UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)
x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2017

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from             to            

Commission File Number: 001-32384

 

MACQUARIE INFRASTRUCTURE CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware		43-2052503
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification No.)

125 West 55^th Street
New York, New York 10019

(Address of Principal Executive Offices) (Zip Code)

(212) 231-1000

(Registrant’s Telephone Number, Including Area Code)

(Former Name, Former Address and Former Fiscal Year if Changed Since Last Report): N/A

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer x		Accelerated Filer o
Non-accelerated Filer o		Smaller Reporting Company o		Emerging Growth Company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes o No x

There were 82,419,923 shares of common stock, with $0.001 par value, outstanding at May 2, 2017.

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MACQUARIE INFRASTRUCTURE CORPORATION
 
TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations			1
Quantitative and Qualitative Disclosures About Market Risk			26
Controls and Procedures			26
Consolidated Condensed Balance Sheets as of March 31, 2017 (Unaudited) and December 31, 2016			27
Consolidated Condensed Statements of Operations for the Quarters Ended March 31, 2017 and 2016 (Unaudited)			29
Consolidated Condensed Statements of Comprehensive Income for the Quarters Ended March 31, 2017 and 2016 (Unaudited)			30
Consolidated Condensed Statements of Cash Flows for the Quarters Ended March 31, 2017 and 2016 (Unaudited)			31
Notes to Consolidated Condensed Financial Statements (Unaudited)			33
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			49
Item 1A. Risk Factors			49
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			49
Item 3. Defaults Upon Senior Securities			49
Item 4. Mine Safety Disclosures			49
Item 5. Other Information			49
Item 6. Exhibits			49

Macquarie Infrastructure Corporation is not an authorized deposit-taking institution for the purposes of the Banking Act 1959 (Commonwealth of Australia) and its obligations do not represent deposits or other liabilities of Macquarie Bank Limited ABN 46 008 583 542 (MBL). MBL does not guarantee or otherwise provide assurance in respect of the obligations of Macquarie Infrastructure Corporation.

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Cautionary Note Regarding Forward-Looking Statements

In addition to historical information, this quarterly report on Form 10-Q (Quarterly Report) contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act and Section 21E of the Exchange Act. Forward-looking statements may appear throughout this Quarterly Report, including without limitation, the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section. We use words such as “believe”, “intend”, “expect”, “anticipate”, “plan”, “may”, “will”, “should”, “estimate”, “potential”, “project” and similar expressions to identify forward-looking statements. Such statements include, among others, those concerning our expected financial performance and strategic and operational plans, as well as all assumptions, expectations, predictions, intentions or beliefs about future events. You are cautioned that any such forward-looking statements are not guarantees of future performance and that a number of risks and uncertainties could cause actual results to differ materially from those anticipated in the forward-looking statements. Such risks and uncertainties include, but are not limited to, the risks identified in our Annual Report on the Form 10-K for the year ended December 31, 2016, and in other reports we file from time to time with the Securities and Exchange Commission (SEC).

Given the risks and uncertainties surrounding forward-looking statements, you should not place undue reliance on these statements. Many of these factors are beyond our ability to control or predict. Our forward-looking statements speak only as of the date of this Quarterly Report. Other than as required by law, we undertake no obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise.

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PART I
 
FINANCIAL INFORMATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of the financial condition and results of operations of Macquarie Infrastructure Corporation should be read in conjunction with the consolidated condensed financial statements and the notes to those statements included elsewhere herein.

Macquarie Infrastructure Corporation (MIC) is a Delaware corporation formed on May 21, 2015. MIC’s predecessor, Macquarie Infrastructure Company LLC, was formed on April 13, 2004. Except as otherwise specified, all references in this Form 10-Q to “MIC”, “we”, “us”, and “our” refer to Macquarie Infrastructure Corporation and its subsidiaries.

MIC is externally managed by Macquarie Infrastructure Management (USA) Inc. (our Manager) pursuant to the terms of a Management Services Agreement that is subject to the oversight and supervision of our Board of Directors. The majority of the members of our Board of Directors have no affiliation with Macquarie. Our Manager is a member of the Macquarie Group of companies comprising the Macquarie Group Limited and its subsidiaries and affiliates worldwide. Macquarie Group Limited is headquartered in Australia and is listed on the Australian Stock Exchange.

We currently own and operate a diversified portfolio of businesses that provide services to other businesses, government agencies and individuals primarily in the U.S. The businesses we own and operate are organized into four segments:

Our businesses generally operate in sectors with barriers to entry including high initial development and construction costs, long-term contracts or the requirement to obtain government approvals and a lack of immediate cost-effective alternatives to the services provided. Overall they tend to generate sustainable, stable and growing cash flows over the long term.

Overview

Use of Non-GAAP measures

In addition to our results under U.S. GAAP, we use certain non-GAAP measures to assess the performance and prospects of our businesses. In particular, we use EBITDA excluding non-cash items, Free Cash Flow and certain proportionately combined financial metrics. Proportionately combined financial metrics reflect MIC Corporate and our ownership interest in each of our businesses.

We measure EBITDA excluding non-cash items as it reflects our businesses’ ability to effectively manage the volume of products sold or services provided, the margin earned on those transactions and the management of operating expenses independent of the capitalization and tax attributes of those businesses.

In analyzing the financial performance of our businesses, we focus primarily on cash generation and Free Cash Flow in particular. We believe investors use Free Cash Flow as a measure of our ability to sustain and potentially increase our quarterly cash dividend and to fund a portion of our growth.

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See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Consolidated — Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) excluding non-cash items, Free Cash Flow and Proportionately Combined Metrics” for further information on our calculation of EBITDA excluding non-cash items, Free Cash Flow and our proportionately combined metrics and for reconciliations of non-GAAP measures to the most comparable GAAP measures.

At IMTT, we focus on providing bulk liquid storage, handling and other services to customers who place a premium on ease of access and operational flexibility. The substantial majority of IMTT’s revenue is generated pursuant to “take-or-pay” contracts providing access to storage tank capacity and ancillary services.

At Atlantic Aviation, our focus is on attracting and maintaining relationships with GA aircraft owners and pilots and encouraging them to purchase fuel and other services from our fixed based operations (FBOs). Atlantic Aviation’s gross margin is correlated with the number of GA flight movements in the U.S. and the business’ ability to service a portion of the aircraft involved in those operations.

The businesses that comprise our CP segment generate revenue by producing and selling electric power pursuant primarily to long-dated power purchase agreements (PPAs) or tolling agreements all with creditworthy off-takers.

MIC Hawaii comprises Hawaii Gas and several smaller businesses collectively engaged in efforts to reduce the cost and improve the reliability and sustainability of energy in Hawaii. The businesses of MIC Hawaii generate revenue primarily from the provision of gas services to commercial, residential and governmental customers, the generation of power and the design and construction of building mechanical systems.

Dividends

Since January 1, 2016, MIC has paid or declared the following dividends:

Declared

Period Covered

$ per Share

Record Date

Payable Date

May 2, 2017

First quarter 2017

$

1.32

May 15, 2017

May 18, 2017

February 17, 2017

Fourth quarter 2016

1.31

March 3, 2017

March 8, 2017

October 27, 2016

Third quarter 2016

1.29

November 10, 2016

November 15, 2016

July 28, 2016

Second quarter 2016

1.25

August 11, 2016

August 16, 2016

April 28, 2016

First quarter 2016

1.20

May 12, 2016

May 17, 2016

February 18, 2016

Fourth quarter 2015

1.15

March 3, 2016

March 8, 2016

We currently intend to maintain, and where possible, increase our quarterly cash dividend to our shareholders. The MIC Board has authorized a quarterly cash dividend of $1.32 per share for the quarter ended March 31, 2017, or a 0.8% increase over the dividend for the quarter ended December 31, 2016 and 10.0% increase over the dividend for the quarter ended March 31, 2016. In determining whether to adjust the amount of our quarterly dividend, our Board will take into account such matters as the state of the capital markets and general business conditions, the Company’s financial condition, results of operations, capital requirements, capital opportunities and any contractual, legal and regulatory restrictions on the payment of dividends by the Company to its stockholders or by its subsidiaries to the Company, and any other factors that it deems relevant, subject to maintaining a prudent level of reserves and without creating undue volatility in the amount of such dividends where possible. Moreover, the Company’s senior secured credit facility and the debt commitments at our businesses contain restrictions that may limit the Company’s ability to pay dividends. Although historically we have declared cash dividends on our shares, any or all of these or other factors could result in the modification of our dividend policy, or the reduction, modification or elimination of our dividend in the future.

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Results of Operations

Consolidated

Key Factors Affecting Operating Results for the Quarter:

Our consolidated results of operations are as follows:

		Quarter Ended March 31,								Change Favorable/(Unfavorable)
		2017				2016				$				%
		($ In Thousands, Except Share and Per Share Data) (Unaudited)
Revenue
Service revenue		$	363,804			$	312,241				51,563				16.5
Product revenue			87,653				84,146				3,507				4.2
Total revenue			451,457				396,387				55,070				13.9
Costs and expenses
Cost of services			154,706				116,463				(38,243	)			(32.8	)
Cost of product sales			47,225				33,060				(14,165	)			(42.8	)
Selling, general and administrative			76,952				72,284				(4,668	)			(6.5	)
Fees to Manager – related party			18,223				14,796				(3,427	)			(23.2	)
Depreciation			57,681				53,221				(4,460	)			(8.4	)
Amortization of intangibles			17,693				17,787				94				0.5
Total operating expenses			372,480				307,611				(64,869	)			(21.1	)
Operating income			78,977				88,776				(9,799	)			(11.0	)
Other income (expense)
Interest income			34				33				1				3.0
Interest expense(1)			(25,482	)			(56,895	)			31,413				55.2
Other income, net			1,182				3,429				(2,247	)			(65.5	)
Net income before income taxes			54,711				35,343				19,368				54.8
Provision for income taxes			(22,073	)			(15,167	)			(6,906	)			(45.5	)
Net income		$	32,638			$	20,176				12,462				61.8
Less: net loss attributable to noncontrolling interests			(3,377	)			(2,179	)			1,198				55.0
Net income attributable to MIC		$	36,015			$	22,355				13,660				61.1
Basic income per share attributable to MIC		$	0.44			$	0.28				0.16				57.1
Weighted average number of shares outstanding: basic			82,138,168				80,113,011				2,025,157				2.5

Revenue

Consolidated revenue increased for the quarter ended March 31, 2017 compared with the quarter ended March 31, 2016 primarily as a result of an increase in volume of fuel sold and an increase in the wholesale cost of fuel at Atlantic Aviation and an increase in volume of gas sold and an increase in the wholesale cost of gas at our Hawaii Gas business. Consolidated revenue also increased for the quarter ended March 31, 2017 due to contributions from acquisitions within the MIC Hawaii segment.

