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 June 30, 2018

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 85,370,832 shares of common stock, with $0.001 par value, outstanding at July 31, 2018.

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MACQUARIE INFRASTRUCTURE CORPORATION
 
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		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			30
Controls and Procedures			31
Consolidated Condensed Balance Sheets as of June 30, 2018 (Unaudited) and December 31, 2017			32
Consolidated Condensed Statements of Operations for the Quarters and Six Months Ended June 30, 2018 and 2017 (Unaudited)			34
Consolidated Condensed Statements of Comprehensive Income for the Quarters and Six Months Ended June 30, 2018 and 2017 (Unaudited)			35
Consolidated Condensed Statements of Cash Flows for the Six Months Ended June 30, 2018 and 2017 (Unaudited)			36
Notes to Consolidated Condensed Financial Statements (Unaudited)			38
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			60
Item 1A. Risk Factors			60
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			61
Item 3. Defaults Upon Senior Securities			61
Item 4. Mine Safety Disclosures			61
Item 5. Other Information			61
Item 6. Exhibits			61

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, 2017, 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 (MIC) should be read in conjunction with the consolidated condensed financial statements and the notes to those statements included elsewhere herein.

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, and each member of all Board Committees, is independent and has 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 Securities 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. Collectively, 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 our proportionate interest in our wind and solar facilities.

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.

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.

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)

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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. Contract lengths vary from 30 days to more than ten years.

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 Contracted Power 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, 2017, MIC has paid or declared the following dividends:

Declared		Period Covered		$ per Share		Record Date		Payable Date
July 31, 2018		Second quarter 2018		$1.00		August 13, 2018		August 16, 2018
May 1, 2018		First quarter 2018		1.00		May 14, 2018		May 17, 2018
February 19, 2018		Fourth quarter 2017		1.44		March 5, 2018		March 8, 2018
October 30, 2017		Third quarter 2017		1.42		November 13, 2017		November 16, 2017
August 1, 2017		Second quarter 2017		1.38		August 14, 2017		August 17, 2017
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

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 $1.00 per share for the quarter ended June 30, 2018. MIC has been structured to provide investors with an opportunity to generate an attractive “total return” and we intend to distribute the majority of the cash generated from operations by our businesses as a quarterly dividend.

Our board of directors regularly reviews our dividend policy and payout ratio. 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 and economic conditions, the Company’s financial condition, results of operations, indebtedness levels, 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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Recent Developments

On July 27, 2018, our subsidiary within Contracted Power segment entered into an agreement to sell 100% of Bayonne Energy Center (BEC) to NHIP II Bayonne Holdings LLC for $656.5 million in cash and the assumption of $243.5 million in debt, subject to adjustment based on working capital and debt balances at the effective date. We will guarantee our subsidiary’s payment and certain post-closing indemnity obligations under the purchase agreement. The transaction is expected to close in the fourth quarter of 2018, subject to receipt of required approvals including, among others, from the New York Public Service Commission and the Federal Energy Regulatory Commission. As a consequence, BEC’s assets and liabilities are classified as held for sale on our consolidated condensed balance sheet at June 30, 2018.

We anticipate using part of the net proceeds of approximately $650.0 million, after transaction fees and expenses, to reduce debt including $150.0 million outstanding on the revolving credit facility at IMTT. We expect the use of proceeds from the BEC sale to reduce our ratio of net debt to EBITDA (leverage ratio) at December 31, 2018 to less than 4.5 times.

Proceeds not used to reduce debt will be available to fund a portion of our planned growth capital deployments. Our Board will consider options for returning any excess capital to shareholders.

We expect taxable gain from the sale of BEC to utilize the majority of our federal prior year Net Operating Loss (NOL) carry-forwards. However, we expect to be able to offset future federal taxable income with the tax benefits associated with capital deployments.

We are also undertaking a review of strategic options available to us with respect to certain other, smaller businesses in our portfolio. We may, as a result of this review, undertake to sell, or otherwise divest of these other businesses, although we cannot assure you whether, or on what terms, any such transaction(s) will occur.

In 2017, we completed the development of our shared service center to consolidate common back office functions across our businesses. We use an efforts model to allocate costs incurred by our shared services center to each of our operating and Corporate and Other segments. These costs are reflected in Selling, general and administrative expenses.

To date, we have realized approximately $12.0 million of savings from our shared services center, of which approximately 65% is related to procurement and 35% is related to headcount reductions. These headcount reductions have been partially offset by increases in Selling, general and administrative expenses associated with acquisitions completed in 2017 and 2018 as well as additional functionality that we have added to our shared services center. Savings from our procurement initiative will be reflected in a reduction in costs of services, cost of products sold, selling, general and administrative expenses and capital expenditures and will not be evenly allocated to any individual operating segment.

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Results of Operations

Consolidated

Our consolidated results reflect a decrease in the contribution from IMTT primarily as a result of the deferred revenue recognized in 2017 in connection with the termination of a construction project and the decreased contribution from the previously disclosed non-renewal of certain contracts for bulk liquid storage and handling services in late 2017 and early 2018. These factors were partially offset by contributions from an acquisition completed by IMTT in 2017.

Our consolidated results also reflect increases in the contributions from our Atlantic Aviation and Contracted Power businesses. Atlantic Aviation benefitted from increases in GA flight activity, contributions from acquisitions of additional FBOs and the operational leverage inherent in the business. Results for Contracted Power were better than anticipated driven by, (i) the favorable weather conditions in New York City and an increase in generation capacity from the BEC expansion; and (ii) improved operations of certain of our renewable power generation assets from better wind and solar resources and the internalization of the oversight of day-to-day operations of these assets.

MIC Hawaii’s results were below expectations primarily as a result of cost increases at Hawaii Gas and underperformance versus expectations on the part of our design-build mechanical contractor. The favorable outcome of the rate case is expected to generate incremental revenue and EBITDA by the regulated portion of Hawaii Gas in the third quarter of 2018 and thereafter.

Results for the second quarter of 2018 also reflect the absence of implementation costs related to shared services and the associated benefit of reductions in procurement costs. The absence of these expenses was partially offset by the cost of advisory services in connection with addressing shareholder matters.

Capital deployed in 2017 into acquisitions by each of IMTT and Atlantic Aviation, as well as growth investments generally, contributed an expected level of revenue and EBITDA to our overall results in the quarter and six months ended June 30, 2018. The 2017 acquisitions performed in line with their respective investment cases and the development of additional power generation capacity at BEC contributed modestly to our consolidated results in the second quarter.

