Macquarie Infrastructure Holdings, LLC
Q1 2018 Earnings Call Transcript

Published: 3 May 2018

[Operator:]

Good day, and welcome to the Macquarie Infrastructure Corporation First Quarter 2018 Earnings Conference Call. Today's call is being recorded. At this time, I'd like to turn the conference over to Mr. Jay Davis, Managing Director, Investor Relations. Please go ahead, sir.

[Jay Davis:]

Thank you, and welcome to Macquarie Infrastructure Corporation's earnings conference call, this covering the first quarter of 2018. 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 at 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 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 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. 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 thank you for joining our call this morning. Our call today will cover three principal topics, an overview of our priorities to drive growth and long-term shareholder value; MIC's financial results for the first quarter of 2018, results that were in line with expectations and contain positives across MIC's diverse portfolio of infrastructure businesses; and additional information about IMTT, including insights into our progress with repurposing and repositioning of certain assets. In connection with this call, we have produced a set of slides that have been posted to our website. I encourage you to download them, and we will, of course, provide plenty of time for your questions. Before I get into our agenda, I would like to start by addressing our decision to reduce the dividend and lower dividend guidance to $1 per share per quarter. All of us at MIC from the board down are aware that the decision to reduce the dividend and subsequent decline in MIC's share price has caused frustration for many of you. The decision was not taken lightly, but we believe best positions MIC for long-term financial strength and the creation of sustainable shareholder value. The decline in IMTT's utilization was just one of a number of factors that influenced the board's decision to reduce MIC's quarterly dividend. Some of the other factors considered by the board included a desire to enhance balance sheet flexibility, shifts in credit and equity markets and continued opportunities to invest in MIC's portfolio. As our first quarter results indicate, the cash-generating capacity of MIC's businesses is largely unchanged from 12 months ago. We expect MIC will generate EBITDA of around $700 million this year, roughly the same as last year, and we are confident we can grow from here. Since my appointment as CEO, I have worked with my colleagues to review the performance and prospects of each of our businesses. This analysis has helped us assume 3 strategic priorities for the company. Our first priority is the repurposing and repositioning of IMTT to enhance connectivity with customers and improve the logistics capability of IMTT's facilities in light of shifting market dynamics. We believe this will increase the cash-generating capacity of the business over the medium term. Second, we must manage our capital even more efficiently. We have refined our growth capital requirements for 2018. We are also executing on initiatives to dispose off noncore assets. We expect to be in a position to fund an increasingly larger portion of our capital needs from internally generated cash flows going forward. Our third priority is to increase the company's balance sheet strength and flexibility to position the business to take advantage of attractive