Macquarie Infrastructure Holdings, LLC
Q4 2017 Earnings Call Transcript

Published: 22 Feb 2018

[Operator:]

Good day, and welcome to the Macquarie Infrastructure Corporation Fourth Quarter 2017 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 of Investor Relations. Please go ahead sir.

[Jay Davis:]

Thank you, Jimmy. Thank you and welcome once again to Macquarie Infrastructure Corporation's earnings conference call, this covering the fourth quarter and full year of 2017. Our call today is being web cast 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-K with the Securities and Exchange Commission. These materials were released last evening, and copies may be downloaded from our web site, 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 update 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 thanks to those of you participating in our earnings conference call this morning. We are going to do things a bit differently this morning. While we would normally spend the first portion of our call recapping the fourth quarter and full year just ended, there are clearly other methods that investors would like us to address. Suffice it to say, that our business generated a good result in 2017, with EBITDA up a bit over 5% and free cash flow increasing by more than 8% on a per share basis. A portion of the increases, were the result of successfully deploying more than $625 billion of growth capital. The growth in cash generation supported the dividend for the year of $5.56 per share. To the extent you have additional questions about the 2017 results, I encourage you to contact us following this call. On the back of detailed financial analysis, we have made difficult but necessary decisions about how to take the company forward. Decisions that we believe will ensure the health of the enterprise in the years ahead. We have been focused on three critical elements; first, our guidance for 2018 EBITDA is basically flat with 2017 at $690 million to $720 million. That means, that we won't benefit from any natural deleveraging, that would typically occur as a result of EBITDA expansion. Accordingly, it also means that our pro forma year end leverage of 4.9 times net debt-to-EBITDA is likely to remain at that level or more or move higher over the course of the year. The actual level will depend on the timing of funding of various projects. The second element, is our desire to invest in the growth of our business and in some cases, our obligation to do so. The obligation takes the form of completing projects that are currently underway. For example, the completion of hangars and terminals, to which we have committed by the term of our leases of Atlantic Aviation; or completing the construction of BEC II. The desire comes from wanting to deploy capital into attractive projects, that will generate increases in cash flow and dividends in the future. The highest priority for us at the moment, is the investment in the repurposing of some of the assets at IMTT. The third element, is our limited access to capital markets to fund the continued growth of our business. We have limited access to debt markets, unless you want to further increase leverage, and at some point, stress our investment grade credit rating, and we don't want to increase leverage. We have limited access in the equity market, at prices that would not be overly dilutive. So funding of our obligations and growth opportunities limits us to using internally generated resources. Specifically, resources resulting from recycling assets or reducing our dividend. We have concluded that the path forward involves both sale of certain assets and a reduction in our dividend. To be sure, we intend to continue to pay out the majority of our free cash flow between 60% and 65% based on our forecast for the coming year, as a dividend. But the increased portion of our cash flow will be used for investment in growth and to increase our financial flexibility, by reducing our overall indebtedness. Assuming we are successful in these efforts, including the repurposing of some of the assets of IMTT, we believe they will result in MIC once again generating growth in cash flow and dividends. So what happened? The answer had to do with 6 oil. 6 oil, a broadly defined group of residual and heavy oils, is a global commodity. But there is a structural decline in the 6 oil market. Prices are in backwardation, demand for the product is declining, and less of it is being produced domestically, as a consequence of the shale revolution and the life of feedstocks going to U.S. refineries. In December and early January a number of customers terminated contracts for a significant amount of 6 oil capacity at IMTT's facility in St. Rose. Not only did they terminate those contracts, in some cases, they shut down their operations and exited the industry. Many of these firms have been long term customers of IMTT. To be clear, this is an issue having to do in one product, in one market, in one of our businesses. Utilization averaged 93.3% in 2017 and 90.60% in the fourth quarter. On the last day of the year, it was 89.6%. As we turn to 2018 and extrapolate the impact of terminated contracts on the year, we expect utilization to average in the mid 80% range. The declining utilization is the primary driver behind the year-on-year decrease in EBITDA in 2018. We spent the last month looking at various options for dealing with this issue in 2018. They all lead us back to one conclusion, we need to repurpose some of the IMTT tanks into the storage and handling of bulk liquids other than 6 oil. This is nothing new. IMTT has repurposed tanks opportunistically, in response to changing market conditions. We believe we are better off repurposing these 6 oil tanks now, given the long term structural decline of this product, and the growing demand we see in other product categories. We have said we will deploy approximately $350 million per year of growth capital. Of this, we expect to invest approximately $75 million per year in each of the next three years, in the repurposing of some of IMTT tanks. By the end of the third year, we expect utilization to recover to the historical range, over the past decade of between 92% and 96%. We further expect that IMTT's EBITDA will return to its 2017 level. These are our important opportunities. Analysis of the supply and demand dynamics on the lower Mississippi river show that in certain product categories, there is demand for capacity in excess of current supply. Waiting for the market to move, is not a strategy. We intend to proactively take advantage of the imbalances with our repurposing projects. Again, our highest priority is repurposing portions of the now empty capacity, to use with products that have a better growth outlook. Depending on the specific tank or location, this could mean other petroleum products, including various distillates or agricultural products, such as ethanol. A key feature of repurposing certain of IMTT tanks, is likely to be the above average returns we will generate. Given that the tank already exists, the investment in upgrading to meet the needs of a changing market, means the payback, EBITDA relative to the cost of the project, can be as short as three or four years. The repurposing does not preclude investment in new capacity to continue to expand in other high growth markets, IMTT already serves. What else do we see on the horizon for