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Results of Operations: Consolidated – (continued)

Cost of Services and Product Sales

Consolidated cost of services and product sales increased for the quarter ended March 31, 2017 compared with the quarter ended March 31, 2016 primarily due to an increase in the wholesale cost of fuel at Atlantic Aviation, unrealized losses on commodity hedges and increases in the wholesale cost of gas at the Hawaii Gas business and contributions from acquisitions within MIC Hawaii.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased for the quarter ended March 31, 2017 compared with the quarter ended March 31, 2016 primarily due to $2.4 million of costs incurred in connection with the implementation of our shared services initiative and incremental costs associated with acquisitions in 2016. We expect to incur additional implementation costs during the balance of 2017, principally in relation to severance and consulting services, and to realize full year savings in connection with consolidating common back-office functions including Accounting, Human Resources, Tax, Information Technology and Risk Management support for each of MIC’s operating entities in 2018.

Fees to Manager

Our Manager is entitled to a monthly base management fee based primarily on our market capitalization and potentially a quarterly performance fee based on the total stockholder return relative to a U.S. utilities index. For the quarters ended March 31, 2017 and 2016, we incurred base management fees of $18.2 million and $14.8 million, respectively. For the quarters ended March 31, 2017 and 2016, our Manager did not earn any performance fees. The unpaid portion of the base management fees and performance fees, if any, at the end of each reporting period is included in Due to Manager-related party in our consolidated condensed balance sheets.

In all of the periods shown below, our Manager elected to reinvest any fees to which it was entitled in additional shares. In accordance with the Third Amended and Restated Management Service Agreement, our Manager has currently elected to reinvest future base management fees and performance fees, if any, in additional shares.

Period		Base Management Fee Amount ($ in Thousands)				Performance Fee Amount ($ in Thousands)				Shares Issued
2017 Activity:
First quarter 2017		$	18,223			$	—				232,398	(1)
2016 Activities:
Fourth quarter 2016		$	18,916			$	—				230,773
Third quarter 2016			18,382				—				232,488
Second quarter 2016			16,392				—				232,835
First quarter 2016			14,796				—				234,179

Depreciation

Depreciation expense increased for the quarter ended March 31, 2017 compared with the quarter ended March 31, 2016 primarily as a result of assets placed in service at Atlantic Aviation during 2016 and from acquisitions.

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Results of Operations: Consolidated – (continued)

Interest Expense and Gains (Losses) on Derivative Instruments

Interest expense includes gains on derivative instruments of $954,000 and losses on derivative instruments of $31.8 million for the quarters ended March 31, 2017 and 2016, respectively. Gains and losses on derivatives recorded in interest expense are attributable to the change in fair value of interest rate hedging instruments. For the quarter ended March 31, 2016, interest expense also included the non-cash write-off of deferred financing costs at Hawaii Gas related to the February 2016 refinancing of its $80.0 million term loan debt and its $60.0 million revolving credit facility. Excluding the derivative adjustments and deferred financing cost write-offs, interest expense decreased for the quarter ended March 31, 2017 compared with the quarter ended March 31, 2016 primarily due to an overall lower weighted average interest rate, partially offset by a higher average debt balance. Cash interest expense was $25.9 million and $27.4 million for the quarters ended March 31, 2017 and 2016, respectively. See discussions of interest expense for each of our operating businesses below.

Other Income, net

Other income, net, decreased for the quarter ended March 31, 2017 compared with the quarter ended March 31, 2016 as a result of the absence of insurance recoveries totaling $2.5 million from losses in connection with damaged docks at IMTT.

Income Taxes

We file a consolidated federal income tax return that includes the financial results for IMTT, Atlantic Aviation, Bayonne Energy Center (BEC), MIC Hawaii and our allocable share of the taxable income (loss) from our solar and wind facilities, which are treated as partnerships for tax purposes. Pursuant to a tax sharing agreement, the businesses included in our consolidated federal income tax return pay MIC an amount equal to the federal income tax each would have paid on a standalone basis as if they were not part of the consolidated federal income tax return.

For the year ending December 31, 2017, we expect any consolidated federal income tax liability to be fully offset by net operating loss (NOL) carryforwards. Our federal NOL balance at December 31, 2016 was $398.1 million. We believe that we will be able to utilize all of our federal prior year NOLs and, together with planned tax strategies, we do not expect to make regular federal income tax payments any earlier than the second half of 2019.

At March 31, 2017, we expected that for the year ending December 31, 2017 we would report current year taxable income of approximately $130.0 million and pay approximately $1.5 million in Alternative Minimum Tax, net of available investment tax credits. In May 2017, we completed an investment in a renewable project that will, provided it has reached commercial operations prior to year-end, generate investment tax credits that would entirely offset the forecasted Alternative Minimum Tax. The project is expected to be in service in October 2017.

For the year ending December 31, 2017, we expect to pay state income taxes of approximately $15.0 million. In calculating our consolidated state income tax provision, we have provided a valuation allowance for certain state income tax NOLs, the use of which is uncertain.

Protecting Americans from Tax Hikes Act (PATH Act)

The PATH Act retroactively extends several tax provisions applicable to corporations, including the extension of 50% bonus depreciation for certain assets placed in service in 2015, 2016 and 2017, 40% bonus depreciation for eligible property placed in service in 2018 and 30% bonus depreciation for eligible property placed in service in 2019. Other than the extension of the bonus depreciation provision, the Company does not expect the provisions of the PATH Act to have a material effect on its tax profile.

Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) excluding non-cash items, Free Cash Flow and Proportionately Combined Metrics

In addition to our results under U.S. GAAP, we use certain non-GAAP measures to assess the performance and prospects of our businesses. In particular, we use EBITDA excluding non-cash items, Free Cash Flow and certain proportionately combined financial metrics. Proportionately combined financial metrics reflect MIC Corporate and our ownership interest in each of our businesses.

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Results of Operations: Consolidated – (continued)

We measure EBITDA excluding non-cash items as it reflects our businesses’ ability to effectively manage the volume of products sold or services provided, the operating margin earned on those transactions and the management of operating expenses independent of the capitalization and tax attributes of those businesses. We believe investors use EBITDA excluding non-cash items primarily as a measure of the operating performance of MIC’s businesses and to make comparisons with the operating performance of other businesses whose depreciation and amortization expense may vary widely from ours, particularly where acquisitions and other non-operating factors are involved. We define EBITDA excluding non-cash items as net income (loss) or earnings — the most comparable GAAP measure — before interest, taxes, depreciation and amortization and non-cash items including impairments, unrealized derivative gains and losses, adjustments for other non-cash items and pension expense reflected in the statements of operations. EBITDA excluding non-cash items also excludes base management fees and performance fees, if any, whether paid in cash or stock.

Given our varied ownership levels in our CP and MIC Hawaii segments, together with our obligations to report the results of these businesses on a consolidated basis, GAAP measures such as net income (loss) do not fully reflect all of the items we consider in assessing the amount of cash generated based on our ownership interest in our businesses. We note that the proportionately combined metrics used may be calculated in a different manner by other companies and may limit their usefulness as a comparative measure. Therefore, proportionately combined metrics should be used as a supplemental measure to help understand our financial performance and not in lieu of our financial results reported under GAAP.

Our businesses can be characterized as owners of high-value, long-lived assets capable of generating substantial Free Cash Flow. We define Free Cash Flow as cash from operating activities — the most comparable GAAP measure — which includes cash paid for interest, taxes and pension contributions, less maintenance capital expenditures, which includes principal repayments on capital lease obligations used to fund maintenance capital expenditures, and excludes changes in working capital.

We use Free Cash Flow as a measure of our ability to provide investors with an attractive risk-adjusted return by sustaining and potentially increasing our quarterly cash dividend and funding a portion of our growth. GAAP metrics such as net income (loss) do not provide us with the same level of visibility into the performance and prospects of the business as a result of: (i) the capital intensive nature of our businesses and the generation of non-cash depreciation and amortization; (ii) shares issued to our external Manager under the Management Services Agreement; (iii) our ability to defer all or a portion of current federal income taxes; (iv) non-cash unrealized gains or losses on derivative instruments; (v) amortization of tolling liabilities; (vi) gains (losses) on disposal of assets; and (vii) pension expense. Pension expenses primarily consist of interest cost, expected return on plan assets and amortization of actuarial and performance gains and losses. Any cash contributions to pension plans are reflected as a reduction to Free Cash Flow. We believe that external consumers of our financial statements, including investors and research analysts, use Free Cash Flow both to assess MIC’s performance and as an indicator of its success in generating an attractive risk-adjusted return.

In this Quarterly Report on Form 10-Q, we have disclosed Free Cash Flow on a consolidated basis and for each of our operating segments and MIC Corporate. We believe that both EBITDA excluding non-cash items and Free Cash Flow support a more complete and accurate understanding of the financial and operating performance of our businesses than would otherwise be achieved using GAAP results alone.

Free Cash Flow does not take into consideration required payments on indebtedness and other fixed obligations or the other cash items that are excluded from our definition of Free Cash Flow. We note that Free Cash Flow may be calculated differently by other companies thereby limiting its usefulness as a comparative measure. Free Cash Flow should be used as a supplemental measure to help understand our financial performance and not in lieu of our financial results reported under GAAP.

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Results of Operations: Consolidated – (continued)

Classification of Maintenance Capital Expenditures and Growth Capital Expenditures

We categorize capital expenditures as either maintenance capital expenditures or growth capital expenditures. As neither maintenance capital expenditure nor growth capital expenditure is a GAAP term, we have adopted a framework to categorize specific capital expenditures. In broad terms, maintenance capital expenditures primarily maintain our businesses at current levels of operations, capability, profitability or cash flow, while growth capital expenditures primarily provide new or enhanced levels of operations, capability, profitability or cash flow. We consider a number of factors in determining whether a specific capital expenditure will be classified as maintenance or growth.

In some cases, specific capital expenditures contain characteristics of both maintenance and growth capital expenditures. We do not bifurcate specific capital expenditures into maintenance and growth components. Each discrete capital expenditure is considered within the above framework and the entire capital expenditure is classified as either maintenance or growth.

A reconciliation of net income to EBITDA excluding non-cash items and a reconciliation from cash provided by operating activities to Free Cash Flow, on a consolidated basis, is provided below. Similar reconciliations for each of our operating businesses and MIC Corporate follow.