opportunities when they arrive and to weather periods of economic stress. Underpinning these 3 core priorities is our ongoing commitment to shareholder engagement, transparency and strong corporate governance. Transparency in this context means providing more useful information about our businesses. You will see some of that today in the context of our supplemental disclosure on IMTT. I firmly believe that the effective execution of the initiatives back in each of these priorities will deliver growth and value to our shareholders. I'll turn now to an overview of our results for the first 3 months of the year. MIC's financial performance in the first quarter demonstrates the fundamental strength of our diverse portfolio. MIC generated an expected level of adjusted proportionately combined EBITDA of approximately $179 million for the quarter, broadly flat as opposed to prior comparable quarter and slightly ahead of the fourth quarter in 2017. This EBITDA result reflects performance by IMTT that was consistent with our revised expectations around lower utilization, partially offset by the performance of terminals acquired last year; continued strong performance of Atlantic Aviation driven by increases in flight activity and contributions from two sites acquired in 2017; contributions from contracted power that included better-than-anticipated performance across both the thermal and wind business; and disappointing performance at MIC Hawaii principally as a result of higher costs. Based on the results for the first quarter, together with our view on trading through the first part of the second quarter, we have reaffirmed our 2018 guidance. For the full year, we continue to expect MIC to generate EBITDA of between $690 million and $720 million, which is broadly in line with 2017. Regarding capital deployment, we continue to expect baseline maintenance capital expenditures to total between $35 million and $45 million for the year. At IMTT, a portion of our expenditures related to repurposing storage capacity will also be characterized as maintenance CapEx and be incremental to that figure. In February, I noted that we were expecting to invest approximately $350 million in various growth initiatives in 2018. We have reviewed all of the projects we have committed to and concluded that some of the costs could be saved and that the small number of the projects could be completed in 2019 or later. At this point, we also have a better view about 2018 spending on repurposing and repositioning at IMTT and on the discretionary growth projects more broadly. As a result, we now believe the growth capital deployments in 2018 will be approximately $300 million, including repurposing CapEx. We've illustrated our expectations by category on Slide 8. This means that we could potentially fund our dividend and our growth capital needs with a combination of retained earnings and some cleanup of the portfolio. That cleanup, sales of smaller, noncore businesses, is currently expected to generate about $30 million of cash proceeds. As mentioned in February, we are evaluating the sale of a portion, including 100% of BEC. As you can appreciate, I am unable to comment any further at this time. To the extent we sold BEC, some of the proceeds would be available to further strengthen our balance sheet and increase our financial flexibility. At this point, I'll turn the floor over to our Chief Financial Officer, Liam Stewart, to provide some additional color on these and other matters related to our first quarter results.

