Macquarie Infrastructure Holdings, LLC
Q3 2014 Earnings Call Transcript

Published: 30 Oct 2014

[Operator:]

Good day ladies and gentlemen and welcome to the Macquarie Infrastructure Company Third Quarter 2014 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder today’s conference is being recorded. I would now like to turn the conference over to. Jay Davis, Managing Director of Investor Relations. Sir, you may begin.

[Jay Davis:]

Thank you, Sharon. Good morning everyone, and welcome once again to Macquarie Infrastructure Company’s earning conference call, this one covering the third quarter of 2014. Our call today is being webcast and is open to the media. In addition to discussing our quarterly financial performance on this call we 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 may be 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 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. With that it is my pleasure to introduce Macquarie Infrastructure Company’s Chief Executive Officer, James Hooke.

[James Hooke:]

Thank you Jay. And thank you to those of you participating in our earnings conference call today. We appreciate you taking the time to join us for this update on the performance and prospects of our company. It was a very busy third quarter here at MIC. Since our last update in early August we’ve been focused on the integration of the acquisitions of IMTT and Galaxy Aviation, developing additional opportunities across all of our businesses and finally working on the big questions related to our corporate structure going forward. Above all we’ve been steadfast in our focus on the generation of growing amounts of distributable cash flow. Consistent with that focus the increase in underlying free cash flow for the third quarter has resulted in the MIC Board authorizing the payment of a cash dividend of $0.98 per share for the third quarter. The dividend will be payable on November 13, to shareholders of record on November 10. This represents a 3.2% increase over the dividend paid in the second quarter of the year and is our fourth consecutive quarterly dividend increase. Some of you may have also noticed the revised commentary on dividends in our press release as well. We’ve been listening to you and thanks to all who have shared your thoughts on dividend guidance and we’ve revised our guidance on dividends in an investor friendly fashion. Rather than focusing on free cash flow growth and inferring the dividend will grow at the same rate we’ve cut to the chase. We’re now simply saying that we believe our quarterly cash dividend can grow at a rate of 12% per year for at least the next two years. Just so you know we’re not doing this by increasing our payout ratio. We’re still basing the forecast growth in dividends on our expectations for free cash flow growth and our 80% to 85% payout ratio just as before. But we’re making it clearer that this is expected to translate into attractive dividend growth. So the question is where did the growth in free cash flow come from in the third quarter to fund this dividend growth and the simple answer is that our underlying free cash flow per share grew by 26.9%. However as we anticipated during our update for the second quarter in August there was a lot of noise in our third quarter results. And we’ve tried to separate the underlying performance from the noise. There was some good noise in the mix and some bad noise so we’ve tried not to be so observing in this analysis. For example, the fair value step up of our original investment in IMTT based on the July purchase of the second half of that business together with the District Energy sale resulted in a gain on acquisition and divestitures of more than $1 billion. Tempting though it was to move our reporting metric to EPS and lead with a 9,000% increase in EPS we thought that rather when we concluded the comp in 2015 would be pretty tough. Instead we figured it would be best if we stick to what we know and focus on underlying free cash flow per share. And by that measure the third quarter was a good one. As noted earlier MIC reported growth in underlying free cash flow per share of 26.9% to $1.37 per share, up from $1.08 in the third quarter of last year. The majority of the increase is related to the consolidation of the second half of IMTT, but just as important the continued improvement in the performance of each of our businesses. We saw top line growth and by that I mean gross profit growth and EBITDA growth in every one of our businesses. Underlying EBITDA was up 12% for the quarter versus the same quarter of 2014 assuming that we’d own the 100% of IMTT in each period and we did not own District Energy in either period. Atlantic Aviation’s underlying EBITDA growth was most impressive and Hawaii Gas grew the slowest of the four verticals but they all grew gross profit and EBITDA. In arriving at the underlying figure of a $1.37 per share we’ve attempted to identify and isolate those items that we believe are not reflective of the performance of our businesses in the period. The majority of these are related to the transactions during the quarter. These totaled just over $43 million including voluntary defined benefit pension plan contributions of $25 million. As you might assume the balance includes non-capitalizable legal and professional fees and other transaction costs such as due diligence expense. There are many mouths to feed during a transaction. We’ve treated the settlement to the performance fees incurred in the third quarter in the same manner as prior performance fees. That is as a non-cash item. We view the use of proceeds from the sale of District Energy to settle a portion of the performance fee in cash as a balance sheet matter not an income statement matter. In substance if not form the performance fee payment was a share repurchase using the proceeds of the sale of District Energy, not a diversion of operating cash flows. Including the effect of these various items our business still generated consolidated free cash flow of $0.73 per share. In producing consolidated results we can now include 100% of IMTT for both financial statement and tax purposes. This will be particularly useful in 2015 and thereafter. In the third quarter our results include IMTT results on a proportionately combined basis for the first 15 days of the period and on a consolidated basis from the 16th of July onwards. Clearly we will face the same issue in the fourth quarter with a portion of the year being consolidated and a portion being proportionally combined. In our press release you can see the impact of this broken out in the summary tables that set out gross profit, EBITDA and free cash flow by segment in adding to a proportionally combined results. In 2015 we expect that our consolidated free cash flow per share will at last be a meaningful metric for our company. Moving on to taxes we now believe that it will be in sometime in 2017 before we could have material federal income tax liability in consolidation. Now I want to remind shareholders of the chronology of MIC’s NOL status and our success in pushing out the date at which we become a federal tax payer. When I started as CEO in April of 2009 we guided shareholders that we would not be a federal tax payer before 2012. By 2012 we had updated that guidance to shareholders to be that MIC would not be a federal tax payer before 2014. By the end of 2013 we had again updated that guidance that MIC would not be a federal tax payer before 2016. And today we are again updating that guidance that MIC will not be a federal tax payer before 2017. Clearly we continue to work to push the date out and continue to provide you with guidance on that if and when we have done so. We will of course continue to explore a variety of means of extending that point even further into the future. Among the options we have discussed in the past are making investments in tax equity and more recently whether or not the conversion of all or part of the company to an MLP or REIT would make sense. On the subject of an MLP conversion let me provide you with a brief update on our progress. We are evaluating our various options for converting some or all of IMTT and potentially other MIC assets into an MLP or some other potentially more tax advantaged structure versus its current sequel structure. We are prohibited by the terms of the IMTT sale and purchase agreement from converting any of IMTT until the one year anniversary of the acquisition in July. We have held conversations with a number of individuals and firms including some of the leading practitioners in this area. There is enormous complexity here. The tax basis of many of our assets is low and there are potential taxable gains if assets are moved into different corporate structures. The devil truly is in the detail. Perhaps not surprisingly we have not yet reached any