		Quarter Ended March 31,								Change Favorable/(Unfavorable)
		2017				2016				$				%
		($ In Thousands) (Unaudited)
Net income		$	32,638			$	20,176
Interest expense, net(1)			25,448				56,862
Provision for income taxes			22,073				15,167
Depreciation			57,681				53,221
Amortization of intangibles			17,693				17,787
Fees to Manager-related party			18,223				14,796
Pension expense(2)			2,694				2,198
Other non-cash expense (income), net(3)			3,865				(4,232	)
EBITDA excluding non-cash items		$	180,315			$	175,975				4,340				2.5
EBITDA excluding non-cash items		$	180,315			$	175,975
Interest expense, net(1)			(25,448	)			(56,862	)
Adjustments to derivative instruments recorded in interest expense(1)			(3,247	)			26,605
Amortization of debt financing costs(1)			2,202				2,879
Amortization of debt discount(1)			619				—
Provision for income taxes, net of changes in deferred taxes			(3,721	)			(2,506	)
Changes in working capital			(22,152	)			2,475
Cash provided by operating activities			128,568				148,566
Changes in working capital			22,152				(2,475	)
Maintenance capital expenditures			(4,476	)			(10,413	)
Free cash flow		$	146,244			$	135,678				10,566				7.8

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Reconciliation from Consolidated Free Cash Flow to Proportionately Combined Free Cash Flow

See “Results of Operations — Consolidated” above for a reconciliation of Free Cash Flow — Consolidated basis to cash provided by operating activities, the most comparable GAAP measure. The following table is a reconciliation from Free Cash Flow on a consolidated basis to Free Cash Flow on a proportionately combined basis (in proportion to our equity interests in each of our businesses). See “Results of Operations” below for a reconciliation of Free Cash Flow for each of our segments to cash provided by (used in) operating activities for such segment.

		Quarter Ended March 31,								Change Favorable/(Unfavorable)
		2017				2016				$				%
		($ In Thousands) (Unaudited)
Free Cash Flow – Consolidated basis		$	146,244			$	135,678				10,566				7.8
100% of CP Free Cash Flow included in consolidated Free Cash Flow			(9,839	)			(11,943	)
MIC’s share of CP Free Cash Flow			8,171				9,660
100% of MIC Hawaii Free Cash Flow included in consolidated Free Cash Flow			(14,936	)			(10,862	)
MIC’s share of MIC Hawaii Free Cash Flow			14,933				10,862
Free Cash Flow – Proportionately Combined basis		$	144,573			$	133,395				11,178				8.4

Results of Operations: IMTT

Key Factors Affecting Operating Results for the Quarter:

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Results of Operations: IMTT – (continued)

		Quarter Ended March 31,								Change Favorable/(Unfavorable)
		2017				2016
		$				$				$				%
		($ In Thousands) (Unaudited)
Revenue			138,817				135,425				3,392				2.5
Cost of services			49,846				50,301				455				0.9
Selling, general and administrative expenses			9,038				8,174				(864	)			(10.6	)
Depreciation and amortization			31,520				32,621				1,101				3.4
Operating income			48,413				44,329				4,084				9.2
Interest expense, net(1)			(8,757	)			(19,871	)			11,114				55.9
Other income, net			708				2,988				(2,280	)			(76.3	)
Provision for income taxes			(16,548	)			(11,229	)			(5,319	)			(47.4	)
Net income(2)			23,816				16,217				7,599				46.9
Less: net income attributable to noncontrolling interests			—				59				59				100.0
Net income attributable to MIC(2)			23,816				16,158				7,658				47.4
Reconciliation of net income to EBITDA excluding non-cash items and a reconciliation of cash provided by operating activities to Free Cash Flow:
Net income(2)			23,816				16,217
Interest expense, net(1)			8,757				19,871
Provision for income taxes			16,548				11,229
Depreciation and amortization			31,520				32,621
Pension expense(3)			2,416				1,831
Other non-cash expense, net			68				443
EBITDA excluding non-cash items			83,125				82,212				913				1.1
EBITDA excluding non-cash items			83,125				82,212
Interest expense, net(1)			(8,757	)			(19,871	)
Adjustments to derivative instruments recorded in interest expense(1)			(1,320	)			9,610
Amortization of debt financing costs(1)			411				420
Provision for income taxes, net of changes in deferred taxes			(2,258	)			(1,230	)
Changes in working capital			736				(2,807	)
Cash provided by operating activities			71,937				68,334
Changes in working capital			(736	)			2,807
Maintenance capital expenditures			(2,460	)			(6,297	)
Free cash flow			68,741				64,844				3,897				6.0

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Results of Operations: IMTT – (continued)

Revenue

IMTT generates the majority of its revenue from contracts typically comprising a fixed monthly charge (that escalates annually with inflation) for access to or use of its infrastructure. We refer to revenue generated from such contracts or fixed charges as firm commitments. Firm commitments are generally of medium term duration and at March 31, 2017, had a revenue weighted average remaining life of 2.2 years. Revenue from firm commitments comprised 80.1% of total revenue for the quarter ended March 31, 2017.

For the quarter ended March 31, 2017, total revenue increased by $3.4 million compared with the quarter ended March 31, 2016 primarily due to an increase in the level of spill response activity on the part of IMTT’s subsidiary, OMI, and an increase in revenue from firm commitments. The increase in revenue was partially offset by an absence in rail services revenue principally in connection with the reduced demand for Canadian crude oil in the U.S.

Consistent with strong demand for liquid product storage generally, capacity utilization was higher than historically normal levels at 96.3% for the quarter ended March 31, 2017 and higher than the 96.1% recorded for the quarter ended March 31, 2016. The business views historically normal utilization levels as in a range of 94% to 96%.

Costs of Services and Selling, General and Administrative Expenses

Cost of services and selling, general and administrative expenses combined increased in the quarter ended March 31, 2017 compared with the quarter ended March 31, 2016. The increase was primarily the result of higher costs associated with OMI as a result of increased spill related activity, costs associated with the implementation of our shared services initiative and franchise taxes associated with newly enacted legislation in Louisiana, partially offset by savings from ongoing cost control initiatives.

Interest Expense, Net

Interest expense includes gains on derivative instruments of $521,000 and losses on derivative instruments of $10.8 million for the quarters ended March 31, 2017 and 2016, respectively. Excluding the derivative adjustments, interest expense decreased for the quarter ended March 31, 2017 compared with the quarter ended March 31, 2016 due to lower average interest rates partially offset by a higher average debt balance. Cash interest expense was $9.7 million and $9.8 million for the quarters ended March 31, 2017 and 2016, respectively.

Other Income, net

Other income, net, included insurance recoveries totaling $2.5 million during the first quarter of 2016 from losses in connection with damaged docks.

Income Taxes

The federal taxable income generated by IMTT is reported as part of our consolidated federal tax return. The business files state income tax returns in the states in which it operates. For the year ending December 31, 2017, the business expects to pay state income taxes of approximately $6.0 million. The “Provision for income taxes, net of changes in deferred taxes” of $2.3 million for the quarter ended March 31, 2017 in the above table includes $1.9 million of state income tax expense and $352,000 of federal income tax expense. Any current federal income tax payable is expected to be offset in consolidation with the application of NOLs at the MIC holding company level.

The difference between IMTT’s book and federal taxable income relates to depreciation of terminal fixed assets. For book purposes, these fixed assets are depreciated primarily over 15 to 30 years using the straight-line method of depreciation. For federal income tax purposes, these fixed assets are depreciated primarily over 5 to 15 years using accelerated methods. Most terminal fixed assets placed in service between 2012 through 2016 qualified for the federal 50% bonus tax depreciation. A significant portion of Louisiana terminal fixed assets constructed after Hurricane Katrina were financed with Gulf Opportunity Zone Bonds (GO Zone Bonds). GO Zone Bond financed assets are depreciated, for tax purposes, primarily over 9 to 20 years using the straight-line depreciation method. Most of the states in which the business operates do not allow the use of 50% bonus tax depreciation. However, Louisiana allows the use of 50% bonus depreciation except for assets financed with GO Zone Bonds.

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Results of Operations: IMTT – (continued)

Maintenance Capital Expenditures

During the quarter ended March 31, 2017, IMTT incurred maintenance capital expenditures of $2.5 million and $5.3 million on an accrual basis and cash basis, respectively, compared with $6.3 million and $8.7 million on an accrual basis and cash basis, respectively, for the quarter ended March 31, 2016. The decrease in maintenance capital expenditures for the quarter ended March 31, 2017 was the result of high tank utilization levels and the timing of planned maintenance for the year. IMTT anticipates making between $30.0 million and $35.0 million of maintenance capital expenditures in 2017.

Results of Operations: Atlantic Aviation

Atlantic Aviation generates a significant portion of its revenue from sales of jet fuel. Accordingly, revenue can fluctuate significantly based on the cost of the commodity and reported revenue may not reflect the business’ ability to effectively manage volume and price. For example, an increase in revenue may be attributable to an increase in the cost of the jet fuel and not an increase in the volume sold or price per gallon. Conversely, a decline in revenue may be attributable to a decrease in the cost of jet fuel and not a reduction in the volume sold or price.

Gross margin, which we define as revenue less cost of services, excluding depreciation and amortization, is the effective “top line” for Atlantic Aviation as it is reflective of the business’ ability to drive growth in the volume of products and services sold and the margins earned on those sales over time. We similarly believe that our investors view gross margin as reflective of management’s performance in managing volume and price throughout the commodity cycle. Gross margin can be reconciled to operating income — the most comparable GAAP measure — by subtracting selling, general and administrative expenses and depreciation and amortization in the table below.

Key Factors Affecting Operating Results for the Quarter:

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Results of Operations: Atlantic Aviation – (continued)

		Quarter Ended March 31,								Change Favorable/(Unfavorable)
		2017				2016
		$				$				$				%
		($ In Thousands) (Unaudited)
Revenue			212,753				177,988				34,765				19.5
Cost of services (exclusive of depreciation and amortization of intangibles shown separately below)			93,922				66,162				(27,760	)			(42.0	)
Gross margin			118,831				111,826				7,005				6.3
Selling, general and administrative expenses			53,890				52,611				(1,279	)			(2.4	)
Depreciation and amortization			25,033				22,191				(2,842	)			(12.8	)
Operating income			39,908				37,024				2,884				7.8
Interest expense, net(1)			(3,446	)			(13,314	)			9,868				74.1
Other (expense) income, net			(86	)			390				(476	)			(122.1	)
Provision for income taxes			(14,550	)			(9,742	)			(4,808	)			(49.4	)
Net income(2)			21,826				14,358				7,468				52.0
Reconciliation of net income to EBITDA excluding non-cash items and a reconciliation of cash provided by operating activities to Free Cash Flow:
Net income(2)			21,826				14,358
Interest expense, net(1)			3,446				13,314
Provision for income taxes			14,550				9,742
Depreciation and amortization			25,033				22,191
Pension expense(3)			5				17
Other non-cash expense (income), net			62				(91	)
EBITDA excluding non-cash items			64,922				59,531				5,391				9.1
EBITDA excluding non-cash items			64,922				59,531
Interest expense, net(1)			(3,446	)			(13,314	)
Convertible senior notes interest(4)			(1,744	)			—
Adjustments to derivative instruments recorded in interest expense(1)			133				5,608
Amortization of debt financing costs(1)			314				800
Provision for income taxes, net of changes in deferred taxes			(2,872	)			(1,452	)
Changes in working capital			(6,116	)			6,044
Cash provided by operating activities			51,191				57,217
Changes in working capital			6,116				(6,044	)
Maintenance capital expenditures			(925	)			(2,284	)
Free cash flow			56,382				48,889				7,493				15.3

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Results of Operations: Atlantic Aviation – (continued)

Revenue and Gross Margin

The majority of the revenue and gross margin earned by Atlantic Aviation is generated through fueling GA aircraft at facilities located at the 69 U.S. airports at which Atlantic Aviation operates. The business pursues a strategy of maintaining and, where appropriate, increasing dollar-based margins on fuel sales. Generally, fluctuations in the cost of jet fuel are passed through to the customer.

