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 September 30, 2017

OR

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

For the Transition Period from             to            

Commission File Number: 001-32384

 

MACQUARIE INFRASTRUCTURE CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 

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

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

(Address of Principal Executive Offices) (Zip Code)

(212) 231-1000

(Registrant’s Telephone Number, Including Area Code)

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

 

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

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

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

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

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

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

There were 84,564,051 shares of common stock, with $0.001 par value, outstanding at October 31, 2017.

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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			31
Controls and Procedures			31
Consolidated Condensed Balance Sheets as of September 30, 2017 (Unaudited) and December 31, 2016			32
Consolidated Condensed Statements of Operations for the Quarters and Nine Months Ended September 30, 2017 and 2016 (Unaudited)			34
Consolidated Condensed Statements of Comprehensive Income for the Quarters and Nine Months Ended September 30, 2017 and 2016 (Unaudited)			35
Consolidated Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016 (Unaudited)			36
Notes to Consolidated Condensed Financial Statements (Unaudited)			38
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			57
Item 1A. Risk Factors			57
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			57
Item 3. Defaults Upon Senior Securities			57
Item 4. Mine Safety Disclosures			57
Item 5. Other Information			57
Item 6. Exhibits			57

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

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Cautionary Note Regarding Forward-Looking Statements

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

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

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PART I
 
FINANCIAL INFORMATION

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

The following discussion of the financial condition and results of operations of Macquarie Infrastructure Corporation (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 have no affiliation with Macquarie. Our Manager is a member of the Macquarie Group of companies comprising the Macquarie Group Limited and its subsidiaries and affiliates worldwide. Macquarie Group Limited is headquartered in Australia and is listed on the Australian Stock Exchange.

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

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

Overview

Use of Non-GAAP measures

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

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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) excluding non-cash items, Free Cash Flow and Proportionately Combined Metrics” for further information on our calculation of EBITDA excluding non-cash items, Free Cash Flow and our proportionately combined metrics and for reconciliations of non-GAAP measures to the most comparable GAAP measures.

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

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

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

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

Dividends

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

Declared

Period Covered

$per Share

Record Date

Payable Date

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

October 27, 2016

Third quarter 2016

1.29

November 10, 2016

November 15, 2016

July 28, 2016

Second quarter 2016

1.25

August 11, 2016

August 16, 2016

April 28, 2016

First quarter 2016

1.20

May 12, 2016

May 17, 2016

February 18, 2016

Fourth quarter 2015

1.15

March 3, 2016

March 8, 2016

We currently intend to maintain, and where possible, increase our quarterly cash dividend to our shareholders. The MIC Board has authorized a quarterly cash dividend of $1.42 per share for the quarter ended September 30, 2017, or a 10.1% increase over the dividend for the quarter ended September 30, 2016. In determining whether to adjust the amount of our quarterly dividend, our Board will take into account such matters as the state of the capital markets and general business conditions, the Company’s financial condition, results of operations, capital requirements, capital opportunities and any contractual, legal and regulatory restrictions on the payment of dividends by the Company to its stockholders or by its subsidiaries to the Company, and any other factors that it deems relevant, subject to maintaining a prudent level of reserves and without creating undue volatility in the amount of such dividends where possible. Moreover, the Company’s senior secured credit facility and the debt commitments at our businesses contain restrictions that may limit the Company’s ability to pay dividends. Although historically we have declared cash dividends on our shares, any or all of these or other factors could result in the modification of our dividend policy, or the reduction, modification or elimination of our dividend in the future.

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Recent Developments

On September 11, 2017, we announced that James Hooke, our Chief Executive Officer, intends to step down in early 2018. On September 8, 2017, the MIC board of directors was expanded from six to seven members and Mr. Hooke was elected to fill the vacancy.

Christopher Frost has been appointed President and Chief Operating Officer of MIC, effective October 26, 2017. Mr. Frost has been employed by Macquarie Group for the past 20 years. We anticipate Mr. Frost will be appointed to the position of CEO when Mr. Hooke steps down on January 1, 2018.

On August 8, 2017, IMTT completed the acquisition of Epic Midstream LLC (Epic), a portfolio of seven bulk liquid terminals comprising approximately 3.1 million barrels of storage capacity and related handling capability. The acquisition increases IMTT’s system-wide capacity by approximately 7% and extends its operations into both the Port of Savannah in Georgia and several inland locations.

On September 27, 2017, Atlantic Aviation completed the acquisition of Orion Jet Center (Orion). Orion is a fixed base operator located at Opa Locka-Miami Executive Airport approximately 11 miles north of downtown Miami, Florida. Orion features over 200,000 square feet of newly constructed hangar space and also includes 36,000 square feet of office and maintenance space.

Shared Services Initiative

We have implemented a shared services initiative to consolidate common back-office functions across our businesses, including Accounting, Human Resources, Tax, Information Technology, Procurement and Risk Management support. We have incurred, and expect to continue to incur, implementation costs in 2017, principally in relation to severance and consulting services, and we expect to realize full year savings from this initiative in 2018. The expected savings will not be spread evenly or proportionally across our businesses.

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Results of Operations

Consolidated

Key Factors Affecting Operating Results for the Quarter:

Our consolidated results of operations are as follows:

