Macquarie Infrastructure Holdings, LLC
Q2 2015 Earnings Call Transcript

Published: 4 Aug 2015

[Operator:]

Good day, ladies and gentlemen. And welcome to the Macquarie Infrastructure Corporation Second Quarter 2015 Earnings Call. At this time, all participants are in a listen-only-mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As reminder, this call is being recorded. I would now like to introduce your host for today's conference, Mr. Jay Davis, Head of Investor Relations. You may begin your conference.

[Jay Davis:]

Thank you, Dean, and thank you. And welcome once again to Macquarie Infrastructure Corporation’s earnings conference call, this covering the second quarter of 2015. Our call today is being webcast and is open to the media. In addition to discussing our quarterly financial performance on this call, we've published a press release summarizing the results and filed a financial report on Form 10-Q with the Securities and Exchange Commission. These materials were released last evening and maybe downloaded from our website at www.maquarie.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. 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 thanks to those of you participating in our earnings conference call this morning. We appreciate you taking the time to join us for this update on the performance and prospects of MIC. As reflected in our results press release and 10-Q published last night, we reported $1.46 per share in adjusted proportionately combined free cash flow for the second quarter. We made two adjustments to our consolidated results in order to arrive at the $1.46 per share and free cash flow for the quarter. The first adjustment was that we excluded $31.4 million in interest rate swap breakage fees incurred with the refinancing of IMTT’s long-term debt in May of this year. Secondly, and as previously foreshadowed, we excluded $8.4 million in costs incurred with the acquisition of BEC. These two adjustments totaling $39.8 million increase adjusted purportedly combined free cash flow per share by $0.50 per share to $1.46 per share. I believe that our businesses performed well during the second quarter, indeed quite well, versus the prior comparable period, EBITDA per share was up 23% or $0.37 per share, free cash flow per share was up 46.2% or $0.46 per share and our quarterly dividend was up 16.8%, or $0.16 per share versus guidance of 14% growth. Our 23.1% growth in EBITDA per share for the second quarter well eclipses our historical average. The increase came from a mixture of organic growth and the deployment of growth capital. Of the $0.37 per share in EBITDA we estimate that approximately half came from organic growth and the remainder came from the accretive deployment of capital on growth projects or acquisitions. So I would note that there is some subjectivity to this attribution. This implies an organic EBITDA per share growth rate of approximately 11.5%, which is higher than what we believe was our 2007 to 2014 annual rate of organic growth. The organic growth portion came from two key factors. The first was good topline growth, which we view as gross profit, especially at Atlantic Aviation, and secondly, good cost control across the board that in this case, especially at IMTT. The combination of topline growth and cost control so our EBITDA margins, which we define as EBITDA as a percentage of gross profit, up at all businesses and up in the aggregate. As well as EBITDA growth of 23.1 -- EBITDA per share growth of 23.1% or $0.37 per share, we also saw maintenance CapEx reduction of $0.06 per share. Although, we more than doubled the amount of maintenance CapEx we deployed at Atlantic Aviation. The increase was more than offset by reductions in maintenance CapEx at IMTT. While we disclosed maintenance CapEx by business, I would caution shareholders not to put too much store in the business specific results as, more and more we are managing our maintenance CapEx on a companywide basis. For instance, this quarter, we opportunistically spend more on maintenance CapEx Atlantic Aviation, because its EBITDA results were as high as they were and because we knew we were under spending at IMTT. Our cash taxes were down by $0.13 per share, driven by two factors. First, the benefit of adding IMTT to MIC’s consolidated tax position, and second, the tax shield provided by the fees paid to our external manager. Again, while we disclose cash taxes by business, I would caution shareholders not to put too much store in the business specific results as, more and more our tax results are the function of companywide tax planning and tax consolidation. Importantly, we now believe that the point at which MIC could have a material federal income tax liability and consolidation has been extended to the second half of 2019. While maintenance CapEx and taxes were down, MIC's interest expense increased $0.11 per share, primarily due to the incremental interest associated with, first, our acquisition of BEC and the debt we inherited there, and second, the convertible bonds we issued in July of 2014 to fund the acquisition of the second half of IMTT. And again, while we disclose interest by business, I would caution shareholders not to put too much store in the business specific results as, again more and more our treasury and cash management initiatives are taking and managing to a companywide view of leverage. In aggregate, with $0.37 per share more EBITDA, $0.06 per share less in maintenance CapEx, $0.13 per share less in taxes and $0.11 per share more in interest. We sure our -- we saw our adjusted proportionately combined free cash flow grow by $0.46 per share, or 46.1%. This rate far exceed our 2007 to 2014 average of 13.1% per annum growth in adjusted proportionally combined free cash flow per share. Pleasingly, we saw an increase in the organic growth rates of the business and through the deployment of capital on growth projects or acquisitions. With the improved financial performance, the MIC Board authorized a cash dividend for the second quarter of 2015 of $1.11 per share, up 16.8% from the $0.95 per share for the second quarter of 2014. The increase in our quarterly cash dividend represents our seven consecutive quarterly increase, in this case a 3.7% increase over the dividend paid in the first quarter of 2015, up from $1.07 to a $1.11 per share. The dividend will be payable on August 18th to shareholders of record on August 13th. And looking at the cash available for distribution as a dividend this quarter, we've also projected out tax position for the remainder of 2015. We have concluded that MIC is likely to report a GAAP net loss for the full financial year and therefore, any distributions made in calendar ’25 -- 2015 will most likely be characterized as a return of capital for tax purposes. For those of you who maybe new to our story, please note that the combination of large amounts of depreciation and amortization attributable to our operating entities, all non-cash expenses, together with the expensive base in performance fees, generally results in a net loss for GAAP accounting purposes. To be clear, we manage our businesses to free cash flow generation not GAAP earnings. Clearly, MIC is performing ahead of expectations with results -- with respect to generation of free cash flow. We expect to deliver a full year of 2015 results that substantially ahead of 2014 