Macquarie Infrastructure Corporation : Reports First Quarter 2016 Financial Results, Increased Dividend

Macquarie Infrastructure Corporation (NYSE:MIC) reported an 8.7% increase in proportionately combined Free Cash Flow in the first quarter of 2016 compared with the first quarter in 2015. Proportionately combined Free Cash Flow per share was $1.67, down 0.6% on the prior comparable period and reflective of a 9.5% increase in the weighted average number of shares outstanding and variation in the timing of maintenance capital expenditures and taxes.

The increase in cash generated by MIC’s businesses was attributable to the acquisition of the Bayonne Energy Center (BEC) on April 1, 2015, continued growth at Atlantic Aviation and an increased contribution from MIC’s renewable power facilities. The increases were partially offset by reduced contributions from IMTT reflecting normalization of maintenance capital expenditures, and Hawaii Gas, reflecting primarily higher taxes.

Per share figures include the effect of both a 9.5% increase in the weighted average number of MIC shares outstanding and the timing of maintenance capital expenditures and taxes in 2016 compared with 2015. The number of shares on issue rose as a result of base management and performance fees reinvested in shares during 2015 and capital raised in support of the acquisition of BEC. Additionally, in 2015 the majority of maintenance capital expenditures were made in the second half of the year, thereby increasing the amount of Free Cash Flow generated in the first half of that year and adversely impacting the comparison with results for the first quarter in 2016.

Similarly, MIC recorded a smaller tax liability in the first quarter of 2015 compared with the first quarter in 2016. The increase in 2016 taxes reflects the improved financial performance of MIC’s businesses together with a reduction in deductible expenses, notably performance fees. Cash taxes may be reduced by the impact of acquisitions, if any, by the Company during the balance of the year.

James Hooke, chief executive officer of MIC, said that the timing of deployment of maintenance capital and higher taxes offset what was an otherwise attractive increase in Free Cash Flow per share. “We deployed just 8.9% of our annual maintenance capital expenditures and recorded just $0.01 per share in taxes in the first quarter of 2015.”

“Had we deployed the capex evenly throughout 2015, and assuming we managed our tax position at least as effectively as we have historically, we would have reported an increase in Free Cash Flow per share of 10.4% in the first quarter - but the timing differences will reverse over the course of the year and we expect a corresponding step-up in reported cash generation to emerge. I am particularly pleased that EBITDA was at record high levels for each of IMTT, Atlantic Aviation and Hawaii Gas in the first quarter of 2016,” Hooke added.

Hooke went on to say that MIC’s operating results for the quarter put the Company on track to deliver a previously announced increase in its 2016 dividend to between $5.00 and $5.10 per share, up from $4.46 in 2015. The payment of a future dividend is subject to the continued stable performance of MIC’s businesses and authorization by the Company’s board of directors.

“Our businesses performed well during the first quarter – slightly ahead of our expectations for the period, but consistent with our previous commentary including our full year 2016 outlook provided in late February,” said Hooke. “We enjoyed an increased contribution to consolidated EBITDA from our Contracted Power and Energy (CP&E) segment as a result of the acquisition of BEC and the improved performance of our renewable energy portfolio, together with continued growth in the contribution from Atlantic Aviation from both increases in flight activity and high quality acquisitions.”

The better than anticipated result for the quarter was tempered by unseasonably warm winter weather that adversely affected the performance of certain of MIC’s businesses. The impact included:

• A reduction in the number of times BEC was called upon to supply electricity as a result of reduced power demand from New York City;
• Significantly reduced tank heating at IMTT and with it ancillary services revenue; and,
• Significantly reduced de-icing activity Atlantic Aviation.

A reduction in the level of spill response and third party tank cleaning activity at IMTT subsidiary OMI Environmental Solutions, Inc. resulted in OMI generating negative EBITDA for the period as well.

In keeping with its policy of returning the majority of cash generated by its businesses to shareholders, the MIC Board of Directors has authorized a cash dividend of $1.20 per share, or $4.80 annualized, for the first quarter of 2016. The dividend will be payable May 17, 2016 to shareholders of record on May 12, 2016. The cash payment represents a 12.1% increase over the dividend paid for the first quarter of 2015.

“We are pleased to reaffirm our guidance for a year over year increase in our 2016 cash dividend of 12% to 14%,” said Hooke. “We remain confident in the prospects for our businesses over the remainder of the year.”