conclusions. Fortunately it’s something of a moot point by virtue of the tax shield I mentioned a moment ago. We do not expect to be any worse off from a tax standpoint in the coming years for not having made a change in structure. Admittedly there may a valuation arbitrage we can avail ourselves of and we are keeping that in mind. We will keep you informed of our progress in this regard. We will be evaluating another sort of structural change as well. MIC is a limited liability company treated as a corporation for tax purposes. As a result of the election to be treated as a corporation back in 2007 distributions for MIC are reported on Form 1099 not scheduled K1. We believe however that there are potential investors who look at MIC and see the LLC and assume that we are a partnership for tax purposes and they move on to other opportunities believing that the tax reporting brain damage isn’t worth it. Over the next few months we intend to analyze the steps necessary for conversion from an LLC into a regular corporation along with the potential benefits. For some investors a conversion could remove the hurdle posed by being an LLC. Perhaps more important than that our conversion could also make MIC eligible for inclusion in mainstream stock indices such as the S&P 400 and/or some of the indices managed by Russell. Clearly being part of any or all of those would increase passive demand for our shares. We do not believe that a conversion would have any impact on the characterization of distributions nor would it be a taxable event from a shareholder perspective. This issue has been raised with us by shareholders and we are seeking to respond to it. In order to effect the conversion we would need shareholder approval. If we proceed with the conversion we will either convene a special meeting or add the measure to the ballot in our regular annual shareholder meeting. We do not have a firm date for either meeting at this time. Along with the consolidation of IMTT for the financial reporting purposes and the revision of that to our dividend guidance, we've made several other changes to both our approach to managing our balance sheet and reporting this quarter. For the first time in a long time it made sense for us to have an active cash management program. You'll see the impact of this change when you look at our consolidated balance sheet and see that we hold relatively little cash at the end of the quarter. Now before you think that we've acquired a couple of slick business jets with MIC doughnut logo painted on the tail, let me assure you that we just being prudent in managing both our cash and our debt. With our ability to control the cash coming up from any of our businesses at any time holding cash while we have drawn balances on revolving credit facilities doesn't make much sense. Therefore during the quarter we used our cash to reduce revolver drawings particularly the IMTT and with that the interest due on those facilities. This saves us cash interest. When we name the cash we will simply redraw on the relevant revolvers. You'll also notice that we've attempted to simplify our segment data by condensing and removing unnecessary line items in each. We'll continue to comment on important trends in any of these but it should make our results much easier to digest. In the same vain we have also introduced new more detailed growth CapEx commentary this quarter. Here we are providing investors with a view of the projects on the way across all of our businesses. This is largely the list of growth projects that have been part of the IMTT disclosure historically plus the projects currently underway at each of the other businesses which we never really discussed or disclosed. We believe in the future. This is a key item that you can reference to know how we're faring in replenishing our growth CapEx pipeline and backlog. I note that we are trending in a positive direction. In addition to funding a substantial number of projects this year we've already begun to fill out our project list for 2015. The normal disclosure under cash flows from investing shows that on a year-to-date basis we've deployed a total of $82 million in growth CapEx. This includes money on what we’ll refer to as backlog projects. A backlog project is one currently on the way or all having all required approvals or signed counterparty contracts. To-date in 2014, $47 million of the reported $82 million of growth CapEx has been deployed on projects that have not yet completed and so remain in our backlog with the remaining $35 million spent on projects that are complete. The total investment expected to be made in backlog projects in 2014 is another $55 million. This will see us spend approximately $137 million on growth CapEx in 2014. Importantly we've already identified and approved the deployment of $75 million on growth projects in 2015. So as of the end of the third quarter of 2014 our total backlog had grown to a $130 million. We would expect that these projects will deliver our historical rates of return and have lead times to completion consistent with our prior backlog. You can find this additional disclosure in our 10-Q in the consolidated portion of liquidity and capital resources. We had a few nervous calls from shareholders during the quarter as the energy stocks were pummeled, as the crude price dropped to ask whether the sky was also falling in at MIC or IMTT. Let me provide you with some high level observations on the impact of lower crude prices on MIC's businesses. At IMTT we believe the impact will be negligible and have not observed any impact to-date. IMTT stores very little crude has take or pay contracts and has customers signed for longer durations rather than spot contracts. Further, to the extent we've seen more volatility in energy markets this year. Starting with the [Apollo] vortex and continuing with the recent crude fluctuations, we've seen trading customers make more profit and the return of a slight contango in some product categories in some markets. While these are nuanced benefits the high level answer is that we've observed no impact from falling crude prices. Second, at Atlantic aviation to the extent that lower crude prices lead to lower Jet A prices, we may observe a small benefit from a slight reduction in price sensitivity among some customers. However the data on this is weak. Commodity price volatility probably helps us a little as we have the ability to manage margins more aggressively through our investment and supply chain logistics. Again while these are nuanced benefits the high level answer is that we've observed no impact. And finally at Hawaii Gas to the extent that lower crude prices lead to lower naphtha propane prices we may observe a small benefit as there is degree of price elasticity in customer volumes in Hawaii. As a general rule for all our businesses where commodity costs are a pass-through we would prefer to pass-through lower cost and have customer usage increase. This is probably a very long winded way of saying that at MIC we do not get too excited by the dropping crude prices. I'll now provide you with a few comments on the performance and prospects for each of our businesses, starting with IMTT. At IMTT our work on integrating the second half of the business over the past few months has gone largely as we expected. We continue to believe that the opportunities we outlined at the time of the transaction still exist. In particular we remain confident in our ability to find operating expense savings of at least $10 million per year and we are confident that we can reduce maintenance capital expenditures to closer to industry norms. As we have been saying there are puts and takes in the effort to reduce expenses. We expect to reduce insurance cost and management and back office expenses. There are numerous line items we are addressing. Offsetting these savings are the cost of resources we've added to the business, particularly costs related to financial management and a review of safety practices. Nevertheless we expect to achieve expense reductions of at least $10 million per year on a run rate basis by the end of 2015. Overall, I am pleased with the effort today. One of the most pleasing aspects of the integration has been the support of the staff at IMTT. Many of the folks at IMTT have been reenergized by the opportunities that our ownership of the business is creating. We have capitalized on that with the implementation of incentive plans that are tied to improved performance and the creation of growth options for the business. Together with operating expense and maintenance capital expenditures reductions growth is the third of the three pillars beneath our expectations of improved performance on the part of IMTT. We discussed this at length in July noting that refilling the growth CapEx pipeline was a high priority for us. We have reported a first modest