on a per-share basis. Among the things that could drive free cash flow growth at faster rates in 2016 is our capacity to deploy capital, our capital deployment strategy. So let me now comment on cap -- growth capital deployment and why we remain confident in our ability to deploy growth CapEx. There are two aspects I want to address, the first is liquidity or our ability to fund such growth CapEx and the second is the pipeline of opportunities we see as being available for us to invest in. On both fronts, liquidity and deal flow, I believe we are very well-positioned. Let’s turn first of liquidity. There are two dimensions to liquidity, debt and equity. Dealing first with debt, MIC has approximately $1.09 billion of undrawn debt available. First, we have $600 million of undrawn revolver in IMTT, as a consequence of our successful refinancing of IMTT in May of 2015. Second, we have $360 million of revolver at MIC, which we upsize by $110 million during the second quarter. And third, we have $130 million of undrawn revolver at our other businesses. For convenience, we've added a table of outstanding debt balances and undrawn capacity throughout 10-Q under the liquidity and capital resources section. In addition to these sources of debt, we have three sources of equity to fund further growth. First, we have approximately $25 million of cash on hand. Second, the $400 million at-the-market or ATM program we launched in the second quarter of 2015. And third, we have the cash flow that we generate that is not distributed. As many of you will have seen, we implemented an at-the-market or ATM program of equity issuance on June 24. Under the conditions or under the terms of that program, MIC is authorized to issue up to $400 million of additional equity by participating in the market as any other seller. The difference is that the company is a seller of new or primary shares. It's important to note that the ATM program does not mean that we intend to raise $400 million tomorrow. That's not how an ATM works. Shares issued by the ATM, if any, will be sold into the market in small amounts and in a manner that should not be -- have a discernible impact on the price. The proceeds are expected to be used to fund organic growth CapEx or bolt-on acquisitions, I just mentioned. The best example would be the acquisition of an additional FBO at Atlantic Aviation. Raising equity through an ATM is materially cheaper than a regular way secondary offering. The other contributor to our resources is the acceleration in the rate of cash generation. We can retain a portion of that increased cash even as we've reaffirmed our guidance with respect to dividend growth of at least 14% in each of 2015 and 2016. That means, however, we will have a dividend payout ratio that is below our previously stated target of 80% to 85% of free cash flow per share. Those of you who had time to review our 10-Q will note that we accommodated that possibility in our commentary with a broadening of the target range payout ratio to between 75% and 85%. So between the debt and equity streams, I described above, in total we have reasonably ready access to approximately $1.5 billion that could be deployed across a variety of growth initiatives. But as I have noted above earlier, it’s not just having enough money to deploy, you also need a pipeline of opportunities. That's the other element in our growth CapEx story, the deal flow in the pipeline of opportunities. At the start of the year, we noted that we expected to deploy approximately $250 million in growth projects during 2015, including both projects at each of our operating companies and bolt-on transactions. We continue to expect that this will be the case. And we are confident in our ability to deploy that amount of capital. On the other hand, we've only deployed approximately $45 million in organic and bolt-on opportunities in the first half of the year. On the other, including the BEC recapitalization, we've deployed more than $500 million in growth CapEx this year. I can make the case that it really doesn't matter which business or new vertical sees the investment so long as in the aggregate, it contributes to free cash flow growth at rates above our target. Our ability to identify additional investment opportunities in which to deploy growth CapEx is supporting our confidence as well. For example, our backlog of 2016 projects has increased to approximately $90 million, up from $27 million reported previously. In the midstream space, in the last two months, we have seen a definite increase in interest from customers in expanding their business with us to a degree that would require us to deploy growth capital. I believe that our energy producing and energy transporting customers are now adjusting to a $50 per barrel crude as the new normal. Of what we are excited about is, what we see happening in terms of transformative opportunities. We’ve used these calls in the past to comment on what we believe could be a challenging period for companies in the energy space. We’ve speculated the continued low oil prices together with a firming credit market could cause some firms to shed assets as a means of shoring up balance sheets or improving credit metrics, clearly that is playing out. I think you only have to look at how some of the MLPs, the yieldcos, and certain of the industrials have been trading rightly to see or to be able to see the opportunity for us. Moreover, we’ve proven our ability to deploy capital effectively with the successful completion of several acquisitions over the past year. Specifically, Atlantic Aviation's acquisition of a total of seven FBOs has had a substantial positive impact on their business beyond simply the increase in the size of the network. The acquisition of the remainder of IMTT has already been a tremendous success. We have already exceeded our cost and maintenance CapEx reduction targets and we’re yet to begin to tap growth opportunities there. And BEC is allowing us to take advantage of the unique set of circumstances that will deliver growth in a new subsector contracted power and energy in the years ahead. We remain in the fortunate position of being able -- willing and able to consider the acquisition of the businesses or parts of businesses that possess the key characteristics of infrastructure as an asset class. These include high physical value, high-value physical assets that are difficult to replicate and with sufficiently long-dated visibility into their cash generating capacity has to provide us with another dependable source of free cash flow. In short, we have the resources across our operating businesses and at the holding company, sufficient to address expected opportunities over the medium term. And second in addition to the projects identified internally and by teams of each of our businesses, we believe that portions of the market continue to move closer to us in terms of acquisition opportunities. Before providing you with an update on our businesses, I do want to spend a few minutes on one additional corporate matter. The reduction in our payout ratio as a consequence of better-than-expected growth in free cash flow that I mentioned a moment ago is a positive for MIC shareholders. Variability in free cash flow can be situational. For example, depending on the rate of organic growth and the seasonality and pace of maintenance CapEx, the