		Quarter Ended September 30,								Change Favorable/ (Unfavorable)								Nine Months Ended September 30,								Change Favorable/ (Unfavorable)
		2017				2016				$				%				2017				2016				$				%
		($ In Thousands, Except Share and Per Share Data) (Unaudited)
Revenue
Service revenue		$	358,220			$	323,975				34,245				10.6			$	1,067,069			$	942,437				124,632				13.2
Product revenue			94,841				96,549				(1,708	)			(1.8	)			276,439				272,053				4,386				1.6
Total revenue			453,061				420,524				32,537				7.7				1,343,508				1,214,490				129,018				10.6
Costs and expenses
Cost of services			153,218				134,512				(18,706	)			(13.9	)			455,038				371,832				(83,206	)			(22.4	)
Cost of product sales			35,669				39,845				4,176				10.5				123,143				107,923				(15,220	)			(14.1	)
Selling, general and administrative			84,898				77,468				(7,430	)			(9.6	)			244,817				222,182				(22,635	)			(10.2	)
Fees to Manager – related party			17,954				18,382				428				2.3				54,610				49,570				(5,040	)			(10.2	)
Depreciation			58,009				59,242				1,233				2.1				172,753				172,125				(628	)			(0.4	)
Amortization of intangibles			17,329				15,417				(1,912	)			(12.4	)			50,920				49,917				(1,003	)			(2.0	)
Total operating expenses			367,077				344,866				(22,211	)			(6.4	)			1,101,281				973,549				(127,732	)			(13.1	)
Operating income			85,984				75,658				10,326				13.6				242,227				240,941				1,286				0.5
Other income (expense)
Interest income			54				27				27				100.0				129				85				44				51.8
Interest expense(1)			(29,291	)			(20,871	)			(8,420	)			(40.3	)			(90,129	)			(117,268	)			27,139				23.1
Other income, net			4,973				16,689				(11,716	)			(70.2	)			7,893				20,389				(12,496	)			(61.3	)
Net income before income taxes			61,720				71,503				(9,783	)			(13.7	)			160,120				144,147				15,973				11.1
Provision for income taxes			(25,547	)			(29,022	)			3,475				12.0				(65,284	)			(60,409	)			(4,875	)			(8.1	)
Net income		$	36,173			$	42,481				(6,308	)			(14.8	)		$	94,836			$	83,738				11,098				13.3
Less: net (loss) income attributable to noncontrolling interests			(3,922	)			455				4,377				NM				(7,294	)			165				7,459				NM
Net income attributable to MIC		$	40,095			$	42,026				(1,931	)			(4.6	)		$	102,130			$	83,573				18,557				22.2
Basic income per share attributable to MIC		$	0.48			$	0.52				(0.04	)			(7.7	)		$	1.23			$	1.04				0.19				18.3
Weighted average number of shares outstanding: basic			83,644,806				81,220,841				2,423,965				3.0				82,743,285				80,570,192				2,173,093				2.7

NM — Not meaningful

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Results of Operations: Consolidated – (continued)

Revenue

Consolidated revenue increased for the quarter and nine months ended September 30, 2017 compared with the quarter and nine months ended September 30, 2016 primarily as a result of an increase in the wholesale cost of jet fuel and an increase in the volume of jet fuel sold at Atlantic Aviation and contributions from acquisitions, partially offset by reduced revenue from Bayonne Energy Center (BEC) as a result of lower capacity prices and lower energy margins. The increase in the consolidated revenue for the nine months ended September 30, 2017 also includes a contribution from IMTT from the recognition of deferred revenue resulting from termination of a construction project by a biodiesel customer.

Cost of Services and Product Sales

Consolidated cost of services and product sales increased for the quarter and nine months ended September 30, 2017 compared with the quarter and nine months ended September 30, 2016 primarily due to an increase in the wholesale cost of jet fuel and propane and contributions from acquisitions. 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 nine months ended September 30, 2017 compared with the quarter and nine months ended September 30, 2016 primarily due to (i) $3.0 million and $7.9 million, respectively, of costs incurred in connection with the evaluation of various investment and acquisition opportunities; (ii) $1.4 million and $6.8 million, respectively, of costs incurred in connection with the implementation of our shared services initiative; and (iii) incremental costs associated with acquired businesses.

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 nine months ended September 30, 2017, we incurred base management fees of $17.9 million and $54.6 million, respectively, compared with $18.4 million and $49.6 million for the quarter and nine months ended September 30, 2016, respectively. No performance fees were generated 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.

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Results of Operations: Consolidated – (continued)

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

Period		Base Management Fee Amount ($ in Thousands)				Performance Fee Amount ($ in Thousands)				Shares Issued
2017 Activities:
Third quarter 2017		$	17,954			$	—				240,674	(1)
Second quarter 2017			18,433				—				233,394
First quarter 2017			18,223				—				232,398
2016 Activities:
Fourth quarter 2016		$	18,916			$	—				230,773
Third quarter 2016			18,382				—				232,488
Second quarter 2016			16,392				—				232,835
First quarter 2016			14,796				—				234,179

Depreciation

Depreciation expense decreased for the quarter ended September 30, 2017 compared with the quarter ended September 30, 2016 primarily due to the write-off of tanks and docks in 2016 at IMTT. Depreciation expense increased for the nine months ended September 30, 2017 compared with the nine months ended September 30, 2016 primarily as a result of assets placed in service and contributions from acquisitions.

Amortization of Intangibles

Amortization of intangibles increased for the quarter and nine months ended September 30, 2017 compared with the quarter and nine months ended September 30, 2016 primarily due to contributions from acquisitions.

Interest Expense and Gains (Losses) on Derivative Instruments

Interest expense includes losses on derivative instruments of $162,000 and $6.9 million for the quarter and nine months ended September 30, 2017, respectively, compared with gains on derivative instruments of $3.7 million and losses on derivative instruments of $43.0 million for the quarter and nine months ended September 30, 2016, respectively. Gains and losses on derivatives recorded in interest expense are attributable to the change in fair value of interest rate hedging instruments. For the nine months ended September 30, 2016, interest expense also included the non-cash write-off of deferred financing costs at Hawaii Gas related to the February 2016 refinancing of its $80.0 million term loan debt and its $60.0 million revolving credit facility. Excluding the derivative adjustments and deferred financing cost write-offs, interest expense decreased for the quarter and nine months ended September 30, 2017 compared with the quarter and nine months ended September 30, 2016 primarily due to a reduction in the weighted average interest rate, partially offset by a higher average debt balance. Cash interest expense was $27.1 million and $79.4 million for the quarter and nine months ended September 30, 2017, respectively, compared with $27.4 million and $82.0 million for the quarter and nine months ended September 30, 2016, respectively. See discussions of interest expense for each of our operating businesses below.

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Results of Operations: Consolidated – (continued)

Other Income, net

Other income, net, decreased for the quarter and nine months ended September 30, 2017 compared with the quarter and nine months ended September 30, 2016 as 2016 included insurance recoveries associated with damage docks to IMTT’s facilities and escrow proceeds related to the acquisition of BEC. This decrease was partially offset by financing income from a revolving credit facility provided by CP to a third party developer of renewable projects and the associated development profit for the periods in 2017.

Income Taxes

We file a consolidated federal income tax return that includes the financial results for 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 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.

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

For the year ending December 31, 2017, we expect current year taxable income to be approximately $33.0 million. The reduction in anticipated current year taxable income from the previously disclosed $95.0 million is primarily attributable to additional tax depreciation related to acquisitions and tax strategies. For the year ending December 31, 2017, we expect that our available investment tax credits will offset any Alternative Minimum Tax liability.

