Macquarie Infrastructure Holdings, LLC
Q1 2013 Earnings Call Transcript

Published: 30 Apr 2013

[Operator:]

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

[Jay Davis:]

Thank you. And welcome once again to Macquarie Infrastructure Company’s earnings conference call this covering the first quarter of 2013. 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 our results and filed a financial report on Form 10-Q with the Securities and Exchange Commission. These materials were released last evening and maybe downloaded from our website at www.macquarie.com/mic. Before turning the proceedings over to Macquarie Infrastructure Company’s Chief Executive Officer, James Hooke, let me remind you that this presentation is proprietary and all rights are reserved. Any recording, rebroadcast or other use of this presentation in whole or in part without the prior written consent of Macquarie Infrastructure Company 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 and 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’re 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 and 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. With that it is my pleasure to introduce Macquarie Infrastructure Company’s Chief Executive Officer, James Hooke.

[James Hooke:]

Thank you, Jay. Thank you for participating in our earnings conference call. It’s a busy time of year with so many companies reporting results and we appreciate you taking the time to join our call. 2013 has been a busy and successful year for MIC thus far. We just completed a good first quarter, including a healthy 33.2% headline increase in proportionately combined free cash flow and we’ve made substantial progress toward refinancing Atlantic Aviation. Our underlying free cash flow per share grew by approximately 15%, while 15% is less than the 33.2% headline, it’s still higher than our expectation and good start to 2013. I’ll be discussing both the results and the Atlantic refinance in more detail in just a couple of minutes. You will notice in our filling on Form 10-Q and a numerous press releases that we have commenced the process of refinancing the debt at Atlantic Aviation. We’ve launched both debt and equity offerings as components of the refinancing, as such we’ll not be able to take questions at the end of this earnings call, as I’m limited in what I can say in the context of the capital raising. I’d like to begin our call with commentary on our dividend. As many of you would know our policy is to payout a significant portion of the free cash flow generated by our businesses has a quarterly cash dividend and to increase our dividend overtime as and when our free cash flow per share grows. We’ve made two announcements today in relation to our 2013 dividend. Firstly, our Board elected to keep the current dividend at the same $2.75 annualized level as was paid in the fourth quarter of last year. And, secondly, after completing our proposed refinancing transactions and subject to the continued stable performance of our businesses. We expect to increase our dividend to $3.50 per share annualized commencing with the second quarter 2013 dividend in August. Our Board chose to retain our $2.75 per share annualized dividend for the first quarter of 2013 for two key reasons. First, as we are on the cusp of the refinancing of the long-term debt at Atlantic Aviation raising the dividend level this quarter would be premature. The refinancing is not yet commenced. First, as we are on cusp of the refinancing of the long-term debt at Atlantic Aviation, raising the dividend this quarter would be premature. The refinancing is not yet complete. While debt commitment letter has been executed neither the debt nor the equity paces have been consummated. Second, with the change in our refinancing strategy, including raising equity and the mix, we were less inclined to raise the dividend for the benefit of those who may are now stop for only a few days as opposed to those who have been supporting us for some time. The midpoint of our 2013 guidance of $4.10 to $4.20 of proportionately combined free cash flow per share is $4.15 per share. The expected increase in our quarterly dividend to $3.50 per share annually, represents a payout ratio of approximately 85% of the free cash flow. Over the medium-term, we believe our payout ratio is likely to be between 80% and 85% of free cash flow, depending upon market conditions and the performance of our businesses. With the payout ratio of between 80% and 85% of free cash flow, we believe we would have the ability to withstand the downturn of the magnitude we saw in 2008, 2009, and still be able to maintain our dividend and equity fund portion of our growth CapEx. While such a downturn would change the dividend growth rate we envisage the company having, we would not expect it to jeopardize the dividend at the level we had achieved to that point in time. I’d like to add a bit of color on our decision to raise equity and debt as part of the Atlantic refinancing. We’ve looked at a number of different options for refinancing Atlantic. We’ve spoken to many people from advisors to MIC shareholders to Atlantic management, to the Michael Board. We’ve run many scenarios. For sometime, we’ve been contemplating a refinancing of Atlantic’s long-term debt, using a two tier debt structure, a