Revenue and gross margin are driven, in part, by the volume of fuel sold and the dollar-based margin/fee per gallon on those sales. Revenue increased 19.5% for the quarter ended March 31, 2017 compared with the quarter ended March 31, 2016 as a result of an increase in the volume of fuel sold, a higher wholesale cost of fuel and higher rental and ancillary services revenue. The increase in the wholesale cost of fuel was largely offset by a corresponding increase in cost of services, resulting in an increase in gross margin of 6.3% for the quarter ended March 31, 2017 compared with the quarter ended March 31, 2016.

Atlantic Aviation seeks to extend FBO leases prior to their maturity to improve our visibility into the cash generating capacity of these assets. Atlantic Aviation calculates the weighted average lease life based on EBITDA excluding non-cash items in the prior calendar year adjusted for the impact of acquisitions/dispositions. The weighted average lease life was 19.4 years at March 31, 2017 compared with 19.5 years at March 31, 2016, notwithstanding the passage of one year, as a result of successful extensions and acquisition of leaseholds.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased 2.4% for the quarter ended March 31, 2017 compared with the quarter ended March 31, 2016 primarily due to higher salaries and benefits.

Depreciation and Amortization

Depreciation and amortization expense increased for the quarter ended March 31, 2017 compared with the quarter ended March 31, 2016 primarily as a result of assets placed in service during 2016.

Operating Income

Operating income increased for the quarter ended March 31, 2017 compared with the quarter ended March 31, 2016 due to the increase in gross margin, partially offset by the increase in depreciation and amortization and selling, general and administrative expenses.

Interest Expense, Net

Interest expense includes losses on derivative instruments of $133,000 and $7.7 million for the quarters ended March 31, 2017 and 2016, respectively. Excluding the derivative adjustments, interest expense decreased for the quarter ended March 31, 2017 compared with the quarter ended March 31, 2016 due to lower interest rates attributable to the October 2016 refinancing.

Cash interest expense was $4.7 million and $6.9 million for the quarters ended March 31, 2017 and 2016, respectively. Cash interest expense for the quarter ended March 31, 2017 is inclusive of the interest expense related to the $402.5 million of 2.00% Convertible Senior Notes due October 2023, proceeds of which were used in part to reduce the drawn balance of Atlantic Aviation’s revolving credit facility.

Income Taxes

The federal taxable income generated by Atlantic Aviation is reported as part of our consolidated federal income tax return. The business files state income tax returns in the states in which it operates. The tax expense in the table above includes both state taxes and the portion of the consolidated federal tax liability attributable to the business.

For the year ending December 31, 2017, the business expects to pay state income taxes of approximately $7.0 million. The “Provision for income taxes, net of changes in deferred taxes” of $2.9 million for the quarter ended March 31, 2017 in the above table includes $1.7 million of state income tax expense and $1.2 million of federal income tax expense. Any current federal income tax payable is expected to be offset in consolidation with the application of NOLs at the MIC holding company level.

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Results of Operations: Atlantic Aviation – (continued)

Maintenance Capital Expenditures

For the quarter ended March 31, 2017, Atlantic Aviation incurred maintenance capital expenditures of $925,000 and $1.7 million on an accrual basis and cash basis, respectively, compared with $2.3 million both on an accrual basis and cash basis for the quarter ended March 31, 2016.

Results of Operations: Contracted Power

Key Factors Affecting Operating Results for the Quarter:

		Quarter Ended March 31,								Change Favorable/(Unfavorable)
		2017				2016
		$				$				$				%
		($ In Thousands) (Unaudited)
Product revenue			28,070				30,179				(2,109	)			(7.0	)
Cost of product sales			4,859				4,357				(502	)			(11.5	)
Selling, general and administrative expenses			5,165				5,960				795				13.3
Depreciation and amortization			15,340				13,846				(1,494	)			(10.8	)
Operating income			2,706				6,016				(3,310	)			(55.0	)
Interest expense, net(1)			(5,383	)			(17,848	)			12,465				69.8
Other income, net			765				305				460				150.8
(Provision) benefit for income taxes			(27	)			2,304				(2,331	)			(101.2	)
Net loss(2)			(1,939	)			(9,223	)			7,284				79.0
Less: net loss attributable to noncontrolling interest			(3,349	)			(2,238	)			1,111				49.6
Net income (loss) attributable to MIC(2)			1,410				(6,985	)			8,395				120.2
Reconciliation of net loss to EBITDA excluding non-cash items and a reconciliation of cash provided by operating activities to Free Cash Flow:
Net loss(2)			(1,939	)			(9,223	)
Interest expense, net(1)			5,383				17,848
Provision (benefit) for income taxes			27				(2,304	)
Depreciation and amortization			15,340				13,846
Other non-cash income, net(3)			(2,024	)			(2,020	)
EBITDA excluding non-cash items			16,787				18,147				(1,360	)			(7.5	)
EBITDA excluding non-cash items			16,787				18,147
Interest expense, net(1)			(5,383	)			(17,848	)
Adjustments to derivative instruments recorded in interest expense(1)			(1,834	)			11,268
Amortization of debt financing costs(1)			379				383
Provision/benefit for income taxes, net of changes in deferred taxes			(88	)			(7	)
Changes in working capital			142				2,612
Cash provided by operating activities			10,003				14,555
Changes in working capital			(142	)			(2,612	)
Maintenance capital expenditures			(22	)			—
Free cash flow			9,839				11,943				(2,104	)			(17.6	)

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Results of Operations: Contracted Power – (continued)

Revenue

Revenue generated by CP decreased by $2.1 million for the quarter ended March 31, 2017 compared with the quarter ended March 31, 2016. At BEC, revenue for the quarter ended March 31, 2017 was lower than the quarter ended March 31, 2016 as a result of lower capacity prices and energy margins. Capacity prices impact only the 37.5% untolled portion of BEC’s revenue and were lower than in the prior comparable period due to the regional system operator’s updated capacity requirements. Energy margins for the 37.5% untolled portion were lower as a result of the milder than average weather in January and February 2017. BEC also underwent a required five-year stack emissions test during the first quarter of 2017. The test required the plant to run on fuel oil during specified periods even when uneconomical. The 62.5% of BEC’s revenue is generated pursuant to a fixed price tolling agreement with a creditworthy off-taker.

Solar and wind output decreased for the quarter ended March 31, 2017 compared with the quarter ended March 31, 2016. The decrease was primarily due to lower wind and solar resources in the quarter ended March 31, 2017 compared with the quarter ended March 31, 2016. For the quarter ended March 31, 2017 and 2016, solar resources were approximately 90% and 106%, respectively, of long-term historical average and wind resources were approximately 88% and 94%, respectively, of long-term historical average. The decrease in revenue was partially offset by contributions from an acquisition.

Cost of Product Sales

Cost of product sales increased for the quarter ended March 31, 2017 compared with the quarter ended March 31, 2016 primarily due to incremental costs associated with an acquisition completed in December 2016.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased for the quarter ended March 31, 2017 compared with the quarter ended March 31, 2016 primarily due to decreases in professional fees, property taxes and salaries and benefits. The decrease in selling, general and administrative expenses are partially offset by incremental costs associated with an acquisition completed in December 2016.

Depreciation and Amortization

Depreciation and amortization expense increased for the quarter ended March 31, 2017 compared with the quarter ended March 31, 2016 primarily due to incremental expenses associated with an acquisition completed in December 2016.

Other Income, net

Other income, net, increased for the quarter ended March 31, 2017 compared with the quarter ended March 31, 2016 primarily due to financing income earned from a third party renewables developer on a revolving credit facility provided by the business.

Interest Expense, Net

Interest expense includes gains on derivative instruments of $410,000 and losses on derivative instruments of $13.2 million for the quarters ended March 31, 2017 and 2016, respectively. Excluding the derivative adjustments, interest expense increased for the quarter ended March 31, 2017 compared with the quarter ended March 31, 2016 primarily due to debt assumed in an acquisition completed in December 2016, partially offset by lower average debt balances on all other existing facilities. Cash interest expense was $6.8 million and $6.2 million for the quarters ended March 31, 2017 and 2016, respectively.

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Results of Operations: Contracted Power – (continued)

Income Taxes

Our solar and wind facilities are held in limited liability companies that are treated as partnerships for tax purposes. As such, these entities do not pay federal or state income taxes on a standalone basis, but each partner pays federal and state income taxes based on their allocated share of taxable income. For the year ending December 31, 2017, MIC expects its allocated share of the federal taxable income from these facilities to be a loss of approximately $10.0 million. For 2016, MIC’s allocated share of the federal taxable income from these facilities was a loss of approximately $23.0 million.

The federal taxable income generated by BEC is reported as part of our consolidated federal income tax return and is subject to New York state income tax as part of a combined return. For the year ending December 31, 2017, the business does not expect to have a federal or a state income tax liability. Future current federal taxable income attributable to BEC may be offset in consolidation with the application of NOLs at the MIC holding company level.

Other Matters

CP relies on a small number of suppliers to provide long term operations and maintenance (O&M) and other services for its facilities. One of those O&M providers, SunEdison, Inc. (SunEdison), filed for bankruptcy in April 2016. SunEdison has continued to perform its obligations as an O&M provider, and we expect it to continue to do so. CP has implemented contingency plans to mitigate any potential operational issues that might arise as a result of the inability of SunEdison to provide agreed upon services.

Results of Operations: MIC Hawaii

MIC Hawaii comprises Hawaii Gas and several smaller businesses collectively engaged in efforts to reduce the cost and improve the reliability and sustainability of energy in Hawaii. The businesses of MIC Hawaii generate revenue primarily from the provision of gas services to commercial, residential and governmental customers, the generation of power and the design and construction of building mechanical systems.

Hawaii Gas generates a significant portion of its revenue from sales of gas. Accordingly, revenue can fluctuate significantly based on the cost of the commodity and may not reflect the business’ ability to effectively manage volume and price. For example, an increase in revenue may be attributable to an increase in the cost of gas and not an increase in the volume sold or price per therm. Conversely, a decline in revenue may be attributable to a decrease in the cost of gas and not a reduction in volume sold or price per therm.

