Macquarie Infrastructure Holdings, LLC
Q4 2015 Earnings Call Transcript

Published: 23 Feb 2016

[Operator:]

Good day, ladies and gentlemen. Welcome to the Macquarie Infrastructure Corporation Fourth Quarter and Full Year 2015 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 be given at that time. [Operator Instructions] As a reminder, this conference call may be recorded. I would now like to turn the conference over to Jay Davis, Managing Director of Investor Relations. You may begin.

[Jay Davis:]

Thank you, Nicole. And thank you, everyone, for joining us for Macquarie Infrastructure Corporation’s earnings conference call, this one covering the fourth quarter and full year 2015. Our call today is being webcast and is open to the media. In addition, to discussing our quarterly and annual financial performance on this call, we 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 and copies may be downloaded from our website at www.macquarie.com/mic. Before turning the proceedings over to Macquarie Infrastructure Corporation’s Chief Executive Officer, 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 Corporation 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 Corporation’s Chief Executive Officer, James Hooke.

[James Hooke:]

Thank you, Jay, and 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. There has been enormous volatility in the markets over the past few months. This has contributed to a disappointing decline in MIC’s share price. While equity markets have been volatile and unpredictable, the performance of our businesses has actually been the opposite. For the fourth quarter, our businesses performed ahead of our expectations. For the full 2015 year, our businesses performed ahead of both our guidance and consensus. And for the first 53 days of 2016, based upon the preliminary data, our businesses have continued to perform ahead of our expectations. We have reaffirmed the free cash flow and dividend growth guidance we initially provided one year ago for 2015 and 2016. So while the world around us is volatile and excited, MIC’s businesses have been boringly predictable, that is just the kind of unsexy business model we want. In our results, press release and 10-K published last evening, we reported $1.18 per share in adjusted proportionately combined free cash flow for the fourth quarter; and $5.71 per share for the full year. Both figures were ahead of our expectations. You will also note from our press release, that we actually excluded approximately $0.09 per share from free cash flow in the fourth quarter and full-year results. In the fourth quarter, we received a $6.9 million tax refund. And while this was real cash in the door, we decided to exclude it from our adjusted free cash flow per share. Had we not excluded it, we would have been in the situation where we generated $6.5 million of positive free cash flow for the year from taxes. While our tax department is good, even we don’t view it as a long-term profit center. Now, as foreshadowed in our third quarter call there was some noise in the fourth quarter year-on-year comparison due to maintenance CapEx. Our fourth quarter results overall were a bit better than we had expected. Indeed, as a consequence of the strong performance, we elected to make certain discretionary expenditures in the fourth quarter at both IMTT and Atlantic Aviation. We accelerated this spending into the fourth quarter of 2015, partly because we had this $6.9 million tax cash refund, but it did have an impact of reducing our fourth quarter EBITDA. And in my mind, it was money well spent. So put simply, we excluded the positive free cash flow effect of the tax refund for the quarter, but the negative effect of the extra accelerated costs reduced EBITDA and therefore free cash flow. From a net cash out-the-door or in-the-door perspective we were slightly ahead. This was in addition to the previously disclosed acceleration of maintenance CapEx into 2015 at Atlantic Aviation, to give us even more financial flexibility in the future. The timing and amount of spending on maintenance CapEx slightly complicated our results in two ways. First, the timing of maintenance CapEx was very different in 2015 versus 2014. Indeed, had we spent maintenance CapEx evenly in 2014 and evenly in 2015 our Q4 2015 free cash flow per share would have been up on Q4 2014 rather than down. As we put it in our press release, more than 100% of the fourth quarter decline in free cash flow per share was due to just the timing of maintenance CapEx. The second issue is the amount of maintenance CapEx we deployed. And the amount of maintenance CapEx we deployed at Atlantic Aviation and Hawaii Gas was measurably and intentionally higher than has historically been the case. In aggregate, we spent $69 million on maintenance CapEx at MIC in 2015. In 2016, we would not expect this figure to exceed $55 million. So just to reiterate, we spent $69 million in 2015 and we would not expect 2016 to exceed $55 million. On the basis of these results, the MIC board has authorized a dividend for the fourth quarter of 2015 of $1.15 per share. The cash dividend will be payable on March 8, 2016, to shareholders of record on March 3, 2016. The fourth quarter dividend increase was in line with the dividend increase for the third quarter. Including the upcoming distribution, MIC will have paid out an accumulative $4.46 per share for the 2015 calendar year. That figure represents an increase over the $3.89 in cash distributions in 2014 of 14.7%, slightly ahead of our 14% guidance. Further our free cash flow per share growth was greater than the dividend growth, meaning that our dividend coverage ratio also improved in 2015. We have elected to return to our practice of providing a single year’s guidance. However, that should not be viewed as a lack of confidence in our continued ability to grow. Rather, it’s consistent with what we had been doing each year prior to the last year, when as a result of the BEC acquisition, it was appropriate to project performance for two years to clarify for the markets we expected full year contribution from BEC. While the underlying fourth quarter result was pleasing, the real story is the full-year result and the $5.71 per share in adjusted proportionately combined free cash flow generated. $5.71 per share represents a 17.7% increase over the free cash flow per share generated in 2014 and a result that surpassed our expectations. The full-year result was driven by substantial increase in the contribution from Atlantic Aviation and to a lesser extent from IMTT, consistent performance by Hawaii Gas together with a slight underperformance on the part of the businesses in our Contracted Power and Energy segment. The softness in CP&E relative to our expectations was primarily weather-related. I’ll discuss each of our businesses in turn and make a few observations on their performance in 2015, as well as on the current trading environment and what we foresee for the year ahead. As a reminder, for those of you or for those of you who may not be familiar with our business, we both manage and capitalize our businesses with a focus on the generation of EBITDA and free cash flow. In general, you won’t hear us discuss revenue as a driver of our financial results, as changes in reported revenue reflect primarily fluctuations in the cost of energy inputs

