Macquarie Infrastructure Holdings, LLC
Q4 2014 Earnings Call Transcript

Published: 20 Feb 2015

[Operator:]

Welcome to Macquarie Infrastructure Company fourth-quarter full-year 2014 earnings conference call. [Operator Instructions] As reminder, today's call is being recorded. I would now like to turn the conference over to Jay Davis, Head of Investor Relations. Sir, you may begin.

[Jay Davis:]

Thank you, Shannon. Welcome once again to Macquarie Infrastructure Company's earnings conference call. This one covering the fourth quarter and full year 2014. Our call today is being webcast. It is open to the media. In addition to discussing our quarterly financial performance on this call, we've published a press release summarizing the results and filed a financial report on Form 10-K with the Securities and Exchange Commission. These materials were released last evening. They may be downloaded from our website at www.Maquarie.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. 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 statements 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 once again introduce Macquarie Infrastructure Company's Chief Executive Officer, James Hooke.

[James Hooke:]

Thank you, Jay. Kong Hei Fat Choi, which is my feeble attempt to say, Happy New Year, in Chinese to everyone dialing in this morning. Thank you to those of you participating in our earnings conference call this morning. We appreciate you taking the time to join us for this update on the performance and prospects of MIC. As reflected in our results press release and related materials published last evening, our business has performed well during the fourth quarter. The performance was a continuation of the good performance we had reported through to the end of the third quarter plus a boost from faster than anticipated progress on the integration of IMTT. Consistent with our focus on cash generation, we reported an increase in free cash flow per share for the fourth quarter of 54.2% and an underlying free cash flow per share for the year of 18.6%; notwithstanding a significant increase in the number of shares outstanding. In dollar terms, that translated into $1.28 per share for the quarter and $4.85 per share for the full year. The increase in free cash flow in both the quarter and the full-year periods was driven primarily by the maintenance CapEx reduction and cost control at IMTT, along with the improved operating results at each business. I would note that these results – that these increases were achieved taking into consideration the substantial increase in the number of shares outstanding in 2014 versus 2013 as a result of the IMTT acquisition and the settlement of base and the majority of performance fees incurred during the year in additional shares. With the growth in free cash flow and consistent with our stated intent of maintaining a payout ratio of between 80% and 85% of free cash flow per share as a dividend, the MIC Board authorized the payment of a cash dividend of $1.02 per share for the fourth quarter or $4.08 per share on an annualized basis. On a trailing 12-month basis that means that MIC distributed approximately 81% of its underlying free cash flow per share as a cash dividend for 2014. The dividend for the fourth quarter, which will be payable on March 5, 2015 to shareholders of record on March 2 of 2015. Because a number of you have asked, the dividends MIC paid in the tax year 2014 have all been characterized as a return of capital. I'd ask you to please consult with your tax advisor regarding the treatment of the MIC dividend and your particular circumstances. We have no view at this point time as to whether any dividend paid in 2015 will be characterized as a dividend or as a return of capital. Speaking of dividends in 2015, we now believe that we will be able to grow our cash dividend by at least 14% per year over the next 2 years. I mentioned a 12% per year increase during our third-quarter call; but given what's been achieved at IMTT, the trading performance of our business and our growth pipeline, we are comfortable bumping that up to 14%. Any increase is of course subject to approval of the Board of Directors, the continued stable performance of our businesses and the broader economy here in the US. I'll have a bit more to say about the guidance for 2015 in the context of growth capital deployment in a few minutes. While the past is never a perfect predictor of the future, I want to place that 14% growth guidance into some historical context for you. We're comfortable with guiding to these growth levels because we've been achieving them for some time now. Since 2007, the first full year in which MIC owned IMTT and Hawaii Gas, MIC has grown underlying proportionately combined free cash flow per share by 13.1% per year. Since we resolved the IMTT shareholder disagreement in 2012, we've grown proportionately combined free cash flow per share by 16.2%. In 2014, we grew underlying proportionately combined free cash flow per share by 18.6%. According to Bloomberg, since MIC's IPO in December 20, 2004, more than ten years ago, MIC has delivered total shareholder returns of a little over 17% per year with dividends reinvested. We have a lower leverage than we have had historically and better liquidity than ever. I'm a bit surprised by the questions we fielded around our 2015 free cash flow per share guidance. Especially given the fact that it was in response to shareholder suggestions that we did away with free cash flow per share guidance and instead focus on dividend growth. But just to be clear, if the dividend is expected to grow by 14%, our free cash flow per share should also grow by 14%. We are not changing our payout ratio target or levering up. The 2 figures, free cash flow per share and the dividend per share, should move in tandem by the 14% we referenced. Bayonne Energy Center. Regarding the Bayonne Energy Center or BEC, we're pleased to be building out our contracted parent energy segment with the acquisition of this business. A number of you have asked about how we got involved in the opportunity. I'm happy to fill in some of the details for you. The business is situated on the Bayonne waterfront surrounded by what was the Hess-Bayonne Terminal now owned by Buckeye on one side and IMTT on the other. Indeed, BEC was originally developed as a joint venture between Hess and ArcLight. The earliest public conversations about the project date from around 2007, I think. The developers needed an easement from IMTT. Through the process of IMTT negotiating that easement, we have been aware of the project since those early days. During the construction and after the completion of the project, ArcLight sought to lease additional land from IMTT on which to add more generating capacity to the existing 512 megawatts. Once we had acquired all of IMTT, we approached ArcLight about buying the plant rather than just leasing them more land. Because in this day and age, no one likes to sell an asset without conducting an auction, ArcLight initiated a sale process managed by Morgan Stanley regarding BEC in the fall of 2014. We were active in that process. We were the winning bidder. Part of the reason we were the winning bidder was the fact that we had the benefit of being able to expand BEC in a way that no one else could, namely on a portion of the land owned by IMTT. Stepping back from BEC for just a moment, what you can now see is our approach to deployment of capital in a new vertical. We began several years ago with relatively small steps acquiring contracted solar generation assets in the renewable sub-sector. I said at the time that if we were making a mistake, we wanted to make it in a small way. Fortunately, our efforts in contracted parent energy have played out pretty much as we'd envisaged to this point, but we did learn some things along the way. We also made it clear all along that we weren't adverse to making an investment in gas fired generation alongside our investment in renewables, only that it was difficult to find something like the renewable deals in terms of the long-dated power purchase agreements. With BEC, we believe we have found not only something that has the stability associated with a significant measure of contracted revenue, but also provides us with the opportunity to deploy a meaningful amount of additional capital in the growth of the business over time. In this case, we have the opportunity to develop an additional 100 megawatts of generating capacity. We can do so on a cost-effective basis in part because