Gross margin, which we define as revenue less cost of product sales and services, excluding depreciation and amortization, is the effective “top line” for Hawaii Gas as it is reflective of the business’ ability to drive growth in the volume of products and services and the margins earned on those sales over time. We similarly believe that investors utilize gross margin as it is reflective of our performance in managing volume and price throughout the commodity cycle. Gross margin is reconciled to operating income — the most comparable GAAP measure — by subtracting selling, general and administrative expenses and depreciation and amortization in the table below.

Key Factors Affecting Operating Results for the Quarter:

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Results of Operations: MIC Hawaii  – (continued)

		Quarter Ended March 31,								Change Favorable/(Unfavorable)
		2017				2016
		$				$				$				%
		($ In Thousands) (Unaudited)
Product revenue			59,583				53,967				5,616				10.4
Service revenue			13,457				—				13,457				NM
Total revenue			73,040				53,967				19,073				35.3
Cost of product sales (exclusive of depreciation and amortization of intangibles shown separately below)			42,366				28,703				(13,663	)			(47.6	)
Cost of services (exclusive of depreciation and amortization of intangibles shown separately below)			10,940				—				(10,940	)			NM
Cost of revenue – total			53,306				28,703				(24,603	)			(85.7	)
Gross margin			19,734				25,264				(5,530	)			(21.9	)
Selling, general and administrative expenses			6,085				5,256				(829	)			(15.8	)
Depreciation and amortization			3,481				2,350				(1,131	)			(48.1	)
Operating income			10,168				17,658				(7,490	)			(42.4	)
Interest expense, net(1)			(1,711	)			(2,424	)			713				29.4
Other expense, net			(205	)			(254	)			49				19.3
Provision for income taxes			(3,379	)			(5,911	)			2,532				42.8
Net income(2)			4,873				9,069				(4,196	)			(46.3	)
Less: net loss attributable to noncontrolling interests			(28	)			—				28				NM
Net income attributable to MIC(2)			4,901				9,069				(4,168	)			(46.0	)
Reconciliation of net income to EBITDA excluding non-cash items and a reconciliation of cash provided by operating activities to Free Cash Flow:
Net income(2)			4,873				9,069
Interest expense, net(1)			1,711				2,424
Provision for income taxes			3,379				5,911
Depreciation and amortization			3,481				2,350
Pension expense(3)			273				350
Other non-cash expense (income), net(4)			5,571				(2,752	)
EBITDA excluding non-cash items			19,288				17,352				1,936				11.2
EBITDA excluding non-cash items			19,288				17,352
Interest expense, net(1)			(1,711	)			(2,424	)
Adjustments to derivative instruments recorded in interest expense(1)			(226	)			119
Amortization of debt financing costs(1)			105				664
Provision for income taxes, net of changes in deferred taxes			(1,451	)			(3,017	)
Changes in working capital			(8,480	)			2,937
Cash provided by operating activities			7,525				15,631
Changes in working capital			8,480				(2,937	)
Maintenance capital expenditures			(1,069	)			(1,832	)
Free cash flow			14,936				10,862				4,074				37.5

NM — Not meaningful

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Results of Operations: MIC Hawaii  – (continued)

Revenue and Gross Margin

Revenue increased by $19.1 million for the quarter ended March 31, 2017 compared with the quarter ended March 31, 2016. The increase is primarily attributable to contribution from acquisitions, an increase in the cost of gas and an increase of 4.2% in the volume of gas sold by Hawaii Gas. On an underlying basis, adjusting for changes in customer inventory, the volume of gas sold increased by 1.2% in the quarter ended March 31, 2017 compared with the quarter ended March 31, 2016.

Gross margin decreased by $5.5 million for the quarter ended March 31, 2017 compared with the quarter ended March 31, 2016. The decrease is primarily attributable to unrealized losses on commodity hedges of $5.2 million at Hawaii Gas for the quarter ended March 31, 2017 compared with unrealized gains on commodity hedges of $3.3 million for the quarter ended March 31, 2016. Gross margin, excluding the impact of unrealized gains and losses on commodity hedges, increased by $3.0 million, or 13.7%, for the quarter ended March 31, 2017 compared with the quarter ended March 31, 2016 primarily as a result of acquisitions.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased for the quarter ended March 31, 2017 compared with the quarter ended March 31, 2016 primarily due to incremental costs from acquisitions.

Operating Income

Operating income decreased for the quarter ended March 31, 2017 compared with the quarter ended March 31, 2016 due to the decrease in gross margin, an increase in depreciation and amortization expense and an increase in selling, general and administrative expenses.

Interest Expense, Net

Interest expense includes gains on derivative instruments of $156,000 and losses on derivative instruments of $165,000 for the quarters ended March 31, 2017 and March 31, 2016, respectively. For the quarter ended March 31, 2016, interest expense also included the non-cash write-off of deferred financing costs at Hawaii Gas related to the refinancing of its $80.0 million term loan and its $60.0 million revolving credit facility. Excluding the derivative adjustments and the write-off of the deferred financing costs, interest expense increased for the quarter ended March 31, 2017 compared with the quarter ended March 31, 2016 primarily attributable to debt assumed from acquisitions and the financing of solar facilities. Cash interest expense was $1.8 million and $1.6 million for the quarters ended March 31, 2017 and 2016, respectively.

Income Taxes

The federal taxable income generated by the MIC Hawaii businesses is reported as part of our consolidated federal income tax return and is subject to Hawaii state income tax on a stand-alone basis. The tax expense in the table above includes both state tax and the portion of the consolidated federal tax liability attributable to the businesses. For the year ending December 31, 2017, the business expects to pay state income taxes of approximately $1.5 million. The “Provision for income taxes, net of changes in deferred taxes” of $1.5 million for the quarter ended March 31, 2017 in the above table, includes $1.2 million of federal income tax expense and $267,000 of state income tax expense. Any current federal income tax payable is expected to be offset in consolidation with the application of NOLs at the MIC holding company level.

Maintenance Capital Expenditures

For the quarter ended March 31, 2017, MIC Hawaii incurred maintenance capital expenditures of $1.1 million and $1.5 million on an accrual basis and cash basis, respectively, compared with $1.8 million and $2.6 million on an accrual basis and cash basis, respectively, for the quarter ended March 31, 2016.

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Results of Operations: Corporate and Other

The financial results below reflect Corporate and Other’s performance during the periods below.

		Quarter Ended March 31,								Change Favorable/(Unfavorable)
		2017				2016
		$				$				$				%
		($ In Thousands) (Unaudited)
Fees to Manager-related party			18,223				14,796				(3,427	)			(23.2	)
Selling, general and administrative expenses(1)			3,995				1,455				(2,540	)			(174.6	)
Operating loss			(22,218	)			(16,251	)			(5,967	)			(36.7	)
Interest expense, net(2)			(6,151	)			(3,405	)			(2,746	)			(80.6	)
Benefit for income taxes			12,431				9,411				3,020				32.1
Net loss(3)			(15,938	)			(10,245	)			(5,693	)			(55.6	)
Reconciliation of net loss to EBITDA excluding non-cash items and a reconciliation of cash used in operating activities to Free Cash Flow:
Net loss(3)			(15,938	)			(10,245	)
Interest expense, net(2)			6,151				3,405
Benefit for income taxes			(12,431	)			(9,411	)
Fees to Manager-related party			18,223				14,796
Other non-cash expense			188				188
EBITDA excluding non-cash items			(3,807	)			(1,267	)			(2,540	)			NM
EBITDA excluding non-cash items			(3,807	)			(1,267	)
Interest expense, net(2)			(6,151	)			(3,405	)
Convertible senior notes interest(4)			1,744				—
Amortization of debt financing costs(2)			993				612
Amortization of debt discount(2)			619				—
Benefit for income taxes, net of changes in deferred taxes			2,948				3,200
Changes in working capital			(8,434	)			(6,311	)
Cash used in operating activities			(12,088	)			(7,171	)
Changes in working capital			8,434				6,311
Free cash flow			(3,654	)			(860	)			(2,794	)			NM

NM — Not meaningful

TABLE OF CONTENTS

Liquidity and Capital Resources

General

Our primary cash requirements include normal operating expenses, debt service, debt principal payments, payments of dividends and capital expenditures. Our primary source of cash is operating activities, although we may draw on credit facilities for capital expenditures, raise new equity or debt or sell assets to generate cash.

At March 31, 2017, our consolidated debt outstanding totaled $3,180.1 million (excluding adjustments for unamortized debt discounts), our consolidated cash balance totaled $29.6 million and consolidated available capacity under our revolving credit facilities totaled $1,345.0 million.

The following table shows MIC’s proportionate debt obligations at May 2, 2017 ($ in thousands):

Business		Debt				Weighted Average Remaining Life (in years)				Balance Outstanding(1)				Weighted Average Rate(2)
MIC Corporate			Convertible Senior Notes				4.5			$	752,454				2.41	%
IMTT			Senior Notes				9.0				600,000				3.97	%
			Tax-Exempt Bonds				5.1				508,975				2.70	%
			Revolving Facility				3.1				90,000				2.50	%
Atlantic Aviation(3)			Term Loan				4.4				397,500				3.00	%
			Revolving Facility				4.4				99,500				3.00	%
CP			Renewables – Project Finance				15.1				273,209				4.80	%
			BEC – Term Loan				5.3				258,500				3.91	%
MIC Hawaii(4)			Term Loan				5.6				97,175				2.85	%
			Senior Notes				5.3				100,000				4.22	%
Total							6.4			$	3,177,313				3.24	%

The following table profiles each revolving credit facility at our businesses and at MIC Corporate as of May 2, 2017 ($ in thousands):

Business		Debt				Weighted Average Remaining Life (in years)				Undrawn Amount				Interest Rate(1)
MIC Corporate			Revolving Facility				2.2			$	410,000				LIBOR + 1.750%
IMTT			USD Revolving Facility				3.1				460,000				LIBOR + 1.500%
			CAD Revolving Facility				3.1				50,000				Bankers’ Acceptance Rate + 1.500%
Atlantic Aviation			Revolving Facility				4.4				250,500				LIBOR + 2.000%
CP – BEC			Revolving Facility				5.3				25,000				LIBOR + 2.125%
CP – Renewables			Revolving Facility				2.6				19,980				LIBOR + 2.000%
MIC Hawaii			Revolving Facility				4.8				60,000				LIBOR + 1.250%
Total							3.2			$	1,275,480

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Liquidity and Capital Resources  – (continued)

We will, in general, apply available cash to the repayment of revolving debt balances as a means of minimizing interest expense and draw on those facilities to fund growth projects and for general corporate purposes.

We use revolving credit facilities at each of our operating companies and the holding company as a means of maintaining access to sufficient liquidity to meet future requirements, managing interest expense and funding growth projects. We base our assessment of the sufficiency of our liquidity and capital resources on the assumptions that:

We capitalize our businesses in part using floating rate bank debt with medium-term maturities between five and seven years. In general, we hedge the floating rate exposure for the majority of the term of these facilities using interest rate derivative instruments. We also use longer dated private placement debt and other forms of capital including bond or hybrid debt instruments to capitalize our businesses. In general, the debt facilities at our businesses are non-recourse to the holding company and there are no cross-collateralization or cross-guarantee provisions in these facilities.