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Results of Operations: Consolidated – (continued)

Our consolidated results of operations are as follows:

		Quarter Ended June 30,								Change Favorable/ (Unfavorable)								Six Months Ended June 30,								Change Favorable/ (Unfavorable)
		2018				2017				$				%				2018				2017				$				%
		($ In Thousands, Except Share and Per Share Data) (Unaudited)
Revenue
Service revenue		$	375,997			$	345,045				30,952				9.0			$	778,606			$	708,849				69,757				9.8
Product revenue			102,083				93,945				8,138				8.7				201,030				181,598				19,432				10.7
Total revenue			478,080				438,990				39,090				8.9				979,636				890,447				89,189				10.0
Costs and expenses
Cost of services			179,725				147,114				(32,611	)			(22.2	)			367,195				301,820				(65,375	)			(21.7	)
Cost of product sales			47,164				40,249				(6,915	)			(17.2	)			100,549				87,474				(13,075	)			(14.9	)
Selling, general and administrative			88,927				82,967				(5,960	)			(7.2	)			175,884				159,919				(15,965	)			(10.0	)
Fees to Manager-related party			10,852				18,433				7,581				41.1				23,780				36,656				12,876				35.1
Depreciation			61,086				57,063				(4,023	)			(7.1	)			122,444				114,744				(7,700	)			(6.7	)
Amortization of intangibles			18,224				15,898				(2,326	)			(14.6	)			35,440				33,591				(1,849	)			(5.5	)
Total operating expenses			405,978				361,724				(44,254	)			(12.2	)			825,292				734,204				(91,088	)			(12.4	)
Operating income			72,102				77,266				(5,164	)			(6.7	)			154,344				156,243				(1,899	)			(1.2	)
Other income (expense)
Interest income			111				41				70				170.7				191				75				116				154.7
Interest expense(1)			(30,287	)			(35,356	)			5,069				14.3				(49,077	)			(60,838	)			11,761				19.3
Other income, net			6,248				1,738				4,510				NM				6,290				2,920				3,370				115.4
Net income before income taxes			48,174				43,689				4,485				10.3				111,748				98,400				13,348				13.6
Provision for income taxes			(11,895	)			(17,664	)			5,769				32.7				(28,674	)			(39,737	)			11,063				27.8
Net income		$	36,279			$	26,025				10,254				39.4			$	83,074			$	58,663				24,411				41.6
Less: net (loss) income attributable to noncontrolling interests			(2,087	)			5				2,092				NM				(32,126	)			(3,372	)			28,754				NM
Net income attributable to MIC		$	38,366			$	26,020				12,346				47.4			$	115,200			$	62,035				53,165				85.7
Basic income per share attributable to MIC		$	0.45			$	0.32				0.13				40.6			$	1.36			$	0.75				0.61				81.3
Weighted average number of shares outstanding: basic			85,082,209				82,430,324				2,651,885				3.2				84,952,551				82,285,053				2,667,498				3.2

NM — Not meaningful

Revenue

Consolidated revenues increased for the quarter and six months ended June 30, 2018 compared with the quarter and six months ended June 30, 2017 primarily as a result of, (i) an increase in the wholesale cost of jet fuel sold at Atlantic Aviation; (ii) an increase in the volume and wholesale cost of gas sold at Hawaii Gas and an increase in revenue from the design-build mechanical contractor at MIC Hawaii; (iii) improved operations and power production by our Contracted Power businesses; and, (iv) contributions from acquisitions. The increase in revenue for the quarter and six months ended June 30, 2018 was partially offset by deferred revenue recognized in 2017 in connection with the termination of a construction project at IMTT.

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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 and six months ended June 30, 2018 compared with the quarter and six months ended June 30, 2017 primarily due to, (i) an increase in the wholesale cost of jet fuel at Atlantic Aviation; (ii) an increase in the wholesale cost of gas and lower margins at MIC Hawaii; and, (iii) incremental costs associated with acquired operations. The changes in consolidated cost of services and product sales were also attributable to unrealized gains and losses on commodity hedges at Hawaii Gas (see “Results of Operations — MIC Hawaii” below).

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased for the quarter and six months ended June 30, 2018 compared with the quarter and six months ended June 30, 2017 primarily due to, (i) incremental costs associated with acquired businesses; (ii) approximately $2.0 million of costs incurred for advisory services in connection with addressing shareholder matters; and (iii) costs incurred in connection with the evaluation of various investment and acquisition/disposition opportunities. The increases were partially offset by the absence of costs incurred during 2017 in connection with the implementation of our shared services center.

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 total stockholder returns relative to a U.S. utilities index. For the quarter and six months ended June 30, 2018, we incurred base management fees of $10.9 million and $23.8 million, respectively, compared with $18.4 million and $36.7 million for the quarter and six months ended June 30, 2017, respectively. No performance fees were incurred in any of the above periods. The unpaid portion of base management fees and performance fees, if any, at the end of each reporting period is included in the line item 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 Services Agreement, our Manager has currently elected to reinvest future base management fees and performance fees, if any, in new primary shares.

Period		Base Management Fee Amount ($ in Thousands)				Performance Fee Amount ($ in Thousands)				Shares Issued
2018 Activities:
Second quarter 2018		$	10,852			$	—				277,053	(1)
First quarter 2018			12,928				—				265,002
2017 Activities:
Fourth quarter 2017		$	16,778			$	—				248,162
Third quarter 2017			17,954				—				240,674
Second quarter 2017			18,433				—				233,394
First quarter 2017			18,223				—				232,398

Depreciation

Depreciation expense increased for the quarter and six months ended June 30, 2018 compared with the quarter and six months ended June 30, 2017 primarily due to contributions from acquisitions and assets placed in service.

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Results of Operations: Consolidated – (continued)

Amortization of Intangibles

Amortization of intangibles increased for the quarter and six months ended June 30, 2018 compared with the quarter and six months ended June 30, 2017 primarily due to contributions from acquisitions and a reassessment of the useful life of customer relationships at the design-build mechanical contractor in MIC Hawaii.

Interest Expense and Gains (Losses) on Derivative Instruments

Interest expense includes gains on derivative instruments of $5.9 million and $21.0 million for the quarter and six months ended June 30, 2018, respectively, compared with losses on derivative instruments of $7.7 million and $6.8 million for the quarter and six months ended June 30, 2017, respectively. Gains and losses on derivatives recorded in interest expense are attributable to the change in fair value of interest rate hedging instruments. Excluding the derivative adjustments, cash interest expense was $31.8 million and $61.6 million for the quarter and six months ended June 30, 2018, respectively, compared with $26.4 million and $52.3 million for the quarter and six months ended June 30, 2017, respectively. The increase reflects primarily higher average debt balances and an increase in the weighted average interest rate. See discussions of interest expense for each of our operating businesses below.

Other Income, net

Other income, net, increased for the quarter and six months ended June 30, 2018 compared with the quarter and six months ended June 30, 2017 reflecting fees paid to us under a loan agreement with a developer of renewable power projects.