[Liam Stewart:]

Think you, Chris. As Chris said, at a consolidated level, MIC generated EBITDA for the first quarter that was flat with the first quarter of 2017. The result highlights the benefits of a diversified portfolio as well as the strength of the performance of, in this quarter, Atlantic Aviation and Contracted Power. Free cash flow totaled $136 million or $1.60 per share for the quarter. This result was consistent with our expectations and reflects both the impact of the increase in the number of our shares outstanding this quarter as well as increases in interest expense and maintenance capital expenditures. At a segment level, IMTT generated EBITDA of $78.1 million, down 6% on last year's result, and free cash flow of $55.5 million, down 19% on the first quarter of 2017. The decline in EBITDA was mainly the result of the previously disclosed and forecast decrease in utilization. Free cash flow was also impacted by increases in maintenance capital expenditures and higher interest expense. Storage utilization, defined as the portion of IMTT's lease space capacity under contract during the quarter, declined to an average of 188% in the first quarter. We continue to expect utilization across IMTT to average in the mid-80% range for the full year, subject to market conditions. Atlantic Aviation posted a record level of EBITDA in the first quarter, up 9.3% on the first quarter of 2017 to more than $70 million. Free cash flow generation was also at record quarterly levels, up 1% to $57 million. Atlantic continued to strengthen its position in the Southern California market during the period, with an on-field consolidation of an FBO in Carlsbad. The performance of Atlantic Aviation in the quarter reflected the benefit of continued favorable trends and general aviation flight activity. Domestic general aviation activity was up 2.2% for the quarter versus the prior comparable period. The performance was also reflective of the work that the team at Atlantic has done over the last 5 years to expand the franchise into key general aviation markets. Those expansions increased both the earnings power and the relevance of Atlantic Aviation's network.. Contracted Power saw the strongest growth in the portfolio in the first quarter of 2018. EBITDA and free cash flow were up 25% to 48%, respectively, versus the first quarter of 2017. While the segment benefited from weather conditions that were favorable for power generation, the improved financial results would not have been achieved without having in sourced overside of the operations of our renewable facilities late last year. Regarding the buildout of BEC, mechanical completion was achieved with BEC II in late February. The generators have since been successfully test fired and are undergoing routine integration into the grid. In contrast to Contracted Power, results for our smaller segment, MIC Hawaii, were below expectations. While the volume of gas sold by Hawaii Gas rose 6% year-over-year, it was offset by lower nonutility margins and higher costs across the Hawaii segment generally. For the quarter, MIC Hawaii produced reduce EBITDA and free cash flow of $14.8 million and $10.7 million, respectively. The General Rate Case filed by Hawaii Gas is progressing through a normal review process. On the current trajectory, we continue to expect an interim decision on the matter by the Hawaii PUC in the middle of 2018. The investments we made in 2017 are delivering expected amounts of EBITDA. We anticipate recording an incremental $16 million of EBITDA in 2018 related to the acquisitions of Epic Midstream and the FBOs added for the Atlantic network in 2017. In addition to various projects that were funded, including, for example, BEC II are expected to contribute approximately $20 million during the year. These contributions are reflected in our 2018 guidance. Turning to our balance sheet. MIC ended the first quarter with proportionally combined net debt of $3.6 billion, pro forma leverage of 4.9x and available liquidity of approximately $1 billion. Leverage increased marginally from the year-end 2017 as expected. We continue to prudently manage our capital deployment in line with our revised guidance to ensure an appropriate balance between maintaining the financial strength of MIC and the growth of our businesses. By leveraging liquidity position at year-end 2018, we'll turn partly on the outcome of our strategic review of BEC. Over the medium term, it remains our objective, given the current mix of businesses, to reduce leverage below 4.5x. In tandem with our ongoing focus on improving operations, we are also progressing a number of initiatives to simplify the MIC business. IMTT has closed on the sale of OMI Environmental Solutions. That transaction is expected to generate net proceeds of approximately $11 million, and we have line of sight over a number of similar initiatives. As Chris also mentioned, assuming we're able to execute on these, we estimate they could generate in the vicinity of an additional $30 million of proceeds. We have reaffirmed our guidance for generation of EBITDA in 2018 in a range of $690 million to $720 million. Our guidance assumes the continued stable performance of our businesses and no material change in the macroeconomic backdrop. We've also initiated segment-level guidance for 2018 as a means of refocusing on one critical point, namely that MIC continues to generate a substantial amount of cash earnings across the portfolio, in particular I note that we expect IMTT to generate EBITDA for the full year in a range between $285 million and $295 million. These figures are inclusive of approximately $15 million of EBITDA from Epic and potentially up to $8 million in deferred revenue. This should be compared with the $326 million reported in 2017, that's partly $6 million from Epic and approximately $12 million in deferred revenue reported in the second quarter. In other words, on a same-store basis, EBITDA at IMTT is expected to be down by approximately $40 million or 12% in 2018. Overall, the decline at IMTT is expected to be offset by improved performance at Atlantic Aviation and Contracted Power in particular. In this regard, we are assuming continued growth in general aviation flight activity and the partly a contribution from BEC II. In short, we anticipate a balance result that reflects the diversity of our portfolio and an EBITDA result that is flat with 2017.

[Christopher Frost:]