Our solar and wind facilities are financed primarily with fully amortizing non-recourse project finance style debt with maturities prior to or coterminous with the expiration of the underlying PPAs. On a multiple of EBITDA basis, we use a higher initial level of leverage in these projects than our other business segments because of the long-term, wholly contracted nature of the revenue stream and the creditworthiness of the PPA counterparties.

Analysis of Consolidated Historical Cash Flows

The following section discusses our sources and uses of cash on a consolidated basis. All intercompany activities such as corporate allocations, capital contributions to our businesses and distributions from our businesses have been excluded from the table as these transactions are eliminated on consolidation.

		Quarter Ended March 31,								Change Favorable/(Unfavorable)
		2017				2016
($ In Thousands)		$				$				$				%
Cash provided by operating activities			128,568				148,566				(19,998	)			(13.5	)
Cash used in investing activities			(67,736	)			(65,698	)			(2,038	)			(3.1	)
Cash used in financing activities			(75,981	)			(83,217	)			7,236				8.7

Operating Activities

Consolidated cash provided by (used in) operating activities is generally comprised of EBITDA excluding non-cash items (as defined by us), less cash interest, tax and pension payments, and changes in working capital. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations” for discussions around the components of EBITDA excluding non-cash items on a consolidated basis and for each of our businesses above.

The decrease in consolidated cash provided by operating activities for the quarter ended March 31, 2017 compared with the quarter ended March 31, 2016 was primarily due to:

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Liquidity and Capital Resources  – (continued)

Investing Activities

The drivers of consolidated cash provided by investing activities include proceeds from divestitures of businesses and fixed assets. The drivers of consolidated cash used in investing activities include acquisitions of businesses in new and existing segments and capital expenditures. Acquisitions of businesses are generally funded by raising additional equity and/or drawings on credit facilities.

In general, maintenance capital expenditures are funded by cash from operating activities and growth capital expenditures are funded by drawing on our available credit facilities or with equity capital. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations” for maintenance capital expenditures for each of our businesses.

The increase in consolidated cash used in investing activities for the quarter ended March 31, 2017 compared with the quarter ended March 31, 2016 was primarily due to drawings from a third party renewables developer on a revolving credit facility provided by our CP business, partially offset by a decrease in capital expenditures.

Growth Capital Expenditures

We invested $51.4 million and $49.4 million of growth capital expenditures in our existing businesses during the quarters ended March 31, 2017 and 2016, respectively.

We continuously evaluate opportunities to deploy capital in both growth projects and in acquisitions of additional businesses, whether as part of our existing businesses or in new lines of business. These opportunities may be significant, such as our acquisition of the remaining 50% interest in IMTT, or they may be ordinary course bolt-on acquisitions, such as an acquisition of an FBO. In aggregate, we currently anticipate deploying approximately $350.0 million in these types of activities in 2017.

In addition, we maintain a backlog of projects that we expect to complete in subsequent periods. We consider projects to be a part of our backlog when we have committed to the deployment of capital for the underlying project, and have, where relevant, received all requisite approvals/authorizations for the deployment of such capital. The inclusion of a project in our backlog does not guarantee that the project will commence, be completed or ultimately generate revenue.

We are actively pursuing an expansion of BEC and have entered into certain agreements, including for the acquisition of generating sets, related to that project. The construction of the additional 130 MW of power generating capacity on land adjacent to BEC is expected to require the deployment of approximately $130.0 million in growth capital, the majority of which is likely to be deployed in 2017. We are also in the process of connecting the BEC facility to a second gas pipeline that runs beneath our IMTT-Bayonne property, which we expect to complete in the second quarter of 2017.

Through May 2, 2017, our backlog of approved growth capital projects was valued at approximately $280.0 million and we have deployed approximately $117.0 million into growth projects and smaller acquisitions by our existing businesses. The amount of capital deployed to date is consistent with our expectation that we will deploy a total of approximately $350.0 million for the full year.

Financing Activities

The drivers of cash provided by financing activities primarily include new equity issuance and debt issuance related to acquisitions and capital expenditures. The drivers of cash used in financing activities primarily include repayment of debt principal balances on maturing debt and dividends to our stockholders.

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Liquidity and Capital Resources  – (continued)

The decrease in consolidated cash used in financing activities for the quarter ended March 31, 2017 compared with the quarter ended March 31, 2016 was primarily due to the increase in net borrowing during the quarter ended March 31, 2017 and the absence of the purchase of the remaining 33.3% interest in IMTT’s Quebec marine terminal that it did not previously own in March 2016. The decrease in consolidated cash used in financing activities are partially offset by an increase in dividends paid to stockholders during the quarter ended March 31, 2017.

IMTT

During the quarter ended March 31, 2017, IMTT borrowed $104.0 million and repaid $46.0 million on its revolving credit facility primarily for general corporate purposes. At March 31, 2017, IMTT had $1.2 billion of debt outstanding consisting of $600.0 million of senior notes and $509.0 million of tax-exempt bonds. IMTT has access to $600.0 million of revolving credit facilities, of which $90.0 million was drawn at March 31, 2017. Cash interest expense was $9.7 million and $9.8 million for the quarters ended March 31, 2017 and 2016, respectively. At March 31, 2017, IMTT was in compliance with its financial covenants.

Atlantic Aviation

At March 31, 2017, Atlantic Aviation had total debt outstanding of $429.1 million comprising $397.5 million senior secured, first lien term loan facility and a $1.6 million stand-alone debt facility used to fund construction at a certain FBO. Atlantic Aviation also has access to a $350.0 million senior secured, first lien revolving credit facility, of which $30.0 million was drawn at March 31, 2017. From April 1, 2017, the business drew down an additional $69.5 million to fund an FBO acquisition and for general corporate purposes.

Cash interest expense was $4.7 million and $6.9 million for the quarters ended March 31, 2017 and 2016, respectively. Cash interest expense for the quarter ended March 31, 2017 is inclusive of the interest expense related to the $402.5 million of 2.00% Convertible Senior Notes due October 2023, the proceeds of which were used in part to reduce the drawn balance of Atlantic Aviation’s revolving credit facility. At March 31, 2017, Atlantic Aviation was in compliance with its financial covenants.

CP

At March 31, 2017, the CP segment had $599.2 million in term loans outstanding. Cash interest expense was $6.8 million and $6.2 million for the quarters ended March 31, 2017 and 2016, respectively.

BEC

BEC had $258.5 million of an amortizing term loan facility outstanding and a revolving credit facility of $25.0 million that remained undrawn. Cash interest expense was $2.7 million for both the quarters ended March 31, 2017 and 2016. BEC was in compliance with its financial covenants.

Solar and Wind Facilities

The solar and wind facilities had $340.7 million in term loan debt outstanding. Cash interest expense was $4.1 million and $3.5 million for the quarters ended March 31, 2017 and 2016, respectively. All of the solar and wind facilities were in compliance with their respective financial covenants.

MIC Hawaii

At March 31, 2017, MIC Hawaii had total debt outstanding of $200.4 million in term loans and senior secured note borrowings and a revolving credit facility of $60.0 million that remained undrawn. Cash interest expense was $1.8 million and $1.6 million for the quarters ended March 31, 2017 and 2016, respectively.

Hawaii Gas

Hawaii Gas had total debt outstanding of $180.0 million in term loan and senior secured note borrowings and a revolving credit facility of $60.0 million that remained undrawn. Cash interest paid was $1.7 million and $1.6 million for the quarters ended March 31, 2017 and 2016, respectively. Hawaii Gas was in compliance with its financial covenants.

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Liquidity and Capital Resources  – (continued)

In February 2017, Hawaii Gas exercised the first of two one-year extensions related to its $80.0 million secured term loan facility and its $60.0 million revolving credit facility. The maturities have been extended to February 2022 and no changes were made to any other terms.

Other Businesses

The other businesses within MIC Hawaii has $20.4 million in outstanding debt, consisting primarily of $17.4 million term loan debt related to our solar facilities. These businesses were in compliance with their financial covenants.

MIC Corporate

At March 31, 2017, MIC had $350.0 million and $402.5 million in convertible senior notes outstanding that bear interest at 2.875% and 2.00%, respectively. MIC also had a senior secured revolving credit facility of $410.0 million that remained undrawn. Cash interest expense was $2.8 million for both the quarters ended March 31, 2017 and 2016. Cash interest expense for the quarter ended March 31, 2017 excludes the cash interest expense related to the $402.5 million of 2.00% Convertible Senior Notes due October 2023, proceeds of which were used in part to reduce the drawn balance of Atlantic Aviation’s revolving credit facility. See Atlantic Aviation above. MIC Corporate was in compliance with its financial covenants.

For a description of the material terms and debt covenants of MIC and its businesses, see Note 7, “Long-Term Debt”, in Part II, Item 8, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

Commitments and Contingencies

Except as noted above, at March 31, 2017, there had been no material changes in our commitments and contingencies compared with our commitments and contingencies at December 31, 2016. At March 31, 2017, we did not have any material purchase obligations. For a discussion of our other future obligations, due by period, under the various contractual obligations, off-balance sheet arrangements and commitments, please see “Liquidity and Capital Resources — Commitments and Contingencies” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed with the SEC on February 21, 2017.

At March 31, 2017, we did not have any material reserves for contingencies. We have other contingencies occurring in the normal course of business, including pending legal and administrative proceedings that are not reflected at this time as they are not ascertainable.

Our sources of cash to meet these obligations include:

Critical Accounting Policies and Estimates

For critical accounting policies and estimates, see “Critical Accounting Policies and Estimates” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and see Note 2, “Basis of Presentation”, in our Notes to Consolidated Condensed Financial Statements in Part I of this Form 10-Q for recently issued accounting standards. Our critical accounting policies and estimates have not changed materially from the description contained in our Annual Report.

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Critical Accounting Policies and Estimates  – (continued)

Business Combinations

Our acquisitions of businesses that we control are accounted for under the purchase method of accounting. The amounts assigned to the identifiable assets acquired and liabilities assumed in connection with acquisitions are based on estimated fair values as of the date of the acquisition, with the remainder, if any, recorded as goodwill. The fair values are determined by our management, taking into consideration information supplied by the management of acquired entities and other relevant information. Such information includes valuations supplied by independent appraisal experts for significant business combinations. The valuations are generally based upon future cash flow projections for the acquired assets, discounted to present value. The determination of fair values require significant judgment both by management and outside experts engaged to assist in this process.

Goodwill, Intangible Assets and Property, Plant and Equipment

Significant assets acquired in connection with our acquisition of businesses include contract rights, customer relationships, non-compete agreements, trademarks, property and equipment and goodwill.