MIC? First, we see a perpetuation of our federal income tax yield. Although the recent reform of the U.S. tax code has created some headwinds, these are more than offset by a strong incentive to invest in the growth of good businesses, and that investment can create a substantial and valuable tax yield. We have been saying for some time, that we expect the tax act to have a net positive impact on our prospects. We continue to believe that will be the case, but we will face some headwinds in the short term. One has to do with IMTT; as many of you will know, IMTT is capitalized in part with a tax exempt debt. The tax exempt agreement requires that -- a benefit resulting from a change in federal tax rates flow through to the debtholders. As a result of the reduction in corporate tax rates from 35% to 21%, the value of the tax exemption has decreased and IMTT is required to make-whole the bondholders for the change. This will result in an increase of interest expense of approximately 60 basis points on the roughly $510 million of tax exempt debt outstanding in IMTT. We expect these headwinds to be a drag on MIC's free cash flow in 2018 of approximately 1%. This versus our expectations prior to the passage of the tax act. On the other hand, the tax act is expected to have a positive impact on MIC from the standpoint of increasing our federal income tax yield. Under the new rules, at present, we do not expect MIC to have a material federal income tax liability in consolidation until 2020. And as I mentioned, the tax act provides considerable incentive to deploy growth capital in the form of immediate expensing or bonus depreciation related to those deployments. We believe that by continuing to deploy an average of $350 million per year into qualifying growth projects, MIC is unlikely to have a material federal income tax liability in consolidation until 2022. While that is a good thing from a free cash flow perspective, the tax [indiscernible] shouldn't wag the dog. The fact is, we have quality opportunities to drive growth in cash generation that we will be pursuing over the next several years. Second, we find value in strengthening our balance sheet and maintaining our investment grade credit rating. We will prefer to have a lower leverage level, as we head into what is clearly a period of monetary tightening. Our leverage is nearly five times net debt-to-EBITDA, so we intend to lower it. For that reason, we intend to apply a portion of our available resources to debt repayment. Our objective is simple; we would like to reduce our leverage from where it is today, to between 4 and 4.5 times, given our current business mix. We think we can achieve this and continue to invest in the growth of our businesses. And third, we see a clear path to renewed growth in cash generation and dividends, by continuing to invest in the very good platforms that are part of MIC today. In aggregate, we deployed more than $625 million in 2017 into a number of high quality bolt-on acquisitions and development projects, including the buildout of BEC. However, in total, the impact on 2017's financial results was a generation of only a little over $15 million in EBITDA. The modest financial contribution was a consequence of two things; the fact that certain investments were made late in the year, and that the investment in development projects like BEC II would not generate the EBITDA until this year. However, these same projects are expected to produce an annualized $60 million of EBITDA in a normal year. Based on the timing of completion of some of these projects, we expect about $50 million to be included in our 2018 results, needing an incremental $35 million on top of the contribution in 2017. The point is, we have allocated our capital well. We anticipate putting additional capital to work in 2018 and beyond. This year, about half of our forecast $350 million of investments, is likely to be in the completion of projects that have already been approved, or in some cases commenced. The completion of BEC II is a good example. We are also forecasting the deployment of capital into attractive new projects, particularly those related to the repurposing of IMTT mentioned previously. As I have said, we need to fund our growth agenda with internally generated resources. Based on our dividend guidance of $1 per share per quarter in 2018, we anticipate retaining close to half the capital that will be required to support these initiatives. We certainly have access to credit facilities with ample capacity to fund the remainder. But that goes against our objective of reducing our overall leverage. Therefore, our solution is to generate the remainder, by recycling capital. As we mentioned in our press release, the first of these recycling opportunities to be considered, is the sale of the partial interest in BEC. In addition to generating capital for redeployment into our growth agenda, a sale of a portion of BEC would allow us to monetize some of the value we believe we have created over the past several years. Since 2015, we added access to a second gas lateral, developed various ancillary services and have nearly completed the construction of BEC II. To-date, we have invested slightly more than $900 million into BEC. Our assessment of the market, suggests there will be a strong demand for an asset like BEC. But the sale of a portion of BEC is not our only opportunity to simplify MIC and potentially generate capital for reinvestment. IMTT subsidiary, OMI Environmental Solutions is another example. Could we have taken a different path? Could we have continued paying out $5.5 per share in dividends? The answer is yes. Our business has generated $6.83 per share in free cash flow in 2017. Even with the forecast reduction and contribution from IMTT and the increased share count, we still expect our businesses to produce between $6 and $6.50 per share of free cash flow in 2018. Our payout ratio would have increased, but it could have been done. But maintaining our dividend policy, would likely have meant either foregoing our investment grade credit rating at some point, or foregoing some portion of our growth agenda, and with that, our federal income tax yield. At the end of the day, it would have called into question, our ability to sustain growth at an attractive rate. In conclusion, MIC's businesses produced solid results for 2017, including an increasing cash generation of better than 8% year-over-year. As a consequence of recent changes in demand for handling the 6 oil at St. Rose, we now expect IMTT's contribution to our 2018 results to be down. We expect the decrease will be partially offset by the continued stable performance of the rest of IMTT, our other businesses, and by the full year impact of investments made during the past year. We are reducing our forecast 2018 dividend to $1 per share per quarter. The capital retained as a result of reducing the dividend, will be used to strengthen our balance sheet and fund a portion of the projects, that we believe will generate incremental federal income tax yield, and contribute to growth in cash generation in the future. Among these are expected to be the repurposing of some of IMTT's tanks to take advantage of favorable growth trends in certain bulk liquids. With that, I will wrap up the prepared portion of our call, and turn the proceedings over to our operator, who will open the phone lines for your questions.

