Macquarie Infrastructure's (MIC) CEO James Hooke on Q3 2017 Results - Earnings Call Transcript

Macquarie Infrastructure Corp. (NYSE:MIC) Q3 2017 Earnings Conference Call November 2, 2017 8:00 AM ET

Executives

Jay Davis - MC, IR

James Hooke - CEO

Liam Stewart - CFO

Analysts

Jeremy Tonet - JPMorgan

Tristan Richardson - SunTrust Robinson Humphrey

Ian Zaffino - Oppenheimer

Torrey Schultz - RBC Capital Markets

Operator

Good day, and welcome to the Macquarie Infrastructure Corporation Third Quarter 2017 Earnings Conference Call.

Today's call is being recorded. At this time, I would like to turn the conference over to Mr. Jay Davis, Managing Director, Investor Relations. Please go ahead, sir.

Jay Davis

Thank you, and welcome once again to Macquarie Infrastructure Corporation's Earnings Conference Call, this covering the third quarter of 2017.

Our call today is being webcast and is open to the media. In addition to discussing our quarterly financial performance on this call, we've published a press release summarizing the results and filed the financial report on Form 10-Q with the Securities and Exchange Commission. These materials were released last evening, and copies may be downloaded from our website, www.macquarie.com/mic.

Before turning the proceedings over to Macquarie Infrastructure Corporation's Chief Executive Officer, James Hooke, let me remind you that this presentation is proprietary and all rights are reserved. Any recording, rebroadcast or other use of this presentation in whole or in part without prior written consent of Macquarie Infrastructure Corporation is prohibited.

This presentation is based on information generally available to the public and does not contain any material nonpublic information. The presentation has been prepared solely for information purposes and is not a solicitation of an offer to buy or sell any security or instrument.

This presentation contains forward-looking statements. We may, in some cases, use words that convey uncertainty of future events or outcomes to identify these forward-looking statements. Forward-looking statements in this presentation are subject to a number of risks and uncertainties. A description of known risks that could cause our actual results to differ appears under the caption Risk Factors in our Form 10-K. Our actual results, performance, prospects or opportunities could differ materially from those expressed in or implied by the forward-looking statements. Additional risks of which we are not currently aware could also cause our actual results to differ. The forward-looking events discussed in this presentation may not occur. These forward-looking statements are made as of the date of this presentation. We undertake no obligation to update publicly or revise any forward-looking statements after the completion of this presentation, whether as a result of new information, future events or otherwise, except as required by law.

With that, it is my pleasure to introduce Macquarie Infrastructure Corporation's Chief Executive Officer, James Hooke.

James Hooke

Thank you, Jay, and thank you once again to those of you participating in our earnings conference call this morning, sadly, my last as CEO of MIC.

MIC's financial results for the third quarter of 2017 were overall in line with our expectations for growth and cash generation. As is often the case, however, there were swings and roundabouts in getting to our bottom line. This quarter's financial results included continued strength in Atlantic Aviation and a steady outcome for IMTT and MIC Hawaii that was partially offset by underperformance at Contracted Power.

MIC's adjusted EBITDA was up 8.2% in the quarter, and the adjusted free cash flow increased 9.5%. On a reported basis, adjusted EBITDA was flat for the quarter and up approximately 4% through the nine months. However, as we noted at the time, the third quarter of 2016 IMTT results included the impact of $13 million of insurance proceeds and related dock repairs.

Last year, we suggested you look at 2016 results excluding those items, and we suggest doing the same with the comparative results. On that basis, adjusted EBITDA for MIC was up 8.2% in the quarter and adjusted free cash flow increased 9.5%.

IMTT's EBITDA was up 6.6%, again, excluding the 2016 insurance proceeds. While IMTT received a boost from the acquisition of Epic Midstream for half the quarter, it was offset by the impact of negative EBITDA at OMI and a decline in storage utilization. OMI saw a slight uptick in activity in the wake of the hurricanes in October but nothing substantial, and it remains a drag on IMTT's results.

On utilization at IMTT. As many of you know, IMTT has a group of tanks on the Lower Mississippi, where each tank represents a bit more than 1% of aggregate storage capacity. Two of these tanks were out of service for a portion of the third quarter and with the primary driver of the decline in utilization.

Keep in mind that the decline in utilization was not outside the historically normal utilization range of between 92% and 94%. These clean tanks were subsequently released at the start of the fourth quarter. These tanks being off-line also contributed in part to an increase in maintenance capital expenditures of 35.2% versus the prior period, again, excluding the portion that was in insurance recovery in 2016. On a year-to-date basis, maintenance CapEx is down.

In general, IMTT's operating results for the third quarter and year-to-date periods were stable. Free cash flow increased by approximately 8% in the quarter and 10% year-to-date. The improvement has been, for the most part, driven mainly -- the improvement has been, for the most part, driven by higher EBITDA but assisted by lower maintenance CapEx.

The year-to-date reduction in maintenance CapEx is not surprising given the high utilization levels through the first half of the year but limited our ability to do maintenance and including the legacy of aggressive maintenance capital expenditures by this business. At this point, we believe IMTT will deploy between $20 million and $25 million of maintenance capital in 2017.

Trading at IMTT to date in the fourth quarter has been consistent with that over the first 9 months of the year. In addition, we've moved closer to signing a number of approximately $500 million worth of projects that were under review at our last update. We look forward to updating you on one or more of these agreements as they are formalized.