step back into the growth mode with the projects announced in our press release yesterday. In particular we announced that IMTT would undertake up to $46 million of projects at Geismar on the lowest Mississippi in connection with the construction of additional chemical storage, a new dock capacity and capability. We hope to be able to announce the deployment of additional growth capital over the next few quarters. Over the past few quarters we noted more limited opportunities for IMTT in the New York Harbor market relative to the opportunities on the lower Mississippi although clearly bringing some of projects on the river to fruition has taken longer than we would have expected. However we are now seeing a bit more activity in New York Harbor. In New York, we've been looking to expand our pipeline capability and further increase our butanization offering. IMTT recorded results for the third quarter even as the integration efforts absorbed a portion of people’s time during the quarter -- sorry, IMTT recorded solid results for the third quarter even as the integration efforts absorbed a portion of people’s time during that period. Revenue rose 4.3% versus the third quarter of 2013. However the flow-through of the increase in revenue to EBITDA and free cash flow was complicated by the accounting treatment of certain matters related to the acquisition. In particular, the depreciation and amortization line in the IMTT P&L was sharply higher as a result of the required step up in fair value of fixed assets and intangibles of the business. This was the adjustment of our basis in the 50% of the business we acquired in 2006 to the fair value implied in the acquisition of the second half in July. The adjustment reduced both net income and EBITDA for the quarter. The decrease in free cash flow reflects primarily the voluntary contribution of an additional $20 million to the IMTT defined benefit pension plan made as required under the IMTT sale and purchase agreement. As I noted a few minutes ago we have eliminated these in determining the underlying performance of the business. Costs were higher in the third quarter versus the prior comparable period primarily as a result of expenses incurred in connection with the transaction in July, the closure of the all-nursery business and damage done to our Gretna dock. Even while we expect to make -- even while we expect to make progress on the operating expense side of things, we also expect that the business will incur higher than normal general and administrative expenses over the next five quarters related to the accrual of employee cost triggered by the transaction. Some of you may have noticed that there was an incident on the lower Mississippi River at Gretna in August. It was a big local news story. A tanker that was alongside our facility at Gretna was struck by a ship carrying grains when the grain vessel lost power in steering. The tanker of the dock was pushed into the dock causing substantial damage to the entire facility. Temporary repairs were made and the facility was capable of handling barges within a couple of weeks. A second phase of repairs since has enabled the resumption of tanker service. Permanent repairs are underway and are expected to be completed in mid-December. The entire event impacted our third quarter results with the most significant line item being approximately $75,000 in repairs and maintenance expense. We expect that the cost of rebuilding the dock will be recovered by insurance or the parties involved. Storage utilization rates rose to an average of 92.5% for the quarter as expected with the return of certain tanks to service following the completion of required cleaning and inspection processes. So while pricing was up, utilization still remained down year-on-year. At the very end of the quarter utilization was close to historically normal levels at around 94%. There could be additional fluctuations in the level of utilization over the next few quarters, depending on the timing of additional tank cleaning and certain -- tank cleanings and certain decisions regarding the conversion of tanks from services storage from one product to another. Maintenance capital expenditures were lower in the quarter and nine month period at the end of September. But once again this has more to do with the absence of the expenses related to recovery from Hurricane Sandy that were incurred in 2013 than anything else. As we said last quarter, we still think that maintenance capital expenditures will be in the range of $50 million to $55 million for the year and have factored that into our expectations for the generation of free cash flow for the year. We remain confident that we can reduce maintenance CapEx spend to closer to industry norms in the next couple of years. To summarize, IMTT’s results reflected anticipated level of transaction related noise that we'll begin to resolve itself as we move into 2015. We're making an expected level of progress with respect to our expense reduction efforts and we're pleased to have been able to and $46 million in projects to the growth CapEx backlog during the quarter. Turning now to Atlantic Aviation; Atlantic’s results for the third quarter reflect more of the same and that's a good thing. The number of general aviation flight movements in the U.S. continued to raise year-on-year. As was the case in the second quarter a portion of the improved operating performance in both the quarter and nine month periods was offset by an increase in interest expense. The interest expense increase is primarily the result of Atlantic’s debt having being unhedged until the May refinancing in 2013 along with the increase debt balance related to the Galaxy acquisition. Slight activity as reported by the FAA increased by 3.9% in the third quarter of 2014 compared with the third quarter of 2013. Same store gross profit excluding the facilities acquired during the past year rose by 5.4%, again demonstrating the ability of Atlantic to grow a combination of volume margin and market share at rates above the industry growth. The gross profit top line grew nicely in the third quarter reflecting the strong same-store results I just mentioned and the additional contribution of the FPOs acquired during the past year. If you pick the results apart you could conclude that the new Galaxy locations didn’t contribute to the extent you’d expected if you had modeled in a straight line an even quarterly contribution from those bases. And you’d be absolutely right. The Galaxy bases clearly have a pronounced seasonality. As the leaves turn here in the northeast and the temper dips toward freezing over the night the level of activity at Atlantic’s Florida facilities is increasing, as it has historically. Based upon FAA data since 2000, 73.1% on average of the take-off and landing activity at the Galaxy locations occurs between October and April. The integration of Galaxy facilities has proceeded in line with our expectations with the exception of the completion of the completion of the West Palm Beach hanger. We didn’t receive a certificate of the occupancy of the facility until near the end of September. That represents a delay of approximately five months from the time where we thought the hanger would be in service. Nevertheless we remain comfortable with our expectations that the Galaxy operations will generated at annualized $21.3 million of incremental EBITDA. Like IMTT Atlantic recorded higher expense in the quarter and year-to-date periods related primarily to the previously discussed transactions. Excluding the impact of these transactions expenses increased at a rate slightly above inflation, principally as a result of higher utility and snow removal costs incurred earlier in the year. The improvement in operations translated into nearly 16% growth in EBITDA in the third quarter compared with the third quarter of 2013. The flow-through to free cash flow was good with free cash flow up nearly 10%. The difference in growth rates was primarily due to the increase in cash interest expense associated with the Atlantic debt being un-hedged in 2013 as well as the increased debt associated with the acquisitions completed in the last year. Above all again we see the considerable operational leverage exist in this business, a relatively modest level of growth in flight activity driving meaningful increase in distributable cash. Atlantic Aviation is continuing to perform well in the fourth quarter. The October comp has one challenge in it namely that this year’s National Business Aviation Association Annual Meeting was held in Las Vegas in October of 2013 at an airport on which Atlantic does not operate in 2014. To sum up the Atlantic story the performance of the business continues to reflect what we’ve been saying for some time is a cyclical recovery in general aviation. We’re confident in our management team there and