[Operator:]

[Operator Instructions]. Our first question comes from TJ Schultz from RBC Capital Markets. Your line is now open.

[TJ Schultz:]

Hi good morning. How many customers did you lose at IMTT, and what is your remaining exposure to those types of customers within that segment?

[Christopher Frost:]

Thanks very much for the question. In response to the number of customers we lost, I would sort of say, that it was half a dozen customers. In terms of the exposure -- to the extent that your question is, what is our exposure, [indiscernible] remaining exposed to 6 oil, I think that we gave you some indication of that, with respect to our forecast average utilization in 2018. As we sort of said, on average in 2018 -- as we sort of said, on average looking at around 85%.

[TJ Schultz:]

Okay. I guess the question also was, are there other customers that have contracts coming up for renewal that are in that product? I know you are anticipating in the forecast, those two not be renewed as well?

[Christopher Frost:]

Yeah, it's a good question, and TJ, I think after the events of December and January, we have spent a considerable amount of time, reviewing those contracts that are expected to come up for renewal, and are taking a very prudent view, as to those contracts that we think will be renewed, and those that will not. And that has informed our forecast for 2018, and the utilization rates that I referred to. So we are feeling pretty good in terms of the remaining contracts that are coming up for renewal in 2018 and our prospects for renewing those.