[Operator:]

Thank you. [Operator Instructions] Our first question is from T.J. Shultz of RBC Capital Management Markets. You may begin.

[T.J. Schultz:]

Great. Thanks. Thanks for all the color. First just a quick one, as you look at BEC capitalization options. Just – does the fact that you filed the S-4 that's being reviewed by the SEC for a conversion from a LLC to a C-Corp preclude you at all from issuing new equity during this SEC review process?

[James Hooke:]

TJ, thanks for your question. I think as it relates to BEC, we've got lots of options. We have the option of an ATM program. As I said in my comments, we have an option of raising equity. We have the option of paying down the debt with the existing facilities at the MIC revolver or IMTT. Step 1 in that process is to have a good dialogue with S&P. I think S&P, after the deal was announced, put us on watch. But I would also say that watch was developing watch, it wasn't negative watch. So people can read into that what they want. I don't think there's anything in relation to any S-4 filing or anything else we've done that precludes us doing what we need to do or want to do at BEC. But the lawyers get very nervous when I mentioned the word S-4 because I think if you want to look at the S-4, yes, my advice is to read the statement, otherwise, I get kicked under the table by the lawyers.

[T.J. Schultz:]

Okay, fair enough. Then as we look at BEC, just how quickly do expect to start pursuing some of the growth options that come about by the proximity to IMTT? Can you quantify how much new capital you think the opportunity presents?

[James Hooke:]

At this point in time, we haven't quantified anything on that. I think those who follow the power sector will have a rough figure of what 100 megawatts of additional capacity would cost, recognizing that it's 100 megawatts bolting-on to an existing facility. We already have the land available to do it. In terms of timing, to some extent that's a how long is a piece of question, where first step is to get FERC approval for the transaction. We would then need to deal with the New York ISO and FERC and suppliers around adding additional capacity. At this point in time given that many stakeholders, I don't know. But I would say it is not a 2015 capital deployment. It's a spend 2015 beating our head against all the bureaucratic processes and look to make some progress in the next couple of years.

[T.J. Schultz:]

Okay, thanks. Then you did highlight that you do expect you can grow through larger acquisitions over time. I'm seeing that with BEC. But you look at – more recently at some of the disruptions that commodity prices have caused. Just any specifics that you could highlight that would mark types of assets that make sense possibly outside the current wheelhouse? Or is the thought here just similar to growing within your current segments?