the direction of the business overall. Hawaii Gas; Hawaii Gas sold more gas in the third quarter of this year than it did in the third quarter of 2013. Year-to-date through September the volume of gas sold was roughly flat with last year. Sales to commercial customers have risen although these have been partially offset by lower residential consumption. In addition to the volume increase the 3% growth in gross profit for the quarter reflects lower inter-island transportation costs partially offset by LPG margin compression and the timing of some pipeline repairs. Increased marketing activities predominantly related to incentives to customers to switch to gas drove selling, general and administrative expenses higher in the quarter. These were offset in the year-to-date period by the absence of severance cost incurred in 2013. Local supplies of LPG continued to improve in the third quarter. However; questions remained about the long-term stability of supply. Increasing storage capacity remains our best defense on the LPG side of things and Hawaii Gas continues to invest in this area. Importing propane to the outer islands makes more economic sense then shipping from Oahu. The local refinery suppliers make sense for Oahu propane volumes but Oahu does not use that much propane as it’s predominantly a utility market. About 80% of its volume is utility. For this Oahu utility volume pleasingly we extended our naphtha feedstock contract through to June of 2016. However we continue to evaluate opportunities to improve feedstock security and cost on the utility side of the business as well. Earlier this month, Hawaii Gas filed an application with the Hawaiian Public Utilities Commission with respect to bringing additional containerized LNG into the state. Hawaii Gas intends to offset approximately 30% of its Naphtha needs with LNG. The business expects to invest approximately $13 million in additional cryogenic shipping containers or ISOs as they call and related equipment needed to deliver more LNG customers on Oahu and expects to begin the additional shipments of LNG as early as the third quarter of 2015. The cost to Oahu utility customers should decrease based on the lower cost of LNG compared with the naphtha. We hope that we’ll be permitted a regulated rate overturn on the expenditure in our next rate case. Hawaii Gas continues to work closely with the State and Hawaiian regulators and like-minded stakeholders to speed the process up and eliminate road blocks to making LNG a much larger component of the energy complex in Hawaii. We know that the political landscape is changing in as much as the current Governor is not on the ballot next week, but both the Republican and Democrat gubernatorial candidates have publicly supported a role for LNG in Hawaii. We remain committed to making the Energy complex in Hawaii cleaner and less costly through the deployment of LNG technologies. While we continue to advance our LNG strategy as noted we won't ignore more conventional means of driving value at Hawaii gas. As I mentioned last quarter we envisage pursuing a rate case on behalf of the regulated portion of business in 2015 and expect that new rates would be effective sometime in 2016. Our last rate case filing was in 2008 with an effective date in 2009. We've maintained our current rate structure for perhaps longer than we should have and the business is now under running relative to its allowable rate of return. Reported free cash flow generated by Hawaii Gas decreased by approximately $600,000 in both the quarter and nine month period. The decrease was entirely the result of the contribution to the business’ defined benefit pension plan of $5 million over the regularly scheduled demand. We estimate the contribution will eliminate any need to make required minimum contributions for the next few years. Excluding the impact of the contribution reported free cash flow would have increased by approximately 48% for the quarter and approximately 20% for the nine months period. We look forward to working with the new Governor of Hawaii, whomever that might be as well as other stake holders to continue ensure the continued provision of clean reliable gas service throughout Hawaii. And finally Contracted Power and Energy, our portfolio Contracted Power and Energy businesses changed substantially during the quarter. We acquired two wind power generating facilities and divested District Energy in Chicago. The acquisitions expanded the CP&E segment into a new sub-sector of renewable power but via similar structures to the solar projects in which we had invested previously. Specifically MIC has invested as common equity and in the case of the New Mexico facility we consolidate the investment for financial reporting purposes. In the case of the facility in Idaho, MIC has a controlling interest in that entity, that owns 10% of the total equity of that operation. Yes, it is accounted for on the equity method just as our interest in IMTT historically has been. The good news is it's too small to worry about reporting on a proportionally combined basis. The sale of District Energy was completed in August and resulted in our receiving net proceeds of approximately $63 million including proceeds from the settlement of our dispute with a former customer of that business. The investment in District Energy generated roughly 23% IRR over the period of our hold. The acquisition and divestitures resulted in the segment posting an increasing gross profit for the nine month period and reduction in the quarter versus the prior comparable period. Not surprisingly selling and general administrative expenses were up as a result of high transaction related fees. CP&E is now comprised exclusively of Contracted Power Generation of the [duration's]. Over the near term we will look for additional opportunities to deploy capital in the segment provided we can achieve appropriate risk adjusted returns. Looking ahead, before I ask our operator to open the phone lines for your questions, I would like to take a couple of minutes to look ahead to our fourth quarter and reporting on a couple of things that you can expect at that point. We expect our fourth quarter reporting will also include a certain amount of noise. IMTT's contribution to our overall result will again be reflected using both equity method and consolidated accounting treatment. And second, as I mentioned earlier we will report an income tax benefit for 2014 that helps push the point at which we could have federal income tax liability in to 2017. In the fourth quarter and beyond our commentary will continue to focus on our consolidated results rather than the level of the asset detail we've provided in the past. Thank you to those of you who continue to encourage just to shorten our release and our commentary. We hear you and we will move in the direction of more succinct discussions of our results. But with all that was going on in the third quarter this was simply not the period to try to do that. I do believe that we will be able to make it easier for all of you to stay abreast of what's happening with MIC in the quarters to come. In summary, MIC and its businesses performed well in the third quarter of 2014 and positioned us well for a strong remainder of the year. The acquisition of the remainder of IMTT and continued strong performance of our businesses particularly Atlantic Aviation resulted in growth in underlying free cash flow of nearly 27%. The use of balance sheet cash to settle a portion of the performance fees for the quarter limited the number of shares issued in satisfaction of the fee and it avoided dilution. Importantly it was not a change in policy on the part of either the Board of MIC or the manager but a prudent thing to do under the circumstances. Also the point in the future at which MIC could be a material federal income tax liability has now been extended into 2017. The consolidation of IMTT for both financial reporting and tax purposes has allowed us to simplify the presentation of our results. And finally the continued growth in cash generation has allowed our Board to increase -- to offer us an increase in our quarterly cash dividend to $0.98 per share and we have made clear that we expect the dividend to step up at a rate of at least 12% for at least the next two years. Our primary focus continues to be on sustaining the performance of our existing businesses and on finding and executing on good growth opportunities via the deployment of capital into those businesses. The deployment of incremental capital together with the organic growth in the generation of distributable cash has allowed us to provide guidance with respect to our cash dividend of 12% per year for at least the next two years. With that I will thank you once again for your participation in our call and ask that our operator open the phone lines for your questions.