broadening in the range of potential payout ratio takes its variability into consideration. Moreover, a lower payout ratio is by definition more conservative. In particular, given the expected growth opportunities, we see, using a greater percentage of internally generated cash flow to fund these, means less dilution, all else being equal. Our payout ratio for both the second quarter and on a trailing 12 month basis was 76% and it further strengthens our competitiveness. For example, an 80% payout implies a dividend coverage ratio of 1.25 times to borrow a jargon from the MLP universe, a 75% payout roughly where the quarter came out implies a dividend coverage ratio of 1.33 times that is a substantial increase in headroom. We believe that longer term our shareholders will benefit from our disciplined capital management. And who knows, we may be in a position to buy some assets from some of those MLPs with a dividend coverage ratio of one times or less. The bottomline is we will attempt to grow free cash flow to support a growing dividend. Turning now to the performance of our businesses during the quarter. At IMTT, the financial performance of IMTT in the second quarter of 2015 reflects the stability in the operations of this business and the value associated with our active management of the business over the past year. Reported revenue at IMTT was flat with prior comparable quarter and down slightly in the year-to-date period of June 30 -- at June 30th. As was the case in the first quarter, OMI environmental services previously called Oil Mop was involved in a larger cleanup efforts in 2014 than it had been -- has been in 2015 and heating revenue was larger in 2014 than in 2015. Since both of these was substantially first quarter events, the revenue line is normalizing as we move through the year. If we adjust these items out of the period-on-period comparisons, we see a modest improvement in IMTT's gross profit year-on-year. The increase is reflective of a combination of price increases and an increase in the amount of storage on the contract this year versus last. Contract renewals in the second quarter continued to be for relatively shorter durations. Our people on the front line at IMTT report an increase in the level of interest in storage. Sentiments seem to change in June perhaps, as IMTT customers are increasingly comfortable with a petrochemical complex that includes $45 to $50 per barrel crude oil. Costs were one of the matters we focused on one year ago when we set our objectives following the acquisition of IMTT. At that point, we said that we’re expected to be able to reduce expenses by approximately $10 million per year while acknowledging that there were likely to be some offsets for a period of time and things like consultants who hold upon to review safety practices and other similar matters. Nonetheless our stated objective has been achieved with expenses down by more than $10 million versus where they were in July of 2014. I believe we’ll continue to find opportunities for further savings and fully expect that these will drive additional performance improvement over the next several quarters. I would note however but between now and the end of year, we’ll have to spend a certain amount to ensure that IMTT is SOX compliant. The next step down in IMTT, cost will therefore not be until 2016 after SOX compliance is behind us. The topline improvement combined with the expense reductions contributed to growth in EBITDA of almost 9% versus the prior comparable period. I note again that OMI was a drag on year-on-year growth rates. Maintenance CapEx expenses at IMTT for the quarter totaled $6 million, up from just $2.5 million in the first quarter but below what we would have expected as a run rate. We now believe that IMTT will make maintenance capital expenditures of about $40 million for the full year, down from our previous projection of approximately $45 million. As discussed at the outset, MIC’s reported result was adjusted for the $31.4 million of breakage costs, associated with terminating out-of-the-market interest rate hedges at IMTT. The fees are shown in line item in IMTT’s standalone financials. At MIC, we typically hedge our businesses variable rate debt exposure using interest rate swaps. These contracts have durations that are usually one year less than the maturity of the related debt. If we refinance this debt, as we commonly would in the last year of the facility, the hedges will have expired. On the other hand, if we refinance the debt earlier than one year prior to the maturity of the debt, we run the risk that interest rate hedges are out of the market. In May, we successfully refinance the long-term debt of IMTT. The majority of the debt was to have matured almost three years, hence in February of 2018. In the process, we have to break a number of out-of-market swap contracts that were hedging the floating rate exposure on the debt. Making the swap counterparties hold at that point cost IMTT $31.4 million. In determining our adjusted free cash flow, we’ve excluded this item on the grounds that including it merely clouds the picture of the cash generating capacity of the operations at IMTT. The fees associated with breaking the interest rate swap contracts on the debt offset a reduction in both taxes and maintenance CapEx in the quarter and resulted in a reported free cash flow decline of $2.3 million or 7.2%. Adjusted for the swap break fees, free cash flow at IMTT in both the quarter and six month periods increased by more than 90%. Trading at IMTT through the first few weeks of the third quarter remains on plan. The positive trends in contract duration and overall interest in liquid storage have continued and the team responsible for IMTT on a day-to-day basis. Atlantic Aviation, turning now to our airport services business. Atlantic Aviation delivered another very good quarter, again outpacing the fundamentals of the industry. Atlantic generated a more than 13% increase in gross profit for the quarter. That combined with the strong performance in the first quarter, drove nearly 19% increase in gross profit through six months. The factors contributing to the improved results include continued increases in general aviation flight activity and contributions from sites acquired by Atlantic over the past year. The FAA reported an increase in general aviation flight activity of 1.4% in the second quarter of 2015, including increases in domestic activity of 2.5%. We've now seen 18 consecutive monthly increases in aggregate general aviation flight movements. Clearly, the positive trend in general aviation activity continues. In addition to the increase in flight movements, Atlantic benefited from the contribution from quality sites, particularly those in Florida acquired in 2014. We expected the contribution from these facilities to lessen in the second and third quarters. One, as we lap the April 30, 2014 acquisition date and two, simply because there is less traffic into Florida in the summer. While that was the case, we nonetheless saw same-store increasing gross profit of 8.8% in the second quarter. Clearly, the improved results were not driven entirely by the acquisitions. Same-store expenses rose consistent with inflation and overall expenses increased, but at a rate that was considerably below 111% increase in the number of FBOs would suggest. This effective expense