Atlantic Aviation benefited from one of the better quarters of flight activity in recent memory. According to the data published by the FAA, domestic flight activity systemwide in the U.S. was up 4% this year versus the third quarter last year. In addition to the increased flight activity, Atlantic also reported larger average fuel uplift and an expected level of contributions from acquisitions.

The FBO in Oxford, Connecticut, acquired in April, is performing in line with our acquisition case, and we're looking forward to a strong fourth quarter from our latest acquisition in Opa-Locka in Miami, Florida. The transaction for the Florida facility closed just 2 days prior to the end of the third quarter. For completeness, aside from some minor wind issues, downed signage and the like, Atlantic facilities suffered no material damage during the recent hurricanes.

Bolt-on acquisitions remain an important part of the MIC and the Atlantic Aviation growth stories. We progressed numerous opportunities related to Atlantic currently in our pipeline during the quarter. The strong fundamentals behind Atlantic produced growth in free cash flow of over 15% for the quarter and better than 13% year-to-date versus the prior comparable periods. Trading at Atlantic in the fourth quarter has been good, and we're looking forward to a strong finish to the year.

At BEC, 3/8 of the facility that is exposed to fluctuations in power demand underperformed our expectations as a result of the relatively mild summer weather in New York in the third quarter. For example, the number of cooling degree days, that's days on which those of us in New York would typically run our air-conditioners and drive power consumption up, was 35% lower during August this year than last year.

For the full quarter, the number of cooling degree days was 22% lower than in 2016. On the plus side, with the new gas lateral completed, BEC benefited from access to a lower-cost source of gas. That suggests that it was likely awarded more hours of generation than would've been the case without the new lateral. But keeping everything in perspective, under the best circumstances, the 3/8 of BEC that is not tolled is only capable of generating about 4% of MIC's total EBITDA.

One other note on power in New York. Capacity prices were higher month-over-month in November by about 17%. We'll see if that persist through the winter, but it does suggest a possible bottoming in prices. The renewable portion of Contracted Power also underperformed expectations as a result of decline in wind and solar resources year-over-year. After a very strong 2016, the decline was not as substantial as the one we experienced in 2015, the El Niño year, but down year-on-year just the same.

During the quarter, we also progressed in-sourcing of key aspects of the management of our renewable portfolio. Previously, these operation functions had been outsourced. There have been and will be some costs with this transition, but it is money well spent.

Longer term, we expect improved performance of the assets themselves as a result of the increased control we have from in-sourcing operation management. When we combine the scale, we have in our renewable energy business today with the scale we can see adding from our development pipeline, we believe that the economic case for in-sourcing now makes sense.

Segment results for MIC Hawaii reflect an increase in the amount of gas sold by MIC Hawaii Gas and contributions from acquisitions during the past year, offset by slightly lower retail gas prices and higher state taxes. As is often the case in the MIC Hawaii segment, unrealized gains and losses on commodity hedges flowing through the segment P&L caused a bit of noise.

Eliminating these noncash movements in both periods shows gross margin as flat year-over-year in the third quarter. Free cash flow generated by MIC Hawaii in the third quarter was also flat on a nominal basis. Year-to-date, free cash flow was up more than 6%. Historically, the fourth quarter has been a good one for our business in Hawaii.

Trading to date in the fourth quarter of this year has been in line with expectations across the operations there. The general rate case filed by Hawaii Gas earlier in the quarter is progressing through the review process. The rate case seeks an increase in regulated utility revenue of $15 million annually.

The actual amount awarded could be different, and the cash flow impact of any revenue increase will be reduced by taxes. A decision on the rate case is not expected prior to the middle of 2018.

At the corporate segment level, the implementation of our shared service initiative is nearly complete. We don't expect to incur meaningful implementation costs in 2018. We remain confident in our ability to reduce our baseline general and administrative expenses by at least $12 million to $15 million per year in 2018.

Together with the investments we've been making this year, our businesses have generated a consistent and growing amount of cash. To be clear, with a bit less than two months to go, it's likely that the full year results is going to be slightly below the low end of our guidance range, probably around 9%.

While investments and acquisitions have put us in a position to absorb any underperformance of Contracted Power this year, two specific matters have contributed to our revised expectations. First, our increased involvement in development projects creates a drag, we incur operating costs and deploy capital we don't -- we know won't generate incremental EBITDA until next year and beyond.

These development teams and projects are expected to produce far better returns than acquisitions, but they create a near-term drag on our results. However, we believe that we will create more growth and more shareholder value in the medium term by increasing our operating costs associated with development projects and wearing this drag in the short term.

Second, we're also wearing the cost of in-sourcing the operations oversight of our renewable projects. With SunEdison out of the picture as a provider of outsourced O&M for our solar facilities, we chose to utilize some of our shared service resources in Texas rather than finding another contract provider. We've chosen to do the same with our Idaho wind operations.

Incurring the in-sourcing costs was the right thing to do, but together with the development drag, it's taking our growth in cash generation below our 10% bogey on a year-over-year basis. To be clear, we are not adjusting our results for the development costs. We're simply wearing the costs associated with funding the development teams working on jet fuel storage, logistics, LNG and renewable power development opportunities and other development projects we have underway.

We anticipate that over the medium term, these investments will generate superior risk-adjusted returns. Neither are we adjusting our results for the decision to in-source the renewable back office. Although it has been in-sourced through our shared services operation, we don't view it as a shared service implementation cost of the type we had forecast at the start of the year. If we had excluded the development and in-sourcing costs, we would likely to finish the year with just over 10% growth, but all that seemed just a bit cheeky.