[TJ Schultz:]

Okay, understood. Debt leverage was already fairly tied to investment grade metrics, and now should tick a bit higher in 2018. So have you discussed kind of the strategy shift here with the agencies at all, whether on the dividend cut or potential asset sales, and what's your expectation to remain an investment grade amid this --?

[Liam Stewart:]

So TJ, it's Liam. It's a good question. We are in the process of having that discussion with the agencies, and it's obviously going to be an ongoing dialog relative to -- one, the trajectory of the business over the course of the year, and then two, the timing of those projects. So we ended the year at 4.9 times headline, 4.8 times pro forma, so below the five times, and we will have a dialog with the agencies over the course of the year, relative to the trajectory of the business. Our intention is to delev for over the course of 2018.

[TJ Schultz:]

Okay. Is there the necessity to sell a piece or a BEC to stay investment grade in your mind?

[Liam Stewart:]

Well from our perspective, there is no necessity to sell a piece of BEC to maintain the investment grade rating. But as Chris said earlier in the call, it's balancing that with what we believe, are very compelling opportunities at IMTT in respect of repurposing, while maintaining the investment grade rating.

[TJ Schultz:]

Okay. And just lastly for me, you guys have historically been mindful of the mix of the aviation segment cash flow as part of the overall mix, just given some of the cyclicality. So now given lower IMTT cash flow over the next couple of years, and the potential for some sale of BEC, would you anticipate still adding FBOs into the portfolio, or consider selling any?

[Liam Stewart:]

I think what Chris said, is that sort of our target range is between 4 and 4.5 times. Obviously, to some extent, that will be dependent on business mix. While Atlantic is a fantastic business, as you indicate, it is an uncontracted business. So where we land between that 4 and 4.5 times, will be driven in part by the trajectory of the business and the other opportunities that we add to Atlantic. The industry remains a very fragmented industry. We are obviously mindful of the overall mix of the business, and we think the diversity that MIC represents today, is a key element of our investment thesis. So there are compelling opportunities, that are synergistic with the network. We would look to add those, but we would look to add them, in a way that fell within those investment grade parameters.

[Christopher Frost:]

I will just add TJ that, I think that that is entirely why we are seeking to have financial flexibility in the balance sheet. So that A, that we can adequately fund the repurposing of certain IMTT assets. But if the opportunity arose to add strategic FBO sites to the business that we could do so, and that we would have the financial flexibility to withstand any slowdown, to the extent that we increased the number of sites beyond the 70 that we currently have.

[TJ Schultz:]

Okay. Thanks.

[Operator:]

Thank you. And our next question comes from Ian Zaffino from Oppenheimer. Your line is now open.

[Ian Zaffino:]

Great. Can you guys just touch on what you think your growth rate is going to be free cash flow going forward? Maybe the mix of it, between organic, inorganic, and how we should think about that? Thanks.

[Liam Stewart:]

Thanks for the question as well. I think as Chris said in respect of IMTT, as we deploy that capital over the next three years, we would anticipate that IMTT would return to growth. I think that the way we would think about it is, sort of you know, once that had occurred, that our portfolio should deliver organic growth, that's effectively in the 3% to 4% to 5% range on a year-over-year basis, once we have done that repurposing. And then that $350 million of growth capital that we intend to deploy overlap [ph] based on a historical investment model, should add another 2% to 3% on top of it.

[Ian Zaffino:]

Okay. And then I guess, you would assume dividend to kind of grow on a commensurate level, to sort of that mid-single digit level?

[Liam Stewart:]

Look, we haven't given guidance in the dividend, in respect of any period beyond 2018. Our historical practice though is, as you have seen, has been to grow the dividend in line with our historical growth in free cash flow.

[Ian Zaffino:]

Okay. And now, when you are also talking about the free cash flow growth, are you talking about -- is that fully [indiscernible] all your spending or is that -- are you going to parse out CapEx between maintenance, and what sort of definition of maintenance do you --

[Liam Stewart:]

We been consistent with our historical definition, which is free cash flow is reduced by the amount of maintenance capital expenditure that we spend, but not reduced by broad capital expenditure.