Trademarks are generally considered to be indefinite life intangibles. Trademarks and goodwill are not amortized in most circumstances. It may be appropriate to amortize some trademarks. However, for unamortized intangible assets, we are required to perform annual impairment reviews and more frequently in certain circumstances.

ASU No. 2011-08, Intangibles — Goodwill and Other (Topic 350): Testing Goodwill for Impairment, permits an entity to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test, as discussed below. If an entity concludes it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it need not perform the two-step impairment test.

If an entity concludes that it is more likely than not that the fair value of reporting unit is less than its carrying amount, it needs to perform the two-step impairment test. This requires management to make judgments in determining what assumptions to use in the calculation. The first step of the process consists of estimating the fair value of each reporting unit based on a discounted cash flow model using revenue and profit forecasts and comparing those estimated fair values with the carrying values, which includes the allocated goodwill. If the estimated fair value is less than the carrying value, a second step is performed to compute the amount of the impairment by determining an “implied fair value” of goodwill. The determination of a reporting unit’s “implied fair value” of goodwill requires the allocation of the estimated fair value of the reporting unit to the assets and liabilities of the reporting unit. Any unallocated fair value represents the “implied fair value” of goodwill, which is compared with its corresponding carrying value. IMTT, Atlantic Aviation, CP and the MIC Hawaii businesses are separate reporting units for purposes of this analysis. The impairment test for trademarks, which are not amortized, requires the determination of the fair value of such assets. If the fair value of the trademarks is less than their carrying value, an impairment loss is recognized in an amount equal to the difference. We cannot predict the occurrence of certain future events that might adversely affect the reported value of goodwill and/or intangible assets. Such events include, but are not limited to, strategic decisions made in response to economic and competitive conditions, the impact of the economic environment on our customer base, or material negative change in relationship with significant customers.

Property and equipment is initially stated at cost. Depreciation on property and equipment is computed using the straight-line method over the estimated useful lives of the property and equipment after consideration of historical results and anticipated results based on our current plans. Our estimated useful lives represent the period the asset remains in service assuming normal routine maintenance. We review the estimated useful lives assigned to property and equipment when our business experience suggests that they do not properly reflect the consumption of economic benefits embodied in the property and equipment nor result in the appropriate matching of cost against revenue. Factors that lead to such a conclusion may include physical observation of asset usage, examination of realized gains and losses on asset disposals and consideration of market trends such as technological obsolescence or change in market demand.

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Critical Accounting Policies and Estimates – (continued)

Significant intangibles, including contract rights, customer relationships, non-compete agreements and technology are amortized using the straight-line method over the estimated useful lives of the intangible asset after consideration of historical results and anticipated results based on our current plans. With respect to contractual rights at Atlantic Aviation, the useful lives will generally match the remaining lease terms plus extensions under the business’ control.

We perform impairment reviews of property and equipment and intangibles subject to amortization, when events or circumstances indicate that assets are less than their carrying amount and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets. In this circumstance, the impairment charge is determined based upon the amount by which the net book value of the assets exceeds their fair market value. Any impairment is measured by comparing the fair value of the asset to its carrying value.

The “implied fair value” of reporting units and fair value of property and equipment and intangible assets is determined by our management and is generally based upon future cash flow projections for the acquired assets, discounted to present value. We use outside valuation experts when management considers that it is appropriate to do so.

We test for goodwill and indefinite-lived intangible assets annually as of October 1^st or when there is an indicator of impairment.

Quantitative and Qualitative Disclosures About Market Risk

For quantitative and qualitative disclosures about market risk, see Part II, Item 7A “Quantitative and Qualitative Disclosures about Market Risk” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016. Our exposure to market risk has not changed materially since February 21, 2017, the filing date for our Annual Report on Form 10-K.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the direction and with the participation of our Chief Executive Officer and Chief Financial Officer, we evaluated our disclosure controls and procedures (as such term is defined under Rule 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this report. The purpose of disclosure controls is to ensure that information required to be disclosed in our reports filed with or submitted to the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls are also designed to ensure that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2017.

Changes in Internal Control Over Financial Reporting

There have not been any changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the quarter ended March 31, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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MACQUARIE INFRASTRUCTURE CORPORATION
 
CONSOLIDATED CONDENSED BALANCE SHEETS
($ in Thousands, Except Share Data)

		March 31, 2017				December 31, 2016
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	29,618			$	44,767
Restricted cash			15,169				16,420
Accounts receivable, less allowance for doubtful accounts of $1,238 and $1,434, respectively			123,849				124,846
Inventories			35,063				31,461
Prepaid expenses			19,328				14,561
Fair value of derivative instruments			4,515				5,514
Other current assets			9,794				7,099
Total current assets			237,336				244,668
Property, equipment, land and leasehold improvements, net			4,346,597				4,346,536
Investment in unconsolidated business			8,944				8,835
Goodwill			2,024,484				2,024,409
Intangible assets, net			871,278				888,971
Fair value of derivative instruments			25,850				30,781
Other noncurrent assets			24,073				15,053
Total assets		$	7,538,562			$	7,559,253
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Due to Manager – related party		$	6,366			$	6,594
Accounts payable			62,820				69,566
Accrued expenses			76,260				83,734
Current portion of long-term debt			42,782				40,016
Fair value of derivative instruments			5,902				9,297
Other current liabilities			42,977				41,802
Total current liabilities			237,107				251,009
Long-term debt, net of current portion			3,070,883				3,039,966
Deferred income taxes			914,461				896,116
Fair value of derivative instruments			5,403				5,966
Tolling agreements – noncurrent			58,428				60,373
Other noncurrent liabilities			160,787				158,289
Total liabilities			4,447,069				4,411,719
Commitments and contingencies			—				—

 
 
See accompanying notes to the consolidated condensed financial statements.

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MACQUARIE INFRASTRUCTURE CORPORATION
 
CONSOLIDATED CONDENSED BALANCE SHEETS – (continued)
($ in Thousands, Except Share Data)

		March 31, 2017				December 31, 2016
		(Unaudited)
Stockholders’ equity(1):
Common stock ($0.001 par value; 500,000,000 authorized; 82,306,372 shares issued and outstanding at March 31, 2017 and 82,047,526 shares issued and outstanding at December 31, 2016)		$	82			$	82
Additional paid in capital			2,002,066				2,089,407
Accumulated other comprehensive loss			(28,960	)			(28,960	)
Retained earnings			928,380				892,365
Total stockholders’ equity			2,901,568				2,952,894
Noncontrolling interests			189,925				194,640
Total equity			3,091,493				3,147,534
Total liabilities and equity		$	7,538,562			$	7,559,253

 
 
See accompanying notes to the consolidated condensed financial statements.

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MACQUARIE INFRASTRUCTURE CORPORATION
 
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
($ in Thousands, Except Share and Per Share Data)

		Quarter Ended March 31,
		2017				2016
Revenue
Service revenue		$	363,804			$	312,241
Product revenue			87,653				84,146
Total revenue			451,457				396,387
Costs and expenses
Cost of services			154,706				116,463
Cost of product sales			47,225				33,060
Selling, general and administrative			76,952				72,284
Fees to Manager – related party			18,223				14,796
Depreciation			57,681				53,221
Amortization of intangibles			17,693				17,787
Total operating expenses			372,480				307,611
Operating income			78,977				88,776
Other income (expense)
Interest income			34				33
Interest expense(1)			(25,482	)			(56,895	)
Other income, net			1,182				3,429
Net income before income taxes			54,711				35,343
Provision for income taxes			(22,073	)			(15,167	)
Net income		$	32,638			$	20,176
Less: net loss attributable to noncontrolling interests			(3,377	)			(2,179	)
Net income attributable to MIC		$	36,015			$	22,355
Basic income per share attributable to MIC		$	0.44			$	0.28
Weighted average number of shares outstanding: basic			82,138,168				80,113,011
Diluted income per share attributable to MIC		$	0.44			$	0.28
Weighted average number of shares outstanding: diluted			82,147,763				81,171,346
Cash dividends declared per share		$	1.32			$	1.20

 
 
See accompanying notes to the consolidated condensed financial statements.

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MACQUARIE INFRASTRUCTURE CORPORATION
 
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
($ in Thousands)

		Quarter Ended March 31,
		2017				2016
Net income		$	32,638			$	20,176
Other comprehensive income, net of taxes:
Translation adjustment(1)(2)			—				3,563
Other comprehensive income			—				3,563
Comprehensive income		$	32,638			$	23,739
Less: comprehensive loss attributable to noncontrolling interests(2)			(3,377	)			(745	)
Comprehensive income attributable to MIC		$	36,015			$	24,484

 
 
See accompanying notes to the consolidated condensed financial statements.

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MACQUARIE INFRASTRUCTURE CORPORATION
 
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
($ in Thousands)

		Quarter Ended March 31,
		2017				2016
Operating activities
Net income		$	32,638			$	20,176
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of property and equipment			57,681				53,221
Amortization of intangible assets			17,693				17,787
Amortization of debt financing costs			2,202				2,879
Amortization of debt discount			619				—
Adjustments to derivative instruments			1,972				23,278
Fees to Manager-related party			18,223				14,796
Deferred taxes			18,352				12,661
Pension expense			2,694				2,198
Other non-cash income, net			(1,354	)			(905	)
Changes in other assets and liabilities, net of acquisitions:
Restricted cash			974				2,202
Accounts receivable			1,059				3,910
Inventories			(3,718	)			1,879
Prepaid expenses and other current assets			(7,559	)			9,352
Due to Manager – related party			11				(73	)
Accounts payable and accrued expenses			(12,382	)			(13,293	)
Income taxes payable			1,341				2,753
Other, net			(1,878	)			(4,255	)
Net cash provided by operating activities			128,568				148,566
Investing activities
Acquisitions of businesses and investments, net of cash acquired			—				(3,153	)
Purchases of property and equipment			(59,869	)			(62,593	)
Change in restricted cash			83				—
Other, net			(7,950	)			48
Net cash used in investing activities			(67,736	)			(65,698	)

 
 
See accompanying notes to the consolidated condensed financial statements.