combination of senior-term loan and a junior or mezzanine debt. And we’ve talked about the benefits of accelerating the debt repayment using some of the cash on the MIC balance sheet. At all times, we’ve been focused on four guiding principles. One, creating a sustainable capital structure for Atlantic in particular. Two, achieving unfitted access to the cash being generated by Atlantic. Three, taking maximum advantage of the current credit markets to look in the base long-term debt package for Atlantic. And four, creating a sustainable capital structure for MIC in a larger sense, given that in our view today’s very benign interest rate in credit market environment will not exist in perpetuity. In the course of considering the various options available to us, we also considered the use of additional equity as a means of achieving our objectives. In the end, we found that the combination of debt and equity we are proposing produced what we believe to be the most attractive risk refinancing result. If successful, the proposed strategy will result in Atlantic being levied to significantly less in the four times net debt to EBITDA that we have set us our target previously. With leverage of less than four times and the current state of the credit markets, we’ve been able to obtained a commitment letter for a debt facility consisting of a seven year $465 million term loan and access to a $70 million revolving credit facility. Moreover, we will have ample headroom that needs to learn covenants as well. We will be able to distribute cash to MIC, while Atlantic’s leverage is less than 4.5 times for the first two years of the facility and while leverage is less than 4.25 times for the remainder of the life to learn. Sit differently, assuming the refinancing is successful, we believe that Atlantic will have sufficient headroom under this new loan agreement even if general aviation trading flight activity returns to 2009 levels. While we would have -- while we could have pursued a permanent life facility, in our judgment a covenant life package was not worth the price it would have cost in terms of higher margins. It’s important to note that while the equity raise will increase the number of shares on issues, we have not revised our guidance with respect to free cash flow per share in 2013. This is a function of the attractiveness of the debt terms I just mentioned. As a part of the refinancing process, we have been in dialog with the rating agencies here in New York. Although we have not gone down on their path that includes use of MIC corporate bonds, we have provided the agencies with everything that they will need to assign a rating to both Atlantic Aviation and to MIC. This has informed our thinking about the right level of leverage for Atlantic and for MIC. So we are pleased that on Monday afternoon, S&P issued an investment grade rating for MIC and a BB- rating for Atlantic. When Atlantic has been refinanced in the way we propose, our pro forma proportionately combined leverage would be 3.76 times net debt to EBITDA as of March 31. In my view, this is our very robust capital structure that I think compares favorably with that of similar businesses. For example, the MSCI utilities index average leverage was 4.0 times at the end of March and the Alerian MLP Index average leverage was 4.8 times. At 3.76 times leverage, MIC is very well positioned relative to the businesses in these indices. With that backdrop and because I’m precluded from discussing the equity offering here, let me turn now to a commentary on the performance of MIC in the first quarter of 2013. Our businesses performed well overall and the positive trends underlying each are intact. There is a bit of Hurricane Sandy noise in the results for IMTT but that is explainable and quantifiable. At IMTT, 6.8% storage pricing improvement, increases in environmental response activity and lower taxes compared with the first quarter of 2012 were offset by increases in repairs and maintenance expense and maintenance capital expenditures. The repairs and maintenance expense and maintenance capital expenditures were incurred largely in connection with the cleanup and reconstruction of IMTTs Bayonne, New Jersey facility in the wake of Hurricane Sandy. Excluding the Sandy impact, EBITDA grew by 12.8%. Atlantic Aviation benefitted from the reduced cost of debt post the expiration of interest rate hedges last fall related to the businesses long-term debt. Year-over-year, the debt cost dropped by more than $9 million, removing the $0.17 per share benefit of this reduction in interest expense for MIC's year-on-year results means MIC's underlying proportionally combined free cash grew by 15%. This includes an, $0.08 per share impact from Sandy. In addition to the lower debt costs, Atlantic enjoyed an increase in the volume of general aviation fuel sold. Same-store EBITDA was up 6.8%. The aggregate increase in free cash flow generated by Atlantic during the first quarter was possibly offset by an increase in taxes compared with the first quarter in 2012. Hawaii Gas continued to perform well and benefitted from an increase in the volume of gas sold, improved margins and the lower interest expense and maintenance CapEx. And District Energy’s results reflected the more normal winter temperature in Chicago this year versus last year and the