Income Taxes

We file a consolidated federal income tax return that includes the financial results of IMTT, Atlantic Aviation, BEC, MIC Hawaii and our allocable share of the taxable income (loss) from our wind and solar facilities. The wind and solar facilities in which we have less than 100% equity interests are held by limited liability companies 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. In addition, our businesses also file income tax returns in the state and local jurisdictions in which they operate.

For the year ending December 31, 2018, we expect any consolidated federal income tax liability our businesses may generate to be fully offset by NOL carryforwards. Our federal NOL balance at December 31, 2017 was $347.3 million, which we believe we will be able to fully utilize. If the aforementioned sale of BEC does not close, we do not expect to make material federal income tax payments, with our current portfolio of businesses, any earlier than 2020 due to the availability of our federal prior year NOLs. If the sale of BEC closes, we expect to utilize a substantial amount of our federal prior year NOLs and may be required to make material federal income tax payments as early as 2019. Some or all of any current federal income tax liabilities otherwise arising in 2019 could be offset by capital deployed into assets that qualify for bonus depreciation.

For the year ending December 31, 2018, we expect current year federal taxable income to be approximately $80.0 million, excluding any gain from the sale of BEC. In addition, we expect our businesses collectively to pay state/provincial income taxes of approximately $14.0 million for the year ending December 31, 2018. 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.

The Tax Cuts and Jobs Act

The Tax Cuts and Jobs Act signed into law on December 22, 2017 includes provisions that will have an impact on our federal taxable income. The most significant of these are 100% bonus depreciation on qualifying assets (which is scheduled to decrease ratably to 0% between 2023 and 2027) and a reduction in the federal corporate tax rate from 35% to 21%.

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Results of Operations: Consolidated – (continued)

The Tax Cuts and Jobs Act also limits the deductibility of net interest expense to 30% of “adjusted taxable income”. We do not expect this limitation to have a material impact our financial results.

Noncontrolling Interest

The increase in loss attributable to noncontrolling interest for the six months ended June 30, 2018 compared with the six months ended June 30, 2017 was driven primarily by the change in tax rates imposed on certain entities within the Contracted Power segment by the Tax Cuts and Jobs Act.

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 our proportionate interest in our wind and solar facilities.

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 Contracted Power 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 proportionate interest in our wind and solar facilities. 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 and not in lieu of our financial results reported under GAAP.

Our businesses are characteristically 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 interest, tax payments and pension contributions, less maintenance capital expenditures, which includes principal repayments on capital lease obligations used to fund maintenance capital expenditures, and excluding changes in working capital.

We use Free Cash Flow as a measure of our ability to provide investors with an attractive risk-adjusted total 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 expenses. 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 and are not included in pension expense. 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 total return.

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Results of Operations: Consolidated – (continued)

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 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 and not in lieu of our financial results reported under GAAP.

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 flows. We consider a number of factors in determining whether a specific capital expenditure will be classified as maintenance or growth.

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.

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Results of Operations: Consolidated – (continued)

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 June 30,								Change Favorable/ (Unfavorable)								Six Months Ended June 30,								Change Favorable/ (Unfavorable)
		2018				2017				$				%				2018				2017				$				%
		($ In Thousands) (Unaudited)
Net income		$	36,279			$	26,025											$	83,074			$	58,663
Interest expense, net(1)			30,176				35,315												48,886				60,763
Provision for income taxes			11,895				17,664												28,674				39,737
Depreciation			61,086				57,063												122,444				114,744
Amortization of intangibles			18,224				15,898												35,440				33,591
Fees to Manager-related party			10,852				18,433												23,780				36,656
Pension expense(2)			1,937				1,627												4,190				4,321
Other non-cash (income) expense, net(3)			(1,514	)			(1,101	)											3,366				2,764
EBITDA excluding non-cash items		$	168,935			$	170,924				(1,989	)			(1.2	)		$	349,854			$	351,239				(1,385	)			(0.4	)
EBITDA excluding non-cash items		$	168,935			$	170,924											$	349,854			$	351,239
Interest expense, net(1)			(30,176	)			(35,315	)											(48,886	)			(60,763	)
Adjustments to derivative instruments recorded in interest expense(1)			(4,706	)			5,930												(19,755	)			2,683
Amortization of debt financing costs(1)			2,190				2,099												5,239				4,301
Amortization of debt discount(1)			903				876												1,800				1,495
Provision for current income taxes			(3,712	)			(2,618	)											(7,583	)			(6,339	)
Changes in working capital(4)			(11,534	)			(20,853	)											(14,667	)			(43,979	)
Cash provided by operating activities			121,900				121,043												266,002				248,637
Changes in working capital(4)			11,534				20,853												14,667				43,979
Maintenance capital expenditures			(9,490	)			(6,480	)											(19,352	)			(10,956	)
Free cash flow		$	123,944			$	135,416				(11,472	)			(8.5	)		$	261,317			$	281,660				(20,343	)			(7.2	)

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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 (our proportionate interest in our wind and solar facilities). 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 June 30,								Change Favorable/ (Unfavorable)								Six Months Ended June 30,								Change Favorable/ (Unfavorable)
		2018				2017				$				%				2018				2017				$				%
		($ In Thousands) (Unaudited)
Free Cash Flow – Consolidated basis		$	123,944			$	135,416				(11,472	)			(8.5	)		$	261,317			$	281,660				(20,343	)			(7.2	)
100% of Contracted Power Free Cash Flow included in consolidated Free Cash Flow			(25,973	)			(20,704	)											(40,500	)			(30,543	)
MIC’s share of Contracted Power Free Cash Flow			24,027				18,462												36,126				26,633
100% of MIC Hawaii Free Cash Flow included in consolidated Free Cash Flow			(7,226	)			(9,295	)											(17,976	)			(24,231	)
MIC’s share of MIC Hawaii Free Cash Flow			7,224				9,293												17,971				24,226
Free Cash Flow – Proportionately Combined basis		$	121,996			$	133,172				(11,176	)			(8.4	)		$	256,938			$	277,745				(20,807	)			(7.5	)

Results of Operations: IMTT

The financial performance of IMTT is in large part a function of the amount of bulk liquid storage capacity under contract and the rates achieved on leases of that capacity. IMTT recorded financial results for the quarter and six months ended June 30, 2018 that reflects the deferred revenue recognized in 2017 in connection with the termination of a construction project, an expected decline in storage capacity utilization levels and slightly lower average storage rates, partially offset by contributions from an acquisition in 2017. Contract non-renewals reduced capacity utilization to an average of 86.1% for the quarter ended June 30, 2018 compared with 94.0% for the quarter ended June 30, 2017 and 88.1% for the quarter ended March 31, 2018. Storage pricing, although generally flat across the business as a whole, remains under pressure with respect to gasoline and distillates in New York Harbor.