management, combined with strong gross profit growth saw Atlantic report EBITDA growth of nearly 24% for the quarter and over 32% through six months. Atlantic’s EBITDA margin, again EBITDA as a percentage of gross profit in 2015 was 49.7% versus 45.6% in the second quarter of 2014. These trends -- the trends were evident in the first quarter and they continue to influence performance of the business in the second quarter, namely strong volume growth, on average larger aircraft filling more of their large fuel tanks with Atlantic fuel, market share gains and effective margin management. Both interest expense and maintenance CapEx were higher in the second quarter of 2015 versus the prior comparable periods. The increase in interest stems from the incremental debt associated with the acquisitions. Similar to the EBITDA result, the flow through to increase free cash flow at Atlantic was 23.4% for the quarter and 34.4% through six months. I would note that the better-than-expected performance of the business in 2015 will likely accelerate -- with that better-than-expected performance will likely accelerate certain maintenance capital expenditures into 2015. At this point, we expect the business to deploy approximately $17 million in maintenance capital projects this year. We are taking advantage of the cash being generated by the business and reinvesting back into it. Atlantic Aviation has continued to perform well through July. Moving now to Contracted Power and Energy. The contribution to the second quarter results from our Contracted Power and Energy segment reflected both the solar and wind businesses and the newest addition to our portfolio, the Bayonne Energy Center or BEC. The reported results included the impact of transaction-related expenses of approximately $8.4 million in connection with BEC as foreshadowed last quarter. The contributions from the wind facilities and BEC acquisitions in the past year were partially offset by the sale of district energy in August of 2014. Adjusted for the acquisition expenses, EBITDA generated by the segment was slightly below our expectations. There was a modest level of underperformance by the renewable facilities, as both the solar and the wind resources were reduced by unusual weather patterns in the Western U.S. in the quarter. We don’t view this as particularly significant and it's consistent with the results being reported by others in that line of business. Regarding BEC, its results for the first quarter of our ownership were marginally below expectations due to lower transmission congestion credits and lower capacity payments. Costs were in line with the expectations across the entire segment, including approximately $8.4 million in transaction-related costs associated with the acquisition of BEC. To the extent that we can build additional efficient generating capacity, we displaced less efficient peaking producers in the market. The fact that we already own the land, the interconnection and the transition cable and we have access to low-cost natural gas means that there is a high likelihood that we can do that. In fact, you will soon see in a filing in the New York ISO Interconnection Queue, in which we are seeking authorization to increase the capacity at BEC by an additional 132 megawatts, not the 100 megawatts we had discussed previously. Now, this is clearly a positive for the project if we are able to secure the requisite approvals. On the other hand, we believe that reaching commercial operations with the additional capacity could take until 2018, not 2017, as had been mentioned earlier this year. That's still a good try, increasing the size of the project by about 30% versus a one-year delay in receipt of cash flows on a present value basis. Before we think about building out additional capacity at BEC, however, we need to finish our work on the balance sheet of that business. In June, we paid down approximately 50% of the $510 million in debt we acquired in April. In July, we paid down the remainder using our holding company revolving credit facility. In our view, BEC had fundamentally the wrong capital structure when we acquired it. That is, it was fine for a private-equity vehicle but not for a total return story like ours. As a result, we intend to finance BEC using a structure that substantially reduces any cash sweep and doesn't push the envelope with respect to our overall leverage target. The new debt is expected to have a cost that is similar to the debt at our other businesses and we anticipate completing the financing of BEC in the very near future. In summary, we are satisfied with the performance of the CP&E segment assets generally and expect some modest upside in normalization of the solar and wind resources over time. Hawaii Gas, the volume of gas sold at Hawaii Gas increased again in the second quarter. Demand was strongest from current and new commercial customers, but there was an uptick in residential consumption as well that lifted aggregate volume by 3.7% versus the prior comparable period. In addition to a relatively stronger economy in the islands, Hawaii Gas continues to benefit from the share shift in the energy complex, away from high-cost electricity to lower cost and cleaner gas products. Regarding our plans to bring containerized L&G into Hawaii, sufficient to offset 30% of our naphtha, the Consumer Advocate issued a statement of position recommending that the HPUC approved the proposal and the matter is now before the commission for a final ruling. Assuming a favorable ruling, Hawaii Gas will proceed with the deployment of approximately $13 million in growth CapEx over the next year or so in relation to that project. Hawaii Gas generated and reported increase in free cash flow of better than 60% in the quarter and year-to-date periods. In summary, growth in the volume of gas sold together with lower taxes, pension contributions and maintenance CapEx resulted in attractive growth in free cash flow generation by Hawaii Gas this quarter. We continue to view Hawaii Gas as being in the best position to deliver a reduction in energy costs for Hawaii by increasing the state's use of cleaner, lower cost gas products. And finally, to summarize our results for the quarter, they were notable for the improvement in operations at IMTT, the continued strong performance of Atlantic Aviation and good contributions from our Hawaii Gas and CP&E businesses. The resulting growth in cash generation was reflected in an increased dividend of $1.11 per share. We reiterate our expectations that we will be able to increase our cash dividend by at least 14% per year in each of 2015 and 2016. MIC remains in a strong position financially. The company has ample resources with which to fund current operations and expected growth opportunities. In addition, we’ve created additional financial flexibility with an increase in our revolving credit facility capacity and the implementation of an ATM, or at-the-market program of share issuances. And our federal income tax position is improved as we now don’t foresee having any material liability until the second half of 2019. We are pleased at the way -- halfway point of 2015. Our businesses are performing better than we expected at the start of the year. With that, I will thank you once again for your participation in our call and ask that our operator open the phone lines for your questions.