MIC continues to expect that it will invest between $225.0 million and $250.0 million in 2016 in growth projects and bolt-on acquisitions to existing businesses. “We successfully deployed slightly over $49.0 million in growth capital during the quarter, including in the completion of previously announced projects at IMTT,” said Hooke. “Along with completing these projects, our team developed an additional $36.0 million of new projects and our backlog of approved investment opportunities now totals approximately $200.0 million.”

The announced backlog of growth projects at MIC does not include the planned $130.0 million investment in the development of 130MW of gas-fired power generating capacity at BEC in Bayonne, NJ.

Overview of Proportionately Combined Measures at March 31, 2016

Revenue – Proportionately combined revenue for the first quarter decreased 0.8% to $392.4 million. The decrease primarily reflects a reduction in the cost of fuel sold by Atlantic Aviation, gas sold by Hawaii Gas, and certain services, such as tank heating and rail car handling, provided to customers of IMTT. The lower cost of aviation fuel and gas products is generally passed through to customers resulting in a reduction in revenue which is offset by a corresponding reduction in cost of goods sold/services provided and does not reflect a decline in volume or margin. The revenue decrease was partially offset by the contribution from BEC and improved results from the renewables portion of the CP&E segment.

Gross Profit – The pass-through nature of fluctuations in energy input costs, up or down, mean that gross profit is effectively the “top line” to which MIC manages its businesses. Gross profit generated in the first quarter increased 9.4% to $244.7 million. The increase was attributable to:

• Contributions from the acquisition of BEC; and,
• Improved results at each of Atlantic Aviation, the renewables portion of CP&E and Hawaii Gas.

Earnings Before Interest Taxes Depreciation and Amortization (EBITDA), Excluding Non-Cash Items – Proportionately combined EBITDA excluding non-cash items increased 12.8% to $172.8 million in the first quarter. The increase reflects higher gross profit resulting from improved performance and contributions from acquisitions completed in 2015, partially offset by higher SG&A and/or operating expenses attributable to:

• Incremental expenses related to BEC;
• Professional services fees and salary and benefits at Atlantic Aviation; partially offset by,
• Lower fuel costs, lower costs associated with OMI and continued cost control at IMTT.

See “Use of Non-GAAP Measures” below for MIC’s definition of EBITDA excluding Non-Cash Items and further information on MIC’s use of this measure and see the reconciliation of Proportionately Combines Net Income (Loss) to EBITDA excluding Non-Cash Items attached to this release.

Cash Interest – Excluding non-cash derivatives gains and losses, proportionately combined cash interest expense increased 12.4% to $26.5 million in the first quarter. The increase in cash interest expense was attributable to:

• Incremental debt associated with BEC;
• Higher average debt balances at both IMTT and MIC Corporate; partially offset by,
• Lower debt balances at Atlantic Aviation and the renewable portion of CP&E, both as a result of scheduled amortization.

Cash Taxes – Proportionately combined cash taxes increased 211.4% to $2.5 million primarily as a result of the absence of any performance fees incurred during first quarter in 2016 compared with the first quarter in 2015. The federal portion of this amount and any consolidated federal income tax liability incurred in 2016 is expected to be offset by net operating loss carryforwards.

Maintenance Capital Expenditures – Proportionately combined maintenance capital expenditures increased by 70.3% to $10.4 million in the first quarter. The increase was attributable to:

• An increase in maintenance capital expenditures at IMTT and Hawaii Gas; partially offset by,
• Lower maintenance capital expenditures at Atlantic Aviation.

The Company incurred a relatively small amount of maintenance capital expenditures in the first half of 2015, particularly at IMTT, but saw expenditures increase in the second half of the year, notably in the fourth quarter. Maintenance capital expenditures are expected to be incurred more evenly throughout 2016.

Free Cash Flow – Proportionately Combined Free Cash Flow increased 8.7% to $133.4 million in the first quarter primarily as a result of the acquisitions of both BEC and FBOs at Atlantic Aviation, the improved performance of Atlantic Aviation generally, and an increased contribution from the renewables portion of CP&E.

MIC regards Free Cash Flow as an important tool in assessing the performance of its capital intensive, cash generative businesses. Proportionately combined Free Cash Flow refers to the consolidated Free Cash Flow generated by MIC’s businesses other than non-controlling interests in its partnerships in solar and wind power facilities, after holding company costs. See “Use of Non-GAAP Measures” below for MIC’s definition of Free Cash Flow and further information and see the reconciliation of Proportionately Combined Cash from Operating Activities to Free Cash Flow attached to this release.