IMTT is currently both involved in and evaluating repurposing and repositioning opportunities:

Approximately 1.3 million barrels of IMTT storage capacity is currently being repurposed. Of that, 500,000 barrels were contracted in the second quarter and an additional 370,000 barrels were contracted in the third quarter. IMTT expects to invest approximately $15.0 million in the repurposing of storage capacity in 2018 and had deployed approximately $2.8 million through June 2018.

Repositioning also includes enhancing connectivity by investing in truck, pipeline, marine and rail infrastructure that will enhance supply chain efficiencies for its customers and provide better integration with IMTT’s facilities.

The successful implementation of these initiatives is, over time, expected to, (i) improve utilization and pricing, (ii) increase exposure to growth markets, (iii) generate a larger proportion of IMTT’s revenue from longer-dated contracts, and (iv) reduce IMTT’s exposure to heavy and residual oil storage demand.

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Results of Operations: IMTT – (continued)

In April 2018, IMTT sold its environmental response subsidiary (OMI Environmental Solutions).

		Quarter Ended June 30,								Change Favorable/ (Unfavorable)								Six Months Ended June 30,								Change Favorable/ (Unfavorable)
		2018				2017												2018				2017
		$				$				$				%				$				$				$				%
			($ In Thousands) (Unaudited)
Revenue			129,363				137,144				(7,781	)			(5.7	)			268,752				275,961				(7,209	)			(2.6	)
Cost of services			49,716				49,224				(492	)			(1.0	)			104,141				99,070				(5,071	)			(5.1	)
Selling, general and administrative expenses			7,814				7,485				(329	)			(4.4	)			17,120				16,523				(597	)			(3.6	)
Depreciation and amortization			32,770				30,795				(1,975	)			(6.4	)			66,019				62,315				(3,704	)			(5.9	)
Operating income			39,063				49,640				(10,577	)			(21.3	)			81,472				98,053				(16,581	)			(16.9	)
Interest expense, net(1)			(10,933	)			(11,763	)			830				7.1				(18,672	)			(20,520	)			1,848				9.0
Other income, net			154				452				(298	)			(65.9	)			450				1,160				(710	)			(61.2	)
Provision for income taxes			(8,087	)			(15,716	)			7,629				48.5				(17,773	)			(32,264	)			14,491				44.9
Net income			20,197				22,613				(2,416	)			(10.7	)			45,477				46,429				(952	)			(2.1	)
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			20,197				22,613												45,477				46,429
Interest expense, net(1)			10,933				11,763												18,672				20,520
Provision for income taxes			8,087				15,716												17,773				32,264
Depreciation and amortization			32,770				30,795												66,019				62,315
Pension expense(2)			1,743				1,350												3,823				3,766
Other non-cash expense, net			310				69												404				137
EBITDA excluding non-cash items			74,040				82,306				(8,266	)			(10.0	)			152,168				165,431				(13,263	)			(8.0	)
EBITDA excluding non-cash items			74,040				82,306												152,168				165,431
Interest expense, net(1)			(10,933	)			(11,763	)											(18,672	)			(20,520	)
Adjustments to derivative instruments recorded in interest expense(1)			(1,351	)			1,587												(5,393	)			267
Amortization of debt financing costs(1)			412				412												823				823
Provision for current income taxes			(4,376	)			(1,155	)											(8,652	)			(3,413	)
Changes in working capital			5,545				(16,881	)											10,634				(16,145	)
Cash provided by operating activities			63,337				54,506												130,908				126,443
Changes in working capital			(5,545	)			16,881												(10,634	)			16,145
Maintenance capital expenditures			(5,483	)			(2,987	)											(12,472	)			(5,447	)
Free cash flow			52,309				68,400				(16,091	)			(23.5	)			107,802				137,141				(29,339	)			(21.4	)

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Results of Operations: IMTT – (continued)

Revenue

IMTT generates the majority of its revenue from contracts comprising a fixed monthly charge (that typically escalates annually with inflation) for access to or use of a specified amount of capacity and/or its infrastructure and land. Contract lengths vary from 30 days to more than ten years. We refer to revenue generated from such contracts or fixed charges as firm commitments. Firm commitments are generally of medium term duration and at June 30, 2018, had a revenue weighted average remaining life of 2.3 years. However, some customers storing certain petroleum products are renewing contracts for shorter durations that will increase the frequency with which contracts are renewed. Revenue from firm commitments comprised 80.5% and 79.8% of total revenue for the quarter and trailing twelve months ended June 30, 2018, respectively.

For the quarter and six months ended June 30, 2018, total revenue decreased by $7.8 million and $7.2 million, respectively, compared with the quarter and six months ended June 30, 2017 primarily due to the deferred revenue recognized in 2017 in connection with the termination of a construction project, the decline in utilization and slightly lower average storage rates. The decrease in revenue was partially offset by contributions from an acquisition.

Costs of Services and Selling, General and Administrative Expenses

Cost of services and selling, general and administrative expenses combined increased for the quarter and six months ended June 30, 2018 compared with the quarter and six months ended June 30, 2017 primarily due to incremental costs related to an acquisition and increased repair and maintenance expenses. The cost increases were partially offset by lower costs related to spill response activity primarily as a result of the sale of OMI Environmental Solutions in April 2018.

Depreciation and Amortization

Depreciation and amortization expense increased for the quarter and six months ended June 30, 2018 compared with the quarter and six months ended June 30, 2017 primarily due to an acquisition.

Interest Expense, Net

Interest expense includes gains on derivative instruments of $1.6 million and $5.6 million for the quarter and six months ended June 30, 2018, respectively, compared with losses on derivative instruments of $2.2 million and $1.7 million for the quarter and six months ended June 30, 2017, respectively. Excluding the derivative adjustments, cash interest expense was $11.8 million and $23.2 million for the quarter and six months ended June 30, 2018, respectively, compared with $9.7 million and $19.4 million for the quarter and six months ended June 30, 2017, respectively. The increases reflect primarily higher average debt balances and a higher weighted average interest rate.

The interest rate on IMTT’s tax-exempt Gulf Opportunity Zone Bonds (GO Zone Bonds) increased by 0.6% in 2018 as a result of the reduction in the corporate tax rate from 35% to 21% under the Tax Cuts and Jobs Act.

Income Taxes

The taxable income generated by IMTT is reported on our consolidated federal income tax return. The business files state/provincial income tax returns in the jurisdictions in which it operates. For the year ending December 31, 2018, the business expects to pay state/provincial income taxes of approximately $5.0 million. The Provision for current income taxes of $8.7 million for the six months ended June 30, 2018 in the above table includes $4.7 million of federal income tax expense and $4.0 million of state/provincial 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: IMTT – (continued)

The majority of 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 5 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. In addition, most terminal fixed assets qualify for the federal bonus tax depreciation. A significant portion of terminal fixed assets in Louisiana that were constructed in the period after Hurricane Katrina were financed with GO Zone Bonds. GO Zone Bond financed assets are depreciated, for tax purposes, primarily over 9 to 20 years using the straight-line method. Most of the states in which the business operates do not allow the use of bonus tax depreciation. However, Louisiana allows the use of bonus depreciation except for assets financed with GO Zone Bonds.