For the year ending December 31, 2017, we expect our businesses collectively to pay state income taxes of approximately $11.5 million. In calculating our consolidated state income tax provision, we have provided a valuation allowance for certain state income tax NOLs, the use of which is uncertain.

Protecting Americans from Tax Hikes Act (PATH Act)

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

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

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

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Results of Operations: Consolidated – (continued)

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

Given our varied ownership levels in our CP and MIC Hawaii segments, together with our obligations to report the results of these businesses on a consolidated basis, GAAP measures such as net income (loss) do not fully reflect all of the items we consider in assessing the amount of cash generated based on our 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 paid for interest, taxes and pension contributions, less maintenance capital expenditures, which includes principal repayments on capital lease obligations used to fund maintenance capital expenditures, and excluding changes in working capital.

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

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

Free Cash Flow does not take into consideration required payments on indebtedness and other fixed obligations or 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.

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Results of Operations: Consolidated – (continued)

Classification of Maintenance Capital Expenditures and Growth Capital Expenditures

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

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

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

		Quarter Ended September 30,								Change Favorable/ (Unfavorable)								Nine Months Ended September 30,								Change Favorable/ (Unfavorable)
		2017				2016				$				%				2017				2016				$				%
		($ In Thousands) (Unaudited)
Net income		$	36,173			$	42,481											$	94,836			$	83,738
Interest expense, net(1)			29,237				20,844												90,000				117,183
Provision for income taxes			25,547				29,022												65,284				60,409
Depreciation			58,009				59,242												172,753				172,125
Amortization of intangibles			17,329				15,417												50,920				49,917
Fees to Manager-related party			17,954				18,382												54,610				49,570
Pension expense(2)			2,160				2,117												6,481				6,512
Other non-cash income, net(3)			(3,725	)			(682	)											(961	)			(9,872	)
EBITDA excluding non-cash items(4)		$	182,684			$	186,823				(4,139	)			(2.2	)		$	533,923			$	529,582				4,341				0.8
EBITDA excluding non-cash items(4)		$	182,684			$	186,823											$	533,923			$	529,582
Interest expense, net(1)			(29,237	)			(20,844	)											(90,000	)			(117,183	)
Adjustments to derivative instruments recorded in interest expense(1)			(959	)			(8,832	)											1,724				27,639
Amortization of debt financing costs(1)			2,163				2,287												6,464				7,536
Amortization of debt discount(1)			882				—												2,377				—
Provision for income taxes, net of changes in deferred taxes			(2,154	)			(1,115	)											(8,493	)			(5,283	)
Changes in working capital			(4,914	)			751												(48,326	)			(5,303	)
Cash provided by operating activities			148,465				159,070												397,669				436,988
Changes in working capital			4,914				(751	)											48,326				5,303
Maintenance capital expenditures(5)			(12,106	)			(24,472	)											(23,062	)			(44,725	)
Free cash flow		$	141,273			$	133,847				7,426				5.5			$	422,933			$	397,566				25,367				6.4

TABLE OF CONTENTS

Results of Operations: Consolidated – (continued)

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 September 30,								Change Favorable/ (Unfavorable)								Nine Months Ended September 30,								Change Favorable/ (Unfavorable)
		2017				2016				$				%				2017				2016				$				%
		($ In Thousands) (Unaudited)
Free Cash Flow – Consolidated basis		$	141,273			$	133,847				7,426				5.5			$	422,933			$	397,566				25,367				6.4
100% of CP Free Cash Flow included in consolidated Free Cash Flow			(25,970	)			(26,718	)											(56,513	)			(56,532	)
MIC’s share of CP Free Cash Flow			24,667				24,773												51,300				50,580
100% of MIC Hawaii Free Cash Flow included in consolidated Free Cash Flow			(8,137	)			(8,696	)											(32,368	)			(30,432	)
MIC’s share of MIC Hawaii Free Cash Flow			8,132				8,694												32,358				30,430
Free Cash Flow – Proportionately Combined basis		$	139,965			$	131,900				8,065				6.1			$	417,710			$	391,612				26,098				6.7

TABLE OF CONTENTS

Results of Operations: IMTT

Key Factors Affecting Operating Results for the Quarter:

		Quarter Ended September 30,								Change Favorable/ (Unfavorable)								Nine Months Ended September 30,								Change Favorable/ (Unfavorable)
		2017				2016												2017				2016
		$				$				$				%				$				$				$				%
		($ In Thousands) (Unaudited)
Revenue			134,167				133,143				1,024				0.8				410,128				396,786				13,342				3.4
Cost of services			48,982				53,085				4,103				7.7				148,052				149,845				1,793				1.2
Selling, general and administrative expenses			9,104				8,358				(746	)			(8.9	)			25,627				24,322				(1,305	)			(5.4	)
Depreciation and amortization			31,511				35,709				4,198				11.8				93,826				103,612				9,786				9.4
Operating income			44,570				35,991				8,579				23.8				142,623				119,007				23,616				19.8
Interest expense, net(1)			(10,187	)			(7,827	)			(2,360	)			(30.2	)			(30,707	)			(41,462	)			10,755				25.9
Other income, net			794				13,495				(12,701	)			(94.1	)			1,954				16,947				(14,993	)			(88.5	)
Provision for income taxes			(14,422	)			(17,079	)			2,657				15.6				(46,686	)			(38,717	)			(7,969	)			(20.6	)
Net income			20,755				24,580				(3,825	)			(15.6	)			67,184				55,775				11,409				20.5
Less: net income attributable to noncontrolling interests			—				—				—				—				—				59				59				100.0
Net income attributable to MIC			20,755				24,580				(3,825	)			(15.6	)			67,184				55,716				11,468				20.6
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			20,755				24,580												67,184				55,775
Interest expense, net(1)			10,187				7,827												30,707				41,462
Provision for income taxes			14,422				17,079												46,686				38,717
Depreciation and amortization			31,511				35,709												93,826				103,612
Pension expense(2)			1,883				1,752												5,649				5,414
Other non-cash expense, net			178				73												315				631
EBITDA excluding non-cash items(3)			78,936				87,020				(8,084	)			(9.3	)			244,367				245,611				(1,244	)			(0.5	)
EBITDA excluding non-cash items(3)			78,936				87,020												244,367				245,611
Interest expense, net(1)			(10,187	)			(7,827	)											(30,707	)			(41,462	)
Adjustments to derivative instruments recorded in interest expense(1)			(524	)			(2,433	)											(257	)			10,723
Amortization of debt financing costs(1)			413				411												1,236				1,242
Provision for income taxes, net of changes in deferred taxes			344				(904	)											(3,069	)			(3,071	)
Changes in working capital			3,732				(1,243	)											(12,413	)			(11,726	)
Cash provided by operating activities			72,714				75,024												199,157				201,317
Changes in working capital			(3,732	)			1,243												12,413				11,726
Maintenance capital expenditures(4)			(8,116	)			(19,860	)											(13,563	)			(33,099	)
Free cash flow			60,866				56,407				4,459				7.9				198,007				179,944				18,063				10.0