consequent decline in consumption revenue and free cash flow. Our small investment in solar power generation performed consistent with our expectations for the quarter. The Texas facility achieved substantial completion and we also received a return of capital of $3.4 million. We also recorded a distribution of approximately $300,000 from the Arizona project for the quarter that is included in free cash flow. As I said in February, the solar project represents an interesting investment opportunity and we may pursue additional facilities to the extent we can secure them on comparably favorable and attractive terms. Holding company costs were not surprisingly lower in the first quarter this year compared with 2012, largely as a result of them not having legal costs related to the 2012 arbitration. On the whole, proportionally combined free cash flow per share grew by 15% in the first quarter of the year, compared with the first quarter of 2012 on an underlying basis. The continued strength of the MIC share price again results in outperformance relative to our benchmark index during the quarter as well. Our manager has elected to reinvest the previously announced performance fee of $22 million payable for the period in additional shares. To provide some context around this, MIC has delivered total shareholder returns of 15% per annum since our IPO in 2004. Over the same period of time, the S&P has delivered 4.2% per year and the MSCI utilities index has delivered 7.3% per year. Infrastructure as an asset cost has outperformed many of the S&P 500 components. As I’ve mentioned in the past, settlement of the performance fee and additional shares renders effectively a non-cash expense. However, the payment does flow through our P&L and reduces our taxable income. As such, it helps to perpetrate our federal income tax shield. We continue to foresee having no material current federal income tax liability in consolidation into 2016. Overall, I characterize the first quarter of 2013 as a reflective -- as reflective of positive trends with respect to the fundamental drivers beneath each of our businesses. We reiterate our EBITDA guidance by segment and our free cash flow per share guidance as provided in our fourth quarter 2012 uptight. With the next few minutes of my remarks, I’ll provide additional color concerning the performance of each of our operating entities. At Hawaii Gas, contribution margin increased by nearly 11% versus the prior comparable period. The volume of gas sold rose by 1.9% reflective of increased consumption of the part of large volume customers and a continuing shift in energy usage from electricity to gas. An increase in labor-related expenses offset the portion of the top line improvements at Hawaii Gas. Increased marketing activity and cost associated with the LNG initiative also factored into the results. Nonetheless EBITDA excluding non-cash items grew by 10.8% during the first quarter. Free cash flow was up sharply as a result of the improvement in operating results and lower interest expense and lower maintenance CapEx versus the first quarter of 2012. The reduced interest expense is a direct result of the successful refinancing of the business that was concluded in the third quarter of last year. The situation with Tesoro and the feedstock supply for the regulated side of the business in Hawaii continues to evolve. Hawaii Gas has agreed with Tesoro on the continued supply of naphtha through mid July. Pricing for the feedstock will be per the terms of the agreement currently in place. We expect Hawaii Gas to complete new feedstock supply arrangements within the second quarter. With nearly $16 million in EBITDA booked for the first quarter, we’re comfortable reiterating our guidance for Hawaii Gas for the full year. And we continue to expect the business to generate EBITDA of between $57 million and $63 million in 2013. Although it looks like, it will be the higher end of that range. Trading through mid April of Hawaii Gas has been consistent with our outlook. At IMTT, terminal gross profit grew by 9% compared with the same period of 2012. Within this, average rental rates grew by 6.8%. We continue to see more robust activity on the lower Mississippi than in New York harbor. The improvement in pricing is on the high end of our guidance for pricing for the full year. And we remain comfortable with an estimated increase in pricing of between 5% and 7% for the full year. Volume in the context of IMTT is related to capacity and capacity utilization. While capacity increased by 3.2%, utilization declined as expected in the first quarter of 2013 compared to the first quarter of 2012 to just under 93%. In fact, this was almost identical to the utilization in the fourth quarter of 2012. As described in our call for the fourth quarter, the utilization decline was a result of having a particularly large tank, a 500,000 barrel tank on the lower Mississippi out of service for cleaning and inspection. The relatively lower level of utilization is expected to persist while this tank and another 500,000 barrel tank are being serviced this year. The actual percentage utilization rates will vary from quarter to quarter as new capacity is commissioned and as the 500,000 barrel tanks come back on line, changing both the numerator and denominator in the utilization