[Operator:]

[Operator Instructions] And I am showing our first question coming from the line of Ian Zaffino of Oppenheimer. Your line is open.

[Ian Zaffino:]

Hi. Great. Thank you very much. A very good quarter.

[James Hooke:]

Thanks, Ian.

[Ian Zaffino:]

Question would be on a couple things on the payout ratio. I guess we've always kind of assumed that the dividend would grow at the pace of free cash flow did. And I guess now you're taking the ratio down a little bit. Does that then assume free cash flow is going to be growing faster than that 14% that the dividend is going to grow or how do we conceptually think about that?

[James Hooke:]

I think yes. Ian, it’s a good question. I think we’re standing by our guidance of at least 14% dividend growth and actually this quarter we grew by 16.8%. But I guess to the extent that free cash flow grew materially faster that means that the payout ratio will come down. And what we’ve done is broaden our bands out to sort of 75% to 85% payout ratio, recognizing that there could be sort of quarters in which you see accelerated rate of free cash flow growth. That means you sort of bank some of that in the form of lower payout ratio.

[Ian Zaffino:]

Okay. And then the follow-up would be, is there any type of cyclicality in the second half of the year that we're not accounting for? I guess because it seems like you're on pace to exceed guidance at least from your first half results. Is there something maybe that we're not considering right now?

[James Hooke:]

Look, I think there is probably two aspects to your question. One is, the second half of the year from a year-on-year growth perspective, remember that we acquired IMTT in July 15. So the July 15, we get the comp coming in of IMTT and whilst IMTT is going well, a lot of the benefit that we achieved from free cash flow per share accretion you probably get in your first year ownership. So you got the anniversary of IMTT. In the case of Atlantic Aviation, you’ve had the anniversary of Galaxy acquisition in early April. We do have the full year benefit of BEC sort of offsetting that. I think the only other issue is in the second half of the year. You will see higher maintenance CapEx expansion IMTT. Obviously with us lowering our maintenance CapEx guidance for IMTT to $40 million, you will see a little bit of extra maintenance CapEx expenditure will be back weighted. So I think that’s sort of the only sort of one event to seasonality that I expect in the results. The only other thing that I would add which sort of is implicit in the question, which is given the run rate that you’re on, why didn’t you increase guidance. And I guess the answer is I guess at this point, we didn’t feel the need to. I think the other is, unlike others in the sort of yielding an MLP space, once we have deployed growth CapEx we will factor that into our guidance once the CapEx, growth CapEx is being deployed rather than in advance of that.

[Ian Zaffino:]

Okay. Thank you very much.

[James Hooke:]

Thanks, Ian.

[Operator:]

Thank you. And our next question comes from the line of T.J. Shultz from RBC Capital Markets. Your line is open.

[James Hooke:]

Good morning, T.J.

[T.J. Shultz:]

Good morning. How are you doing? Good quarter. I guess just first on the deal flow, one of the things that you guys talked about. If you could just give a little bit more color on the organic project opportunity set in the lower Mississippi area, kind of what's your line of sight or backlog on projects specifically there? And then as I think about that $250 million in CapEx this year that you're targeting between projects and bolt-ons, can you just kind of tell us what portion of that is focused at kind of the IMTT project level and what portion may be allocated to bolt-ons?

[James Hooke:]

Yes. So I think at the start of the year we sit within that 250 -- 100 roughly a 100 would be on bolt-ons and 100 would be organic. That mix may move around a little as the year progresses. So it may end up at sort of the 120 of bolt-ons and 130 of organic, but that’s the sort of order of magnitude. Part of the reason for that slight tweak is some projects I think will now be more -- on the organic side will be more likely in 2016 than in 2015, but I don’t think that’s a material change. In terms of the mix of organic versus bolt-on, IMTT, we don’t foresee really any significant bolt-on activity. I think if they were bolt-on activity at IMTT, it would be materially bigger than the sort of $100ish million bolt-on that we’re talking about. I think in terms of that 130 to 150 of sort of organic, the vast majority of that is at IMTT. In terms then of the projects that we’re seeing for the lower Mississippi specifically, I wouldn’t just limit IMTT at the moment to the lowest Mississippi. There is actually a couple of projects. We are looking at a New York Harbor as well in the organic space. But I would say overall is there is a set of projects in the petrochemical space that we’ve always spoken about at Geismar, but there is also opportunities at the St. Rose and other locations on the lower Mississippi in the petroleum space. And I would say that Rick Courtney and James May and the team at IMTT had seen a definite sort of uptick in the seriousness and momentum of dialogue. I think in the script we said in June, I don’t know whether it was June or late May or June but the last couple of months, the whole sector seems to have got more used to $15 or lower crude. And I would say the sort of rabbit in the headlights moment that we saw from the sort of back into the fourth quarter and certainly the first quarter of this year is starting to dissipate and the rabbit is probably getting used to the headlights and has resumed activity. So I think whether it’s in methanol or ethanol or distillates, we are certainly seeing increased commercial discussion and dialogue with the view that we think that will lend itself to product, incremental product demand as well as demand for specialty chemicals.

[T.J. Shultz:]

Okay. Good. Thanks. I appreciate that. I guess just thinking more from a larger scale potential M&A just given some of the weakness in the MLP market, are you seeing any more opportunities there come across your desk? And then I guess would you still envision as you think about the MLP market an opportunity here to get involved at the general partner level as the most likely path?

[James Hooke:]

So to your question MLPs with high leverage and high yields and core dividend coverage, have they started to blink? I would say yes. So that sort of started to blink. First, they would have blinked with their shareholders, who blinked and then hit the sell button. But I would say yes, a lot of those folks, I think, are becoming more self-aware. I think probably the last time I was down in Houston, maybe in fact when we caught up, my comment was that you sit across the table from a lot of people in this space and they would say things like you would be surprised at how well we can do in low crude environments. We are having list of those sort of discussions. So I do think there I think in terms of what our involvement would be in that space, it could be anything from buying assets to buying GPs to buying MLP. So I wouldn’t want to restrict degrees of freedom in that space. But I do think that there is a shake out going on and I think it’s probably to some extent being driven by access to credit markets and access to capital markets for those people who have slightly too much leverage. One of the things I would say we have experience with an MIC and I don’t say this is any matter of pride, just more a matter of fact is the management team here is very used to dealing with assets that are very good assets but with the wrong balance sheet. And I would say that that seems to be the case with the number of the midstream asset businesses at the moment is that you have some businesses with good assets but just the wrong balance sheet. So I think we have the capability set there. We are clearly not the only people looking at that space and there are still some pretty whacky views of value out there. So we’re going to need to be disciplined, but I think that opportunity set is definitely opening up.

[T.J. Shultz:]

Okay. Thanks. I will leave it there.

[Operator:]

Thank you. And our next question comes from the line of Jeremy Tonet from JPMorgan. Your line is open.

[Jeremy Tonet:]

Good morning. Congratulations on the strong quarter.