TABLE OF CONTENTS

Results of Operations: IMTT – (continued)

Revenue

IMTT generates the majority of its revenue from contracts typically comprising a fixed monthly charge (that escalates annually with inflation) for access to or use of its infrastructure. We refer to revenue generated from such contracts or fixed charges as firm commitments. Firm commitments are generally of medium term duration and at September 30, 2017, had a revenue weighted average remaining life of 2.1 years. Revenue from firm commitments comprised 82.6% and 80.4% of total revenue for the quarter ended September 30, 2017 and the trailing twelve months ended September 30, 2017, respectively.

For the quarter and nine months ended September 30, 2017, total revenue increased by $1.0 million and $13.3 million, respectively, compared with the quarter and nine months ended September 30, 2016. The increase in revenue for the quarter ended September 30, 2017 compared with the quarter ended September 30, 2016 was primarily due to an acquisition, partially offset by lower revenue from spill response activity and lower utilization. For the nine months ended September 30, 2017, revenue also increased due to the recognition of deferred revenue resulting from termination of a construction project by a biodiesel customer.

Capacity utilization was 92.7% and 94.3% for the quarter and nine months ended September 30, 2017, respectively, compared with 96.7% and 96.4% for the quarter and nine months ended September 30, 2016, respectively. The decrease in utilization primarily reflects the transition of customers and tanks coming out of service for repairs and inspections. We expect utilization levels to be approximately 94% over the long term, as they have been historically.

Costs of Services and Selling, General and Administrative Expenses

Cost of services and selling, general and administrative expenses combined decreased for the quarter and nine months ended September 30, 2017 compared with the quarter and nine months ended September 30, 2016. The decrease was primarily the result of lower labor, healthcare and repair and maintenance expenses, partially offset by incremental costs from an acquisition and higher franchise taxes.

Depreciation and Amortization

Depreciation and amortization expense decreased for the quarter and nine months ended September 30, 2017 compared with the quarter and nine months ended September 30, 2016 primarily due to the write-off of tanks and docks in 2016.

Interest Expense, Net

Interest expense includes gains on derivative instruments of $124,000 and losses on derivative instruments of $1.5 million for the quarter and nine months ended September 30, 2017, respectively, compared with gains on derivative instruments of $1.4 million and losses on derivative instruments of $14.0 million for the quarter and nine months ended September 30, 2016, respectively.

TABLE OF CONTENTS

Results of Operations: IMTT – (continued)

Excluding the derivative adjustments, interest expense increased for the quarter ended September 30, 2017 compared with the quarter ended September 30, 2016 primarily due to increased debt balances. Interest expense for the nine months ended September 30, 2017 compared with the nine months ended September 30, 2016 remained flat. Cash interest expense was $10.3 million and $29.7 million for the quarter and nine months ended September 30, 2017, respectively, compared with $9.9 million and $29.5 million for the quarter and nine months ended September 30, 2016, respectively.

Other Income, net

Other income, net, decreased for the quarter and nine months ended September 30, 2017 compared with the quarter and nine months ended September 30, 2016. The business incurred insured losses in connection with damage done to various docks in Bayonne and Gretna for which insurance recoveries of approximately $13.0 million and $15.5 million were recorded during the quarter and nine months ended September 30, 2016, respectively.

Income Taxes

The taxable income generated by IMTT is reported on our consolidated federal income tax return. The business files state income tax returns in the states in which it operates. For the year ending December 31, 2017, the business expects to pay state income taxes of approximately $4.0 million. The Provision for income taxes, net of changes in deferred taxes of $3.1 million for the nine months ended September 30, 2017 in the above table includes $2.4 million of state income tax expense and $626,000 of federal income tax expense. Any current federal income tax payable is expected to be offset in consolidation with the application of NOLs at the MIC holding company level.

The 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 placed in service between 2012 through 2017 qualify for the federal 50% bonus tax depreciation. A significant portion of Louisiana terminal fixed assets constructed in the period after Hurricane Katrina were financed with Gulf Opportunity Zone Bonds (GO Zone Bonds). GO Zone Bond financed assets are depreciated, for tax purposes, primarily over 9 to 20 years using the straight-line depreciation method. Most of the states in which the business operates do not allow the use of 50% bonus tax depreciation. However, Louisiana allows the use of 50% bonus depreciation except for assets financed with GO Zone Bonds.

EBITDA Excluding Non-Cash Items

For the quarter and nine months ended September 30, 2016, EBITDA excluding non-cash items included $13.0 million and $15.5 million, respectively, of insurance recoveries for damaged docks. These insurance recoveries were used to repair damaged docks and recorded in Other Income, net. The cost of those repairs were recorded in Maintenance Capital Expenditures. Excluding insurance proceeds, EBITDA excluding non-cash items would have been $74.0 million and $230.1 million for the quarter and nine months ended September 30, 2016, respectively. On that basis, EBITDA excluding non-cash items would have increased by $4.9 million, or 6.6%, for the quarter ended September 30, 2017, and increased by $14.2 million, or 6.2%, for the nine months ended September 30, 2017, compared with the prior comparable periods.

TABLE OF CONTENTS

Results of Operations: IMTT – (continued)

Maintenance Capital Expenditures

For the nine months ended September 30, 2017, IMTT incurred maintenance capital expenditures of $13.6 million and $16.4 million on an accrual basis and cash basis, respectively, compared with $33.1 million and $34.5 million on an accrual basis and cash basis, respectively, for the nine months ended September 30, 2016. For the quarter and nine months ended September 30, 2016, maintenance capital expenditures included $13.9 million associated with the rebuilding of damaged docks at IMTT’s Gretna and Bayonne terminals. The property insurance recoveries are recorded in Other Income, net in the above statement of operations. Excluding these costs, maintenance capital expenditures would have been $6.0 million and $19.2 million for the quarter and nine months ended September 30, 2016, respectively. On that basis, maintenance capital expenditures would have increased by $2.1 million, or 35.2%, for the quarter ended September 30, 2017, and decreased by $5.7 million, or 29.5%, for the nine months ended September 30, 2017, compared with the prior comparable periods. The decrease for the nine months ended September 30, 2017 compared with the nine months ended September 30, 2016 is primarily as a result of the timing of planned maintenance for the year. IMTT expects to incur between $20.0 million and $25.0 million of maintenance capital expenditures in 2017.