To recap the key figures from the quarter. Adjusted free cash flow increased by 9.5% nominally and by 6.3% on a per share basis, taking into account the roughly 3% increase in our weighted average shares outstanding. Keep in mind that a portion of the increased share counts was attributable to the issuance of shares in connection with the acquisitions of Epic Midstream. Through 9 months, adjusted free cash flow is up 7.5% on a per share basis.

We did make two modifications to our reported results to arrive at adjusted EBITDA and adjusted free cash flow figures for the quarter. These are the same two items we have flagged throughout the year. The first is the exclusion of the nonrecurring expenses incurred in implementing our shared service initiative.

These totaled $1.4 million in the third quarter and comprised primarily consulting fees. Year-to-date, the shared service implementation costs summed to $6.8 million.

The second adjustment removes deal costs, including those related to some of the transactions I've already mentioned. These totaled $3 million in the third quarter and $7.9 million year-to-date. Here again, looking at our results excluding these as we have when the company has been involved in transactions historically, provides better visibility into the recurring cash generation capacity of the enterprise. Both adjustments are shown clearly in the table of summary financial information in our press release.

Taking all of this into consideration, particularly the consistency of underlying cash generation and our continued good prospects, the MIC board has authorized a cash dividend for the third quarter of $1.42 per share. That represents a 10.1% increase over the dividend paid for the third quarter in 2016 and is consistent with our guidance for 2017.

Including the third quarter dividend, our payout ratio -- that is aggregate dividends divided by aggregate adjusted free cash flow, was 78.8% year-to-date. The ratio varies quarter-to-quarter, but that figure is pretty much middle of our long-term target for a payout of 75% to 85% of adjusted free cash flow.

Turning from our operating results to growth activities. The third quarter was another good one from a growth capital deployment perspective. We deployed approximately $100 million into growth projects, bringing our year-to-date deployments to approximately $550 million. We remain on track to invest more than $650 million in growth projects and bolt-on acquisitions in 2017.

Importantly, at the end of the quarter, our backlog of approved projects has a value of approximately $200 million. Some of these will carry over into 2018 and give us a jump start on growth capital deployment then. We intend to provide you with formal guidance with respect to our growth capital pipeline and capital deployment agenda along with our full year results released in February. But it is clear today that we will have no difficulty achieving our threshold level of growth investment of $350 million in 2018.

The lead time prior to cash generation associated with some of our projects has caused temporary increase in our leverage. This is neither surprising nor a cause for concern. We have, for example, all of the debt associated with various acquisitions but only about 1 quarter worth of EBITDA. It's also a function of our investments in development projects.

The best example is, of course, BEC II. The project will end up being in development for about 18 months before it generates any EBITDA at all. As a result, our leverage can reasonably be expected to first increase then decrease as contributions from the acquisitions and investments in development projects emerge.

Inasmuch as this will be the last time I'm able to address you in this forum, I'd like to take a moment to reflect on a couple of matters. I leave it to others to gauge the level of any success we might have had. What I think is informative and valuable and hopefully generates lessons learned are the things I would like to have done differently. If I had my time again, I would've been more front-footed in a couple of areas.

First, I think we could have and should have implemented our shared service organization sooner. Not only is the consolidation a good thing from an efficiency improvement and value creation perspective, it's also providing us with opportunities to work more effectively. In other words, not only are we able to do things faster and cheaper, we're able to do the right things faster and in the right way.

For example, instead of trying to maintain expertise in each of the operating companies that is only utilized periodically, we're now able to centrally house expertise in Plano, Texas, that can respond to and support each business as needed in a professional and effective way. In the relatively short time that shared services has been up and running, this is already being true of our IT, HR and procurement functions, in particular.

Second, in hindsight, I'm going to push to invest more and more rapidly into renewable power developments. We took baby steps back in 2012 and 2013, looking to avoid what I had call payment of the dumb tax. I think we could have seen this as a larger opportunity, a global trend for that matter, and capitalize on what was clearly an early adopter advantage.

We're certainly not sidelined in renewables, far from it. Our relationship with developers of both wind and solar facilities are likely to provide us with substantial attractive investment opportunities and tax benefits in the future. In fact, I remain tremendously excited about the potential in the joint venture with Intersect Power.

Last, it's clear to me that we could have and should have expanded our effort into general asset development sooner than we did. As I've often noted, with infrastructure, building EBITDA usually generates better returns than buying EBITDA. While we've always built EBITDA at IMTT, we've tended to focus more on bolt-on M&A in our other businesses.

We look to acquire businesses that provide us with an opportunity to improve their performance over time, both through top line growth and expense management. We also view the businesses as platforms for the deployment of additional capital in support of their growth.

That's good and certainly supports an attractive rate of growth in cash generation over time, but I'm convinced that what delivers outsized performance and what will prove to be the catalyst for step function changes in MIC that many of you look for is investment in development of infrastructure in the businesses in which we operate, development of adjacent lines of business, of new relationships, of new ways of addressing the market.

But development comes with a cost. It comes with a measure of additional complexity in an environment in which most people seem to value simplicity. Unfortunately, complexity also tends to drive capital costs higher. The reality for me is that additional measures of complexity is the source of tremendous value creation even when the markets seem to have trouble perceiving that value.

So, I wish we'd pushed into this area sooner, with more vigor, made it part of what we did every day and figured out how to convey to the market the real value of such activities.

By way of example. For 2017, our investment in BEC II and Intersect Power will produce nothing other than less EBITDA and less free cash flow and reduce the perceived near-term value of MIC. However, over the next few years, I believe the value generated by both investments will be significant. Clearly, it will behoove us to consider methods of reporting the results of development activities distinct from core operations.