calculation. OMI environmental services contributed a bit more to IMTT’s results this quarter than it did in the first quarter of last year. As we’ve seen over the past several years, financial results at OMI can and do very significantly depending on the level of spill activity. Clearly, there was more cleanup activity this year than there was -- than it was last. Hurricane Sandy continued to impact IMTT’s results in the first quarter of 2013. As I mentioned, both repairs and maintenance and maintenance CapEx were higher in the first quarter versus the prior comparable period. Excluding the impact of the Sandy-related costs, EBITDA would have increased by 12.8% year-on-year. Similarly, maintenance CapEx associated with Sandy was approximately $6 million or 31% of IMTT’s Q1 2013 maintenance CapEx. There were several reasons IMTT’s maintenance CapEx was up so much in Q1 of 2013. These include, first, approximately $3.5 million spent on projects that could not be completed in the fourth quarter of 2012 because of Hurricane Sandy either because we did not have access to start or because the part of Bayonne could not be addressed until Sandy repairs were complete. Second, approximately $2 million of costs associated with cleaning and inspection of tanks including the 500,000 barrel tank we took offline on the lower Mississippi. And three, the $6 million in Sandy related costs I just mentioned. We still expect maintenance CapEx for 2013 will be around $60 million but we will continue to monitor this in light of the Bayonne work after Sandy. Growth CapEx at IMTT of $15 million for the quarter was large. And while no new projects were contracted during the quarter, IMTT is currently evaluating projects requiring an estimated capital expenditure of between $100 million and $200 million. Potential returns on these are expected to be in line with historical levels. Before we could sign up more CapEx projects, we needed to finalize the refinancing of IMTT, which is now almost done. As we reported in our earnings for the fourth quarter, IMTT had put in place a new revolving debt facility of $1.04 billion and were seeking to increase that by adding either new members to the loan syndicate or by securing additional bond debt. We’re pleased that IMTT has been successful on this front and has added new members to the revolving credit facility syndicate. The balance available under that facility is now $1.205 billion. As a result, IMTT has approximately $450 million of undrawn revolver capacity with which to fund additional growth capital projects. In sum, IMTT reported a good quarter. Storage rates were up consistent with expectations. Utilization was in line with guidance and available funding for growth CapEx improved. The offsetting factors were largely a function of recovering from what we hope will be an infrequent event on our northeast power gain. Looking ahead, we continue to expect IMTT will generate EBITDA of between $260 million and $270 million in 2013. Additionally, we continue to believe that maintenance capital expenditures including the items related to the caveat at Bayonne will be approximately $60 million for the full year but we will monitor this. Trading at IMTT through April has been consistent with the guidance, I’ve just described. Moving to District Energy, winter weather in Chicago felt much more like normal this year versus 2012 wherein February of 2012, Chicago was enjoying short-sleeve weather and demand for cooling services increased accordingly. It was all (inaudible) this year. As a result, cooling consumption declined by nearly half. Having said that, the value of the decline of the gross profit level was just about $400,000. The timing of maintenance CapEx and tax payments was a bit different this year as well. Both of these contributed to a reduction in free cash flow to the quarter. None of these matters impact our outlook on the continued stable performance of the business in 2013 and we reaffirm our guidance for District Energy. The one item at District Energy that I would draw your attention to has to do with the loss of a customer in Chicago. The customer in question has elected, as they are entitled to terminate their arrangements with District Energy and assume responsibility for the operations of its portion of the system. Unfortunately, the customers is also trying to walk way from what we believe to be the unamortized lease principle balance on certain equipment and we will be diligent in pursuing this. Aside from the customer issue and assuming continued seasonally normal weather, we’re comfortable with our EBITDA guidance for the full year. And we expect District Energy to remain a consistent albeit small component of our overall results. Atlantic Aviation results for the first quarter reflects continued improvement in operations as well as the outsize somewhat of our official impact of the sharply lower interest expense. Operationally, Atlantic continued to generate improved results against what appears to be a tepid industry backdrop. Landings at airports at which Atlantic operates were up nearly 3% this year. As I’ve noted in the past, we think this speaks to the popularity of the destinations at which Atlantic operates and the business is focused culture -- safety-focused culture. Data from the SIA on the flight movements industry wide