Maintenance Capital Expenditures

During the six months ended June 30, 2018, IMTT incurred maintenance capital expenditures of $12.5 million and $12.9 million on an accrual basis and cash basis, respectively, compared with $5.4 million and $8.3 million on an accrual basis and cash basis, respectively, for the six months ended June 30, 2017. The increase for the six months ended June 30, 2018 compared with the six months ended June 30, 2017 was primarily a result of the timing of tank and dock inspections and repairs. Maintenance capital expenditure for the six months ended June 30, 2018 also includes approximately $1.8 million of capital expenditure associated with repurposing existing tanks. For the full year, IMTT anticipates spending up to $15.0 million on repurposing existing tanks with approximately $10.0 million of that being characterized as maintenance capital expenditures. The repurposing expenditures would be in addition to a forecast $20.0 million to $25.0 million of recurring maintenance capital expenditures.

Results of Operations: Atlantic Aviation

A fundamental driver of the performance of Atlantic Aviation is the number of GA flight movements (take-offs and landings) in a given period. Industry-wide, domestic GA flight movements increased by 1.7% and 2.2% for the quarter and six months ended June 30, 2018, respectively, compared with the quarter and six months ended June 30, 2017 according to data reported by the FAA. GA flight movements at airports on which Atlantic Aviation operates increased by 0.1% and 0.4% during the quarter and six months ended June 30, 2018, respectively, compared with the quarter and six months ended June 30, 2017. The modest increase in flight movements at airports on which Atlantic Aviation operates reflects primarily decreased traffic at Santa Monica Municipal Airport in Santa Monica, CA as a result of the shortening of the runway. Flight movements at the remainder of the airports on which Atlantic Aviation operates increased by 1.3% and 1.6% during the quarter and six months ended June 30, 2018.

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Results of Operations: Atlantic Aviation – (continued)

Atlantic Aviation seeks to extend FBO leases prior to their maturity in order to maintain visibility into the cash generating capacity of these assets over the long-term. Atlantic Aviation calculates a weighted average remaining lease life based on EBITDA excluding non-cash items in the prior calendar year adjusted for the impact of acquisitions/dispositions. The weighted average remaining lease life was 20.1 years at June 30, 2018 compared with 19.8 years at June 30, 2017. Notwithstanding the passage of one year, the length of the remaining lease life increased as a result of acquisitions and successful extensions of certain leaseholds.

		Quarter Ended June 30,								Change Favorable/ (Unfavorable)								Six Months Ended June 30,								Change Favorable/ (Unfavorable)
		2018				2017												2018				2017
		$				$				$				%				$				$				$				%
			($ In Thousands) (Unaudited)
Revenue			232,931				196,939				35,992				18.3				480,133				409,692				70,441				17.2
Cost of services (exclusive of depreciation and amortization shown separately below)			115,994				86,957				(29,037	)			(33.4	)			232,687				180,879				(51,808	)			(28.6	)
Gross margin			116,937				109,982				6,955				6.3				247,446				228,813				18,633				8.1
Selling, general and administrative expenses			56,717				52,596				(4,121	)			(7.8	)			116,656				106,486				(10,170	)			(9.6	)
Depreciation and amortization			26,959				23,575				(3,384	)			(14.4	)			52,438				48,608				(3,830	)			(7.9	)
Operating income			33,261				33,811				(550	)			(1.6	)			78,352				73,719				4,633				6.3
Interest expense, net(1)			(4,242	)			(5,907	)			1,665				28.2				(4,311	)			(9,353	)			5,042				53.9
Other expense, net			(555	)			(19	)			(536	)			NM				(499	)			(105	)			(394	)			NM
Provision for income taxes			(7,600	)			(11,077	)			3,477				31.4				(19,711	)			(25,627	)			5,916				23.1
Net income			20,864				16,808				4,056				24.1				53,831				38,634				15,197				39.3
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			20,864				16,808												53,831				38,634
Interest expense, net(1)			4,242				5,907												4,311				9,353
Provision for income taxes			7,600				11,077												19,711				25,627
Depreciation and amortization			26,959				23,575												52,438				48,608
Pension expense(2)			6				5												11				10
Other non-cash expense (income), net			597				(22	)											909				40
EBITDA excluding non-cash items			60,268				57,350				2,918				5.1				131,211				122,272				8,939				7.3
EBITDA excluding non-cash items			60,268				57,350												131,211				122,272
Interest expense, net(1)			(4,242	)			(5,907	)											(4,311	)			(9,353	)
Convertible senior notes interest(3)			(2,013	)			(2,013	)											(4,025	)			(3,757	)
Adjustments to derivative instruments recorded in interest expense(1)			(1,077	)			2,553												(5,444	)			2,686
Amortization of debt financing costs(1)			283				221												562				535
Provision for current income taxes			(7,207	)			(1,730	)											(13,740	)			(4,602	)
Changes in working capital			4,572				784												10,591				(5,332	)
Cash provided by operating activities			50,584				51,258												114,844				102,449
Changes in working capital			(4,572	)			(784	)											(10,591	)			5,332
Maintenance capital expenditures			(1,807	)			(1,981	)											(3,109	)			(2,906	)
Free cash flow			44,205				48,493				(4,288	)			(8.8	)			101,144				104,875				(3,731	)			(3.6	)

NM — Not meaningful

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Results of Operations: Atlantic Aviation – (continued)

Atlantic Aviation generates a significant portion of its revenue from sales of jet fuel. Increases and decreases in the cost of jet fuel are generally passed through to consumers. Accordingly, revenue will fluctuate based on the cost of jet fuel to Atlantic Aviation and reported revenue may not reflect the business’ ability to effectively manage volume and gross margin. 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 margin per gallon to the customer. 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 margin per gallon.

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 believe that our investors view gross margin as reflective of our ability to manage 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 above.

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 on the 70 U.S. airports at which the business operates. Atlantic Aviation seeks to maintain and, where appropriate, increase dollar-based margins on fuel sales.

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 by 18.3% and 17.2% for the quarter and six months ended June 30, 2018, respectively, compared with the quarter and six months ended June 30, 2017 as a result of increases in the wholesale cost of fuel and contributions from acquisitions. The increased 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% and 8.1% for the quarter and six months ended June 30, 2018, respectively, compared with the quarter and six months ended June 30, 2017.