[James Hooke:]

Yes, it's a good question, TJ, so thanks. I think in terms of growth, we're really focused on the existing 4 segments that we are in at the moment. It's not to say we wouldn't look to a fifth at some point in time. As you said, the discontinuity that's going on, our personal view is that there will continue to be a massive amount of what I would call carnage in the MLP sector. I think our personal view is the party has only just begun there. I think there are a number of players in that space that have no equity value but perceive they have equity value. The question for us is, do we spend any time talking with them or do we just go straight to talking to their lenders. I think what we're more looking at in that space and what more excites me is good businesses with bad balance sheets than just businesses that should never have been IPOs or MLPs, to start with. But if you said when we acquired IMTT in July of last year, all of our growth capital focus was organic growth CapEx. Bolt-on acquisitions didn't feel like they made sense to us because we saw the prices that others were paying and that was stratospheric. I think we are now looking at other opportunities in the midstream space. Asset prices for those things have clearly compressed us. A lot of those businesses no longer have access to equity capital given where their share prices are and don't have access to debt capital given that they don't have access to equity capital and given that they – given that I think lenders have wised up to some of those businesses. So I think, IMTT levered at 3.5 times, where out of day with $600 million on undrawn liquidity is in a great position to take advantages of some of those opportunities. We're not going to rush into it because – our personal view is that the carnage has only just begun.

[T.J. Schultz:]

Okay, thanks. That's helpful. That's all I've got.

[Operator:]

Thank you. Our next question is from Jeremy Tonet of JPMorgan. You may begin.

[Jeremy Tonet:]

Good morning. Congratulations on the strong quarter.

[James Hooke:]

Hey, Jeremy. Thank you very much, Jeremy.

[Jeremy Tonet:]

Turning to the corporate conversion process, would you be in a position to provide any color on what type of index inclusion MIC might see? How that could work out in your eyes?

[James Hooke:]

Yes. It's a good question. I will throw it to Jay Davis from Investor Relations because he's got a better sense of it than me.

[Jay Davis:]

There's a couple of options here, Jeremy. I think that we've looked at what might be open to us. It's obviously subject to consideration by the index managers, the Russell Organization as an example or S&P. Russell will look at the end of May at the make-up of the listed companies in the US and decide what the cutoff is for inclusion in their list typically the top 4,000 largest organizations. S&P is a little more ad hoc as to when they include or remove anybody from their indices. But there is potentially opportunity for passive demand for our shares in the range of $3 million to $3.5 million, maybe $4 million shares depending on how many of those indices actually pick MIC up. We'd look at something like the S&P MidCap 400 or the Russell 3,000 as likely to do so but there is certainly no guarantee.

[Jeremy Tonet:]

That's very helpful. Thank you. I was just wondering, after we've had – the second half of IMTT under the belt for some time, if you might be able to provide any updated thoughts from potential cross business synergies that you guys could enjoy now that you have full control of IMTT?

[James Hooke:]

Yes, we're not yet going to quantify that. But I would say the – Rick Courtney from IMTT and some of the – an IMTT Head of Engineering went out to Hawaii Gas this quarter to assist with what we are looking at doing in the LNG terminal opportunity and investment in Hawaii. We are continuing or really kicking off the process now of jet fuel opportunities between Hawaii and – I'm sorry between IMTT and Atlantic Aviation. I would put those into the revenue bucket opportunities we are looking at. Obviously, once we own BEC, the fuel oil storage for the BEC plan to run on fuel oil when gas prices spike or gas isn't available. That business will all shift to IMTT and IMTT will increase the capability of BEC to run on fuel oil if and when that transaction closes. So on the revenue side, they are the sort of opportunities we are exploring. We're also kicking off or driving forward for opportunities on the back-office integration of all of our businesses more broadly where that make sense. So we haven't quantified it. But we are seeing a greater level of interaction between the different businesses driving opportunities to each other.

[Jeremy Tonet:]

That's helpful, thank you. Then coming at the M&A questions at maybe just a little different angle here. It seems like there is broader distress in the energy markets and even beyond the MLP market. I'm just curious if you see larger energy companies that are looking to live within cash flow and might be more willing to divest midstream assets to bridge that funding gap? If you're seeing any more opportunities on that part of the energy arena.

[James Hooke:]

We're definitely – the answer to that is we're definitely seeing opportunities there. Folks who would previously not have looked to divest assets because essentially their cost of capital was zero or they believed their cost of capital was zero because their access to capital was infinite, have had a sudden dose of reality. I think there, we're treading our way carefully. One of the reasons for that is especially in some of the oil and gas fields locally, this opportunity for people to divest to you pipeline systems that have off-take agreements. But your off-take agreement is with someone that may or may not stand in place to honor that off-take agreement depending on where the commodity price comes out. So there are certainly those opportunities. Many of those opportunities that I would describe as being first to market and are available now are probably with the more distressed because there the ones who have rushed – who have had a dose of reality sooner. But we have to think very carefully through the counter-party risk there.