for the first quarter of this year has not been published, perhaps as a result of the impact of sequestration on that agency. On related point, some of you have asked about the impact of the furlough on air traffic control is on Atlantic results. We’ve asked a number of our pilots and concluded that is at worst to monitoring inconvenience. In fact, the majority of airports in the U.S., some 19,500 out of 20,000 are uncontrolled which is to say they have no control tower and pilots simplified by well established rules regarding flight patterns and takeoff and landing protocols. This is incidentally true with respect to commercial operations at certain airports around the company. I think it’s fair to say when I found that out, I understood the true meaning of the word ignorance is bliss. The increase in traffic led to growth in the volume of the general aviation jet fuel sold during the period. On a same-store basis, general aviation jet fuel sales increase by 3.2%. Because we’ve been buying and selling FBOs in small numbers but consistently over the last couple of years. I think comparison on a same store basis make the most sense. The more normal winter weather that we’ve experienced in 2013 compared with 2012 had two positive impacts on Atlantic. The first was the recovery in de-icing activity. De-icing revenue increased by more than 84% versus very warm winter of 2012. The second benefit and it stands to reasons was an increase in hangar rental revenue. If it’s cold and snowy outside, you want your plane parked in the hangar at night if it can be. Hangar rental income was up by approximately $1.2 million compared to 2012. Including the growth in volume of fuel sold and revenue related to de-icing and hangaring, same-store EBITDA increase by 6.9% for the period. Expenses remain under control of Atlantic. The line item actually decreased period-over-period but that had to do with divestures of sides concluded during the past year, contributing to the improvement in the reported results. The big driver of Atlantic’s improved performance on the quarter was the lower interest expense. Interest expense declined the roll-off of interest rate hedges that were put in place through the first week of October last year and below our debt levels. With the exploration of those hedges, the all-in cost of Atlantic’s long-term debt dropped from roughly 6.55% to L+1.75% or approximately 2%. The cash interest savings were worth that $9.5 million in the quarter. Clearly, these savings are artificial in the sense that the business’ debt service costs will be increasing following the refinance we’ve just launched. That said, on to the proposed structure, Atlantic will be levied to a much lower level than it had been historically, and the cost of debt in the current environment is such that we believe the new term loan facility will price at an all-in rate, substantially inside the 6.55% it had been prior to the expiration of the hedges. These bodes well in terms of our ability to upstream a meaningful amount of cash from Atlantic in the future. Trading through Atlantic in certain -- trading through April at Atlantic has been consistent with our expectations and I would characterize the trend as in line with or slightly better than the first quarter of the year. So, Atlantic Aviation is off to a good start in 2013. Activity levels and EBITDA are up and consistent with our guidance to the full year of EBITDA of between $137 million and $145 million. The business enjoyed a return to more normal levels of the de-icing and hankering this winter and stands to benefit from the implementation of a more robust capital structure in the weeks ahead. Once again, I would characterize the first quarter as good but with a bit of underlying noise. The fundamental drivers of continued good performance are intact, and our businesses remain on track relative to our guidance for the full year. We are pleased to be undertaking the refinancing of Atlantic Aviation’s long-term debt. We are particularly happy with the components of the refinancing that we expect to put in place and I believe it will leave but Atlantic and MIC in total with a very resilient, sustainable capital structure going forward. And it probably goes without saying but we are happy to able to update our dividend guidance. Thank you, all of your support and your continued confidence in our ability to deliver on our commitment to building shareholder value. In as much as we are launching our roadshow, we are unable to entertain your question at this point. We look forward to providing you with an update on the results for the second quarter in August or prior to that as events were. As always feel come free to contract us with any questions you may have along the way. In closing, I would like to thank the staff and management teams at all of our portfolio companies. I would like to thank our key suppliers, and I would like to thank our lenders who are excellent business partners as we move Atlantic forward. And thanks finally to the team at Michael who has worked hard to prepare the quarterly earnings result, the debt refinance for Atlantic and the equity capital raise. Thank you very much.

[Operator:]

Ladies and Gentlemen, this concludes today’s conference. Thank you for your participation and have a wonderful day. You may now disconnect.