Thanks, Liam. On the back end of the first quarter results, the MIC board has authorized the payment of a cash dividend of $1 per share for the first quarter, consistent with the guidance we provided in February. We believe this strikes an appropriate balance between returning cash to our shareholders and being able to invest in the growth of our businesses. The $1 dividend represents a payout of approximately 63% of the free cash flow generated during the period. The dividend will be paid on May 17 to shareholders of record on May 14. We intend to use a portion of the future growth in our free cash flow to support an increase in our dividend. When we have advanced ongoing initiatives at IMTT and determine the best path forward for BEC, we expect to be able to provide you with dividend guidance around the timing of the dividend increase. With that as a review of the quarter, I'll move to a few comments on IMTT and prospects for that business, beginning with some additional background. IMTT operates principally in two markets, the Lower Mississippi River and the New York Harbor at Bayonne. The Lower Mississippi comprises the main terminal at St. Rose and 3 other terminals on the river. Together, the Lower Mississippi and Bayonne facilities account for approximately 85% of the IMTT business by EBITDA and 80% by installed tank capacity. A break into the IMTT estate is shown on Slide 10. IMTT has approximately 45 million barrels of capacity available to lease to third parties across all of its 19 terminals. Another roughly 3.5 million barrels generate revenue unrelated to utilization. As shown on slide 11, a significant portion of Lower Mississippi storage and handling facilities are positioned towards heavy and residual oils. In Bayonne, the facilities are mainly positioned towards gasoline and distillates, or what we refer to as clean petroleum products and to a lesser extent heavy residual products. As with many bulk liquid storage businesses, IMTT's customers are a mix of commodity traders and system players, customers who use IMTT storage and handling facilities as part of production processes or supply chains. It is important to note that a substantial majority of IMTT customers are system players, but bulk liquid storage businesses benefit from the presence of some commodity traders. As with many markets and many products, traders facilitate product movement among other customers within the terminal. Over time, both the Lower Mississippi and Bayonne facilities have had a meaningful contingence of commodity traders as customers as much as 20% both by contract number and lease capacity. Commodity traders typically move in and out of the market based on short-term opportunities. Turning to what happened late last year. Over the course of the fourth quarter, approximately 1.6 million barrels of storage capacity was not renewed. Additionally, in December 2017, IMTT was notified by 7 major commodity traders that contracts for approximately 1.8 million barrels of storage capacity coming up for renewal in December and January will not be renewed. The [indiscernible] normal yields impact 2018 as of utilization, not 2017, as the tanks were under contract. In addition, we were notified that another 1.6 million barrels currently under contract would only be under contract through the middle of December 2018 as a result of a refinery closure. It is important to note that in late December normal yield were not mid-term cancellations, but rather contracts that were reaching their agreed end date. These events taken together led us to chime through the IMTT lease book across the entire business to determine the extent to which the business might be at risk for nonrenewals in the future. Based on what we knew about nonrenewals at that point plus what we consider potential nonrenewals over the course of year following the review of the lease book, we issued guidance in February, including the expectation that storage utilization would average in mid-80% range in 2018. The repurposing and repositioning initiatives are anticipated to result in utilization recovering to the low 90% range in 2020. Many of you have asked what products or markets contributed to the challenges at IMTT. When we spoke with you in February, we used the word 6 Oil as a shorthand for a range of heavy and residual oils rather than discussing the specifics of the number of subcategories. But by doing so, we may have inadvertently created the impression there were no positive aspects to the market. That is not accurate. There is demand for subcategories of heavy residual oils, including, for example, VGO, VTB, et cetera. It is accurate that the capacity involved is located at IMTT St. Rose facility. It is also accurate that the counterparties, who do not renew their contracts, were mainly commodity traders, not system players. Commodity traders exited the market as a consequence of a backwardation in heavy and residual oils. We believe heavy and residual oils are in backwardation in part as a result of the uncertainty surrounding the implementation of new regulations related to low sulfur fuel oil in 2020. Because they don't need the storage per se, traders have low barriers to exit. However, refiners must make heavy and residual oil. Every barrel of crude yields a few gallons of the stuff. And there was an ongoing need to move this product into useful processes. We believe some of it will be tote to extract low sulfur distillates and some of it is likely to be used as a supplement to crude feedstock to be further refined. Given IMTT's strategic location on the Lower Mississippi, our repurposing and repositioning initiatives are designed to take advantage of these developments. How much capacity is involved and how much will be repurposed? Today, the 45 million barrels of capacity at IMTT includes approximately 