[Operator:]

Thank you. (Operator Instructions). Our first question is from Ian Zaffino of Oppenheimer & Company. You may begin.

[Ian Zaffino:]

Hi great. The question would be basically, first of all good quarter.

[James Hooke:]

Thanks Ian.

[Ian Zaffino:]

The question would be on the conversion to C Corp. how far along in the process are you and what should we expect as far as timing, I know you mentioned the shareholder vote, are we bringing it to shareholder vote already or what’s sort of the timing on that? Thanks.

[James Hooke:]

There is still more work to be done. I would describe this as way more than a thought bubble. If it was a thought bubble we wouldn’t be disclosing it. It was brought to us by a shareholder and we have done considerable work looking at it. We’re still -- but there is two more pieces of work to do. One is work around the process to make it happen and second is just thinking through the lore of unintended consequence and just reality checking that there is no unintended consequence. We are pretty comfortable that there is no unintended consequence and by that I mean things like it creating some tax event for our shareholders and we are very confident that that’s not the case. We’re running it to ground in parallel, just making sure it doesn’t create any complexity on what we may want to do with an MLP or a REIT if that were possible and we are pretty confident that doesn’t have any adverse impact on that. So we still got to run to ground all the areas of potential unintended consequence. We can’t see any at the moment but by definition with unintended consequences you never can. And secondly we then need to move to the process and so what we wanted to do in terms of this call was put it out there for our existing shareholders, who as an analyst who are smart group of people to provide feedback with -- here are some unintended consequences you may want to think through that you may have not already. And then once we have done that we’ll come back with further guidance as to does it make sense to do before the AGM or does it make sense to do at the AGM. But that’s where we are at in the process. At the moment it seems like a really good idea to us but that’s why we’ve gone down the path disclosing it the way we have.

[Ian Zaffino:]

Okay, thank you. And then also on the IMTT pipeline I know you have this project in Louisiana that’s underway, where is the pipeline as far as the amount of investments you see? And then on the return side it looks like Louisiana project is sort of like a 13% return. Is that what we should expect or how do we think about that? Thanks.

[James Hooke:]

Let me deal first with the Geismar opportunity, there is a couple of components to it. There is new sort of contracted stream is part of it for a nice long dated contract to build some incremental capacity and there is also a new dock that we are adding. The new dock partially satisfies that increased demand, partially satisfies increased demand from existing locations there and it’s partly because from the pipeline of opportunities we see for the Geismar expansion we know that we are going to need a new dock capacity and building that in one go rather than building a barge facility and then upgrading it to dock for ship dock makes more sense from a cost perspective at the moment. So that's what in there. In terms of the rate of return I would say the way we've described IMTT's growth CapEx in the past is that historically there is always been about 20% of that which was not directly revenue generating. That was sort of support infrastructure and the new dock falls into that capacity and the other 80% is direct revenue generating and a portion of that amount we've announced falls into that pocket today. I would have thought that Geismar specifically going forward with this new dock, going forward you'll see more directly revenue generating growth CapEx. So I don't expect that 80-20 mix to change over time, although it clearly changes in relation to the specifics that we have announced today. But I don't think that's really going to change over time. I think the second thing in terms of returns is you'll see basically the historical rates of return we've achieved over the medium term, so long is that sort of 80-20 mix holds up and you’ll see roughly the same time frame from projects commencing to completion which has historically been around 11 months to around a year is the sort of number to use. So I don't think you should read too much into the return profile of projects we’re looking at, changing based on what we've disclosed at Geismar. That's more just a function of what the mix is between support infrastructure and contracted revenue. In terms of the broader question which is; what's going on at IMTT? What's the broader pipeline look like? The answer is that's extremely promising. I think in terms of the period since we've invested in the second half I've spend a little less of my time on maintenance CapEx reduction and cost reduction than I would have initially thought and that's partly because I've been extremely busy on meetings that sort of relate to the growth agenda and the growth pipeline for IMTT. I don't want people to think that means therefore we haven't been putting cost controls in place or maintenance CapEx reduction in place. We have and the thing I’ll say has being pleasing is we haven't really found any resistance within the company. In fact we've had some really good ideas and good suggestions of things we could do from the team at IMTT and they have got behind us. What has been pleasing is the sort of the number of meetings that we're taking and the doors that are starting to open up on the growth CapEx pipeline. Now I'm naturally a cynical person. I don't measure -- my return on success isn't sort of number of meetings held. But before you can get through the funnel to cash in the door you probably do need to have a lot of meetings and we had some very -- I’ve been really pleased with the meetings that we've had and really pleased with some of the growth capital ideas that have come up from the management team at IMTT of opportunities to pursue. So I think there is a level of energy on the -- and enthusiasm in drive on the growth side at IMTT, that to be honest I thought would be sort of 2015 event in terms of before we got to it. But this sort of level of momentum. As I think we've always said there is good opportunities on the Lower Mississippi in terms of both the petrochemical complex at Geismar, in terms of rail capacity and in terms of looking at crude and crude blending, which is not a business that we're in, in any substantial way there. So that -- those opportunities are all there in the Lower Mississippi excites us. I think the other opportunities is probably a little more opportunity for us in New York Harbor than we may have seen. I think the gasoline business and our butanization business has gone phenomenally well there and I think the butane blending business the season there is generating really good money for people who are involved in that business. And so I think we are seeing good growth CapEx opportunities across the business. It will take us a while to bring those to fruition. But there’s probably, I guess when you buy these businesses and you open the door you always worried is there a small package there or a big package and the package -- certainly the box that we found behind the door looks to be bigger than we're expecting. What's in the box? We'll let you know when we signup some more contracts.

