility down there. The other would be to build and develop a power plant and retain ownership of it ourselves and the third would be to jointly build and develop the power plant with a co-owner and then retain ownership. Which of those alternatives are we pursuing at the moment? All three? Which will we continue to pursue right up until the finish line? All three. I think you’ll end up getting the most -- the more horses in a race the harder the horses run. So that’s where they will all be. Fortunately, we have the ground and we have most of the permitting. I think to date, we have found the state of Virginia extremely supportive of everything we're doing there. So we’re going to keep working away at that and keep our options open depending on what we think will maximize shareholder value in the long term for MIC shareholders.

[Nicholas Chen:]

That's great. And can you discuss the new out of zone power competing in Zone J and just the impact it's having on pricing in that market?

[James Hooke:]

Yes. So if you look at out of zone power, when a regulator sets the amount of the capacity required and the capacity auction, they set amount of power that has to be produced in market and then an amount that has to be produced out of market. The end market requirement has moved anywhere from 80% to 83%, 83.5% and it’s been historically within those bands. There appears to me to be no signs beyond whether it’s at 80% or 83.5%. I’ve had the signs explain to me extensively and having had it explained to me extensively, I'm pretty convinced there is no science to have that 83.5% to 80%. We’re down that 80 odd percent at the moment. So that impacts the capacity auctions, which are held twice a year. Long-term with Indian point’s closure, I think the out of market electricity transmission market will be, to some extent, need to go through period of adjustment as to what the closure of Indian point means. The one thing I would say is with gas coming from Transco and soon to be coming from Spectra and the heat rate of the equipment we operate on, we are the cheapest electricity provider on a heat rate basis given our new age fleet and the access to cheaper gas. So to some extent, you’ll see these blips and variations in the pricing and the capacity market. That affects by a way of explanation of only three-eighths of that facility, the other five-eighths is not impacted by. And again what do I expect will happen and apologies for sounding like a stuck record on that. I think it will revert to the mean over the long term and over the long term, reverting to the mean would be higher capacity processes in New York. How long will it take to revert to the mean, will it be 2018 or will it be 2025, don’t really know for an asset that we think will last 30 to 35 years, we’re elegantly comfortable with where we are at given that there is only three-eighths of that business that’s exposed to that.

[Nicholas Chen:]

All right, great. And then a final question. Earlier on you mentioned that the engineers at IMTT have been a little bit busier than they have over the past year or two. You've got some customers looking at adding additional capacity. I was hoping you could tell us what end market's at and whether it's pet chem, methanol, vegetable oils, that sort of stuff?

[James Hooke:]

So at the moment, I would say it’s methanol, ethanol, petroleum products and a little vegetable and animal oil and obviously chemical sector other than methanol, we’re seeing stuff in the chemical sector as well.

[Operator:]

That now concludes our Q&A session. I will now like to turn the call back to Mr. James Hooke, CEO, for any closing remarks.

[James Hooke:]

Well, thank you very much for that and consistent with our efforts of late to attract additional investors, we’ll be on the road, participating in a number of roadshows and conferences over the next couple of months. If there's someone you think should be introduced to the MIC story, please let Jay or Mike know and we will add these folks to our outreach. I want to thank our shareholders and lenders for their ongoing support and loyalty to our company. I want to thank our staff and management team for their support and loyalty to our company and particularly, I'd like to [indiscernible] who have really done a great job in implementing our shared services initiative as we roll that out during this quarter. So thanks to them, much appreciated for their assistance. We look forward to speaking with you soon. Good bye.

[Operator:]

Ladies and gentleman, thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone, have a great day.