Macquarie Infrastructure Holdings, LLC
Q3 2019 Earnings Call Transcript

Published: 1 Nov 2019

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Macquarie Infrastructure Corporation Third Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Jay Davis, Managing Director of Investor Relations. Please go ahead sir.

[Jay Davis:]

Thank you and welcome to Macquarie Infrastructure Corporation’s earnings conference call, this covering the third quarter of 2019. Our call today is being webcast and is open to the media. In addition to discussing our quarterly financial performance on this call we have published a press release summarizing the results and filed a financial report on Form 10-Q with the Securities and Exchange Commission. These materials were released last evening and copies maybe downloaded from our website www.macquarie.com/mic.Before turning the proceedings over to Macquarie Infrastructure Corporation’s Chief Executive Officer, Christopher Frost, 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 the 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 non-public 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 publicly update 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.During today’s call, we will at various times make reference to the non-GAAP measures, earnings before interest, taxes, depreciation and amortization or EBITDA and free cash flow as defined by us. A reconciliation of these non-GAAP measures to the most comparable GAAP measures can be found in the tables attached to our earnings press release published this morning. In addition to Christopher Frost, participating in today’s call is Macquarie Infrastructure Corporation’s Chief Financial Officer, Liam Stewart.At this time, it is my pleasure to introduce Macquarie Infrastructure Corporation’s Chief Executive Officer, Christopher Frost.

[Christopher Frost:]

Thank you, Jay, and thanks to those of you joining our call this morning. As many of you’ll have seen by now, along with the publication of our earnings press release this morning, we distributed a second release announcing our intention to actively pursue strategic alternatives for MIC. This decision to pursue strategic alternatives reflects confidence in our ability to unlock significant additional value for shareholders by selling MIC or selling each of its businesses or executing on other strategic transactions. The decision follows a thorough review by our board at its annual strategic retreat this fall. The review included analysis and support from a range of financial, legal, tax and industry advisers. For the past 2 years, we have been focused on executing initiatives in support of 3 strategic priorities. These have been

[Liam Stewart:]

Thank you, Chris. I will be brief. MIC’s financial and operational results for the third quarter of 2019 were consistent with our expectations are across the board. They reflect continued good performance at Atlantic Aviation, driven by effective management of the business and growth in general aviation flight activity year-on-year. An improvement in the contribution from MIC Hawaii, reflecting the sale of the mechanical contracting business sold in late 2018 and the continuation of the positive trends at IMTT that were present in the first half of the year. IMTT’s results for the quarter reflect the ongoing increase in utilization, partially offset by lower average storage rates. Utilization averaged 85.2% for the quarter, up from an average of 82.9% in the second quarter and 82.1% in the prior comparable period.We continue to expect utilization to be in the mid- to high 80s percent range at year-end. Demand for heavy and residual oil storage on the Lower Mississippi River has driven the improved performance. Heavy products are used as feedstocks in secondary refining processes. As a result, IMTT’s heavy and residual oil storage capacity on the Lower Mississippi River is largely full other than the crude oil tanks related to the refinery that IMTT purchased in July. As such, IMTT has paused large-scale efforts to repurpose storage capacity. We continue to expect that IMTT will generate EBITDA for the full year of between $287 million and $297 million or between $248 million and $258 million, excluding the refinery termination fee received in the first quarter of this year.IMTT has also benefited from increased throughput revenue and increased ancillary services fees in 2019. Atlantic Aviation delivered a good result for the third quarter against FAA-reported general aviation flight movement industry-wide that were up 0.7% overall. Based on the same FAA data, flight activity at the airports on which Atlantic Aviation operates increased by about 1%.As in the second quarter, Atlantic Aviation sold more jet fuel this year than last and generated more revenue from hanger rentals, an increase in expenses particularly salaries and benefits, reduced the amount of improved gross margin flowing through to EBITDA. Atlantic’s EBITDA result also reflects approximately $3 million of negative adjustments, primarily related to its maintenance business. Excluding this, the results for the third quarter this year will be a modest improvement on the third quarter in 2018. The adjustments will also impact Atlantic Aviation’s results for the full year, of course. However, we are reaffirming EBITDA guidance for the business in a range of $275 million to $285 million.MIC Hawaii generated substantially more EBITDA in the third quarter of this year compared with last. You will recall that the 2018 results included the write-down of the mechanical contracting business that was subsequently sold in the fourth quarter of last year. That aside, MIC Hawaii performed in line with expectations. Unseasonably warm weather this year reduced demands for gas modestly and labor costs increased. We expect MIC Hawaii to deliver a full year result consistent with our prior guidance as well. The Corporate and Other segment recorded costs of $5 million compared with cost of $6 million a year ago. The results for the third quarter of this year reflects the re-categorization of transaction costs, associated with the sales of our renewables businesses to discontinued operations now that those transactions have caused approximately $2 million have been recorded in ongoing operations in the first half of the year.I am pleased to report the closing of the sale of our remaining operating and renewable business as anticipated in September. In total, we generated net proceeds from the sales of our various interest in renewables businesses of approximately $210 million after transaction costs and taxes. Available liquidity principally balances on existing credit facilities was approximately $2 billion at quarter end. We anticipate having a cash balance at year-end of approximately $300 million, the majority of which would be available to support our dividends or to fund a portion of our growth projects in 2020.As foreshadowed during our last conference call, the Lower Mississippi River subsided to levels of permitted work on various growth and maintenance products in the region to proceed. As a result, our spending on growth projects increased sequentially in the third quarter to approximately $52 million. We now expect to deploy between $200 million and $220 million on growth projects for the year, lower by about $50 million versus our original expectations. Our reduced expectations for 2019 represent largely a deferral of projects into 2020. Importantly, the deferral is not expected to have an impact on either our consolidated EBITDA or our tax liability in 2019, given most of the delayed projects was scheduled to be placed in service in 2020 or beyond.With that, I’ll hand the call back over to Chris for a few additional observations.