[Ian Zaffino:]

Alright, perfect. Thank you very much for the color.

[Operator:]

Thank you. Our next question is form Christine Cho of Barclays. You may begin.

[Christine Cho:]

Hi, guys. Good morning.

[James Hooke:]

Hi, Christine.

[Christine Cho:]

In the last year, I've seen a number of interesting transactions, transactions that reduced cash taxes all because in LLC or LPs at some sort of [an up C] or a C Corp. bought an LLC or LP. In the event you guys do convert to a C Corp. are there ways to structure it so that you get some sort of step up in tax basis that would enable you to reduce your cash taxes for a period beyond what your NOLs provide?

[James Hooke:]

The answer is the tax is a work in progress. In terms of within the C Corp. structure I think what you maybe referring to is what has been described to me as the up C structure and on that we are now starting to exhaust -- you are at the outer limits of my vocabulary and knowledge on this subject but clearly we think there could be some benefits in that regard as well that I was looking at. But I think at this point we are happy saying to people we can push the tax liability into 2017, and then maybe next earnings call or the earnings call after we can say that other stuff. But yes we are clearly working on it. The C Corp. structure is good thing in do even of itself even without an up C structure. An up C structure would be I think probably has artistic merit points and the Russian judgment would be very pleased with it.

[Christine Cho:]

And then I think just to confirm what I think you said before, you said converting to a C Corp. wouldn’t preclude you from doing other sorts of restructuring on IMTT later on, right?

[James Hooke:]

That is correct. I did say that. I think what we want to talk to, I want to be clear with though is in the lore of -- I mean given the complexity around MLP or REIT conversions and tax basis I want to do a little bit more work on that before I can say for certain because that’s one of the areas where we sort of don’t want to run into a bizarre lore of unintended consequence but from everything we have seen to-date the answer is no, it doesn’t preclude it in any way.

[Christine Cho:]

Okay. And then just to clarify what I also think you said before, did say you got to step up in tax basis for the first 50% stake of IMTT when you bought the second half?

[James Hooke:]

I will refer to Todd, the CFO on this.

[Todd Weintraub:]

Yes and that’s led to the big P&L gain on the 10-Q. Our initial basis in that was about $250 million from when we bought the 50% in 2006 and the adjusted basis was something less than that after adjusting for the equity earnings, less the dividends paid from 2006 until 2014 when we bought the second half of IMTT we write up our basis our book basis for the 50% we already own from that original amount to the new fair value which obviously was well in excess of a multiple of our book basis and that led to the large gain that you see on the P&L.

[Christine Cho:]

Okay I see. And then is that a taxable event or it’s just that your NOLs are offset it or?

[Todd Weintraub:]

No, that is a book basis only. That does not result in any incremental taxable income which is why despite the high level of income before taxes you will see in 10-Q we still have a tax benefit for the quarter on a year-to-date basis.

[Christine Cho:]

Okay, and then you had three months as operator of IMTT and you have already started to firm up some growth projects. How difficult was it to land these projects, what’s the competition like, are there certain niche opportunities where there isn’t many competitors and also what’s the M&A market looking for complementary assets?

[James Hooke:]

Let me start with the M&A market. The M&A market looks extremely expensive. I think when you looked at enterprises transaction with oil tanking, there is obviously enormous strategic benefit for both but for enterprise sorry, but I think at 33 times EBITDA we are more likely to be a seller than a buyer and we would certainly take a meeting with anyone at 33 times. So I think M&A prices look high. I think in terms of the growth CapEx opportunity it sort of how contested it is really depends on the assets you have got and the specifics of it. So some of the opportunities we have in New York and in the lower Mississippi are probably pretty unique to the locations that we have. I think if it comes to a scenario where it’s not unique to the locations we have, we're probably not going to pursue it because in the same way that the M&A multiple is high just if someone’s going to blow their brains out to get a growth pipeline we will leave them to do so. So I think there is a good pipeline at both the locations I’ve talked about and at some of our other terminals there is also ancillary opportunities that we are looking at as well. But look I’d say midstream energy doesn’t suffer from a want of capital at this moment in its history.

[Christine Cho:]

Okay. Thank you so much.

[Operator:]

Thank you. Our next question comes from Brendan Maiorana of Wells Fargo. You may begin.

[Brendan Maiorana:]

Thanks, good morning.

[James Hooke:]

Good morning, Bren.

[Brendan Maiorana:]

So, James, hey, so just point of clarification on the dividend. So is 12% growth from the $0.98 annualized, is that from kind of what you’re going to put up for this year would take us to what 381 or 382 just how should we think about the 12% growth from what base. And does that number -- does the growth outlook on the dividend or on free cash flow include any move up in leverage, given that leverage and it is fairly low following the equity offering and acquisition of IMTT?