17.4 million barrels of heavy and residential oil. About 2/3 of the heavy and residual capacity is in the Lower Mississippi due to the proximity of the terminal to major refineries. The remaining 1/3 is spread across the estate and generally tied to fundamental demand, such as local bunker market or backup fuel for power generation. Heavy and residual oil capacity will be rightsized to approximately 14 million barrels across all of IMTT as a result of the repurposing to clean product capacity on the Lower Mississippi. How much will be repurposing costs? And how long it will take? In February, I said that MIC would invest about $75 million per year over 3 years on the repurposing and repositioning of certain assets of IMTT. Some people have misinterpreted that as repurposing will cost $225 million. That is not accurate. As shown on slide 12, there was a significant number of projects underway in connection with the repurposing and repositioning of IMTT. Repurposing storage capacity involves potentially 3 phases, as set out on Slide 15. In the first phase, the capacity is returned to a condition suitable for heavy and residual product use. In Phase 2, secondary cleaning prepares the capacity for use with a clean product. Finally, in Phase 3, physical modifications of the capacity, if needed, are completed. In total, these could take up to 9 months. While the repurposing of the tanks has been carried out, it will be important for IMTT to secure contracts from new customers. Ideally, IMTT will not repurpose storage capacities speculatively. However, it is unlikely that every tank being repurposed will be contracted prior to modification, but that will be the objective. I am confident that this is the right strategy for IMTT. As evidenced, I am pleased to announce that contracts have already been signed with a system player customer for the repurposing of 500,000 barrels of the 1.3 million barrels currently being repurpose. When the repurposing has been completed, we will improve the condition of IMTT in several ways. First, the business expects to have a more diversified customer base that includes more system players. Second, revenue per barrel should increase from where it is today, all else being equal, with the addition of higher-value higher-revenue products. And third, IMTT will have reduced the exposure to heavy and residential oil by removing capacity. So what is repositioning? Repositioning involves modification or addition of certain assets and the development of additional capacity and capability in response to customer demand in growth markets, some of these are projects that IMTT has been working on for the better part of 2 years. In some cases, these projects are backed by long-dated contracts. We expect that repositioning expenditures by IMTT will also total between $10 million and $20 million in 2018. Importantly, neither the repurposing of existing tanks nor the repositioning of the estates are new concepts. IMTT undertook substantially similar repurposing of heavy and residual oil capacity in Bayonne in late 2012 as shown on Slide 13. And the Geismar Logistics Center developed in 2008 and 2009 is an excellent example of the kind of integration between IMTT and its customers that we believe can be achieved today as well. Where do we stand now relative to repurposing and repositioning IMTT and other initiatives highlighted in our last call? Since our February results announcement, IMTT has exited OMI Environmental Solutions, a noncore business of IMTT; plans for infrastructure expansion on the Lower mississippi have been developed; improvements to intermodal connectivity in Bayonne are being evaluated, and these would enhance the marketability of the terminal and potentially offset softer demand to clean refined product storage; existing capacity at St. Rose has been reconfigured among current customers in order to optimize IMTT's ability to get new customers into existing tanks and S&P has confirmed IMTT's investment-grade corporation. Over the next 18 months, we anticipate repurposing up to 3 million barrels in the Lower Mississippi to store clean petroleum products, ethanol, chemical or vegetable and tropical oils. The conversion of a portion of the capacity to clean petroleum, in particular, will allow IMTT to capitalize on expected increases in gasoline and diesel exports as the U.S. refiners increase production efficiency. Given the presence of large refineries on the river and our unequaled marine access, the Lower Mississippi is well placed to benefit from that trend. Last, I would like to mention our upcoming annual shareholder meeting taking place on May 16. In preparation for the meeting, we will reach out to many of you to discuss of our strategic initiatives. We appreciate and value the input and feedback that we have received today. We have laid out a clear set of priorities that we believe will drive greater value for shareholders. We are reinforcing the infrastructure characteristics of our businesses, managing our capital even more efficiently, increasing our balance sheet strength and flexibility and proactively engaging with investors. MIC's performance for the quarter was wholly consistent with our expectations. Reliable performance by the majority of our businesses is expected to offset a decrease in the contribution from IMTT and is expected to result in generation of EBITDA in 2018 that is very nearly the same as it was in 2017. At IMTT, we have moved quickly to address the challenges of an evolving liquid commodities market. We have a good plan and look forward to updating you on our progress throughout the year. I realize that these have been lengthy prepared remarks, but I feel that it was essential to get this information out to the widest possible audience. I thank you for your patience and welcome your questions at this time.