[Christopher Frost:]

Thanks, Liam. Between now and early 2020, with the support of our advisers, we will refine our analysis of various strategic alternatives. As I mentioned a few moments ago, these could include the sale of MIC, sales of one or more of our businesses or any of spin-offs, a merger or joint venture as a means of generating value for shareholders. We will update the market when the Board has approved a specific course of action or has otherwise determined that further disclosure is necessary or appropriate.While we are setting a specific path forward, we will continue to focus on our current priorities, particularly on investing in the infrastructure of our businesses. We remain confident in our ability to further diversify the product and customer mix at IMTT by delivering new renewed capacity, connectivity and capability that positions the business well over the medium to long term. At Atlantic Aviation, we will continue to pursue acquisition and development opportunities to expand the already significant footprint of the business and the services it provides to customers. In general, both acquisitions and development projects will also add value in the form of extending the weighted average remaining lease life of Atlantic Aviation’s portfolio. And MIC Hawaii and Hawaii Gas will benefit from ongoing investment in the reliability and sustainability of the energy complex in Hawaii.We are confident that our nearly 4,000 employees across our businesses will continue to focus on what they do well. Namely, managing and operating our businesses safely and efficiently, while providing the high level of service and support that customers have come to expect. In summary, we intend to pursue strategic alternatives that could include the sale of MIC or of its businesses. We have solid businesses with good prospects, and we’re confident in our ability to deliver value in a sales process should that be the most appropriate path forward, just like we have in our sale processes to-date.MIC’s third quarter results were consistent with our guidance and reflective of the stability inherent in the asset class. We reaffirm our previously provided guidance with respect to the performance of the businesses over the balance of the year and the distribution of $1 per share as a dividend in the fourth quarter. And finally, we intend to pay a dividend of $1 per share per quarter in 2020. This assumes our businesses and operations are performing at levels that support the dividend does not assume a sale of any business and remains subject to general economic conditions and stability in the broader market. With that I thank you, again, for your participation in our call this morning.At this time, I will ask our operator to open the phone lines for questions.

[Operator:]

[Operator Instructions] And our first question coming from the line of Jeremy Tonet with JPMorgan. Your line is open.

[Christopher Frost:]

Good morning, Jeremy.

[Jeremy Tonet:]

Hi, good morning. Just want to start off with the strategic actions you guys are taking today and wondering if you could provide a bit more color as far as how active your conversations have been with potential buyers of the businesses or any color that you could share as far as appetite out there?

[Christopher Frost:]

Yes. Jeremy, I think you would appreciate that we are not able to comment on that.

[Jeremy Tonet:]

Got it, okay. And maybe you could talk a bit about the disposition agreement with the sponsor there and walk us through the mechanics, how that works a bit?

[Christopher Frost:]

Yes, certainly. I think the important point to note is the disposition agreement sets out the terms upon which the manager will be terminated following either the sale of the company or any of the operating businesses or any other strategic alternatives that we may pursue. As I mentioned in my prepared remarks, the disposition agreement includes a payment to the manager, which seeks to represent the potential earnings the manager may have earned had it continue to operate or manage the business or the company. Importantly, the payment is based on the equity proceeds realized to the company. It is subject to a minimum threshold, and we adjust the proceeds for transaction costs, estimates of any taxes that will be payable on the disposition and also paying off or reserving for the payment of both corporate level debts. The payment increases along the sliding scale based on increases in the proceeds that are realized.

[Jeremy Tonet:]

Great. I was just looking to the language a bit here and there is something about the date of January 2022, is there anything – could you explain a bit more about how the timeline works there?

[Christopher Frost:]

The disposition agreement has a term of 6 years on it and the course that you are referring to represents an additional payment to the manager to the extent that we have successfully executed on the strategic priorities – or sorry alternatives within that time period.

[Jeremy Tonet:]

Got it. And then maybe just a final one on IMTT here, wondering the utilization stepped up a bit here. Where do you see that kind of exiting the year versus your prior expectations at this point and how do you think about the trade-off between increasing utilization and the rates that you guys are looking for the tenor of the contracts, how that all mixes together?