[Ian Zaffino:]

Okay. All right. And then also, just as far as the customers, when -- [indiscernible] the contracts look like as far as their ability to terminate the contracts? Your ability to getting the recourse back? And then I would have thought also, that there would have been enough demand behind at IMTT, from other types of customers, that you could have maybe slotted them in, and I know there is some repurposing the tanks, but still for the most part -- there will be other customers that would maybe be able to just [indiscernible] in there? Thanks.

[Liam Stewart:]

So Ian, the contracts in question that Chris referred to, that terminate, did not terminate in the middle of the contract period. They were not renewed at the expiration of the term of those contracts, and the term of those contracts is consistent with what our average tenure has been. Some are longer, some are shorter. I think in terms of your question around the ability to repurpose the tanks or to another customer. These customers were specifically in the heavy residual oil product, 6 oil, so in order to fill those, we have a different product. The tanks actually require cleaning and repurposing. So our ability to dropping another 6 oil customer, which as Chris said, is a product that's in structural demand, is somewhat limited, absent embarking on that repurposing initiative.

[Ian Zaffino:]

Thank you.

[Christopher Frost:]

[Indiscernible] degradation in pricing.

[Ian Zaffino:]

Okay, got it. Thank you.

[Operator:]

Thank you. And our next question comes from Jeremy Tonet with JPMorgan. Your line is now open.

[Jeremy Tonet:]

Good morning. Just wanted to go to the 6 oil situation again, and would you be able to share how much the tankage was capacity wise, that was turned back at the end of the contract, and just the capacity number for the rest of the 6 oil in service right now?

[Christopher Frost:]

I think Jeremy, we want to be a little careful here, just to sort of reserve IMTT's -- or not prejudice IMTT's sort of commercial position. But I think that we would refer you to our occupancy or utilization rate at the end of the quarter and at the end of the year, we reported 89.6% and then at the same time, we talked about the 85% average utilization for 2018, having regard for a prudent approach to our existing 6 oil contracts, and our assessment, as to whether they will review, will they may be [ph] sort of follow tracks. And our assessment, as to whether they will review, will they may be [ph] sort of follow path with some of the other clients.

[Jeremy Tonet:]

Got you. And I am just wondering, when you might have started to have indication of the renewal process turning out this way, because in the November call, it didn't seem like there was any indication as far as kind of a material deterioration in the environment, and I was just wondering, I guess how the process evolved?

[Christopher Frost:]

Yes, and it's a good question. I think it was very much a surprise to IMTT. As I mentioned, a number of these customers had indicated that they are not prepared to renew their contract. It wasn't necessarily a negotiation about rates, it was simply the fact that they were either exiting the business or no longer had demand for 6 oil storage. So it was quite sudden, and it did happen to a number of contracts, when the notice period came up, and it is quite common, that these do occur at the end of the year. But it was something that was a surprise.

[Jeremy Tonet:]

Got you. Just one last one I guess, considering the tough times for the business, is there any thought as far as -- any relief in the fees to the manager to try to help MIC through this transition period?

[Christopher Frost:]

Well I think to be clear, the couple of the businesses I mentioned, is with respect to one of MIC's businesses, with respect to one product, principally, and one of IMTT's sites, to put it into context.

[Jeremy Tonet:]

Got you. Okay. That's it for me. Thank you.

[Liam Stewart:]

Thank you, Jeremy.

[Operator:]

Thank you. And our next question comes from Tristan Richardson from SunTrust. Your line is now open.

[Tristan Richardson:]

Good morning guys. Just to follow-up on the last question perhaps a different way, and I think the line of questioning maybe speaks to what investors are thinking about currently; but would you say that prior to the reconfiguration residual, is your single largest capacity exposure within the refined products portion of IMTT?

[Christopher Frost:]

Yeah, that's right.

[Tristan Richardson:]

And then, sort of looking to exiting the year, kind of post repurposing, where would that fit in the stack? I mean, obviously Epic was -- the rationale partly for Epic was jet fuel. I mean, exiting the year, should we see jet fuel, the single largest capacity exposure in the IMTT portfolio?