MIC’s reported increase in Free Cash Flow was partially offset on a per share basis by an increase in the number of shares outstanding. The increase in share count reflects the impact of capital raised in connection with the acquisition of BEC and the reinvestment in shares of base fees and a portion of the performance fees earned by the Company’s Manager during 2015. No performance fee was payable for the first quarter of 2016.

Overview of Consolidated Results for the First Quarter

Revenue – MIC reported consolidated revenue for the first quarter of 2016 of $396.4 million, down 0.5% compared with the first quarter in 2015. Increased revenue from BEC and improvement in performance of renewable power facilities was offset by a reduction in the cost of jet fuel sold by Atlantic Aviation and gas sold by Hawaii Gas. MIC notes that this decrease in revenue reflects the pass-through nature of energy-related costs and not a decline in volume or margin.

Expenses – Selling, general and administrative expenses increased in the first quarter by 2.3% to $72.3 million. The increase was the result of the BEC acquisition and increases at Atlantic Aviation, partially offset by lower costs at Corporate and the renewable portion of CP&E.

Fees payable to MIC’s external manager decreased 91.0% to $14.8 million in the first quarter primarily as a result of the absence of any performance fee in 2016 together with a reduction in the Company’s market capitalization. All fees were reinvested in new shares.

Net Income (Loss) – MIC reported consolidated net income, before taxes, of $35.3 million in the first quarter of 2016 compared with a net loss of $145.8 million in the first quarter of 2015. The improvement reflects both the absence of performance fees incurred in the first quarter of 2015 and improvement in the operating performance of MIC’s businesses in 2016.

Use of Non-GAAP Measures

MIC reports EBITDA excluding non-cash items on a consolidated and operating segment basis and reconciles each to consolidated net income (loss). EBITDA excluding non-cash items is a measure relied upon by management in evaluating the performance of its businesses and investments. EBITDA excluding non-cash items is defined as earnings before interest, taxes, depreciation and amortization and non-cash items, which includes impairments, gains and losses on derivatives and adjustments for certain other items reflected in the statement of operations. EBITDA excluding non-cash items also excludes any base management and performance fees, if any, whether paid in cash or stock.

MIC believes that EBITDA excluding non-cash items provides additional insight into the performance of its operating businesses, relative to each other and to similar businesses without regard to capital structure, and into their ability to service or reduce debt, fund capital expenditures and/or support distributions to the holding company.

MIC also reports Free Cash Flow and Proportionately Combined Free Cash Flow, as defined below, on both a consolidated and an operating segment basis as a means of assessing the amount of cash generated by its businesses and as a supplement to other information provided in accordance with GAAP, and reconciles each to cash from operating activities. MIC believes that reporting Free Cash Flow provides additional insight into its ability to deploy cash as GAAP measures, such as net income (loss) and cash from operating activities, do not reflect all of the items that management considers in determining the amount of cash generated by its operating businesses. MIC defines Free Cash Flow as cash from operating activities, which includes cash paid for interest, taxes and pension contributions, less maintenance capital expenditures, and includes principal repayments on capital lease obligations used to fund maintenance capital expenditures, and excludes changes in working capital.

Free Cash Flow does not fully reflect MIC’s ability to freely deploy generated cash, as it does not reflect required payments on indebtedness and other fixed obligations or the other cash items excluded when calculating Free Cash Flow. Free Cash Flow may be calculated in a different manner by other companies, which limits its usefulness as a comparative measure. Free Cash Flow should be used as a supplemental measure and not in lieu of MIC’s financial results as reported under GAAP.

MIC may report certain financial metrics on a proportionately combined basis including proportionately combined gross profit, proportionately combined EBITDA excluding non-cash items, proportionately combined cash interest, proportionately combined cash taxes, proportionately combined maintenance capital expenditures, proportionately combined Free Cash Flow including adjusted proportionately combined Free Cash Flow, proportionately combined Free Cash Flow per share, proportionately combined growth capital expenditures and proportionately combined net debt. The Company believes that such measures provide investors and management with additional insight into the financial results and cash generated on the basis of its varied ownership interests in its businesses and investments for the reporting periods.

Proportionately combined metrics used by MIC may be calculated in a different manner by other companies and may limit their usefulness as a comparative measure. Proportionately combined metrics should be used as a supplement to and not in lieu of financial results reported in accordance with GAAP.

The following tables summarize MIC’s financial performance on a proportionately combined basis ($ in Thousands) (Unaudited) for the quarter ended March 31, 2016 and for the prior comparable period.