[James Hooke:]

Yeah, look in terms of leverage, the answer is no. I think the two -- I guess tricks to increase your dividend without doing it sort of in an underlying way that gives you leverage, or it gives you payout ratio and sort of I had clarified on the -- we're not trying to goose our payout ratio but I should also clarify we don’t intend to goose the leverage. The leverage is a little bit under. We’re sort of roughly sitting on about -- I don’t know $200 million of cash at the moment albeit as I said that’s $200 million that’s paid down the IMTT revolver rather than this actual cash. So there’s probably a little bit a balance sheet capacity there that I would say we're little under-levered where we would like to be but we don’t intent to sort of materially change our leverage outlook. In terms of the dividend growth, the way I answer that is historically we've grown our free cash flow per share since 2007, I think by about 12.5%, 12.7%. 12.3% per annum. And I think historically what we've done with that is I think we're going to grow roughly that right. And as we grow with that right we will payout dividend out to people, the dividend will grow but the way we given that guidance was to say to people we'll grow the free cash flow and we'll maintain this payout ratio and you do the math, and you connect the dots as to what the dividend growth will be. And I think we're just cutting to the chase now and saying that, that sort of historical 12.3% free cash flow per share growth we think we can sustain for the next two years at least and so the dividend will keep growing at that rate. In terms of what it means quarter-to-quarter whether it’s sort of 3.2% as it was this quarter or 2.8% next quarter because that rounds to a nicer number. We're sort of put nuance on that but I think what we are saying is going forward we see a sort of we expect to see a continuation of that sort of historical free cash flow growth, will now translate into a -- okay here’s the dividend growth. The other thing I would say on that which people need to take into account is that the -- we have a little bit more seasonality in the business then we used to have by virtue of the Galaxy acquisitions. So sometime we're running a little bit under that 80% to 85% payout ratio because we've just got through the winter month so the fourth quarter and the first quarter and Galaxy has done well. We'll be taking a slight look forward in terms of applying usual seasonality. So it’s not going to be quite the mathematical formula of that. There is a little bit more seasonality in the mix than we've historically had. But that how we came to the sort of 12% figure and so I think you’ll see it over the medium term keep growing at that growth rate.

[Brendan Maiorana:]

Okay. That’s, helpful. With respect to the tax outlook, if we ignore the potential to maybe make some broader corporate changes to corporate structure that could have an impact in terms of the taxes. If we just think about the 2017 date from here, when I kind of think about what MIC has done since the credit bubble in the aftermath of the recession it’s been you guys have acquired but it’s been a little bit more maybe surgical other than the IMTT deal than you guys were in the lead up of the credit bubble where I think the acquisition pace was higher. Do you feel like you can continue to push out the tax date, the cash tax payment date if you continue to be, what I would say relatively modest in terms of acquisitions?

[James Hooke:]

Sure it’s a good question and I think the answer is yes. The best way for us to deploy growth capital is to build the EBITDA and building EBITDA gives us nice depreciation shield. We get an accelerated level of depreciation in years where we get bonus depreciation it’s fantastic but even without bonus depreciation there is a nice depreciation schedule. So the highest and best return on investment is to grow the growth CapEx pipeline at each of the businesses predominantly IMTT but at Hawaii as well. Anything we do on the LNG side in Hawaii falls into the category of building EBITDA. And so that for us remains the highest priority in terms of creating tax shield. In terms of sort of the Contracted Power space however we’re not going to be, like realistically we’re not going to be a builder of Contracted Power facility. That’s totally different business. So that probably does involve a degree of judicious acquisition but I like your description of surgical in the approach we took to acquisitions. The only real acquisitions that we have done under my tenure as CEO have been buying the other half of IMTT which wasn’t -- it was an acquisition but it was business we knew and there was strategic advantage in owning the other half, adding to the Atlantic portfolio by getting us into Florida which is the biggest market that we were already in and entering into the Contracted Power space in very small -- with very small steps. And so that’s the approach we take to capital is we get a lot more jazz by growth CapEx at the existing businesses than we do by an M&A opportunity. The investment bankers obviously get much more jazz by M&A opportunities but I am much more excited talking about growth CapEx pipeline and sort of what we can build because that’s where we will create the most value for our shareholders. But I think we can keep pushing the tax. The answer which is that’s not a capital allocation but a tax issue which is the reason I run through the chronology is if we get to 2017 and we are paying federal income tax I will feel like we have really failed. So I don’t want to set out there as to people as paying income tax in 2017 is our target. Paying income tax in 2017 is like we will have all done a bad job managing the business if that occurs.

[Brendan Maiorana:]

Okay, great. I appreciate the color. Last one so you mentioned in your script Hawaii Gas and I apologize because I missed this but I think you mentioned you are kind of -- you sort of feel like you are under earning on a rate base now since I think it’s been since ‘09 when the most recent rate review was done. So did I infer from those comments that a rate review could be upcoming sometime over the next couple of years?

[James Hooke:]

Yes we will file a rate case in 2015 and hope that it will be finalized and implemented in ’16. So we are definitely -- and the PUC is aware this is not -- I am not announcing that sort of we will definitely go down that path. One of the reasons for the timing of the pension contribution the way it was is we wanted to get the pension contribution to a level of funding that we were pleased with before the rate case. The LNG, the timing on the ISO is obviously now we going to try and take 30% of our utility business to LNG within -- starting the 2015 time frame. That would obviously be included in any rate case for regulated rate of return on the capital we deploy there. So yes we will be both -- we will be filing it’s obviously contingent on the HPUC as to what rate of return they allow us, but yes we are under earning and it’s time for rate case we’ve held off for a couple of years whilst we put in place some changes of the business that we wanted and got ready on the L&G side and now is the appropriate time. I think there we have a very different regulatory strategy to the other utility who filed -- is a member of the frequent filers club. It's been five years since, back to 2008 since we've filed. We have a very different regulatory strategy and approach.

[Brendan Maiorana:]

Great, thanks for the color.

[Operator:]

Thank you. Our next question is from Andrew [inaudible]. You may begin.

[Unidentified Analyst:]

Hi, nice numbers guys. On Atlantic, can you just take us through where you are with the synergies and remind us how much there are and also just trying to understanding a little bit better [which] Galaxy is Q3 now a seasonally weak quarter for you for Atlantic.