[Christopher Frost:]

No. I think we would -- I think as I mentioned in my earlier presentation, that the expectation is that we will return to our historic utilization of between 92% and 96% following completion of the repurposing, which we are sort of saying, having regard for other contracts, which will come up for renewal or not, likely to take three years.

[Tristan Richardson:]

That's helpful. And then Chris, just curious, could you talk a little bit about the project funnel? I think that, if -- just think about that as part of a general target of $350 million a year, but perhaps absent the repurposing, the $350 million is closer to $275 million. But just kind of curious about the project funnel. Again also, in the context of maybe being more cautious on adding FBOs from a concentration standpoint?

[Christopher Frost:]

A good question; I mean, in terms of IMTT, where we sit today, we have a good line of sight on capital projects of around $500 million over the next three years. Now clearly, some of those may not get to a stage where they are investable. That $500 million relates to both repurposing, as well as expansion into some of these other growth products that we talk about. Some of those maybe within IMTT's existing campus or they could be new sites. So when we talk about that $75 million, we are talking about that as a subsector of the capital projects we see within IMTT. I think with respect to the $350 million -- I think the story is the same, with respect to our other businesses. But we see significant opportunity to deploy capital going forward, not just in IMTT, but in some of the other verticals. But as we have talked about that in our capital management initiatives that we talk about, we are -- if you like, providing $350 million per annum, but ensuring that we have a balance sheet, which enables us to be opportunistic, given that some of these opportunities to invest are outside of our control, as regards to timing. And I think if you look at 2017, with the $625 million we deployed, clearly, that was in relation to a number of projects that we saw as desirable, and indeed so far have proven to be the case. But the timing was outside of our control. And I think that is the nature of often investing in infrastructure, and therefore having the financial flexibility to respond, is important going forward.

[Tristan Richardson:]

That's helpful. And then just last one, I guess absent repurposing 18 growth opportunities primarily revolve around some of the recently sanctioned projects, namely BEC II and investments within MIC Hawaii. Is that how we should think about sort of 2018 capital deployment, ex-repurposing?

[Christopher Frost:]

As I sort of mentioned in the presentation, of the $350 million, around half of that relates to projects, which have either already been approved or have already commenced, and I would sort of say that the majority of those relate to capital projects within the Atlantic vertical. There is also other capital earmarked for IMTT, in addition to the repurposing and through some of the smaller verticals as well. And then in terms of new growth projects, as I sort of said, that we probably have line of sight on around $800 million worth of growth capital opportunities, but obviously, having to review those very carefully, given the center of the capital rationing, capital management that we are talking about.

[Tristan Richardson:]

That's helpful. Thank you guys very much. Appreciate it.

[Operator:]

Thank you. And our next question comes from Christine Cho from Barclays. Your line is now open.

[Christine Cho:]

Good morning everyone. I wanted to start with the dividend. Why is $1 per quarter the right number, why not pay less and delever faster? I am just curious if the -- how you came to that number?

[Christopher Frost:]

I think as I mentioned in my presentation, ultimately we were having regard for a number of factors. What is ultimately our -- what we sort of see as a sustainable and desirable leverage level, given where we are in the cycle, and given our current business mix, and as I mentioned in the presentation, that we consider targeting 4 to 4.5 times is an appropriate level, and we believe that it will be appropriate to seek to achieve that timing over a couple of years. These are sort of the prospects for the business, as they currently are in terms of generating free cash flow. And then, what are also the capital demands on the business. And so it really was trying to balance all of those factors, that is what is the outlook for the businesses, excluding any growth capital. What is our leverage today? Where would we like to get to? And then sort of glidepathing to that number.

[Christine Cho:]

Okay. And then, over the three years of repurposing, should we expect that, at the end of all the terminals for 6 oil have been converted and there is no more for resid and heavy oil?

[Christopher Frost:]

No. As I mentioned, part of this work we have undertaken, there is prudent review of our existing exposure to 6 oil and that following the repurposing, we still anticipate that we will have exposed the 6 oil by the -- but the type of customer that we are likely to have exposure to, we believe, will provide more stability in terms of 6 oil revenues.