[Liam Stewart:]

Yes. Jeremy, it’s Liam. So clearly, this quarter we have seen a step up in utilization. And then I would note that it’s sort of first step up we have seen year-over-year as well. So we do see signs of utilization continuing to improve. Our guidance, i.e., sort of for the – sort of year end spot utilization is in that sort of mid to high 80s range as well and that’s consistent with what we have said previously. I think as you see in the results for this quarter, notwithstanding the improvement in utilization, the sort of average storage revenues down sort of in the low single-digit percentages year-over-year. So clearly, as we see that improvement in utilization rises, taking some time to recover. And as we have said, we anticipate that the utilization recovery will come first and then the late recovery will follow thereafter. What we continue to see sort of to seek, to engage with our customers around meeting their needs in respect to one, sort of utilization as well, but two, also in terms of what we can do to extend tenor.

[Jeremy Tonet:]

Great. That’s all for me. Thanks for taking my questions.

[Operator:]

And our next question coming from the line of Tristan Richardson from SunTrust. Your line is open.

[Tristan Richardson:]

Hey, good morning gents. Just, Liam, could you talk a little bit more about the maintenance business in terms of a revision, is that kind of a restatement of past results or is it an asset write-down, just kind of curious because...

[Liam Stewart:]

No, it’s not a write-down it’s really just a reversal of some prior period maintenance revenue and Atlantic does a little bit of maintenance and it’s obliged to on some of the lease agreements it has with a few FBOs. So, it’s really non-core to the overall business and in the quarter we had a very good results from a volume perspective. The FAA activity was slightly stronger to Atlantic FBOs and it was across the industry and I wouldn’t anticipate that we would see this going forward.

[Tristan Richardson:]

Helpful. Thank you. And then just lastly on the disposition agreement, I guess just traditionally we just think of the sponsor is generally aligned in its ownership of MIC shares and would be beneficiary of any value creation proportionate to its ownership as any shareholder would, but could you talk just about sort of the board’s decision and/or just what the board was weighing as it sort of offered this agreement to the sponsor?

[Christopher Frost:]

Yes. Tristan, I think it’s important to note that Macquarie’s 15% shareholding is quite separate and distinct from its rights and obligations under the management services agreement. The two should be separated. The disposition agreements that we talked about really deals with how we are treating the manager on termination following the sale of the company or the operating businesses, so I think it is important to sort of see them as quite separate and distinct.

[Tristan Richardson:]

Helpful. Thank you guys very much.

[Operator:]

And our next question coming from the line of TJ Schultz with RBC Capital Markets. Your line is open.

[TJ Schultz:]

Hey, good morning. Would you sell St. Rose and IMTT band separately or is IMTT to be sold in its entirety?

[Christopher Frost:]

I think, TJ, you would appreciate that we are not going to speculate at this stage on hypotheticals. As I said in my prepared remarks that we are going to use the balance of this year and the early part of next year to refine our analysis of the different strategic alternatives with the support of our advisers, and we will do that as efficiently and in a timely way possible. And once the board has made a decision on the preferred course of action, we will look to update the market then.

[TJ Schultz:]

Okay. In the disposition agreement, is there an incentive to undertake a whole company transaction or is it the same either way if it’s a whole company transaction or assets to different buyers?

[Christopher Frost:]

There is no differentiation with respect to the strategic alternatives being pursued.

[TJ Schultz:]

Okay. And then in that agreement just a lot of moving parts still haven’t gotten through the whole thing, but can you clarify the base management fee waivers going forward if a qualifying event occurs or the caps you announced last year recouped or are they waived going forward?

[Christopher Frost:]

You will see in the agreement, then you will recall that the manager agreed to waive a portion of the base management fee as part of the disposition agreement. The manager has undertaken not to reverse that waiver during the period of the agreement.

[TJ Schultz:]

Okay. And just in the interim here how much – at IMTT as you operate the business, how much capital do you expect to deploy into IMTT next year for growth projects?

[Liam Stewart:]

Yes. Rob, I am going to give you the sort of segment by segment breakdown, TJ. So our guidance we have revised down this year to be sort of $200 million to $220 million and that largely reflects the sort of projects at IMTT, which will fall over into 2020 as well. And then we have today roughly $150 million of growth capital committed across all of the MIC verticals for next year and consistent with historical norm, with a large proportion of that is at IMTT.

[TJ Schultz:]

Okay, thank you.

[Christopher Frost:]

Thank you.

[Operator:]

And I am not showing any further questions at this time. I would like to turn the conference call back over to Mr. Christopher Frost for closing remarks.

[Christopher Frost:]

Thank you for participating in our conference call today. We remain focused on continuing to execute on our strategic priorities and will again be on the road meeting with investors and analysts in the weeks ahead. We look forward to speaking with many of you during that time. With that, have a great day.

[Operator:]

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may all disconnect. Good day.