Finally, some people have asked me, what will the new guy be like? And the new guy is actually here with us today in New York. And by that, they mean the incoming CEO, Chris Frost. My response to that is he'll be better than the current guy. Chris' fresh set of eyes and new perspective have already added value as he's been looking at our businesses in a new way. As noted in our filing on the matter, the MIC board has elected Chris CEO of the company with an effective date of January 1, 2018.

I think people should view the future of MIC with optimism. For the things we currently do well, it will be business as usual. But the things we need to do better, for example, providing additional granularity on development activities, I think Chris would bring fresh ideas and energy.

But I don't think there will be any radical change in strategy or approach. MIC will continue to seek to grow shareholder value by aggressively managing what we have and judiciously allocating capital where we see attractive risk-adjusted returns. MIC will continue to manage our businesses with a view to maximizing shareholder returns in the medium to longer term rather than for the short term.

Our decision to in-source renewable operations this year is just the latest example of that. Growing distributions to shareholders in a steady, predictable fashion while investing for the future will continue to be part of MIC's strategy; current income supplemented by longer-term capital gain.

During my time at MIC, I've been enormously lucky to have been surrounded by wonderful people. First, I'm particularly grateful to the providers of our capital; our lenders and our shareholders, who helped us grow the company. MIC shareholders have given me countless good ideas of how we could run the company better or more prudently allocate capital.

Companies involved -- companies with involved and interested shareholders, with engaged shareholders, have a real advantage. As I've said repeatedly, we are not too proud to plagiarize good ideas, whatever their source.

Second, I've had the best Board of Directors of any New York Stock Exchange listed company. They've provided support, wisdom and oversight in the right mix. They've refused to let us do the harebrained but supported us in doing the counterintuitive if it was the right thing to do.

And finally, I've had the best colleagues, both at MIC corporate level and in all our businesses we own of any CEO in America. While we are definitely not a team of champions, we have been a champion team. I look forward to staying involved in MIC and continuing to work with the management team as both an irritating board member and a demanding shareholder.

In summary, MIC's results from core operations for the third quarter were consistent with our expectations. Out-performance in Atlantic Aviation was partially offset by some headwinds at Contracted Power. We now expect to deliver growth in cash generation in 2017 of between 9% and 10% on a per share basis, nothing that we're -- noting that we're wearing the unanticipated cost of infrastructure developments and as a result of our decision to in-source operations of the renewable power assets.

Supported by the consistent core performance, we will pay a cash dividend of $1.42 per share on November 16, a 10.1% increase over last year's third quarter dividend. The increase marks the 17th consecutive quarter step-up, and we have maintained our investment-grade status and increased our growth CapEx backlog.

Year-to-date, we've completed -- or committed to complete growth investments and acquisitions with an aggregate value of approximately $550 million, and we expect to deploy more than $650 million for the full year.

With that, I'll wrap up the prepared portion of our call and turn the proceedings over to our operator, who will open the phone line for your questions.

Question-and-Answer Session

Operator

Thank you. [Operator instructions] And our first question comes from Jeremy Tonet. You may proceed sir.

Jeremy Tonet

Good morning.

James Hooke

Good morning, Jeremy.

Jeremy Tonet

James, I was just wondering, I think this might be the first kind of public audience you've had since the announcement to leave. I've kind of always envisioned you being at MIC for life, it felt like. I was just wondering if you could share any more as far as your thoughts to move on at this point.

James Hooke

Sure. It's a very difficult decision. And those who know my wife and I would say it was a split decision with her being the winner of the discussion. We got some family issues that we need to address back in Australia. And look, they're not serious family issues. We've got aging parents. We've got nieces and nephews who live down there. And we've got our own kids at an age and stage in life where if we were to make the decision to return to Australia for the sake of our eldest child's education, we effectively needed to make it now.

The reason for the end of year is the Australian school year is in -- starts at the end of January. It's counterintuitive to Americans, but if you think about it, it's the end of summer, just as school starts in September here. So, if our kids would return back, we had to do it now. I have loved running MIC and I've loved living in the United States, so for me, it's with a sort of degree of personal heartache that I go back, but it ended up being sort of the rational and the emotional competing with each other.

And as much as I joke about it being a split decision with my wife, it is the right thing for us to do in terms of the family responsibilities we have back there to do it. And so, I leave it with a heavy heart. I'm enormously grateful to the MIC board and to Macquarie for allowing me to stay on as a board member of MIC. I think quitting cold turkey would have -- I would not have adjusted well to.

And so, I am glad that I will continue to have a sort of an oversight of the business. The only final thing, and this is sort of why my wife also was able to persuade me, like 8.5 years is long enough for anyone to be CEO of a public company. I still, as you well know, Jeremy, have thousands of ideas as to what MIC could do and what they could do differently, but they're my ideas. And Chris Frost brings fantastic new ideas.

We get the benefit of my ideas. He gets to reality check them, and he gets to say, yes, that's good, and no, that's harebrained. But he also brings a fresh perspective. And one of the things -- she -- when she said that to me as an abstract argument, and sort of said, No one is indispensable. You're just being vain in staying around. I said, me vain, I'm shocked that you would say that. But that's the sort of spousal support I have become accustomed to. But it was an abstract concept.

But I'd also say, when Chris arrived, just seeing him for the last three months and Chris and I have known each other for over a decade, so it's not like he's new to me. And one of the things I was overjoyed about him joining was he is the perfect person for this time in MIC's history.