[Operator:]

[Operator Instructions]. Our first question comes from Jeremy Tonet with JP Morgan.

[William Kawas:]

This is Bill on for Jeremy. Can you expand on the changes you're seeing in the New York Harbor storage market for IMTT? And how much heavy and residual oil exposure is there at the Bayonne facility?

[Christopher Frost:]

I think as we sort of alluded to in the prepared remarks that we see -- we are sort of seeing a little softening in demand for distillate and gasoline shortage in Bayonne. And part of the repurposing and repositioning, particularly in relation to the repositioning, is really designed to look at ways that we can enhance the infrastructure connectivity around Bayonne to ensure that we have the ability to attract customers and to distribute their products.

[William Kawas:]

Okay. And then for the Contracted Power segment guidance, it looked similar to last year's EBITDA. Just curious on the drivers there, given the BEC II in service in 2018?

[Liam Stewart:]

Bill, it's Liam. With the guidance for Contracted Power in first that we continue to have pretty good resource, which we definitely experienced on the renewable front. And also the BEC II comes online and starts to, one, generate electrons around June of this year. So we get the benefit of capacity prices into the second half of the year. So that's the genesis behind the guidance for that segment.

[William Kawas:]

Okay, thanks. And then just one last one. What level in the storage utilization guidance of recontracting do you assume through 2020 of that 17. 3 million barrels of heavy and residual storage?

[Christopher Frost:]

Bill, it's Chris. I would sort of say the assumption to the guidance seems 85% average utilization throughout 2018. We, as we sort of said in the prepared remarks, are currently on track with that, with running a number of different scenarios as we look as the rent comes up for renewal and all of those are guiding us to 85% average utilization across the entire state.

[Operator:]

Our next question comes from Tristan Richardson.

[Tristan Richardson:]

Just curious on the $225 million, $25 million repurposing and repositioning. What portion do you guys expect to be classified as maintenance CapEx or sustaining CapEx versus growth capital over that time period?

[Liam Stewart:]

Hi, it's Liam. I think what we've laid out is that the guidance for sustaining capital expenditure for IMTT this year is in the range of $20 million to $25 million. And we preliminary identified for 2018 that all the anticipated spend on repurposing up to potentially $15 million will be classified as maintenance capital expenditure. We don't have precise line of sight, one, because as the projects come up, coursings will potentially be made or be -- a part in the projects will be maintenance CapEx and part will be growth CapEx, but we wanted to flag that out as potentially being classified as maintenance capital expenditure going forward. I think it's probably pretty reasonable to assume and, again, I clarify by saying we don't have precise visibility on which projects will constitute the $225 million over the next 3 years. But of the repurposing projects, it will be in the range, I would suspect, at sort of that $10 million to $15 million per annum potentially is classified as maintenance CapEx expenditure.

[Tristan Richardson:]

That's helpful. And then just also, a small minor item, just the benefit of the deferred revenue at IMTT in the quarter?

[Liam Stewart:]

Yes. So it's like a de minimis contribution to IMTT's EBITDA in the quarter, and may potentially be over the course of the year, 1% to 2% of IMTT's overall EBITDA.

[Tristan Richardson:]

That's helpful. And then, just last one. I think you talked a little bit about capital efficiency in finding some projects that could be executed in 2019 or beyond and that was part of the refining of the CapEx? Could you break out the refining of CapEx between scope change on IMTT versus other projects that you saw that could be done in '19 and beyond?

[Liam Stewart:]

Yes. I think in terms of the bridge between the initial $350 million and the revision down to $300 million, I'd say there's a portion of it, and a portion that's moved to other businesses in IMTT that we pushed out into 2019 just from a sort of perspective as to we have line of sight on today. There's also a portion of it. As Chris mentioned, we're very focused on making sure that we deploy that capital as effectively as we possibly can in a way that's most accretive in terms of returning to growth. And as a result of that, there have been a few projects across all of the segments that we've determined we're going to put on hold for the time being and not incorporating the $300 million.

[Operator:]

Our next question comes from Ian Zaffino with Oppenheimer.