Segment Results for the First Quarter

IMTT - MIC’s bulk liquid terminals business, IMTT, is one of the largest independent terminal operations in the country. IMTT generated a 2.0% decrease in Free Cash Flow in the first quarter of 2016 compared with the first quarter in 2015 primarily reflecting the timing of maintenance capital expenditures. IMTT deployed $6.3 million of maintenance capital during the first quarter of 2016 compared with only $2.5 million in the first quarter in 2015 when revisions to policies concerning maintenance capital spending were being implemented. For the full year 2016 the business is expected to incur between $30.0 million and $35.0 million of maintenance capital expenditures.

Revenue at IMTT was lower in the first quarter of 2016 compared with the first quarter in 2015 as a result of a reduction in tank heating consistent with the relatively mild weather in the Northeast, a decline in spill response activity on the part of OMI Environmental Solutions (OMI, an IMTT subsidiary), and a reduction in rail car handling, specifically the transport of Canadian crude oil products.

“The absence of any meaningful spill response or tank cleaning activity in the quarter was significant,” said Hooke. “The performance of OMI has always been variable, in some cases providing a substantial benefit – such as in connection with the Macondo oil spill in 2010 – and in some cases, not. In the first quarter of 2016 the contribution from OMI was actually negative.” Excluding the impact of the contributions from OMI in each of the first quarter of 2016 and 2015, EBITDA generated by IMTT would have increased by 5.8% rather than the reported 4.9%.

Aggregate costs at IMTT declined by 4.6% in the first quarter of 2016 compared with the first quarter in 2015. “We remain focused on expense management – both operating expenses and general and administrative expenses – at IMTT,” Hooke noted. “Our priorities at IMTT for the year include right-sizing various operations, and managing utility expenses and a variety of procurement related initiatives.”

On March 31, 2016, IMTT completed the acquisition of the 33.3% interest in a bulk liquid terminal in Quebec it did not already own. IMTT was previously providing management services to this terminal and no operational changes are expected. The contribution to IMTT’s results from the minority interest was not significant.

Atlantic Aviation - Atlantic Aviation comprises a nationwide network of 68 fixed base operations serving owners and operators of general aviation jet aircraft. The business continued to benefit from increases in general aviation flight activity in the U.S., together with the impact of acquisitions of additional fixed base operations in 2015, and market share gains. Free Cash Flow generated by Atlantic Aviation increased 6.1% in the first quarter of 2016 versus the first quarter in 2015. The increase reflects primarily a 5.8% increase in EBITDA excluding non-cash items driven by same store growth in gross profit of 2.8%.

“We do not believe that Atlantic Aviation is overly sensitive to an ordinary course kind of economic slowdown, should one occur,” said Hooke, “although the performance of the business is more likely to serve as a barometer of conditions in the broader economy than our other businesses.”

MIC believes that the favorable growth trends in general aviation flight activity in the U.S. will persist. The increased flight activity, growth in the volume of fuel sold and margins on fuel sales, in combination with the operational leverage in the business, is expected to continue to drive improvement in EBITDA and Free Cash Flow.

Contracted Power & Energy – With the acquisition of BEC, the CP&E segment now comprises approximately 779MW of power generating capacity. Output from the 267MW of wind and solar power portion of the portfolio was better in the first quarter of 2016 than it was in the first quarter of 2015 as a result of increased solar and wind resources. Together with the acquisition of BEC, the segment produced a more than fivefold increase in proportionately combined Free Cash Flow compared with the first quarter in 2015.

The weather and the availability of renewable resources was generally good during the quarter, however the mild winter temperatures in the Northeast contributed to underperformance versus expectations at BEC. The underperformance was mitigated by the tolling (availability) agreements in place for the capaci ty of five of the facility’s eight turbines. Although the untolled (merchant) portion of the facility generates capacity revenue regardless of the level of generation, the underperformance in the quarter was attributed to a lower than anticipated level of dispatch of these three turbines.

Hawaii Gas – The amount of gas sold by Hawaii Gas increased by an aggregate 1.3% during the first quarter of 2016 compared with the first quarter in 2015. The increase reflects the addition of new military and commercial customers partially offset by reductions in demand associated with customers whose facilities were undergoing planned repairs/renovations.

The increase in gross profit from the gas sales, together with a modest reduction in selling, general and administrative expenses, contributed to growth in EBITDA excluding non-cash items of $0.5 million or 3.0%.