[Jeremy Tonet:]

That makes sense. Thanks. Just one last one if I could. Sorry if I missed it, but the S-4, are you able to share any thoughts on timeline for how that process generally unfolds?

[James Hooke:]

I can't really say anything more other than the comments that I have given, which is the process that's involved after we filed the S-4, which was last night, is the SEC take a look at it and decide whether and how they will review it. Then the next step in the process is once the SEC has completed that process how long it takes the SEC to do that is in their hands not ours. The only thing I would say is the reason we are moving forward on this as we can, as Jay mentioned that the Russell index is readjusted by the end of May and we are hoping though not guaranteeing but we're certainly hoping that with the timing we've done in this, we should be through the process in time to be included in the Russell index if everything went as the way these things normally go. That sort of timing would be doable. But as to the specifics of timing, I can't give you any more color than that.

[Jeremy Tonet:]

That's helpful. That's it for me. Thank you very much.

[Jay Davis:]

Thanks, Jeremy.

[Operator:]

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

[Brendan Maiorana:]

Thanks. Good morning.

[James Hooke:]

Hi, Brendan.

[Brendan Maiorana:]

Hey, guys. So first, on BEC, is there – so you guys provided the EBITDA outlook. Is there much by way of maintenance CapEx that we should expect from that facility? Or is it fairly new so maintenance CapEx was pretty minimal at this point.

[James Hooke:]

Yes. Maintenance CapEx will be minimal I think for the first few years of life. It was only put into service in 2012.

[Brendan Maiorana:]

Okay, great. James, you mentioned the co-gen plant at IMTT. I think you said the ground lease is up in 2018. So, you – am I right? Do you own the ground? Are you receiving payments from the owner of the plant for the ground?

[James Hooke:]

Yes. So that ground has been leased, I think the timeline will be roughly a 30-year lease that comes up for fruition in 2018. I don't think it was originally struck as a 30-year lease but I think that will be the rough timing with extensions. So we are receiving very small, well-below market lease payments from that facility today. When that ground lease expires and we get the ground back, there is clearly a much higher and better use of that ground that is – currently it's ground used today.

[Brendan Maiorana:]

Is the plants useful life likely to end at the time of the expiration of lease in 2018? Or would the plant – would the improvements there fall to you guys and then you have that co-gen facility along with BEC?

[James Hooke:]

That's a very interesting question. Different people have different views on that. There's probably only 2 views that matter

[Brendan Maiorana:]

Okay. All right, great. Thanks. Then just on the M&A outlook that is there, maybe I'm just being a little bit dense in terms of hearing your comments. So it sounded like you are looking at pipelines as possible options. Are storage facilities that are either owned by MLPs or other energy companies, are they, things that are coming up now more as options for acquisition or are bulk liquid storage facilities still performing well and they're more likely to be held on to by companies that may or may not have some pressure on other parts of their business?

[James Hooke:]

Yes, I think the answer is by and large, terminals are doing well. I think if you look across the reporting period, from what I've seen from other companies who wanted terminals, they've done well. That's not uniformly true. Not all terminals were created equal. So some terminals are doing better than others. I think the terminal opportunities would be to buy from companies that got themselves distressed or the terminal opportunities would be to buy from companies that got themselves distressed not just as terminal operators because they own some other stuff as well as terminals. So we definitely like the terminal space and would look to add there. We'd like to see people who own terminals. It may well be the better asset that they own but they're prepared to divest it because they won't get anything else for any of the other assets. So all of the above, I would say we were looking at. Pipelines, we always have an interest in. But the prices have been too high more recently. So we will take a look across that midstream spectrum.

[Brendan Maiorana:]

Okay. All right, great. Thanks for the time.

[James Hooke:]

Thank you.

[Operator:]

Thank you. Our next question is from Ian Zaffino of Oppenheimer. You may begin.

[Unidentified Analyst:]

Hi, guys. This is Rick Faulkner [ph] for Ian.

[James Hooke:]

Hi.

[Unidentified Analyst:]

I just wanted to ask about maintenance CapEx at IMTT. It looks like it went from $83 million in 2013 to $44 million in 2014.

[James Hooke:]

Yes.

[Unidentified Analyst:]

I was hoping you could just explain that decline year-over-year? If possible, get a sense of what it would be going forward?