[Ian Zaffino:]

I just have a follow-up on that CapEx question there is -- what's sort of the goal here? Is the goal to eventually become self-funding with all your capital expenditures or just a portion of it? How do we think about that? Because it seems like you're pushing things out a little bit, which is fine as long as it is kind of consistent with the strategy, which I'm kind of trying to drill down into. And also of those projects that you kind of either cutout or delayed, was it just short of the forced ranking of IRRs? Or how did you kind of get to that bottom of the critical barrel and decided to switch it to 2019?

[Christopher Frost:]

It's Chris Frost. I think we just sort of laid out in the prepared remarks and even the accompanying the material, the key element of our strategy and our priorities this year is to invest in our two large businesses to ensure that we're strengthening the infrastructure characteristics of those businesses. Related to that, we're also looking to manage the capital that we have available to us as efficiently as we can. Our focus is very much on the repurposing and repositioning of IMTT in order to return that business to growth and to position IMTT to get greater exposure to some of these growth markets and diversify its product base, which it has been doing historically. I think you're right in sort of saying that as we evaluate the pool of investable opportunities that we have, obviously we are constantly prioritizing those opportunities to ensure that they provide the greatest accretion and that they are consistent with our strategy, which is willing to sort of reinforce the investment characteristics of the business.

[Ian Zaffino:]

Okay. And second question would be on BEC? Where are we as far as a sale process? I mean are you switching bids or you're still looking for bids? What is sort of the timing of maybe the receipt of proceeds? And is there a chance that other different options, where you might be willing to sell half of it or you're really considering 100% of it?

[Liam Stewart:]

Ian, as I said on the February earnings announcement, we are currently evaluating options with respect to BEC. As we indicated that, that could be -- that could involve an exit of some of it or could involve an exit of 100%, but we're still in the process of undertaking that review and would look to update the market as we conclude that.

[Operator:]

Our next question comes from TJ Schultz with RBC Capital Markets.

[Torrey Schultz:]

The 3 million barrels that are to be repurposed, are those all at St. Rose? Or is there also some capacity to be repurposed at Bayonne?

[Christopher Frost:]

The principal focus is -- of the 3 million barrels is on the Lower Mississippi and the corrected St. Rose. Our focus with respect to Bayonne is more around enhancing the customer connectivity and so looking at the additional infrastructure we can put in there to ensure that it provides the most attractive option for our distant customers.

[Torrey Schultz:]

Okay. And the remaining heavy and residual oil exposure, are there remaining customers there that are traders? If you could just provide some more color on the remaining customer mix there and comfort level that those customers will stay in place?

[Christopher Frost:]

Yes. Look, I think I would certainly refer back to the comments with regards to the methodology that we deploy to come up with the guidance of 85% average utilization across 2018. And that is that we have a really good look at the rent book at IMTT and to that extent we felt that some other contracts, which are due to expire this year were at risk of nonrenewal, we incorporated those into our guidance. So we sort of feel like we've given it a good shake. And the customers that we continue to have, we feel pretty comfortable about, even there's a good majority of those which are system players.

[Torrey Schultz:]

Okay. And then moving to BEC with the potential sale, can you just discuss the use for cash and balance sheet management? Would you expect to recycle some of that cash in the new assets or investments just to replace some of the lost cash flow? Or is that all really earmarked for debt reduction?

[Christopher Frost:]

I sort of said in the prepared remarks, the intention with any sale proceeds, and I don't want to get ahead of us, would be really to sort of strengthen the balance sheet and enhance our financial flexibility. I think we need to sort of see where we end up, and we'll look to update the market as and when that occurs.

[Operator:]

At this time, I'm showing no further questions. I'd like to turn the call back over to Mr. Christopher Frost, CEO, for closing remarks.

[Christopher Frost:]

Thank you very much. I'd just like to conclude by thanking you all for taking the time this morning to listen to the update. And we look forward to updating you on our next earnings call.

[Operator:]

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.