[James Hooke:]

Thanks, Jeremy.

[Jeremy Tonet:]

I think T.J. took a lot of the good questions, but I want to follow up on the M&A theme there and talk about the power side. And I was wondering if you could give us a refresher there as far as how you see valuations out there for M&A. There has been a bit of a change in the market. So I was wondering if you could give us some updated thoughts.

[James Hooke:]

Yes. So I would say let me bifurcate power M&A into wind and solar and also -- and then gas. I think in the wind and the solar space, valuations are too high and remain too high on an M&A front perspective. But I would also say that the market seems to have taken a fairly corrected view in my mind of the yieldco space. And in fact, we’ve even seen yieldcos basically trying to expand outside their traditional space. We saw next NextEra sort of I guess decide that. Solar and wind was too expensive. And so that would pay 15 to 16 times for gas pipeline yesterday. And we’ve seen SunEdison decide to get into sort of any businesses that it can find, but not necessarily in the middle of the fairway compared to where they were. I don’t think yet that solar and wind developers that’s reflected in sort of price normalization in that category, but I do think we sort of see a correction going on in that space. How long it will take to wash through is sort of hard to see. But I do think from a cost of capital perspective, there maybe a sort of outbreak of -- green shoots of an outbreak of rationality in that space or maybe just a passing fad. In the contracted gas space, I’d say valuations again there remain high. Obviously, the IPT’s valuations have come off substantially. So I do think in the sort of contracted power space, there is a chance that sort of some of the eye watering valuations that were being paid six months ago may come off. I'd say it's a lot earlier in that phase of the correction than say the MLP space or I do think the MLP space is further down the path on that correction.

[Jeremy Tonet:]

Great. Thanks for that color. And as far as the performance fees concerned, we appreciate the sponsor. To us it seems like taken a supportive approach to this last one. Could you just let us know what you can say as far as thoughts about taking little bit of a different path there?

[James Hooke:]

Yes. Look, the first think I would say, it’s a one-off that occurred in the second quarter. And so while I agree with your characterization of the supportive path, I don’t think the things we need to be clear that sort of it was a one-off and there is no sort of official precedent value of any of that. I can't comment for Macquarie Group, but I can comment for MIC. And from MIC's perspective, I think that given the situation we were in with the size of the fee we requested and the Board requested of Macquarie that they structure the payment so that a part of it was in cash and a part of it was in stock next year. And I think after that sort of process Macquarie agreed to it. So I clearly thought it was good for MIC, which is why we asked for it. And we were pleased that the manager agreed and did the same, but I do think it was sort of one-off to that circumstance. I think sort of since then what you've seen has been a strengthening in the utilities index. And so I sort of think from where we stand today, certainly that sort of performance fee cycle there was behind us based on where the utilities index is at today. But I would also sort of note that one of the issues is that we sort of clear on this is that the guidance we give doesn’t incorporate any performance fee contemplation. And one of the reasons for that is factoring performance fees into your guidance effectively means you're guessing your own share price and you're implicitly guessing the utilities index performance and predicting one’s own share price seems what slightly vain anyway, even vainer than us probably would be the way I put it. But yes, I think it was a good outcome and I think the manager showed a very good long-term perspective, but clearly I would think that because I like the deal that we struck.

[Jeremy Tonet:]

Great. Thanks for that. And then just one last one for me. I think MLPs might be known from time to time to play with maintenance CapEx to goose distributable cash flow. And I think I know the answer here and I think you made it clear that that's not the case here, but I was just wondering if you could just refresh us as far as your philosophy for maintenance CapEx?

[James Hooke:]

Look, it’s a good question because I do think people goose elsewhere. I think at IMTT, we’re spending less maintenance CapEx in the first half than we plan to spend for the year. So I think we did six in the quarter and we did 2.5 in the first and we’re still maintaining that we’ll spend 40 for the year. So certainly, I think that the run rate of maintenance CapEx than IMTT is on at the moment is lower than we expect. Converse to that, I think you should read into that is, one, we’ve called that out for you. Two, we have accelerated the rate of expenditure of Atlantic. And one of the reasons we’ve accelerated the rate of expenditure of Atlantic is Atlantic is doing very well. But the second reason is because IMTT is under spending versus our expectation, we pulled forward some spending at Atlantic where we could and prudently manage it across the board. So certainly and one of the things we spelled out in the one of the sources of growth of free cash flow for the quarter year-on-year was the maintenance CapEx. The reason I spent so much time in the script actually talking about the EBITDA increase and sort of $0.37, $0.38 of per share that we got from EBITDA is that to me is the real source of value creation. The maintenance CapEx outcome for the second quarter was sort of nice, but it's not what we’re trying to manage to grow free cash flow. The real way of us growing free cash flow is to grow the EBITDA. And so I do think we’ve sort of called out that the result for the quarter on maintenance CapEx at IMTT was sort of lower than we’re expecting. We bought the full year guidance down from $45 million to $40 million. But even at $40 million per year, that would be well higher as a percentage of EBITDA than the terminally midstream businesses are spending. A spending on EBITDA, they’re averaging around 7% of EBITDA. And if you sort of use or sort of trailing 12 around $300 million for ease of math for IMTT, $40 million of maintenance capital on $300 million of EBITDA is well higher than the average.

[Jeremy Tonet:]

Make sense to us. Appreciate the under promise over deliver.

[James Hooke:]

Thank you.

[Operator:]

Thank you. And our next question comes from the line of Brendan Maiorana from Wells Fargo. Your line is open.

[Brendan Maiorana:]

Hi. Thanks. Good morning.

[James Hooke:]

Hi, Brendan.

[Brendan Maiorana:]

How are you guys? So, James, the transformative acquisition that you guys are looking at or that you mentioned? So is this existing platform or are you looking at what could potentially be a new vertical for MIC with some of those opportunities?