Results of Operations: Atlantic Aviation

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

Gross margin, which we define as revenue less cost of services, excluding depreciation and amortization, is the effective “top line” for Atlantic Aviation as it is reflective of the business’ ability to drive growth in the volume of products and services sold and the margins earned on those sales over time. We 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 below.

Key Factors Affecting Operating Results for the Quarter:

TABLE OF CONTENTS

Results of Operations: Atlantic Aviation – (continued)

		Quarter Ended September 30,								Change Favorable/ (Unfavorable)								Nine Months Ended September 30,								Change Favorable/ (Unfavorable)
		2017				2016												2017				2016
		$				$				$				%				$				$				$				%
		($ In Thousands) (Unaudited)
Revenue			211,457				186,823				24,634				13.2				621,149				544,029				77,120				14.2
Cost of services (exclusive of depreciation and amortization shown separately below)			92,106				77,524				(14,582	)			(18.8	)			272,985				218,126				(54,859	)			(25.2	)
Gross margin			119,351				109,299				10,052				9.2				348,164				325,903				22,261				6.8
Selling, general and administrative expenses			57,026				53,027				(3,999	)			(7.5	)			163,512				157,019				(6,493	)			(4.1	)
Depreciation and amortization			25,286				22,148				(3,138	)			(14.2	)			73,894				69,041				(4,853	)			(7.0	)
Operating income			37,039				34,124				2,915				8.5				110,758				99,843				10,915				10.9
Interest expense, net(1)			(4,295	)			(5,199	)			904				17.4				(13,648	)			(27,437	)			13,789				50.3
Other (expense) income, net			(14	)			(150	)			136				90.7				(119	)			191				(310	)			(162.3	)
Provision for income taxes			(11,139	)			(11,543	)			404				3.5				(36,766	)			(29,258	)			(7,508	)			(25.7	)
Net income			21,591				17,232				4,359				25.3				60,225				43,339				16,886				39.0
Reconciliation of net income to EBITDA excluding non-cash items and a reconciliation of cash provided by operating activities to Free Cash Flow:
Net income			21,591				17,232												60,225				43,339
Interest expense, net(1)			4,295				5,199												13,648				27,437
Provision for income taxes			11,139				11,543												36,766				29,258
Depreciation and amortization			25,286				22,148												73,894				69,041
Pension expense(2)			5				16												15				50
Other non-cash expense, net			1,212				200												1,252				448
EBITDA excluding non-cash items			63,528				56,338				7,190				12.8				185,800				169,573				16,227				9.6
EBITDA excluding non-cash items			63,528				56,338												185,800				169,573
Interest expense, net(1)			(4,295	)			(5,199	)											(13,648	)			(27,437	)
Convertible senior notes interest(3)			(2,012	)			—												(5,769	)			—
Adjustments to derivative instruments recorded in interest expense(1)			464				(2,371	)											3,150				4,416
Amortization of debt financing costs(1)			284				791												819				2,496
Provision for income taxes, net of changes in deferred taxes			(1,208	)			(159	)											(5,810	)			(2,521	)
Changes in working capital			(1,335	)			5,142												(6,667	)			11,412
Cash provided by operating activities			55,426				54,542												157,875				157,939
Changes in working capital			1,335				(5,142	)											6,667				(11,412	)
Maintenance capital expenditures			(2,165	)			(2,075	)											(5,071	)			(5,816	)
Free cash flow			54,596				47,325				7,271				15.4				159,471				140,711				18,760				13.3

TABLE OF CONTENTS

Results of Operations: Atlantic Aviation – (continued)

Revenue and Gross Margin

The majority of the revenue and gross margin earned by Atlantic Aviation is generated through fueling GA aircraft at facilities located on the 70 U.S. airports at which the business operates. Atlantic Aviation pursues a strategy of maintaining and, where appropriate, increasing dollar-based margins on fuel sales. Generally, fluctuations in the cost of jet fuel are passed through to the customer.

Revenue and gross margin are driven, in part, by the volume of fuel sold and the dollar-based margin/fee per gallon on those sales. Revenue increased 13.2% and 14.2% for the quarter and nine months ended September 30, 2017, respectively, compared with the quarter and nine months ended September 30, 2016 as a result of higher wholesale cost of fuel, an increase in the volume of fuel sold and contributions from acquisitions. The higher wholesale cost of fuel was largely offset by a corresponding increase in cost of services, resulting in an increase in gross margin of 9.2% and 6.8% for the quarter and nine months ended September 30, 2017, respectively, compared with the quarter and nine months ended September 30, 2016.

Atlantic Aviation seeks to extend FBO leases prior to their maturity to improve our visibility into the cash generating capacity of these assets. Atlantic Aviation calculates 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 20.7 years at September 30, 2017 compared with 19.5 years at September 30, 2016. 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.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased for the quarter and nine months ended September 30, 2017 compared with the quarter and nine months ended September 30, 2016 primarily due to higher salaries and benefit costs and incremental costs associated with acquisitions.

Depreciation and Amortization

Depreciation and amortization expense increased for the quarter and nine months ended September 30, 2017 compared with the quarter and nine months ended September 30, 2016 primarily as a result of assets placed in service and contributions from acquisitions.

Operating Income

Operating income increased for the quarter and nine months ended September 30, 2017 compared with the quarter and nine months ended September 30, 2016 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 losses on derivative instruments of $219,000 and $2.9 million for the quarter and nine months ended September 30, 2017, respectively, compared with gains on derivative instruments of $257,000 and losses on derivative instruments of $10.7 million for the quarter and nine months ended September 30, 2016, respectively. Excluding the derivative adjustments, interest expense decreased for the quarter and nine months ended September 30, 2017 compared with the quarter and nine months ended September 30, 2016 due to a lower weighted average interest rate resulting from the October 2016 refinancing and a lower average debt balance.