Our discussion of same store results in the current and prior comparable periods reflects contributions from FBOs that have been in operation for the same full months in each period, and excludes the costs of acquiring, integrating or disposing of FBOs. On a same store basis, gross margin increased by 2.9% and 4.1% in the quarter and six months ended June 30, 2018, respectively, compared with the quarter and six months ended June 30, 2017 driven in part by an increase in hangar rentals and ancillary services.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased for the quarter and six months ended June 30, 2018 compared with the quarter and six months ended June 30, 2017 primarily as a result of incremental costs associated with acquisitions, higher salaries and benefit costs and rent increases.

Depreciation and Amortization

Depreciation and amortization expense increased for the quarter and six months ended June 30, 2018 compared with the quarter and six months ended June 30, 2017 primarily as a result of contributions from acquisitions and assets placed in service.

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Results of Operations: Atlantic Aviation – (continued)

Operating Income

Operating income decreased for the quarter ended June 30, 2018 compared with the quarter ended June 30, 2017 due to the increase in selling, general and administrative expenses and the increase in depreciation and amortization expense, partially offset by the increase in gross margin. Operating income increased for the six months ended June 30, 2018 compared with the six months ended June 30, 2017 due to the increase in gross margin, partially offset by the increase in selling, general and administrative expenses and the increase in depreciation and amortization expense.

Interest Expense, Net

Interest expense includes gains on derivative instruments of $2.0 million and $7.0 million for the quarter and six months ended June 30, 2018, respectively, compared with losses on derivative instruments of $2.5 million and $2.7 million for the quarter and six months ended June 30, 2017, respectively. Excluding the derivative adjustments, cash interest expense was $7.0 million and $13.2 million for the quarter and six months ended June 30, 2018, respectively, compared with $5.2 million and $9.9 million for the quarter and six months ended June 30, 2017, respectively. The increases reflect primarily higher average debt balances and a higher weighted average interest rate.

Cash interest expense for the quarter and six months ended June 30, 2018 and 2017 includes the cash interest expense on the $402.5 million of the MIC Corporate 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 in October 2016.

Income Taxes

The taxable income generated by Atlantic Aviation is included in our consolidated federal income tax return. The business files state income tax returns in the majority of 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, 2018, the business expects to pay state income taxes of approximately $8.0 million. The Provision for current income taxes of $13.7 million for the six months ended June 30, 2018 in the above table includes $9.5 million of federal income tax expense and $4.2 million 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 six months ended June 30, 2018, Atlantic Aviation incurred maintenance capital expenditures of $3.1 million and $3.4 million on an accrual basis and cash basis, respectively, compared with $2.9 million both on an accrual basis and cash basis for the six months ended June 30, 2017.

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Results of Operations: Contracted Power

The performance of our Contracted Power segment is a function, broadly, of the availability of wind and solar resources and the demand for peaking power in New York City. Segment results for the quarter and six months ended June 30, 2018 exceeded expectations primarily as a result of improved renewable resources versus the prior comparable periods and weather conditions in and around New York City that resulted in an increase in power demand. In addition, we received fees pursuant to a loan agreement with a developer of renewable power projects during the second quarter. Results for the period also reflect a contribution from the recently completed BEC expansion project and increased tariff-based ancillary services revenue.

		Quarter Ended June 30,								Change Favorable/ (Unfavorable)								Six Months Ended June 30,								Change Favorable/ (Unfavorable)
		2018				2017												2018				2017
		$				$				$				%				$				$				$				%
			($ In Thousands) (Unaudited)
Product revenue			41,403				40,166				1,237				3.1				76,690				68,236				8,454				12.4
Cost of product sales			5,862				5,498				(364	)			(6.6	)			11,699				10,357				(1,342	)			(13.0	)
Selling, general and administrative expenses			7,510				6,244				(1,266	)			(20.3	)			15,022				11,409				(3,613	)			(31.7	)
Depreciation and amortization			14,519				14,861				342				2.3				30,046				30,201				155				0.5
Operating income			13,512				13,563				(51	)			(0.4	)			19,923				16,269				3,654				22.5
Interest expense, net(1)			(4,832	)			(8,767	)			3,935				44.9				(5,717	)			(14,150	)			8,433				59.6
Other income, net			6,721				1,341				5,380				NM				7,726				2,106				5,620				NM
Provision for income taxes			(3,654	)			(1,845	)			(1,809	)			(98.0	)			(4,604	)			(1,872	)			(2,732	)			(145.9	)
Net income			11,747				4,292				7,455				173.7				17,328				2,353				14,975				NM
Less: net (loss) income attributable to noncontrolling interest			(2,003	)			16				2,019				NM				(32,059	)			(3,333	)			28,726				NM
Net income attributable to MIC			13,750				4,276				9,474				NM				49,387				5,686				43,701				NM
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			11,747				4,292												17,328				2,353
Interest expense, net(1)			4,832				8,767												5,717				14,150
Provision for income taxes			3,654				1,845												4,604				1,872
Depreciation and amortization			14,519				14,861												30,046				30,201
Other non-cash income, net(2)			(1,690	)			(2,232	)											(3,578	)			(4,256	)
EBITDA excluding non-cash items			33,062				27,533				5,529				20.1				54,117				44,320				9,797				22.1
EBITDA excluding non-cash items			33,062				27,533												54,117				44,320
Interest expense, net(1)			(4,832	)			(8,767	)											(5,717	)			(14,150	)
Adjustments to derivative instruments recorded in interest expense(1)			(2,178	)			1,474												(8,148	)			(360	)
Amortization of debt financing costs(1)			379				379												758				758
(Provision) benefit for current income taxes			(54	)			85												(70	)			(3	)
Changes in working capital(3)			(12,694	)			(7,621	)											(11,775	)			(8,206	)
Cash provided by operating activities			13,683				13,083												29,165				22,359
Changes in working capital(3)			12,694				7,621												11,775				8,206
Maintenance capital expenditures			(404	)			—												(440	)			(22	)
Free cash flow			25,973				20,704				5,269				25.4				40,500				30,543				9,957				32.6

NM — Not meaningful

TABLE OF CONTENTS

Results of Operations: Contracted Power – (continued)

Revenue

Revenue increased by $1.2 million and $8.5 million for the quarter and six months ended June 30, 2018, respectively, compared with the quarter and six months ended June 30, 2017. Revenue from BEC increased due to, (i) higher ancillary services and transmission congestion revenue; (ii) an increase in generation capacity; and, (iii) higher capacity prices that positively impacts the merchant portion of BEC. Revenue from our renewable facilities increased primarily due to strong wind resources for the six months ended June 30, 2018.

Cost of Product Sales

Cost of product sales increased for the quarter and six months ended June 30, 2018 compared with the quarter and six months ended June 30, 2017 due to the BEC expansion completed in May 2018. For the six months ended June 30, 2018, the increase in cost of product sales also reflects higher generation levels at BEC resulting in an increase in gas consumed and higher variable operations and maintenance expenses.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased for the quarter and six months ended June 30, 2018 compared with the quarter and six months ended June 30, 2017 primarily due to the expansion of BEC and development-related expenses. These increases were partially offset by lower insurance costs at BEC.