It's just seeing the fresh perspective he's brought has been refreshing. It's been taxing on the team because a lot of the answers you fall in to, why did you do it this way? Well, that's just the way we've done it with James for the last few years. And that's not a good enough answer. And so, Chris has brought up a really fresh perspective and a set of eyes.

So, the combination of the personal and the emotional combined with the no one is indispensable sees me leaving a job that has been a job that I have loved doing. And as I said, the MIC board has been a phenomenal group to me. I intend to change the dynamic by irritating management a lot more from my perch on the MIC Board.

But I think it will very much be business as usual, but I -- and so I don't think there's any change in strategy. We're not going to do a GE and come out and sort of reinvent a business. MIC is going really well. It's business that's not broken. Free cash flow of this year over the period I've been here has gone up 14.5% per year, and it's going to continue to grow, continue to grow through the exact way we've done it.

So, I don't think there will be any radical change, but I do think me saying will it be identical, well, I hope it won't be identical because I hope -- as I said in the earnings call, the things we do well, I hope we keep doing, and the things we do badly, I hope Chris changes as urgently as he possibly can. So that's -- but I thank you for the question, Jeremy.

But I hope that's not too much of a Days of Our Lives soap opera explanation of events in the Hooke family. But it really is -- there's some personal stuff we have to attend to back in Australia. And that is also just so my wife doesn't kick me. That's not a euphemism for my wife and I having marital problems or there's a set of Harvey Weinstein moments about to be revealed.

That's my wife and I are very happy, and so she always says, if you say there's personal issues we have to work on, people will think there's some problem. There's not. But anyway, the guys are telling me I've said too much. There you go. Thanks, Jeremy.

Jeremy Tonet

That makes sense. A happy wife is a happy life.

James Hooke

Exactly.

Jeremy Tonet

We will miss your witty commentary, though. My next question, it might be more for Chris at this point as far as looking to the future, but it seems, like at least in the midstream market, there's a bit of a pivot towards what the market values and not as much maximizing dividend growth but more retaining cash flow and having stronger financials that way.

And leverage for you guys is about, I think, closer to the limit to where you want it. So, I'm just wondering how you kind of think about balancing these different items going forward given kind of the landscape we see out there in the market.

James Hooke

Sure. Look, the answer I give to that is clearly something we observed and we've looked at what everyone has done. I don't think you'll see us imitate too many others over time. I think our view is fads come and go as to what's popular. Exuberant dividend growth at all costs where people were urging us to guide to 7 years' visibility of 20% plus dividend growth, we never did that.

People slashing their dividend saying we're going to slash our dividend to deploy capital internally, I don't think you'll see us do that. I don't think we will get into any of those fads. I would say that some of the midstream firms are sort of having to take, today, some pain for some decisions they've taken in the past that we haven't taken. Remember that sort of 60% of our business or so is not midstream.

And so, while we get associated with them, what's going on at Atlantic Aviation, what's going on at -- in Hawaii and what's going on at Contracted Power are very different to what's going on in the MLP universe. Yes, there's some similarities with us and some similarities to IMTT. I think across the period I've been here, you've never seen us make radical lurching changes of, sort of, revisiting capital policy and dividend policy, et cetera. I would be pretty surprised if anything changes going forward.

I think what will change is the granularity that we start to give on the development, the amount of stuff that we've got in development and the impact of that drag. And so, I can envisage a change there, but I don't envisage anything radically different. I think also, as it relates to leverage, I think there's a difference between what I would call the headline leverage number and the underlying pro forma leverage number.

If we look at where we think our pro forma leverage will be once BEC comes online -- BEC II comes online, once the Hawaii rate case goes through, once we've got contributions -- full year contributions from Epic, once we've got full year contributions from Opa-Locka and Oxford, Connecticut, and some of the shared services finally implemented, I think you'll find that our leverage ratio is well below that sort of the outer end of where we're at.

So, when we look at -- as I said in my comments, when we look at the state of the balance sheet, we're much more focused at this point in time, I think, in adding extra tenner to that in terms of like you always want to have the refinancings as far out as you can. I don't think we're too worried about the shape of the balance sheet in terms of where we're at from a debt-to-EBITDA because we understand fully where it is from a debt-to-EBITDA.

So, I think Chris will -- is looking through this. We're obviously all discussing it as a board. But I think you'd say that we are, as we have always been, slightly amused observers of what others are doing rather than active plagiarists in that sense.

Jeremy Tonet

That's helpful. And then just one last one, if I could. I don't know if you would mention more details as far as the Westchester bid in this call, but are there any updated thoughts that you could share there?

James Hooke

I think what we can update people on there is what sort of has been available publicly, which is we're 1 of 3 finalists in that. We think that the credentials that we bring and the capabilities we bring are better than the other two finalists, knowing who they are, but I'm sure they think -- we think we're the prettiest girl of the dance, and I'm sure they think they are, too.

And so, everyone can tell you why they should be the preferred bidder. We genuinely should be the preferred bidder because we genuinely are better credentialed than anyone else, but I'm probably not the most objective on that. I think you will find that there is a preliminary decision on that in the middle of November from a timing perspective, but that's all we've had.

For the way we bid the deal, we think it creates an enormous value for the people of Westchester as well as, I think, creating some good value for MIC. But time will tell. But I think it will be the middle of November before we hear what's going on there.

Jeremy Tonet

That's helpful. That's it for me. Thank you. And good luck.

James Hooke

Thank you.

Operator

And our next question comes from Tristan Richardson. You may proceed.

Tristan Richardson

Good morning, guys.

James Hooke

Good morning, Tristan.