TABLE OF CONTENTS

Results of Operations: Atlantic Aviation – (continued)

Cash interest expense was $5.5 million and $15.4 million for the quarter and nine months ended September 30, 2017, respectively, compared with $6.8 million and $20.5 million for the quarter and nine months ended September 30, 2016, respectively. Cash interest expense for the quarter and nine months ended September 30, 2017 is inclusive of the interest expense related to the $402.5 million of 2.00% Convertible Senior Notes due October 2023, proceeds of which were used in part to reduce the drawn balance of Atlantic Aviation’s revolving credit facility.

Income Taxes

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

For the year ending December 31, 2017, the business expects to pay state income taxes of approximately $6.0 million. The Provision for income taxes, net of changes in deferred taxes of $5.8 million for the nine months ended September 30, 2017 in the above table includes $4.3 million of state income tax expense and $1.5 million of federal income tax expense. Any current federal income tax payable is expected to be offset in consolidation with the application of NOLs at the MIC holding company level.

Maintenance Capital Expenditures

For the nine months ended September 30, 2017, Atlantic Aviation incurred maintenance capital expenditures of $5.1 million and $5.6 million on an accrual basis and cash basis, respectively, compared with $5.8 million and $5.9 million on an accrual basis and cash basis, respectively, for the nine months ended September 30, 2016.

TABLE OF CONTENTS

Results of Operations: Contracted Power

Key Factors Affecting Operating Results for the Quarter:

		Quarter Ended September 30,								Change Favorable/ (Unfavorable)								Nine Months Ended September 30,								Change Favorable/ (Unfavorable)
		2017				2016												2017				2016
		$				$				$				%				$				$				$				%
		($ In Thousands) (Unaudited)
Product revenue			42,445				45,538				(3,093	)			(6.8	)			110,681				114,017				(3,336	)			(2.9	)
Cost of product sales			5,171				7,344				2,173				29.6				15,528				17,495				1,967				11.2
Selling, general and administrative expenses			6,909				6,824				(85	)			(1.2	)			18,318				19,331				1,013				5.2
Depreciation and amortization			14,830				14,000				(830	)			(5.9	)			45,031				41,693				(3,338	)			(8.0	)
Operating income			15,535				17,370				(1,835	)			(10.6	)			31,804				35,498				(3,694	)			(10.4	)
Interest expense, net(1)			(6,281	)			(2,764	)			(3,517	)			(127.2	)			(20,431	)			(31,614	)			11,183				35.4
Other income, net			4,334				3,531				803				22.7				6,440				3,839				2,601				67.8
Provision for income taxes			(6,337	)			(8,013	)			1,676				20.9				(8,209	)			(7,626	)			(583	)			(7.6	)
Net income			7,251				10,124				(2,873	)			(28.4	)			9,604				97				9,507				NM
Less: net (loss) income attributable to noncontrolling interest			(3,890	)			566				4,456				NM				(7,223	)			217				7,440				NM
Net income (loss) attributable to MIC			11,141				9,558				1,583				16.6				16,827				(120	)			16,947				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			7,251				10,124												9,604				97
Interest expense, net(1)			6,281				2,764												20,431				31,614
Provision for income taxes			6,337				8,013												8,209				7,626
Depreciation and amortization			14,830				14,000												45,031				41,693
Other non-cash income, net(2)			(1,914	)			(1,459	)											(6,170	)			(5,424	)
EBITDA excluding non-cash items			32,785				33,442				(657	)			(2.0	)			77,105				75,606				1,499				2.0
EBITDA excluding non-cash items			32,785				33,442												77,105				75,606
Interest expense, net(1)			(6,281	)			(2,764	)											(20,431	)			(31,614	)
Adjustments to derivative instruments recorded in interest expense(1)			(922	)			(3,778	)											(1,282	)			11,994
Amortization of debt financing costs(1)			379				376												1,137				1,113
Provision for income taxes, net of changes in deferred taxes			9				1												6				(8	)
Changes in working capital			(1,842	)			949												(9,703	)			(1,909	)
Cash provided by operating activities			24,128				28,226												46,832				55,182
Changes in working capital			1,842				(949	)											9,703				1,909
Maintenance capital expenditures			—				(559	)											(22	)			(559	)
Free cash flow			25,970				26,718				(748	)			(2.8	)			56,513				56,532				(19	)			(0.0	)

NM — Not meaningful

TABLE OF CONTENTS

Results of Operations: Contracted Power – (continued)

Revenue

Revenue decreased $3.1 million and $3.3 million for the quarter and nine months ended September 30, 2017 compared with the quarter and nine months ended September 30, 2016, respectively. The decrease at the wind and solar facilities was primarily attributable to lower resources compared with the prior comparable periods, partially offset by revenue contributed from acquired solar facilities.

At BEC, the 37.5% of the business that operates on a merchant basis drove a reduction in revenue as a result of lower capacity prices from updated capacity requirements and lower energy margins. Energy margins decreased primarily due to milder weather during the quarter ended September 30, 2017 compared with the quarter ended September 30, 2016. The aggregate decrease in revenue from BEC was partially offset by new tariff revenue for additional services provided to the grid operator. The remaining 62.5% of BEC’s capacity generates revenue pursuant to a fixed price tolling agreement.

Cost of Product Sales

Cost of product sales decreased for the quarter and nine months ended September 30, 2017 compared with the quarter and nine months ended September 30, 2016 primarily due to a reduction in gas consumed at BEC as a result of reduced generation and lower natural gas costs from the recently completed gas lateral connecting the facility to a lower cost source of gas. The decreases in both periods were partially offset by incremental costs associated with an acquisition of a solar facility completed in December 2016.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased for the nine months ended September 30, 2017 compared with the nine months ended September 30, 2016 primarily due to lower property taxes, lower costs related to leased engines and insurance savings at BEC. These decreases were partially offset by incremental costs from acquisitions.

Depreciation and Amortization

Depreciation and amortization expense increased for the quarter and nine months ended September 30, 2017 compared with the quarter and nine months ended September 30, 2016 primarily due to incremental expenses associated with an acquisition completed in December 2016.

Other Income, net

Other income, net, increased for the quarter and nine months ended September 30, 2017 compared with the quarter and nine months ended September 30, 2016 primarily due to financing income from a revolving credit facility provided by CP to a third party developer of renewable projects and the associated development profit. The increase was partially offset by escrow proceeds related to the BEC acquisition received during the quarter ended September 30, 2016.