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of Ian Zaffino of Oppenheimer. Your line is now open.

[Ian Zaffino:]

Hi, thank you very much, James, good job just addressing all the issues that are going on there. I think that is very helpful to the stock price for sure. Question would be on IMTT. It looks like the length of the terms of the contracts have extended or increased this year. What’s driving that? Are your customers feeling more comfortable you pushing towards longer-term contracts? What’s actually driving that, because you would think in this environment they’d be going the other way, that’s not the case, so..?

[James Hooke:]

Yes. I think what we saw in the fourth quarter was some customers prepared to strike materially longer deals. And so there was a five-year deal which we’ve previously discussed. I think the other issue is that, in essence I think the industry is starting to accept that $30 is the new normal and adjusting to that. Now, that’s a personal and a subjective view. But I think that there was a period where people were wondering whether low cost or a low crude environment was a blip below the new normal. I think the answer is it appears to be the new normal. Now, given that, when the industry decides that that’s the new normal, I think the answer is that probably means that it will be anything but what those people expect. It doesn’t really worry me if they’d be happy lock into that. I think many of those people, and this is where I get down to the fact that we store essentially refined product rather than crude, we’re essentially in a central point in the logistic supply chain for them. And I think that’s the other thing, which is for many of these people, they are internally now starting to differentiate between what is capacity, and if you think about the oil majors, what is capacity that they have that I guess I would describe as swing capacity, and what is capacity they have that makes up a fundamental part of the supply chain for them. And I guess it’s what we’re seeing is those for whom capacity is a fundamental part of the supply chain have realized that if it’s a fundamental part of their supply chain they need to lock it in for five years, rather than just locking it in for six months and hoping that in six months’ time they’ll be able to lock it in for six months for each of the next five years. But I think there is a number of factors that are driving that. In terms of our approach, our approach has been I think to push for tenure where we think it’s prudent, but I guess in that sense it’s to push the tenure where there is an open door, but where there is brick wall, not to waste our time pushing for tenure.

[Ian Zaffino:]

Okay. And then another question would be, if you look at sort of your investments that you can make and your growth rate, maybe you could kind of disaggregate parts of your growth rate. For instance, how much would be pure organic? How much would be growth that you could fund from internally generated cash flow? And then, how much would you need of investments to increase that growth rate, because it seems to me that between organic growth and your cash flow, even after paying the dividend, you have a decent amount of growth in the business alone? So I just kind of want to disaggregate. But how much of the growth is really being driven by, let’s just say, spending above and beyond internally generated cash flow versus what you’re generating from your current assets and your internally generated cash flow? Thanks.