[James Hooke:]

Sure. So the first thing I'd say is that the 2013 number whilst disappointing was slightly artificially high because roughly $20 million to $25 million of that related to Hurricane Sandy uninsured repairs. So I think the run rate was sort of closer to $60 million rather than the headline $80 million. So we decreased it from $60 million to $44 million. I think we said that for all intents and purposes, $45 million should be the new normal until we provide further advice that we can still reduce it. I think versus benchmarks, we should be able to get it down further than the $45 million; however, there is more work to be done on that. I think the thing I would say in relation to the reduction is when we did the transaction I think our view was first step was reduce it to $50 million and second step was reduced to $45 million. We had thought it would take us until maybe 2016 to get to $45 million or maybe longer. We just ended up getting there faster than we had expected. But we think that $45 million is sustainable and maybe lowerable going forward. The real thing about IMTT that pleased me during the fourth quarter was, it actually had its best safety record of any period since we had acquired a stake in the business in 2006. There was no lost time incident in the fourth quarter at IMTT. The focus on safety and environmental health and safety that we ramped up post our acquisition bringing DuPont in has really been well-received and the management team there have done a great job of implementing it. I'm pleased that the safety initiative is actually being led by the CFO, James May, who we put in there. One of the reasons I say that is, if you get the safety processes and procedures right, it is a sign that you are starting to rollout processes and procedures everywhere else. So the fact that safety is improving, tells me that operating costs will prove and that maintenance CapEx processes and procedures will improve because it's part of the same mindset of rolling out standard procedures. So the safety result in the fourth quarter, in my mind, is in no small way linked to the maintenance CapEx reduction because it's all about putting standard process and systems in place.

[Unidentified Analyst:]

Great, thanks.

[James Hooke:]

Thanks.

[Operator:]

Thank you. Our next question is from Nick Chin of ALEMBIC Cap Global. You may begin.

[Nick Chin:]

Hi, guys. Thanks so much for taking my question this morning.

[James Hooke:]

Hi.

[Nick Chin:]

And congratulations on a good quarter.

[James Hooke:]

Thanks.

[Nick Chin:]

Great. So I was hoping you could give us an update quickly just on the integration of Showalter and if it's still expected to close in Q1. Then also if you could just give us an idea of any other possible acquisition targets in the aviation space? If there's any other geographic markets you are looking to expand into at this point?

[James Hooke:]

Sure. Thanks for the question, Nick. Showalter, the transaction actually closed in late January. So that's now in and operating. One of the things I would say about Showalter as to why it appealed to us was, Orlando has an enormous amount of convention traffic. The reason we like that as a market is, it gives us an access point into a customer who visited for the convention that we can then cross-sell our network to for the rest of the year. So as well as being a nice bolt-on opportunity, the network effect of being in convention locations. We are in Vegas. It's a very important destination for us, not just because we make money at Vegas but it's a key touch point to develop customer relationships for the rest of the year. Orlando is probably as good as Vegas from that perspective. So that integration is going well. We are always looking with the Atlantic portfolio at whether there is locations to bolt-on or to divest. The key – the one keyhole in our footprint I would say is IAD or Dulles in Washington DC. The 2 incumbents there are Landmark and Signature. We understand that Landmark's lease has expired; it's the most profitable and biggest site in the Landmark portfolio. The airport will be running an RFP. So we are very keen to run hard at that RFP to get into IAD. I certainly think it would be better for the airport in Dulles to have Atlantic the sort of premiere FBO network at the nation's capital. I think we would probably do a better job than either of the incumbents at big events in DC. So we will take a good crack at that. That's probably the biggest hole in our footprint. Places like Seattle, we have no presence. We'd like to have a presence, but we will be judicious in our approach to those business opportunities.

[Nick Chin:]

That's great. Thanks so much guys.

[James Hooke:]

Thank you. End of Q&A

[Operator:]

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

[James Hooke:]

Thank you very much. It's the time of year when a number of conferences and non-deal road shows are on the calendar. We look forward to seeing a number of you at these events. As always, if you have comments or really tough questions call Jay. If you something easy or nice to say, please call me. Before closing, I would like to note that during – since the start of the year, we have lost a very important member of the MIC family. Ann Tang, who was the Executive Assistant to the CEO at Hawaii Gas passed away very suddenly at her home. We miss her. We remember her fondly. Our thoughts and prayers go out to the team at Hawaii and to her family. Thanks to our great team here at MIC including our finance and legal personnel, our external advisors and the management teams at each of our businesses. Thank you to our lenders, who are very important suppliers to us. Everyone did a tremendous job of pulling all the materials for this report together. I thank you for that. We look forward to discussing our first-quarter 2015 results with you in early May.

[Operator:]

Ladies and gentlemen, this concludes today's conference. Thanks for your participation. Have a wonderful day.