[Christine Cho:]

Okay. But still then, I guess, following up with that, for the contracts that you are or for the tanks that you are going to keep in that service, for the remaining contracts that are coming up for renewal, and you expect to get renewed, what kind of declines should we expect in the rates?

[Christopher Frost:]

We are not expecting any decline in the rate. And so part of the consideration that we have gone through is, are we confident that we will be able to relive the tanks and relive those tanks without significant degradation in the current life.

[Christine Cho:]

Okay. And then last question for me, thinking about selling BEC, is it an interest in the whole thing, or can you separate out BEC I and II, and if you can, like why not sell all of BEC too, if you can, especially since it isn't contracted?

[Liam Stewart:]

Christine, it's Liam, I will take that and then Chris can hop in as well. I think in respect to BEC, that we are targeting what we believe is value maximizing, and to the extent that involves selling 50% or 100%, we are agnostic. We are just seeking value maximization. In terms of your technical point, I think it would be technically possible to bifurcate BEC I and BEC II. Again, we believe that the value maximizing strategy is to aggregate them together and sell them in one block.

[Christine Cho:]

Helpful. Thank you.

[Operator:]

Thank you. And our last question in queue is from Rob Norfleet with ALEMBIC Global Advisors. Your line is now open.

[Rob Norfleet:]

Hey, good morning. Just a quick question, most of mine were answered. Given the focus on obviously reducing leverage and being more prudent in spending capital, how will that potentially impact investments that you are looking at? In particular, the opportunity to operate Westchester airport, and then obviously the focus you guys have had in building out the renewables platform on the solar side, through funding various projects from a capital perspective?

[Liam Stewart:]

Rob, it's Liam. I will take that and again Chris will hop in to the extent he has additional color on it as well. I think in respect of other opportunities, we view them through a long run financing lens, that effectively incorporates financing, and in a way that's consistent with the investment grade rating. And that's really, irrespective of whether it's Westchester, whether it's a renewable transaction, whether it's a transaction in an existing vertical. So we really looked at our long term financing strategy, that's consistent with that investment grade rating. In terms of your specific question around renewables, I think one, you would have seen some of the transaction costs over the last six months. One of the reasons that we are more focused on the developmental opportunities, is notwithstanding the fact that it's a little bit earlier stage, and taking a COD project. We think; one, there are better returns through pursuing those opportunity. Two, given those better returns, it's actually easier to fit in within our ratings metric as it were, in respect of maintaining that investment grade rating, rather than effectively levering [ph] up to acquire COD assets.

[Christopher Frost:]

I think Rob -- as regards to Westchester, it is probably worth providing an update on that. I think since we last updated the market, the MIC was awarded preferred dealer status, under the privatization process. But you may also be aware that there were elections within Westchester county, and the incumbent was removed, and a Democrat was elected, and the Democrat has taken office in January this year, and has undertaken to -- or is currently reassessing, as to whether or not he is prepared to support the privatization of the airport. So at this stage, it is unclear to us, as to whether it would proceed, and that in terms of MIC, having -- if you like, any capital earmarked for allocation or outstanding with respect to that period, the letter of credit which was supporting our offer, has since expired under the terms of the process. So while we hope that we may be able to persuade the new elected officials of the merits of proceeding, it's unclear at this stage.

[Rob Norfleet:]

Okay, great. And my last question is just, can you talk a little bit about, as it relates to IMTT, have there been any, obviously with the 6 oil issues, I understand the repurposing and all that we have talked about. But can you talk about what customers now are looking at in terms of average lease terms? I mean, it seems like the lease terms have kind of -- the duration has declined over the last few years, to you know, at 1.3 years now, to maybe 18 to 24 months. And is that still continuing to kind of digress on the downside? And then in addition, can you just talk a little bit about the competitive landscape? Meaning, has there been any new capacity that has been added in any of your markets, that in your opinion has resulted in some of that utilization coming down? I understand most of it is because of the non-renewal of contracts for 6 oil customers, but I just want to see if the competitive landscape had changed at all?