Other Income, Net

Other income, net, increased for the quarter and six months ended June 30, 2018 compared with the quarter and six months ended June 30, 2017 reflecting fees paid to Contracted Power pursuant to a loan agreement with a developer of renewable power projects.

Interest Expense, Net

Interest expense includes gains on derivative instruments of $2.0 million and $7.4 million for the quarter and six months ended June 30, 2018, respectively, compared with losses on derivative instruments of $2.7 million and $2.3 million for the quarter and six months ended June 30, 2017, respectively. Excluding the derivative adjustments, cash interest expense was $6.6 million and $13.1 million for the quarter and six months ended June 30, 2018, respectively, compared with $7.0 million and $13.8 million for the quarter and six months ended June 30, 2017, respectively. The decreases reflect primarily lower average debt balances on all facilities.

Income Taxes

Our wind and solar facilities are held in limited liability companies that are treated as pass through entities for tax purposes. As such, these entities do not pay federal or state income taxes on a standalone basis, but each owner pays federal and state income taxes on its allocable share of taxable income. For the year ending December 31, 2018, MIC expects its share of the federal taxable income from these facilities to be a loss of approximately $1.2 million. For 2017, MIC’s share of the federal taxable income from these facilities was a loss of approximately $10.7 million.

TABLE OF CONTENTS

Results of Operations: Contracted Power – (continued)

The taxable income generated by BEC’s operations is included in 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, 2018, if the aforementioned sale of BEC does not close, 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.

If the aforementioned sale of BEC does close, the business expects to have a state income tax liability in New Jersey and New York.

Noncontrolling Interest

The increase in loss attributable to noncontrolling interest for the six months ended June 30, 2018 compared with the six months ended June 30, 2017 was driven primarily by the change in tax rates imposed on certain entities by the Tax Cuts and Jobs Act.

Results of Operations: MIC Hawaii

MIC Hawaii generated results for the quarter and six months ended June 30, 2018 that were below both our expectations and results in the prior year. The underperformance was driven primarily by higher operating costs at Hawaii Gas and at the design-build mechanical contractor.

In August 2017, Hawaii Gas filed a general rate case with the Hawaii Public Utilities Commission (HPUC). On June 27, 2018, the HPUC issued an Interim Decision and Order providing the regulated utility operations of Hawaii Gas with interim rate relief. New rates reflecting the decision went into effect on July 1, 2018. The Interim Decision and Order approves an increase in regulated revenue over present rates of $8.9 million, or 8.4%, annually and infers a post-tax return on the equity invested in the utility of 9.75%. The HPUC is expected to issue a Final Decision and Order subject to, among other things, the completion by Hawaii Gas of the Honouliuli Waste Water Treatment Plant Biogas Project, which is currently estimated to be completed in the fourth quarter of 2018.

TABLE OF CONTENTS

Results of Operations: MIC Hawaii – (continued)

		Quarter Ended June 30,								Change Favorable/ (Unfavorable)								Six Months Ended June 30,								Change Favorable/ (Unfavorable)
		2018				2017												2018				2017
		$				$				$				%				$				$				$				%
			($ In Thousands) (Unaudited)
Product revenue			60,680				53,779				6,901				12.8				124,340				113,362				10,978				9.7
Service revenue			14,935				12,193				2,742				22.5				32,184				25,650				6,534				25.5
Total revenue			75,615				65,972				9,643				14.6				156,524				139,012				17,512				12.6
Cost of product sales (exclusive of depreciation and amortization shown separately below)			41,302				34,751				(6,551	)			(18.9	)			88,850				77,117				(11,733	)			(15.2	)
Cost of services (exclusive of depreciation and amortization shown separately below)			14,015				10,944				(3,071	)			(28.1	)			30,367				21,884				(8,483	)			(38.8	)
Cost of revenue – total			55,317				45,695				(9,622	)			(21.1	)			119,217				99,001				(20,216	)			(20.4	)
Gross margin			20,298				20,277				21				0.1				37,307				40,011				(2,704	)			(6.8	)
Selling, general and administrative expenses			7,974				6,770				(1,204	)			(17.8	)			15,203				12,855				(2,348	)			(18.3	)
Depreciation and amortization			4,896				3,730				(1,166	)			(31.3	)			9,051				7,211				(1,840	)			(25.5	)
Operating income			7,428				9,777				(2,349	)			(24.0	)			13,053				19,945				(6,892	)			(34.6	)
Interest expense, net(1)			(1,887	)			(2,207	)			320				14.5				(3,177	)			(3,918	)			741				18.9
Other income (expense), net			6				(36	)			42				116.7				(1,313	)			(241	)			(1,072	)			NM
Provision for income taxes			(2,144	)			(2,563	)			419				16.3				(2,949	)			(5,942	)			2,993				50.4
Net income			3,403				4,971				(1,568	)			(31.5	)			5,614				9,844				(4,230	)			(43.0	)
Less: net loss attributable to noncontrolling interests			(84	)			(11	)			73				NM				(67	)			(39	)			28				71.8
Net income attributable to MIC			3,487				4,982				(1,495	)			(30.0	)			5,681				9,883				(4,202	)			(42.5	)
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			3,403				4,971												5,614				9,844
Interest expense, net(1)			1,887				2,207												3,177				3,918
Provision for income taxes			2,144				2,563												2,949				5,942
Depreciation and amortization			4,896				3,730												9,051				7,211
Pension expense(2)			128				272												255				545
Other non-cash (income) expense, net(3)			(954	)			897												5,245				6,468
EBITDA excluding non-cash items			11,504				14,640				(3,136	)			(21.4	)			26,291				33,928				(7,637	)			(22.5	)
EBITDA excluding non-cash items			11,504				14,640												26,291				33,928
Interest expense, net(1)			(1,887	)			(2,207	)											(3,177	)			(3,918	)
Adjustments to derivative instruments recorded in interest expense(1)			(100	)			316												(770	)			90
Amortization of debt financing costs(1)			95				99												192				204
Provision for current income taxes			(590	)			(2,041	)											(1,229	)			(3,492	)
Changes in working capital(4)			(11	)			(1,812	)											(6,150	)			(10,539	)
Cash provided by operating activities			9,011				8,995												15,157				16,273
Changes in working capital(4)			11				1,812												6,150				10,539
Maintenance capital expenditures			(1,796	)			(1,512	)											(3,331	)			(2,581	)
Free cash flow			7,226				9,295				(2,069	)			(22.3	)			17,976				24,231				(6,255	)			(25.8	)

NM — Not meaningful

TABLE OF CONTENTS

Results of Operations: MIC Hawaii – (continued)

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 the sale of gas. Accordingly, revenue can fluctuate based on the wholesale cost of gas to Hawaii Gas and may not reflect the business’ ability to effectively manage volume and gross margin. For example, an increase in revenue may be attributable to an increase in the wholesale cost of gas and not an increase in the volume sold or margin per therm. Conversely, a decline in revenue may be attributable to a decrease in the wholesale cost of gas and not a reduction in volume sold or margin 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 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 above.