[James Hooke:]

Yes, I think the worst months for Galaxy from a take-off and landing perspective are June, July, August. So I think you would say it starts to pick up a bit in September but it really June, July, August are the dips, so it straddles second and third quarter. Second and third quarter are definitely the weakest two quarters and then the first quarter of the year has historically been the greatest with the sort of March is bigger than February is bigger than January and that's probably as you build up to spring break but also you see the depression in the Northeast get people sadder and sadder and they need the sun by March. That's the way it seasonally fluctuates. In terms of -- and that’s -- I mean I think everyone can get that data from the FAA if they have the will to live and work with FAA database, it's all publicly available. In terms of the 21.3 included a level of synergy creation from the insurance saving and procurement savings and that's all being essentially on a pro rata basis we've got that in the bag. In terms of any cross selling synergy from selling the network out of West Palm Beach -- especially, that wasn't included. We're taking good preliminary steps on that. The biggest part of that equation is the West Palm Beach, the [inaudible] Lake and I'm pleased to report that the [inaudible] facilities that are being getting a much needed facelift. I’m told the facelift will be completed in time for Thanksgiving. So the construction zone that has existed at -- facility should seem like less of a construction zone as we get closer towards Thanksgiving and that will be the real sort of moment where we sort of take the gloves up from a cross-selling perspective. But the underlying sort of fuel cost saving in terms of the benefit we get from there and the insurance cost were factored into that 21.3 and broadly speaking have been delivered.

[Unidentified Analyst:]

So, in that aggregate now is like the number you reported for the September quarter that’s in aggregate Atlantic is a seasonally weak quarter in Q3 and seasonally strong in Q4 and Q1. Is that the way to think about it or?

[James Hooke:]

Yeah, I would say Q3 for Atlantic was never a [stonking] quarter and it's going to be less stonking when you add Galaxy into it than it was previously. Q1 has always being Atlantic’s best quarter and I think we probably we'll increase the amplitude on that previously, and Q4 has typically being the next quarter and the middle quarters have sort of fluctuated around that. So that's probably the business where we’ve got the most seasonality and we've added to it to a degree.

[Unidentified Analyst:]

Got it and one last thing. Does the $1.37 free cash flow back out the pension contribution at Hawaii?

[James Hooke:]

Yes. Sorry it backs out the incremental pension contribution at Hawaii. It doesn't back out Hawaii's underlying level of pension contribution that it makes year-in, year out.

[Unidentified Analyst:]

Okay, it back out the $5.8 million extra.

[James Hooke:]

It backs out five, roughly 800 is the ongoing.

[Unidentified Analyst:]

Got it. Okay, thank you.

[Operator:]

Thank you. Our next question is from [Nick Chen of Olympic Capital Global]. You may begin.

[Unidentified Analyst:]

Hi, guys. Congratulations on other successful quarter.

[James Hooke:]

Thanks, Nick.

[Unidentified Analyst:]

I know you guys touched on this a little bit earlier in the call end in and the press release, but I wanted to dig a little deeper. Just regarding lower oil prices and concerns over a material slowdown in shell based oil and NGL production, how does this impact your thoughts around IMTT in terms of utilization rates and mix of product? There is clearly a lag between lower demand and utilization but how could this potentially impact pricing on lease renewals? We know your guys agreements are long-term take or pay and you’re generally not impacted by the spot prices of oil but with your current contract portfolio, what is sort of the timeframe that you would think sustained lower prices in oil would begin to have an impact on this business?

[James Hooke:]

I guess it hard to say, because we've never been through the sort of period where the NGLs -- that they’ve been. I think the couple of things I would add to that is we haven’t really added that much new capacity in this space over the last five years. We haven’t been sort of building what there is back to others. The biggest chunk of growth CapEx we've done has been in the chemical space. The second is, I think what people need to differentiate in this space is lower prices on the go forward bases and increased volatility on a go-forward bases. It would seem to me that increased volatility definitely helps us. There is no scenario I can see where increased volatility doesn’t help. Sustainably lower prices in the 80% or $80 range or even if went lower. I guess because our facilities both import and export, if there is less production and less crude or liquids coming up and therefore the U.S. refineries operate on a slightly lower basis and more product gets imported into New York Harbor we're kind of indifferent to that. If lower prices saw some of the mid-Atlantic refineries no longer be able to get an arbitrage and so those refineries become economically unattractive or unviable and get multiple that will be a great windfall for us. So I think it’s -- because we both import and export and we don’t really have to make capital -- unlike say LNG where there is a massive capital investment to be an importer or exporter, whether we've pumping in or pumping out is not really a difficultly for us in any of our terminals. So that's one of the reasons why I guess we haven’t got us excited around the change in crude prices as others in this space because we just don’t have the commodity exposure. If throughput declines in our facilities, throughputs not really enough of a meaningful metric to really -- to make any difference to the financials of the -- I mean it will at the margin but doesn’t at the high level and that's why I say sort of the a little bit of return of volatility certainly has our trading storage customers extremely happy and a little bit of volatility introduces an opportunity for people to make money. So that would be the -- that's the best answer I got for you at this point in time.

[Unidentified Analyst:]

That's very helpful. Thanks again.

[James Hooke:]

Okay.

[Operator:]

Thank you. And I’m showing no further questions at this time. I would now like to turn the conference back over to James Hooke for closing remarks.

[James Hooke:]

Thanks very much for everyone’s time. I think obliviously a complicated quarter and we're hoping to simplify things going forward, so we can get our earnings calls shorter our script shorter and our Qs and press releases shorter. We are at the home stretch in 2014 and look to come out right on top of our original forecast. It feels like we’ve being sprinting non-stop for the past 6 or 8 weeks. And I’d certainly be remiss if I didn’t thank my team for an incredible effort in getting IMTT deal over the line and then turning around and getting the quarter pulled together as well. Our lenders, advisers, accountants and lawyers all did a great job and we appreciate their efforts even if we think they charge us way too much. We look forward to discussing our full year 2014 results with you in February. On other matters prior to that as events warrant. As always, please feel free to contact us with any questions you may have about the way -- along the way, or any suggestions you have about how we can do anything better. Thank you and good morning.

[Operator:]

Ladies and gentlemen this concludes today’s conference, thank you for participating. Have a wonderful day.