Tristan Richardson

James, I just wanted to say thank you again for spending time with us in the investor and media over the years. We always appreciate your clear communication and the always sprinkling in of some of your references. Always appreciate it. Just curious in terms of the decision to invest in development projects.

Curious as to sort of was it projects that came about maybe ahead of expectations or were pulled forward or opportunities revealed themselves ahead of what you had thought? And then similarly, would -- should we have expected to see along with that an increase in the backlog? Or am I thinking about that the right way?

James Hooke

Yes, so I think that's a really good question. I think what happened at the start of the year is as we looked from a capital deployment perspective in a lot of these spaces, but specifically, say, renewable power but a couple of others, even in the midstream space, when we looked at what we could buy projects for and buy EBITDA for, we just didn't think the risk-adjusted returns were anywhere near as good as what we could do in the development space.

And remember, we've been developing projects at IMTT. We've got a little bit of project development at Atlantic, we're paying a development in fuel farm development, and we've entered into capability in Hawaii. We're doing that, but the majority of this was related to the sort of renewables. And we developed a project in Hawaii ourselves, Waihonu.

And following the experience of that, we became comfortable in doing it. So, we partnered with one renewable developer who we've had a phenomenal year with. We've now acquired another in Intersect Power, who we're partners with, and having to acquire them midway through the year, you end up getting a drag from that.

So, I'd say, we were considering it at the start of the year but we've really accelerated it during the year, and the OpEx associated with that produces a drag. In terms of the backlog, that's what I guess I mean about providing greater granularity.

If I look at the sort of projects that we are working on today, generally speaking, in development, whether it's project Spartan in Chesapeake, Virginia, the power plant down there, or all the stuff Intersect Power is doing, none of that shows up in our backlog of specific projects because we haven't pressed go specifically or signed contracts on it. That's why we're going to need to provide you with granularity.

If I see the embedded value in Intersect Power from the land leases that they've got, the close proximity to potential contracts for solar offtake, then I see an embedded value in MIC that no one has visibility into. And that will deliver us a substantial gain. What will we do with those things? When we've done them and we've finished the development, we will probably, and I don't want to bind, we'll probably recycle some capital by selling down a stake in them.

I think we'll hold a stake in the things we develop and then sell them down. But you as shareholders, and this is a filing of mine, have no visibility into that, no granularity into that. So, all you can value is the drag that, that has from a yield perspective, or if you want to do a sum of parts of EBITDA multiple perspective, all you can do is value the drag, you can't see the upside.

So, if I said to you, when we published for you our backlog, that's just a backlog of things that we've commenced effectively and commenced construction on. The bigger funnel that sits behind that, which is what is the -- what's the funnel of projects we are looking at, that has expanded exponentially since we got involved with these people, but we haven't got a disclosure framework ready to come to you about that makes sense.

And I don't want to rush into a disclosure framework about that for two reasons. One, we need to think it through in an orderly fashion, and thinking it through in an orderly fashion doesn't usually coincide with when earnings calls occur. Like we'll do that at a time when we've thought through the smartest and best way of doing it.

But I also think that, that is really something for my successor to do. I could leave him with a great James Hooke harebrained way of disclosing that, but he would then -- so in transition, I think we're there. But that is where I do think the embedded value of the MIC story -- in many ways, you can say we've gone sideways in 2017 because as we've pivoted to doing this -- and when I said pivoted, we've always done it to a degree, which is arced up the emphasis, and the reason we've arced up the emphasis is there's much better returns. But this is all on the promise.

This is all on the calm of me saying to you, you will see some good news out of Intersect. It will provide some catalysts. What we do after BEC II, whether we sort of recycle some capital there, will provide a catalyst. Something from Spartan in Chesapeake will provide a -- there's a whole bunch of catalysts, and I know people are desperate for catalysts, but the catalysts will come at the right time.

What I'm really proud of the team for doing is I think there's been an enormous amount achieved in positioning it to us, in-sourcing -- if we're going to be a serious power developer of renewable power, the in-sourcing of the back-office stuff from our existing renewables was just a no-brainer. This year was a no-brainer to do it.

From a cash flow management or manipulation perspective, this year would be the worst year to do it, so we could have waited to do it and done that. It was -- it took us all of the nanosecond to decide we'll do that this year because this year, it makes sense to do because we're on that journey. So yes, we haven't shown you the increased backlog other than the sort of me saying now it's exponentially increased.

And then once you see the first projects come out of this, everyone will say, yes, that's exactly as you said, in a sense there will be a yawn because it will be, well you always told us this would happen. And so here it's happening. I'm excited for the day that this becomes a yawn as part of our business because I do think -- but that's the transition that we're on.

And I do think that when I look at what we're doing, and it's not just in the renewables space, it's around some of our jet fuel projects, it's around petroleum storage, other logistics projects, I do think there is a massive increase in the backlog. In an intellectual sense, there's just not one that we've worked out a framework to have it -- to guide you to.

Tristan Richardson

No, that's helpful. Thank you for kind of bridging the connection there. And then, I mean, James or Liam, I guess curious on the decision to in-source. I assume that will sort of be a -- an ongoing just expenses part of the business. Curious if you could give us a sense of -- and not looking out in '18 but just generally kind of an annualized impact because presumably, we're only seeing the fourth quarter impact in '17.

James Hooke

Yes. So, what I'd say there, though, is, net, it's not really an increase in costs. And the reason is, net, it's not a huge increase in costs is we're already paying those O&M providers. The reason you're seeing a one-off increase in costs in the implementation is generally speaking to bring this in, we're having to run duplicate costs while we're still paying the O&M provider, while we wind them down, and incurring costs while we wind this up.