[James Hooke:]

Yes. So I would say, 80% to 90% of our attention is on the existing full verticals that we’re in and maybe 10% of our, we would love at some point or at the right point to find the fifth vertical, because one of the things we do believe in is the benefit of sensible diversification, but I don't think it's sort of front of mind at the moment in the sort of opportunities we’re looking at, most of the opportunities we’re looking at are in the full verticals that we’re in today.

[Brendan Maiorana:]

Okay. And would -- I mean, returns be comparable you think to bolt-on acquisition or would it be lower just given the magnitude of these assets and the capital that’s kind of chasing all these opportunities that’s out there?

[James Hooke:]

Yeah. So, I think, the answer is we’re not going to do it if we don’t see similar returns, because if -- we’re not going to drop our returns thresholds to advance into a new space.

[Brendan Maiorana:]

Okay. Helpful. And then the ATM, so that’s definitely an efficient tool as you pointed out and your answer on the question about the fees payable in cash in Q3 to the manager? Is there any more discussion or any more discussion you think from the manager that they may take more of their fees on a regular basis in cash and does the ATM help, if that's the case, does the ATM help you in that tool in the sense to be able to pay that in cash if they go down that route?

[James Hooke:]

I don’t think, I mean, they’ve expressed no indication of taking more in cash. That was without sort of request. So I don’t -- so I think the answer is, I don't expect them to take substantially more fees in cash unless we as a company thought that was worthwhile for them in our preference. In terms of the ATM, no, I don’t think there is a connection there. I think the ATM we really view as being -- if you think about the sort of bolt-ons we’re looking to do and the organic growth CapEx of the projects, the nervousness I had in not having an ATM is essentially you end up having to lever up overtime to fund those growth projects and then hopefully, when you do a capital raise for something else, do a little extra capital to give yourself balance sheet flexibility on those organic projects. I think the ATM now helps us be allowed effectively, continue will be unconstrained relatively in the growth CapEx we deploy and not run the risk of having to lever up over time because actually, whilst we had previously the revolver liquidity, we didn't have as much equity liquidity and this gives us equity liquidity. But I also think there was a lot of commentary in sort of chat rooms when we put it up that okay, that means they’re going to raise $400 million overnight or immediately yedi yada. I think people will be distinctly under whelmed that the speed at which we use the ATM is my guidance, which is sort of when you -- and there is no science that goes into what amount to put on the cover of an ATM. You speak to all these people and they say, just essentially pick a number between 200 and 800, and so we picked 400. And so I don’t think, there is no magic to the number there, but I don’t people should expect to the end of the next quarter to say that we’ve raised $400 million in equity, because I think that would put downward pressure on the stock price through the amount of issuance we were doing and so it would be somewhat self-defeating, so.

[Brendan Maiorana:]

Yeah. You guys can do what 10% of the normal volume, any given day or something like that, is that a threshold?

[James Hooke:]

Yeah. Look, I think, around that people generally say, you want to target to be on average around not more than sort of 10% on average, which may mean some days you do 15% and some you do 5%, but it sort of -- its meant to be such that it doesn’t damage the existing shareholder base and that certainly as existing shareholders, certainly the mindset we will adopt and…

[Brendan Maiorana:]

Yeah. No. I have seen a lot of it in a REIT space and I mean all that have it and have -- seem to have a big issue on their share price once they use it efficiently. So seems like a good one. All right. Thanks for the time, guys.

[James Hooke:]

Thanks, Brandon.

[Operator:]

Thank you. And our next question comes from the line of Sameer Rathod from Macquarie. Your line is open.

[Sameer Rathod:]

Hi. Good morning.

[James Hooke:]

Hi, Sameer.

[Sameer Rathod:]

I had couple of questions regarding the fees sale, why were the cash fees not included in the free cash flow calculation or what's the logic behind that?

[James Hooke:]

Yeah. Look, so I think, paying the fee in cash was something of anomaly because the default mechanism is to pay it in stock. We requested and we had cash on hand, so as not to. And so I think our view was and we’ve sort of disclosed in our K a while ago that we are going to exclude all fees regardless of how they were paid so that we didn’t get in sort of volatility and people comparing the way the businesses ran.

[Sameer Rathod:]

I guess you guys have paid fees in cash twice now. So if it becomes more consistent, should we expect that to be included in the free cash flow calculation or are you saying that going forward you don't expect any more fees to be paid in cash?

[James Hooke:]

Yeah. Look, I think it’s very unlikely. I think we were in a unique situation realistically each time. But the sort of last time we did it before this, you will recall it was that the capital raise for IMTT had gone so well and by so well I mean, the price we issued the stock at was clearly sort of I guess ahead of where we expected to issue it and we upsized the facility. And then compounded by that, we’ve just sold district energy, so we were very long cash, was the first time. And then this time that we did it, we were also long cash because the BEC capital raise had gone very well and the business was delivering fundamentally more earnings than we had sort of expected. So, again, we were long cash and at those periods where you are long cash -- from a cash management perspective, you don't expect to be long cash, we are not managing to be long cash. But when you are and there is a fee going at, you sort of have the conundrum of do I give myself even more dilution or do I use the fact that I’m opportunistically long cash to do it? So, I don’t think it's a -- I think it’s an unusual circumstance and so, I don’t think you'll see it going forward.

[Sameer Rathod:]

Right. I guess could you run through the logic of paying the fees one year from now in terms of -- it seems like it's a dollar value and not a certain amount of shares. It seems like there is additional uncertainty there. I guess what's the logic there? Why one year from now, why not a certain share amount versus like the dollar amount because it seems like there could be a lot more dilution, if the stock price was down?

[James Hooke:]

Sure. Conversely, there will be less dilution if it goes up. I think the reality from MIC's perspective was, we were trying to structure a mechanism whereby we minimized the dilutive impact of the fees. Obviously, in doing that, one way of doing that was push cash out the door now. However, one of the downsides of us pushing cash out the door now was if we did that, there would be a loss of time value of that cash. And so I think in the totality of the trade what we came up with was we’ll issue the stock next year. I think also in terms of just issuing the stock next year, if we’re going to issue stock in 12 months time using today leeway to issue stock in 12 months time has some sort of challenges to it than I don’t know what the SEC's view of that would have been. But I think, probably it would have been that it was a little weird. So, I think the totality of the package was on the basis of that, but my hope would actually be that the dilution will be less not more.