Interest Expense, Net

Interest expense includes losses on derivative instruments of $82,000 and $2.4 million for the quarter and nine months ended September 30, 2017, respectively, compared with gains on derivative instruments of $1.9 million and losses on derivative instruments of $17.6 million for the quarter and nine months ended September 30, 2016, respectively. Excluding the derivative adjustments, interest expense increased for the quarter and nine months ended September 30, 2017 compared with the quarter and nine months ended September 30, 2016 primarily due to debt assumed in an acquisition completed in December 2016, partially offset by lower average debt balances on all other facilities. Cash interest expense was $6.8 million and $20.6 million for the quarter and nine months ended September 30, 2017, respectively, compared with $6.2 million and $18.5 million for the quarter and nine months ended September 30, 2016, respectively.

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Results of Operations: Contracted Power – (continued)

Income Taxes

Our wind and solar facilities are held in limited liability companies that are treated as partnerships for tax purposes. As such, these entities do not pay federal or state income taxes on a standalone basis, but each partner pays federal and state income taxes based on their allocated share of taxable income. For the year ending December 31, 2017, MIC expects its allocated share of the federal taxable income from these facilities to be a loss of approximately $10.5 million. For 2016, MIC’s allocated share of the federal taxable income from these facilities was a loss of approximately $23.0 million.

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

Other Matters

CP relies on a small number of suppliers to provide long term operations and maintenance (O&M) and other services for its facilities. One of those O&M providers, SunEdison, Inc. (SunEdison), filed for bankruptcy in April 2016. SunEdison’s contract was terminated in May 2017 and a new service provider has taken over the O&M and other services for these facilities effective August 1, 2017.

Results of Operations: MIC Hawaii

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

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

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

Key Factors Affecting Operating Results for the Quarter:

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Results of Operations: MIC Hawaii – (continued)

		Quarter Ended September 30,								Change Favorable/ (Unfavorable)								Nine Months Ended September 30,								Change Favorable/ (Unfavorable)
		2017				2016												2017				2016
		$				$				$				%				$				$				$				%
		($ In Thousands) (Unaudited)
Product revenue			52,396				51,011				1,385				2.7				165,758				158,036				7,722				4.9
Service revenue			13,826				5,258				8,568				163.0				39,476				5,258				34,218				NM
Total revenue			66,222				56,269				9,953				17.7				205,234				163,294				41,940				25.7
Cost of product sales (exclusive of depreciation and amortization shown separately below)			30,498				32,501				2,003				6.2				107,615				90,428				(17,187	)			(19.0	)
Cost of services (exclusive of depreciation and amortization shown separately below)			12,131				3,946				(8,185	)			NM				34,015				3,946				(30,069	)			NM
Cost of revenue – total			42,629				36,447				(6,182	)			(17.0	)			141,630				94,374				(47,256	)			(50.1	)
Gross margin			23,593				19,822				3,771				19.0				63,604				68,920				(5,316	)			(7.7	)
Selling, general and administrative expenses			6,874				6,540				(334	)			(5.1	)			19,729				16,230				(3,499	)			(21.6	)
Depreciation and amortization			3,711				2,802				(909	)			(32.4	)			10,922				7,696				(3,226	)			(41.9	)
Operating income			13,008				10,480				2,528				24.1				32,953				44,994				(12,041	)			(26.8	)
Interest expense, net(1)			(1,877	)			(1,571	)			(306	)			(19.5	)			(5,795	)			(6,224	)			429				6.9
Other expense, net			(141	)			(187	)			46				24.6				(382	)			(588	)			206				35.0
Provision for income taxes			(4,830	)			(3,246	)			(1,584	)			(48.8	)			(10,772	)			(14,863	)			4,091				27.5
Net income			6,160				5,476				684				12.5				16,004				23,319				(7,315	)			(31.4	)
Less: net loss attributable to noncontrolling interests			(32	)			(111	)			(79	)			(71.2	)			(71	)			(111	)			(40	)			(36.0	)
Net income attributable to MIC			6,192				5,587				605				10.8				16,075				23,430				(7,355	)			(31.4	)
Reconciliation of net income to EBITDA excluding non-cash items and a reconciliation of cash provided by operating activities to Free Cash Flow:
Net income			6,160				5,476												16,004				23,319
Interest expense, net(1)			1,877				1,571												5,795				6,224
Provision for income taxes			4,830				3,246												10,772				14,863
Depreciation and amortization			3,711				2,802												10,922				7,696
Pension expense(2)			272				349												817				1,048
Other non-cash (income) expense, net(3)			(3,360	)			316												3,108				(6,090	)
EBITDA excluding non-cash items			13,490				13,760				(270	)			(2.0	)			47,418				47,060				358				0.8
EBITDA excluding non-cash items			13,490				13,760												47,418				47,060
Interest expense, net(1)			(1,877	)			(1,571	)											(5,795	)			(6,224	)
Adjustments to derivative instruments recorded in interest expense(1)			23				(250	)											113				506
Amortization of debt financing costs(1)			99				96												303				848
Provision for income taxes, net of changes in deferred taxes			(1,773	)			(1,361	)											(5,265	)			(6,507	)
Changes in working capital			(2,535	)			(1,394	)											(12,852	)			5,554
Cash provided by operating activities			7,427				9,280												23,922				41,237
Changes in working capital			2,535				1,394												12,852				(5,554	)
Maintenance capital expenditures			(1,825	)			(1,978	)											(4,406	)			(5,251	)
Free cash flow			8,137				8,696				(559	)			(6.4	)			32,368				30,432				1,936				6.4

NM — Not meaningful

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Results of Operations: MIC Hawaii – (continued)

Revenue and Gross Margin

Revenue increased by $10.0 million and $41.9 million for the quarter and nine months ended September 30, 2017 compared with the quarter and nine months ended September 30, 2016, respectively. The increase is primarily attributable to contributions from acquisitions, an increase in the wholesale cost of gas and an increase of 0.1% and 1.7% in the volume of gas sold by Hawaii Gas for the quarter and nine months ended September 30, 2017, respectively. On an underlying basis, adjusting for changes in customer inventory, the volume of gas sold increased by 2.5% and 1.8% in the quarter and nine months ended September 30, 2017, respectively, compared with the quarter and nine months ended September 30, 2016.

Gross margin increased by $3.8 million for the quarter ended September 30, 2017 compared with the quarter ended September 30, 2016 and decreased by $5.3 million for the nine months ended September 30, 2017 compared with the nine months ended September 30, 2016. The increase for the quarter ended September 30, 2017 is primarily attributable to unrealized gains on commodity hedges of $4.0 million, compared with unrealized gains on commodity hedges of $174,000 for the quarter ended September 30, 2016. The decrease for the nine months ended September 30, 2017 is primarily attributable to unrealized losses on commodity hedges of $1.7 million compared with unrealized gains on commodity hedges of $7.6 million for the nine months ended September 30, 2016.