That period of overlap is the period we're in at the moment. Once that overlap occurs, trust me, I fully intend not to pay the external O&M providers. So that O&M -- that overlap will disappear.

So, I don't think there's any meaningful increase in O&M costs that you should say this is just a friction of moving from an outsource to an in-source without dropping the ball. The upside that we think we will get from it is actually just better control. It's just better visibility and control. It will also make us better developers of assets.

It will also make it easier if we want to recycle capital from some of the things we develop, to sell down those stakes while still offering a back-office O&M for the portion of those projects that we control but also for the portion of those projects that others control. And so, I think it's more driven by our desire for control of quality, and the control of quality really stabilizes earnings.

Hopefully, you won't have -- it won't take as long to replace inverters, which means you will have better availability and you won't be down as long because we will own it and we will live and sweat it harder than the outsourced providers are. But I think what you're really seeing in the cost of bringing this about is the implementation cost of making it happen and the duel operating cost while we wind down the external providers.

So, I don't think people -- there's not a hidden message in here that's sort of down the track, you should goose up the cost of this. Yes, there will be a little bit of an investment, but I don't think, in the scheme of things, it will be materially different, that we think we can do this better and cheaper on an in-source basis than we were doing it on an outsource basis.

Tristan Richardson

Understood. No, that's helpful. Thank you, guys. And James, best of luck at Rhodes.

James Hooke

Thank you very much.

Operator

And our next question comes from Ian Zaffino. You may proceed Sir.

Ian Zaffino

Hi. Great. Thank you very much. How are you?

James Hooke

Good.

Ian Zaffino

So, I guess the question would really be, maybe on the return criteria, as you're thinking about maybe BEC II, how is the return criteria there compared to BEC I? And I guess the reason why I'm asking you is because now we're starting to talk about weather and some volatility and some other things that kind of move around numbers.

And I would imagine the answer is you're looking for a higher return. But how does that fit with the rest of the business and really your ability to deliver kind of consistent dividend growth, consistent free cash flow growth?

James Hooke

Yes. Look, it's a good question. I would say, as we noted in the call, BEC, for all the volatility around the merchant component of the 3/8 of BEC, it represents 4% of -- the maximum it would ever represent is 4% of MIC. So, I think it's an issue that causes us sort of a degree of challenge and frustration, but it is really at the margin.

I think the broader question is, after we -- and we've already said -- we've always said this, I think, so I'm not reinventing the wheel retrospectively. With the gas -- when we bought BEC, we said we're going to buy BEC, we're going to buy the real estate under BEC. We ended up building gas lateral. We're then going to try and get some ancillary revenue from system stability operations, and then we're going to add BEC II.

And after we've added BEC II, there is space on the cable for maybe another 65 megawatts, so you may see a BEC III. But after we've done that, we will question, are we the right owner once we've added all that value? Where we're at today is no different to exactly where we headed, which is we've completed most of those tasks.

We haven't -- the only thing we haven't completed is BEC II. And we haven't looked at planning and permitting yet on BEC III. But at some point, in time, would it make sense for us to recycle capital around that? Maybe. Would it make sense for the untolled portion of it to look in pace, putting a toll agreement in place for that or putting a hedge in place for a period of time on that, yes, they are all things that could make sense.

By and large, merchant power is not something that sits within the MIC scope of businesses that we really want to look at. But the developing opportunities like that, getting them up to a level and then working at having created that value, whether we sell down a portion of that -- that was always part of our contemplation, and that's exactly where we're at on the journey with BEC.

With the journey coming through the BEC II almost near completion in the early part of 2018, there will be an inflection point where we look at that again, and we'll take a decision then as to what's the best long-term decision. But I think, yes, it adds a bit of noise.

To your question around development more broadly and developer returns, wherever we are doing development, we are looking for an appropriate risk-adjusted return versus that. I would say, in the case of renewable power, yes, there's a much higher IRR expectation if you're doing development than buying operating assets. In the case of BEC II, there's a much higher return threshold than BEC because you're taking on board a degree of developer risk. In the case of IMTT, I think we generate better returns when we do developer.

That's paradoxical for me because I actually think the risks at IMTT of development projects are lower than the risks of acquisition. But that's probably the only business where we've got it. Maybe Atlantic in terms of hangar construction is there a lower risk on the developer stuff than on the M&A. But generally speaking, yes, we're looking for vastly superior returns.

In the case of Hawaii Gas with the LNG opportunity we're looking at out there, that would require higher returns than sort of general utility returns because of the development risk associated. So yes, we do calibrate it across the board. And generally, I would say everywhere, we expect the developer premium relative to the returns of operating assets. I just note a slight nuanced distinction there of IMTT and Atlantic, but broadly speaking, yes.

Ian Zaffino

Okay. And then just one other question would be, I guess as you're considering really going into the commercial airport business, I know a lot of those contracts oftentimes involve some big front-end loaded CapEx, and then your return would kind of come after that. How do you think about maybe either funding that or your appetite to do something like that or even if that would be the case in some of the projects you're looking at bidding on?

James Hooke

Yes. So, I think each project has a different profile. Different communities want different things. Some communities want to maximize the proceeds upfront. Other communities want a regular source of some kind of revenue share over time. So, it varies community by community. And same with commercial airports and with this many municipalities in the United States that there will be one model that this is not true.