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MACQUARIE INFRASTRUCTURE CORPORATION
 
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS – (continued)
(Unaudited)
($ in Thousands)

		Quarter Ended March 31,
		2017				2016
Financing activities
Proceeds from long-term debt		$	104,000			$	176,000
Payment of long-term debt			(72,634	)			(159,730	)
Proceeds from the issuance of shares			2,049				1,093
Dividends paid to common stockholders			(107,714	)			(92,203	)
Purchase of noncontrolling interest			—				(9,909	)
Distributions paid to noncontrolling interests			(1,351	)			(1,824	)
Offering and equity raise costs paid			(69	)			(105	)
Debt financing costs paid			(435	)			(1,119	)
Change in restricted cash			194				5,013
Payment of capital lease obligations			(21	)			(433	)
Net cash used in financing activities			(75,981	)			(83,217	)
Effect of exchange rate changes on cash and cash equivalents			—				457
Net change in cash and cash equivalents			(15,149	)			108
Cash and cash equivalents, beginning of period			44,767				22,394
Cash and cash equivalents, end of period		$	29,618			$	22,502
Supplemental disclosures of cash flow information
Non-cash investing and financing activities:
Accrued equity offering costs		$	93			$	229
Accrued financing costs		$	—			$	68
Accrued purchases of property and equipment		$	25,598			$	19,318
Issuance of shares to Manager		$	18,462			$	15,108
Conversion of convertible senior notes to shares		$	17			$	4
Distributions payable to noncontrolling interests		$	29			$	42
Taxes paid (refund), net		$	2,379			$	(253	)
Interest paid		$	26,764			$	25,488

 
 
See accompanying notes to the consolidated condensed financial statements.

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MACQUARIE INFRASTRUCTURE CORPORATION
 
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)

1. Organization and Description of Business

Macquarie Infrastructure Corporation is a Delaware corporation formed on May 21, 2015. MIC’s predecessor, Macquarie Infrastructure Company LLC, was formed on April 13, 2004. Macquarie Infrastructure Corporation, both on an individual entity basis and together with its consolidated subsidiaries, is referred to in these financial statements as the “Company” or “MIC”.

MIC is externally managed by Macquarie Infrastructure Management (USA) Inc. (the Manager) pursuant to the terms of a Management Services Agreement that is subject to the oversight and supervision of the Board of Directors. The majority of the members of the Board of Directors have no affiliation with Macquarie. The Manager is a member of the Macquarie Group of companies comprising the Macquarie Group Limited and its subsidiaries and affiliates worldwide. Macquarie Group Limited is headquartered in Australia and is listed on the Australian Stock Exchange.

The Company owns its businesses through its direct wholly-owned subsidiary MIC Ohana Corporation, the successor to Macquarie Infrastructure Company Inc. The Company owns and operates a diversified portfolio of businesses that provide services to other businesses, government agencies and individuals primarily in the U.S. The businesses it owns and operates are organized into four segments:

2. Basis of Presentation

The unaudited consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X for interim financial information. Certain information or footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for interim financial reporting. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.

The consolidated balance sheet at December 31, 2016 has been derived from audited financial statements but does not include all of the information and notes required by GAAP for complete financial statements. Certain reclassifications were made to the financial statements for the prior period to conform to current period presentation.

The interim financial information contained herein should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2016 included in the Company’s Annual Report on Form 10-K, as filed with the SEC on February 21, 2017. Operating results for the quarter ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017 or for any future interim periods.

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MACQUARIE INFRASTRUCTURE CORPORATION
 
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)

2. Basis of Presentation  – (continued)

Use of Estimates

The preparation of unaudited consolidated condensed financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure related thereto at the date of the unaudited consolidated condensed financial statements and the reported amounts of revenue and expenses during the reporting period. Management evaluates these estimates and assumptions on an ongoing basis.

Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the unaudited interim consolidated condensed financial statements, which management considered in formulating its estimate, could change in the near term due to one or more future confirming events. Accordingly, the actual results could differ significantly from estimates.

Recently Issued Accounting Standards

On January 26, 2017, the FASB issued ASU No. 2017-04, Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies the measurement of goodwill subsequent to a business combination, and no longer requires an entity to perform a hypothetical purchase price allocation when computing implied fair value to measure goodwill impairment. Instead, impairment will be assessed by quantifying the difference between the fair value of a reporting unit and its carrying amount. An impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value, on condition that the charge doesn’t exceed the total amount of goodwill allocated to that reporting unit. The guidance in the ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 for public issuers and shall be applied prospectively. Early adoption is permitted. The Company will evaluate this ASU prospectively as part of its goodwill impairment testing when it adopts the provisions of this ASU.

On January 5, 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which provides a restrictive framework for determining whether business transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Determining whether a Company acquires a set of assets or a business will impact the initial measurement, the accounting treatment of direct acquisition related costs, contingent considerations and the bargain purchase price. The guidance in the ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017 for public issuers and shall be applied prospectively. Early adoption is permitted. The Company will evaluate this ASU prospectively on asset acquisitions and business combinations when it adopts the provisions of this ASU.

On November 17, 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires companies to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. This reconciliation can be presented either on the face of the statement of cash flows or in the notes to the financial statements. The guidance will be applied retrospectively and is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those years. Early adoption is permitted. The Company will include appropriate disclosures related to restricted cash in accordance with the standard when it adopts the provisions of this ASU.

On February 25, 2016, FASB issued ASU No. 2016-02, Leases (Topic 842), which requires a lessee to recognize assets and liabilities for leases with lease terms of more than 12 months. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP, which requires only capital leases to be recognized on the balance sheet, ASU 2016-02 will require all leases with an initial term greater than one year to be recognized on the balance sheet as a right-of-use asset and a lease liability.

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)

2. Basis of Presentation  – (continued)

The Company also serves as a lessor primarily through operating leases. The accounting for lessors is not expected to fundamentally change except for changes to conform and align existing guidance to the lessee guidance under ASU 2016-02, as well as to the new revenue recognition guidance in ASU 2014-09. ASU 2016-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is allowed. The standard is to be applied using a modified retrospective approach. The Company has begun evaluating and planning for the adoption and implementation of ASU 2016-02, including assessing the overall impact. ASU 2016-02 will have a material impact on the Company’s consolidated balance sheets; however, the full impact to the overall financial statements has not yet been determined. The impact on the Company’s results of operations is being evaluated. The impact of this ASU is non-cash in nature and will not affect the Company’s cash position.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The new guidance sets forth a five-step revenue recognition model which replaces the current revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance and requires more detailed disclosures. To further assist with adoption and implementation of ASU 2014-09, the FASB issued the following ASUs:

With the deferral, the new standard is effective for the Company on January 1, 2018.

There are two adoption methods available for implementation of the standard related to the recognition of revenue from contracts with customers. Under one method, the new guidance is applied retrospectively to contracts for each reporting period presented, subject to allowable practical expedients. Under the other method, the new guidance is applied only to the most current period presented, recognizing the cumulative effect of the change as an adjustment to the beginning balance of retained earnings, and also requires additional disclosures comparing the results to the previous guidance. The Company is going to adopt this standard using the modified retrospective method and is currently evaluating the impact that this standard will have on the Company’s consolidated financial statements, and the changes to its systems, processes and internal controls to meet the reporting and disclosure requirements.

Upon initial evaluation, the Company believes key changes in the standard that impact the Company’s revenue recognition relate to the allocation of contract revenue between various services and equipment, and the timing of when those revenue are recognized. The Company is still in the process of evaluating these impacts and other areas of the standard and its effect on the Company’s financial statements and related disclosures. The Company currently includes sales, excise and value-added taxes related to sales transactions within revenue on the consolidated statements of operations. Upon adoption of ASU 2014-09, the Company will exclude sales-based taxes collected on behalf of third parties from service and product revenue and include these amounts in cost of services and product sales. The result will be a reclassification on the consolidated statements of operations.

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)

2. Basis of Presentation  – (continued)

ASU 2014-09 also introduces new qualitative and quantitative disclosure requirements about contracts with customers including revenue and impairments recognized, disaggregation of revenue and information about contract balance and performance obligations. Information is required about significant judgments and changes in judgments in determining the timing of satisfaction of performance obligations. Additionally, the Company is in the process of evaluating what additional information will be disclosed, but expects the overall level of disclosures related to revenue recognition to increase.

On July 22, 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory, which changes the measurement principle for inventory from the lower of cost or market to lower of cost and net realizable value. The ASU defines net realizable value as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation”. The ASU will not apply to inventories that are measured by using either the last-in, first-out (LIFO) method or the retail inventory method. The guidance in the ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The Company has adopted this ASU and determined that it had an immaterial impact to the Company’s financial condition, results of operations and cash flows.

3. Income per Share

Following is a reconciliation of the basic and diluted income per share computations ($ in thousands, except share and per share data):

		Quarter Ended March 31,
		2017				2016
Numerator:
Net income attributable to MIC		$	36,015			$	22,355
Diluted net income attributable to MIC		$	36,015			$	22,355
Denominator:
Weighted average number of shares outstanding: basic			82,138,168				80,113,011
Dilutive effect of restricted stock unit grants			9,595				8,660
Dilutive effect of fees to Manager-related party(1)			—				1,049,675
Weighted average number of shares outstanding: diluted			82,147,763				81,171,346
Income per share:
Basic income per share attributable to MIC		$	0.44			$	0.28
Diluted income per share attributable to MIC		$	0.44			$	0.28

The effect of potentially dilutive shares for the quarter ended March 31, 2017 is calculated assuming that the restricted stock unit grants totaling 8,604 (net of forfeitures of 2,151 restricted stock unit grants forfeited on September 30, 2016) provided to the independent directors on May 18, 2016 and restricted stock units grants of 991 provided to a new independent director on November 1, 2016, which will all vest during the second quarter of 2017, had been fully converted to shares on those grant dates. The 2.875% Convertible Senior Notes due July 2019 and the 2.00% Convertible Senior Notes due October 2023 were anti-dilutive for the quarter ended March 31, 2017.

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MACQUARIE INFRASTRUCTURE CORPORATION
 
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)

3. Income per Share  – (continued)

The effect of potentially dilutive shares for the quarter ended March 31, 2016 is calculated assuming that (i) the restricted stock unit grants totaling 8,660 provided to the independent directors on June 18, 2015, which vested during the second quarter of 2016, had been fully converted to shares on the grant date and (ii) the $67.8 million of the performance fee for the quarter ended June 30, 2015, which was reinvested in shares by the Manager on August 1, 2016, had been reinvested in shares by the Manager in July 2015. The 2.875% Convertible Senior Notes due July 2019 that were issued on July 15, 2014 were anti-dilutive for the quarter ended March 31, 2016.

The following represents the weighted average potential dilutive shares of common stock that were excluded from the diluted income per share calculation:

		Quarter Ended March 31,
		2017				2016
2.875% Convertible senior notes due July 2019			4,222,378				4,139,250
2.00% Convertible senior notes due October 2023			3,596,901				—
Total			7,819,279				4,139,250

4. Property, Equipment, Land and Leasehold Improvements

Property, equipment, land and leasehold improvements at March 31, 2017 and December 31, 2016 consist of the following ($ in thousands):

		March 31, 2017				December 31, 2016
Land		$	304,236			$	304,240
Easements			131				131
Buildings			43,279				41,711
Leasehold and land improvements			698,412				673,122
Machinery and equipment			3,777,536				3,764,553
Furniture and fixtures			36,031				35,454
Construction in progress			249,076				233,184
			5,108,701				5,052,395
Less: accumulated depreciation			(762,104	)			(705,859	)
Property, equipment, land and leasehold improvements, net		$	4,346,597			$	4,346,536