Gross margin, excluding the impact of unrealized gains and losses on commodity hedges, remained flat for the quarter ended September 30, 2017 compared with the quarter ended September 30, 2016 and increased by $4.0 million, or 6.5%, for the nine months ended September 30, 2017 compared with the nine months ended September 30, 2016. The increase was primarily as a result of contributions from acquisitions.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased for the quarter and nine months ended September 30, 2017 compared with the quarter and nine months ended September 30, 2016 primarily due to incremental costs from acquisitions.

Depreciation and Amortization

Depreciation and amortization expense increased for the quarter and nine months ended September 30, 2017 compared with the quarter and nine months ended September 30, 2016 primarily due to incremental expenses associated with acquisitions.

Operating Income

Operating income increased for the quarter ended September 30, 2017 compared with the quarter ended September 30, 2016 due to the increase in gross margin, partially offset by an increase in depreciation and amortization expense and an increase in selling, general and administrative expenses. Operating income decreased for the nine months ended September 30, 2017 compared with the nine months ended September 30, 2016 due to the decrease in gross margin, an increase in selling, general and administrative expenses and an increase in depreciation and amortization expense.

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Results of Operations: MIC Hawaii – (continued)

Interest Expense, Net

Interest expense includes gains on derivative instruments of $15,000 and losses on derivative instruments of $158,000 for the quarter and nine months ended September 30, 2017, respectively, compared with gains on derivative instruments of $152,000 and losses on derivative instruments of $691,000 for the quarter and nine months ended September 30, 2016, respectively. For the nine months ended September 30, 2016, interest expense also included the non-cash write-off of deferred financing costs at Hawaii Gas related to the refinancing of its $80.0 million term loan and its $60.0 million revolving credit facility. Excluding the derivative adjustments and the write-off of the deferred financing costs, interest expense increased for the quarter and nine months ended September 30, 2017 compared with the quarter and nine months ended September 30, 2016 primarily due to debt assumed from an acquisition and the financing of solar facilities constructed in the past year. Cash interest expense was $1.8 million and $5.4 million for the quarter and nine months ended September 30, 2017, respectively, compared with $1.8 million and $4.9 million for the quarter and nine months ended September 30, 2016, respectively.

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, 2017, the business expects to pay state income taxes of approximately $1.2 million. The Provision for income taxes, net of changes in deferred taxes of $5.3 million for the nine months ended September 30, 2017 in the above table, includes $3.9 million of federal income tax expense and $1.4 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 nine months ended September 30, 2017, MIC Hawaii incurred maintenance capital expenditures of $4.4 million and $4.7 million on an accrual basis and cash basis, respectively, compared with $5.3 million and $6.0 million on an accrual basis and cash basis, respectively, for the nine months ended September 30, 2016.

Other Matters

Hawaii Gas’ utility gas rates are regulated by the Hawaii Public Utilities Commission (HPUC). On August 1, 2017, Hawaii Gas filed a general rate case application with the HPUC requesting an annual increase in regulated revenues of $15.0 million. To the extent that new rates are approved by regulators, we expect that interim rate increases, if any, could take effect in mid-2018.

In August 2016, the City and County of Honolulu awarded the Honouliuli Wastewater Treatment Plant Biogas contract to Hawaii Gas. Under the terms of the agreement, Hawaii Gas will purchase approximately 800,000 therms of biogas per year at a fixed rate through December 31, 2024. On September 12, 2017, the agreement was approved by the HPUC. Operations are expected to commence in 2018.

Hawaii Gas currently sources naphtha feedstock for its SNG plant from Par Hawaii Refining, LLC. A new feedstock supply agreement to receive feedstock through December 31, 2020 from Par Hawaii Refining, LLC was approved on September 7, 2017 by the HPUC.

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Results of Operations: Corporate and Other

		Quarter Ended September 30,								Change Favorable/ (Unfavorable)								Nine Months Ended September 30,								Change Favorable/ (Unfavorable)
		2017				2016												2017				2016
		$				$				$				%				$				$				$				%
		($ In Thousands) (Unaudited)
Fees to Manager-related party			17,954				18,382				428				2.3				54,610				49,570				(5,040	)			(10.2	)
Selling, general and administrative expenses(1)			6,214				3,925				(2,289	)			(58.3	)			21,301				8,831				(12,470	)			(141.2	)
Operating loss			(24,168	)			(22,307	)			(1,861	)			(8.3	)			(75,911	)			(58,401	)			(17,510	)			(30.0	)
Interest expense, net(2)			(6,597	)			(3,483	)			(3,114	)			(89.4	)			(19,419	)			(10,446	)			(8,973	)			(85.9	)
Benefit for income taxes			11,181				10,859				322				3.0				37,149				30,055				7,094				23.6
Net loss			(19,584	)			(14,931	)			(4,653	)			(31.2	)			(58,181	)			(38,792	)			(19,389	)			(50.0	)
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			(19,584	)			(14,931	)											(58,181	)			(38,792	)
Interest expense, net(2)			6,597				3,483												19,419				10,446
Benefit for income taxes			(11,181	)			(10,859	)											(37,149	)			(30,055	)
Fees to Manager-related party			17,954				18,382												54,610				49,570
Other non-cash expense			159				188												534				563
EBITDA excluding non-cash items			(6,055	)			(3,737	)			(2,318	)			(62.0	)			(20,767	)			(8,268	)			(12,499	)			(151.2	)
EBITDA excluding non-cash items			(6,055	)			(3,737	)											(20,767	)			(8,268	)
Interest expense, net(2)			(6,597	)			(3,483	)											(19,419	)			(10,446	)
Convertible senior notes interest(3)			2,012				—												5,769				—
Amortization of debt financing costs(2)			988				613												2,969				1,837
Amortization of debt discount(2)			882				—												2,377				—
Benefit for income taxes, net of changes in deferred taxes			474				1,308												5,645				6,824
Changes in working capital			(2,934	)			(2,703	)											(6,691	)			(8,634	)
Cash used in operating activities			(11,230	)			(8,002	)											(30,117	)			(18,687	)
Changes in working capital			2,934				2,703												6,691				8,634
Free cash flow			(8,296	)			(5,299	)			(2,997	)			(56.6	)			(23,426	)			(10,053	)			(13,373	)			(133.0	)