Hawaii Gas generated $10.9 million in Free Cash Flow for the quarter, down 23.2% on the first quarter in 2015, as a result of higher taxes and a modest increase in maintenance capital expenditures, partially offset by improved operating performance, versus the prior comparable period. The federal income tax component representing the majority of the increase in taxes at Hawaii Gas is expected to be offset in consolidation with the application of holding company net operating loss carryforwards.

Corporate and Other – The Corporate and Other segment includes public company expenses, board of director costs and expenses associated with capital markets activities including interest expense on corporate level debt securities and revolving credit facilities. The segment result also reflects the impact of base management and performance fees, if any, incurred by the Company.

The Corporate and Other segment results for the first quarter of 2016 include substantially lower fees payable to MIC’s manager compared with the first quarter in 2015. Fees payable to MIC’s manager decreased from $165.3 million in 2015 to $14.8 million as a result of the absence of any performance fee and MIC’s reduced market capitalization. All fees to which the manager was entitled were reinvested in additional shares, not paid in cash.

A decrease in selling, general and administrative expenses related to lower professional fees resulted in EBITDA excluding non-cash items totaling ($1.3) million for the first quarter in 2016 compared with ($2.8) million in the first quarter in 2015.

Free Cash Flow recorded in the Corporate and Other segment was ($0.9) million compared with ($5.3) million in the prior comparable period including the offset in consolidation of federal income taxes at the operating company level.

Conference Call and Webcast

When: Management has scheduled a conference call for 8:00 a.m. Eastern Time on Tuesday, May 3, 2016 during which it will review and comment on the Company’s results for the first quarter.

How: To listen to the conference call please dial +1(650) 521-5252 or +1(877) 852-2928 at least 10 minutes prior to the scheduled start time. A webcast of the call will be accessible via the Company’s website at www.macquarie.com/mic. Please allow extra time prior to the call to visit the site and download the necessary software to listen to the webcast.

Slides: The Company will prepare materials in support of its conference call presentation. The materials will be available for downloading from the Company’s website the morning of May 3, 2016 prior to the conference call. A link to the materials will be located on the homepage of the MIC website.

Replay: For interested individuals unable to participate in the live conference call, a replay will be available after 2:00 p.m. on May 3, 2016 through midnight on May 9, 2016, at +1(404) 537-3406 or +1(855) 859-2056, Passcode: 90866510. An online archive of the webcast will be available on the Company’s website for one year following the call. MIC-G

About Macquarie Infrastructure Corporation

Macquarie Infrastructure Corporation owns, operates and invests in a diversified group of infrastructure businesses providing basic services to customers in the United States. Its businesses consist of a bulk liquid terminals business, International-Matex Tank Terminals, an airport services business, Atlantic Aviation, a gas processing and distribution business, Hawaii Gas, and several entities comprising a Contracted Power and Energy segment. MIC is managed by a wholly-owned subsidiary of the Macquarie Group. For additional information, please visit the Macquarie Infrastructure Corporation website at www.macquarie.com/mic.

Forward-Looking Statements

This press release contains forward-looking statements. MIC may, in some cases, use words such as "project”, "believe”, "anticipate”, "plan”, "expect”, "estimate”, "intend”, "should”, "would”, "could”, "potentially”, or "may” or other words that convey uncertainty of future events or outcomes to identify these forward-looking statements. Forward-looking statements in this report are subject to a number of risks and uncertainties, some of which are beyond MIC’s control including, among other things: changes in general economic or business conditions; its ability to service, comply with the terms of and refinance debt, successfully integrate and manage acquired businesses, retain or replace qualified employees, manage growth, make and finance future acquisitions, and implement its strategy; risks associated with development, investment and expansion in the power industry; its shared decision-making with co-investors over investments including the distribution of dividends; its regulatory environment establishing rate structures and monitoring quality of service; demographic trends, the political environment, the economy, tourism, construction and transportation costs, air travel, environmental costs and risks; fuel and gas and other commodity costs; its ability to recover increases in costs from customers, reliance on sole or limited source suppliers, risks or conflicts of interests involving its relationship with the Macquarie Group and changes in U.S. federal tax law.

MIC’s actual results, performance, prospects or opportunities could differ materially from those expressed in or implied by the forward-looking statements. Additional risks of which MIC is not currently aware could also cause its actual results to differ. In light of these risks, uncertainties and assumptions, you should not place undue reliance on any forward-looking statements. The forward-looking events discussed in this release may not occur. These forward-looking statements are made as of the date of this release. MIC undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

“Macquarie Group” refers to the Macquarie Group of companies, which comprises Macquarie Group Limited and its worldwide subsidiaries and affiliates. 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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