[Sameer Rathod:]

Right. Absolutely. I guess my last question is, was the 14% guidance at risk if the entire fee was paid in shares?

[James Hooke:]

I think if you look at the guidance now, the answer is no, because I think if you look at where we're at for 2015 because we haven't revised our guidance based on where we are tracking, right. I think the reality is sort of view we might take with the ATM and also the view we take here is equity needs to be precious and any dilution you can avoid is as good as possible. Now, one of the things we face is just a reality of our function or about structure is that fees paid to the manager are dilutive. And so as with everything else, we do on the balance sheet side, whether its taxes or leverage or this, we sort of have to balance that as best we can.

[Sameer Rathod:]

Okay. Thank you. Have a great day.

[James Hooke:]

Thanks, Sameer.

[Operator:]

Thank you. And our next question comes from the line of from Ken Gupta from HITE Hedge. Your line is open.

[Andy Gupta:]

This is actually, Andy. James, how are you?

[James Hooke:]

Good, Andy. How are you?

[Andy Gupta:]

Good. Couple of quick questions. One is on the power side. Remind me, again, does BEC have any merchant exposure?

[James Hooke:]

The BEC has -- is effectively at the moment has 62.5% tolling without merchant exposure and the remainder has merchant exposure.

[Andy Gupta:]

Understood. So with that understanding that [indiscernible] is one of the best markets and that you are potential looking into PJM with other asset, any incremental 132 megawatts, is the intention to try and get long-term contracts or you look to manage the merchant exposure in both markets?

[James Hooke:]

Yes. It’s a very good question. I would say the trade-off clear. It’s the surety with respect to the cash generation, if we could get tolling agreement. This is higher revenue per megawatt in a merchant setting. And the way I’ll answer at the moment we are thinking this through is if we can come to a suitable agreement with either the current tolling provider over the new tolling provider then a tolling arrangement might be attractive. However, if they -- if we can't do that on what we believe to be attractive terms, we’d stay with merchant exposure given that where we see the market and where we see our place in the stack in those markets. We are prepared to pay an amount to toll it but we are not prepared to have our faces ripped off. And so the question will then come, as we look at this, what sort of -- what's the sort of terms that we get on offer for the tolling agreement versus is it excessively punitive in our view or is it reasonable and that's the way we’ll think that through.

[Andy Gupta:]

Understood. And in terms of timing, do you think this will be closer to 2017 event or -- because who knows what the market is going to be in 2018.

[James Hooke:]

I think it’s more likely to be that we will progress the development project and we’ll progress the incremental capacity that we’re added. And obviously we’ll have discussions along the way. But I think we're more likely to have reasonable discussions with people, in terms of how aggressively you get your faced ripped off. I think the longer you wait, the less face ripping.

[Andy Gupta:]

Understood. And my next question is around you’ve got a very strong liquidity position but I’m also cognizant to some accretive transactions announced in the last few weeks in the MLP and the yieldco space where, unfortunately, has required more equity and the acquirers talk has tumbled. How do you anticipate managing this situation should you be doing an accretive transaction? Is the thought then just to draw down on your revolver and be opportunistic about an equity raise?

[James Hooke:]

So, the way I characterize it is. I think you have to look at accretion through a fairly skeptical lens which was I think some of those transactions were accretive but that were accretive while changing the risk profile of the yieldco’s that we’re doing them. So I think you have the markets sort of saying, well, sort of fascinating that you back sold the math for accretion. But to be blunt, if you bought a pizza restaurant, you could've generated some accretion as well. So, I think the market, my rate of the market is that the market is now rightfully skeptical as to, is the accretion genuine accretion or is it risk transformative accretion, and if it is risk transformative accretion then the stock will get pummeled. I think the sort of opportunities we are looking at, we sort of would see that funding them through the liquidity that we have available to us, takes away the market risk of doing capital raise. But I still and it maybe a naïve view is I think if you do a good -- if you do a good deal, there is a plenty of capital there. And if you do a deal that looks like it's dodgy or got a slick angle to it, it'll cost you more to raise the equity to do it because you get dinged by the market. So, I think we will try and fund things as we are. We stressed that we’ve got the ample liquidity but I think whilst all the transactions we would look to do would have an accretive component to them. I also think that just banging the button of the accretion without looking at the risk profile of the deal is, I think it's sort of investment banking gone haywire rather than fundamental value creation.

[Andy Gupta:]

That makes sense, James. Thank you for taking my questions.

[James Hooke:]

Thank you.

[Operator:]

Thank you. And at this time, I’m showing no more questions. I would like to turn the call back to Mr. James Hooke.

[James Hooke:]

Thank you everyone for your time. We will be on the road participating in conference and road shows over the next couple of months and look forward to seeing a number of you at those events. Jay will likely be in touch either way, as always makes sure you save the difficult questions for him. In concluding remarks today, I’d also note that during the quarter, Todd Weintraub, retired as a CFO and was replaced by Liam Stewart and I welcome Liam to the MIC team. Todd has been a fantastic partner in thought and business since I took over as CEO in 2009. I understand his desire to do something different but I'm sorry that he's moved on. We’re certainly going to miss him enormously not just for his professional input, but also for his recreational input which can only be described as unique. We will miss him and we thank him. I thank all those shareholders who’ve been with us for a while and also obviously during the conversion to a corporation, we've seen a slight turnover in the register. So I welcome those new shareholders. As I’ve said to many of you before, if you have ideas or suggestions of the things we could do better or things we could look at differently, please feel free to contact either Jay or myself with those suggestions. We’re not above plagiarizing anyone's great idea as to how we can grow our business. Good luck for the rest of reporting scene and thank you for your time today. Bye-bye.

[Operator:]

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may now disconnect.