[Christopher Frost:]

And I think the answer is, it somewhat depends on what product or facility the client is taking to store. But I think with respect to some of the petroleum products that the average tenure is probably around 12 months or less, and that is assuming that, it is if you like, an off the shelf product, that is not requiring IMTT to invest any additional capital for already bespoke facilities.

[Rob Norfleet:]

Great.

[Christopher Frost:]

Then I was going to say, I think in response to sort of competitive threats, that in terms of the repurposing and moving away from 6 oil and pivoting towards other growth markets, the fundamental driver of that is really the sort of the structural decline in the demand for 6 oil, rather than necessarily any sort of isolated competitor taking market share.

[Rob Norfleet:]

Okay, thank you.

[Operator:]

Thank you. And our next question comes from Randal Horowitz with Beverly Hills Investors. Your line is now open.

[Randal Horowitz:]

Hi. Good morning. Just wanted to touch on the deterioration of IMTT, and maybe if you could expand a little bit on, what are the specific trends you are seeing, and why don't you have any visibility into those trends as of November, and what happened in the last few months, where these trends have deteriorated significantly to the extent that you are cutting your dividend now?

[Christopher Frost:]

I think with respect to 6 oil, to be clear, IMTT's position or MIC's position was that wasn't a growth market. I think that it is well known to the market that 6 oil is a declining market. But remember that, the utilization that had 6 oil tanks, has been in the 90s, and remember in 2016, IMTT had utilization around 96%, which was probably the highest utilization rate we have had for 10 years. And I think that in part reflects sort of the privileged location and the nature of IMTT's assets. As I sort of said, I think that the number of clients who chose not to renew, with respect to 6 oil, was a surprise. But the long term trend for that product, I think has been well understood. But it just simply hasn't been economic to not renew those tanks and to repurpose them. I think with the terminations that we had and taking this prudent approach, we now feel it is the right time to just get on with repurposing the estate, because it's not just the case of moving away from 6 oil, it is also a case of pivoting part of the estate to some of these high growth markets, that didn't necessarily exist. And without necessarily going into the details of some of the markets, there are some markets which have been growing at 10% to 15%. Yet IMTT has one-tenth the capacity or exposure to it relative to 6 oil. So there is a need to respond to these growing markets, and move away from 6 oil into these high growth markets, and the sense is, that the time is right to do this now, because it's not just the case of moving away from 6 oil, but we want to gain exposure to the high growth markets. And ensure that we monetize IMTT's privileged facilities and access.

[Randal Horowitz:]

Got it. That's helpful. And just as a quick follow-up, if you could maybe touch a little bit on what is the rationale for what seems like kind of putting the interest of credit investors and the investment grade rating ahead of equity investors and the rationale for cutting the dividend, when you have talked about having or previously the company has talked about having all its revolver capacity, and you know, why couldn't that have been used to fund the dividend, and why does it seem like kind of the credit investors are getting the better deal here, and the equity investors are getting the short end of the stick?

[Liam Stewart:]

This is Liam. I will take that, and then I will let Chris give some color as well. I don't really see there is a question of prioritizing credit investors or the rating over equity investors. I think, one, as Chris mentioned, IMTT is fundamentally a very strong business. This enables us to, one, balance the short term need to repurpose, relative to 6 oil. Two, do it in a way that positions our equity holdings for sustainable long term growth. And three, provide balance sheet flexibility. So from our perspective, it's not a question of prioritizing credit relative to equity, it's really around driving sustainable long term growth, in a way that's prudent, creates flexibility for our balance sheet.

[Operator:]

And I am showing no further questions in the queue at this time. I'd like to turn the call back over to Christopher Frost, CEO, for any closing remarks.

[Christopher Frost:]

Thank you. As has been our practice for many years, when we are participating in a number of road shows and conferences over the next couple of months, as well as hosting meetings with investors here in New York. As always, to the extent you have additional questions, please contact Jay, at 212-231-1825. Thank you for participating in our call this morning, and we look forward to updating you again in early may or as events warrant prior to them. Thank you.

[Operator:]

Ladies and gentlemen. This does conclude your call and you may all disconnect. Everyone, have a great day.