The second I would say is whilst MIC is interested in Westchester Airport and there would be other commercial airports that we would be interested in, there's also commercial airports in the United States that we will, as MIC, have absolutely no interest in. It is not axiomatic that MIC, because if we got Westchester, we would pursue every commercial airport opportunity. There would be a lot that we, relatively speaking, may not be the right capital for.

So, I think in the case of Westchester, there was just a happy confluence of strategic upside for us, the need of the community and who we represented as capital. But there will be other airports where that's not the case. And I think the way we view that from an intellectual perspective is these airports have components to them in the way that there's a recurring cash flow component, and that's like any standard acquisition.

And to the extent that the community wants us to do something from a capital perspective in terms of saying upgrading, say, Westchester, giving the commercial terminal at Westchester an upgrade so that if you bring it into the 21st century, you can shoot episodes of Mad Men at the current commercial terminal in Westchester because it's got that look and feel to it, of a time previous.

If the community wants us to do that, then we'll view that as any other capital project that we do at MIC and look at the funding mechanism. It's identical to what we do in other businesses, it's just a new vertical.

Ian Zaffino

Okay. Great. Thank you very much.

James Hooke

Thank you.

Operator

And our next question comes from TJ Schultz.

Torrey Schultz

Just, I guess, a follow-up for, say, kind of on the balance sheet. To stay investment-grade, do you expect to need external equity over the next year? Or what level of organic growth CapEx next year can you fund internally if that's the preferred route in this market and given where the stock is right now?

James Hooke

Yes. So, I think we can -- everything we've done to date, we can fund without going to the market for more capital. And we can fund -- that standard 350 of growth CapEx without going to the market for more capital. If an opportunity comes up in excess of what there is -- what we have today, then we have to look at that.

But we'd look at that and then on a risk/return basis, trade-off, and given where the stock has traded, decide whether we thought that was a great idea or not. But in terms of where we're at today, we don't need to raise any more capital from stuff we've done today and the stuff we have in our existing pipeline to maintain our rating.

If we want to do additive stuff at a faster rate than that normal rate of deployment, we need to have a look for additional sources of capital. I do think, and again, I don't want to sound like a stuck record on that, there are some projects that we've got and some things that come to fruition where you could see us fund new things through recycling capital, and that doesn't seemed to be on anyone's radar screen.

So, I think there's a lot of stuff -- we have a lot of balance sheet flexibility. We have no near-term maturities. Notwithstanding that no near-term maturities, we'll still look to push the tenor out. And so, then everything we look at, we'll look at what's our cost of capital? What does it take for us to create shareholder value and what are the sources of capital to do that? And I think we've got a fair degree of flexibility around that.

Torrey Schultz

Okay. And that kind of -- within those confines of funding that level of CapEx, what's the expectations on becoming a material taxpayer? Would you expect to be a taxpayer by 2020?

James Hooke

Certainly. At the moment, the guidance we've said is that we don't expect to be a taxpayer with the stuff we've got today before the back end of 2019. As I'm -- and I'm again going to be a stuck record on this; in 2009, I said it would be 2012. In 2012, I said 2015. If we do nothing extra today, it's the back end of 2019.

We don't intend to do nothing between now and then, and so I think you will see that move out. What is the thing that makes that move out? We haven't got it done today to be in a position to disclose that, so the disclosure we've got today is right for where we're at today. But we're very conscious and focused on these things, and I think we have a good track record of pushing that out.

So, as I said to a couple of shareholders, of all the things that keep me awake at night, the 2019 tax thing is not one there. That obviously then begs the follow-up question, which is, "Ok, if that doesn't keep you awake at night, what does?" The answer to that is my children. But that -- yes, I think there's a tax liability we have to manage. I'm relaxed and comfortable about our capability to manage it.

Torrey Schultz

Okay. And then just lastly, what does the new project setup look like for you on the terminal side? You increased business development team with Epic. And if you could just discuss a bit how the business development activities at IMTT have evolved over the past couple of years, where things stand to do more in that segment now and how you may be able to accelerate the project queue kind of going forward now with the team from Epic.

James Hooke

Yes. So, we've got a sort of $500 million backlog of projects -- pipeline of projects, not a backlog of projects there. I would say there are 3 words that you should think through when you think about the stuff IMTT is focused on at the moment. The first word is chemicals. And if you look at the vast majority of what we're looking at from a project perspective, it's projects in chemical logistics space. And so, there's a number that we're looking at there.

And the second thing I would say is jet fuel. And jet fuel is the sort of reason for Epic, the reason for jet fuel developer and the missing link between Atlantic and IMTT. So, if jet fuel was one word, it would be easy because I could say there's two words if you think about chemical and jet fuel. Unfortunately, jet fuel is two words.

But that's clearly what we're looking at, and that is about both adding new capacity at our existing locations and taking over chemical logistics for others who are fundamental chemical producers. But that's where we're at today.

Torrey Schultz

Okay. Thank you.

James Hooke

Thank you.

Operator

Thank you. That concludes our Q&A portion of today's call. I would now like to turn the call back to Mr. James Hooke, CEO, for closing remarks.

James Hooke

So, thank you very much for your patience. I'm sorry that we have run past 9 AM on the Q&A part, and I apologize for that. But with that, I will wrap up the prepared portion of our call -- sorry, consistent with our efforts of late to attract additional investors, we'll be on the road participating in a number of roadshows and conferences over the next couple of months.

If there's someone you think we -- should be introduced to the MIC story, please write Jay now and he'll address these folks at our outreach. Thank you, and I appreciate your support over all the years. Thank you, and have a good day.

Operator

Thank you, ladies and gentlemen. This does conclude the conference. You may all disconnect. Everyone, have a great day.