Revenue and Gross Margin

Revenue increased by $9.6 million and $17.5 million for the quarter and six months ended June 30, 2018, respectively, compared with the quarter and six months ended June 30, 2017. The increase was primarily attributable to increases in the volume of utility and nonutility gas sold and a higher average price per therm of utility gas sold by Hawaii Gas, as well as higher revenue at the design-build mechanical contractor. These were partially offset by lower average revenue per therm of non-utility gas sold by Hawaii Gas. On an underlying basis, adjusting for changes in customer inventory, the volume of gas sold increased by 7.1% and 6.3% in the quarter and six months ended June 30, 2018, respectively, compared with the quarter and six months ended June 30, 2017.

Gross margin was flat for the quarter ended June 30, 2018 compared with the quarter ended June 30, 2017 and decreased by $2.7 million for the six months ended June 30, 2018 compared with the six months ended June 30, 2017. The performance was attributable primarily to lower margins at Hawaii Gas and the design-build mechanical contractor, partially offset by favorable movements on commodity hedges.

Gross margins were lower at Hawaii Gas due to increases in production and transmission and distribution costs. Unrealized changes in commodity hedges included a gain of $985,000 and a loss of $3.3 million for the quarter and six months ended June 30, 2018, respectively, compared with unrealized losses of $481,000 and $5.7 million for the quarter and six months ended June 30, 2017, respectively. Lower margins on the design-build mechanical contractor projects resulted from increased costs on fixed revenue contracts attributable to higher labor costs, project delays and general construction cost escalation in Hawaii.

TABLE OF CONTENTS

Results of Operations: MIC Hawaii – (continued)

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased for the quarter and six months ended June 30, 2018 compared with the quarter and six months ended June 30, 2017 primarily driven by higher costs at the design-build mechanical contractor and higher salaries and benefit costs.

Depreciation and Amortization

Depreciation and amortization expense increased for the quarter and six months ended June 30, 2018 compared with the quarter and six months ended June 30, 2017 primarily due to a reassessment of the useful life of customer relationships at the design-build mechanical contractor and additional assets placed in service during 2017.

Operating Income

Operating income decreased for the quarter ended June 30, 2018 compared with the quarter ended June 30, 2017 due to the increase in selling, general and administrative expenses and the increase in depreciation and amortization expenses, partially offset by the marginal increase in gross margin.

Operating income decreased for the six months ended June 30, 2018 compared with the six months ended June 30, 2017 due to the decrease in gross margin, increase in selling, general and administrative expenses and the increase in depreciation and amortization expenses.

Interest Expense, Net

Interest expense includes gains on derivative instruments of $309,000 and $1.1 million for the quarter and six months ended June 30, 2018, respectively, compared with losses on derivative instruments of $329,000 and $173,000 for the quarter and six months ended June 30, 2017, respectively. Excluding the derivative adjustments, cash interest expense was $1.9 million and $3.8 million for the quarter and six months ended June 30, 2018, respectively, compared with $1.8 million and $3.6 million for the quarter and six months ended June 30, 2017, respectively. The increases reflect primarily higher average debt balances outstanding.

Income Taxes

The taxable income generated by the MIC Hawaii businesses is reported on 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, 2018, the business expects to pay state income taxes of approximately $800,000. The Provision for current income taxes of $1.2 million for the six months ended June 30, 2018 in the above table includes $1.9 million of federal income tax expense offset by $708,000 of state income tax benefits. 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 six months ended June 30, 2018, MIC Hawaii incurred maintenance capital expenditures of $3.3 million and $3.2 million on an accrual basis and cash basis, respectively, compared with $2.6 million and $3.0 million on an accrual basis and cash basis, respectively, for the six months ended June 30, 2017.

TABLE OF CONTENTS

Results of Operations: Corporate and Other

Corporate and Other includes expenses paid by the holding company, including base management fees and performance fees, if any, professional fees and costs associated with being a public company.

		Quarter Ended June 30,								Change Favorable/ (Unfavorable)								Six Months Ended June 30,								Change Favorable/ (Unfavorable)
		2018				2017												2018				2017
		$				$				$				%				$				$				$				%
			($ In Thousands) (Unaudited)
Fees to Manager-related party			10,852				18,433				7,581				41.1				23,780				36,656				12,876				35.1
Selling, general and administrative expenses(1)			10,144				11,092				948				8.5				14,346				15,087				741				4.9
Depreciation			166				—				(166	)			NM				330				—				(330	)			NM
Operating loss			(21,162	)			(29,525	)			8,363				28.3				(38,456	)			(51,743	)			13,287				25.7
Interest expense, net(2)			(8,282	)			(6,671	)			(1,611	)			(24.1	)			(17,009	)			(12,822	)			(4,187	)			(32.7	)
Other expense, net			(78	)			—				(78	)			NM				(74	)			—				(74	)			NM
Benefit for income taxes			9,590				13,537				(3,947	)			(29.2	)			16,363				25,968				(9,605	)			(37.0	)
Net loss			(19,932	)			(22,659	)			2,727				12.0				(39,176	)			(38,597	)			(579	)			(1.5	)
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			(19,932	)			(22,659	)											(39,176	)			(38,597	)
Interest expense, net(2)			8,282				6,671												17,009				12,822
Benefit for income taxes			(9,590	)			(13,537	)											(16,363	)			(25,968	)
Depreciation			166				—												330				—
Fees to Manager-related party			10,852				18,433												23,780				36,656
Pension expense(3)			60				—												101				—
Other non-cash expense, net			223				187												386				375
EBITDA excluding non-cash items			(9,939	)			(10,905	)			966				8.9				(13,933	)			(14,712	)			779				5.3
EBITDA excluding non-cash items			(9,939	)			(10,905	)											(13,933	)			(14,712	)
Interest expense, net(2)			(8,282	)			(6,671	)											(17,009	)			(12,822	)
Convertible senior notes interest(4)			2,013				2,013												4,025				3,757
Amortization of debt financing costs(2)			1,021				988												2,904				1,981
Amortization of debt discount(2)			903				876												1,800				1,495
Benefit for current income taxes			8,515				2,223												16,108				5,171
Changes in working capital			(8,946	)			4,677												(17,967	)			(3,757	)
Cash used in operating activities			(14,715	)			(6,799	)											(24,072	)			(18,887	)
Changes in working capital			8,946				(4,677	)											17,967				3,757
Free cash flow			(5,769	)			(11,476	)			5,707				49.7				(6,105	)			(15,130	)			9,025				59.6