[James Hooke:]

Sure. So, in the guidance that we’ve given, and this is about 2015 and 2016, we basically said that we can deliver the growth of 14% with the organic growth of business and with the growth CapEx that we deploy of what I call bolt-on or building EBITDA projects that are non-transformative. And we fund that growth CapEx through two sources as you’ll see. One is reinvestment of the amount of the free cash flow that we don’t dividend out. So the roughly 25% of free cash flow we generate that we don’t dividend out. Funds, I guess equity funds are portion of that. And the second is, we use the undrawn credit facilities, revolving credit facilities to provide the debt funding of that amount. That basically means, the math of that means that we can fund somewhere in the $250 million to $300 million of growth CapEx per year without increasing MIC’s net debt to EBITDA from those sources of cash. That’s enough to generate the growth that we’ve talked about and if you look then at what that gives us we’ve said that for this year that will give us essentially 14% per share growth. If we want to do something well beyond that we would need to access equity markets at this share price, that doesn’t seem hugely attractive. But I’d also say that that’s a function that depends what you’re buying and how attractive what you’re buying is. But by and large, it doesn’t seem very attractive to me. So if you sort of said historically the way we thought through that, given that sort of - I think we said, it’s 13.7% free cash flow per share growth over that period, let me break it out for you. Roughly two-thirds of that comes from what I call organic growth, and one-third comes from capital deployment. Now, I also want to be clear in that, that distinction is a little harder and less clean than some people may like. And the reason I say that is, if I deploy money in IMTT for adding heating capacity to an existing tank and that gives me a material step up in rate from a new customer, do I attribute all the step up in rate to the capital I deploy, or do I assume I would have got some step up in capital - some step up in rate anyway and so I only attribute some of the revenue - incremental revenue to the capital, or do I attribute all the revenue to the capital because I wouldn’t have rented the tank maybe without any edict? The bifurcation of what is organic growth and what is growth CapEx related, is just not as mathematically clean as I know everyone would like it to be, because then we could model it in Excel more neatly than we can. But when we look at the business, and there’s these examples of that from Atlantic as well that I could give you, when we look at the business we basically say two-thirds of that growth in free cash flow per share is organic and one-third is capital related. But you are right, from the capital we reinvest from free cash flow, and from the incremental debt capacity we have available to us without increasing our net debt-to-EBITDA, we have the resources to fund a substantial amount of growth CapEx going forward. All of our growth CapEx pipeline that we’ve outlined without accessing equity markets.

[Ian Zaffino:]

Okay, great. And then just one final question is on the acquisition side. How do you rank where you want to deploy your capital? Just given that you have some weather issues on the contracted power side, but the aviation business is doing very, very well, plus you’re probably going to see some divestitures or at least some forced selling from the mergers that are going on there, so how would you kind of rank where you would deploy your capital in what areas, and that’s [putting yourself on] [ph]?

[James Hooke:]

Yes. So I’d say in terms of capital allocation, the first is we always take a view to the long-term in terms of capital allocation in terms of what’s the right returns in the long-term. Secondly, we do take into account the portfolio mix. And so whilst we would like to grow the aviation business, I think you’ll see us grow that sort of three, four, five locations a year rather than bigger amounts than that from a portfolio mix perspective. At the moment, we are seeing attractive opportunities to deploy capital across all four of our businesses. I would say in the wind and solar segment of the Contracted Power and Energy business, they still appear to us to be a - it still appears to us to be a little bit too much the dumb money at the party in terms of that, whilst it’s no longer the yield because the counterparty is signing the overpriced checks has changed, probably has a Canadian accent now rather than a U.S. accent. So that - we still looking in that space, but we can’t see the returns that we want. I also would say to people, in terms of the - I’m not unduly worried about the weather impact that weather had on our CP&E business, because I know that that will normalize over time. And whilst I agree it creates the jitters short-term in terms of any given quarter, actually we’ve always had a seasonality and weather-related impact at IMTT and across our portfolio. That doesn’t worry me. But I would say, the long-term is where we look for the capital deployment and we see opportunities in all four of our verticals. And the real question is a portfolio mix and a return on that capital deployed.

[Ian Zaffino:]

Okay. Thank you very much.

[James Hooke:]

Thanks.

[Operator:]

Thank you. And our next question comes from the line of Jeremy Tonet with J.P. Morgan. Your line is now open.

[Jeremy Tonet:]

Good morning.

[James Hooke:]

Hey, Jeremy.

[Jeremy Tonet:]

Maybe just picking up on that last company as far as the M&A opportunities that exists in front of you right now. And how do you think about the midstream sector? It seems like there has been a lot of pain out there and I’m wondering how that grieving process is going and what type of opportunities that might be presented to you.

[James Hooke:]

Yes. So I think, Jeremy, what I’d say is there is more pain to come is our view. But that’s sort of subjective view, whilst there’ve been sort of every now and then the market rallies on the back of crude price. I think when crude price falls, the market will tank again. And so a sort of hypothesis is there’s probably more pain to play out there. I’d also say that what we are looking for, and I’d sort of almost refer to our own business in this regard, is businesses - a lot of the businesses we’re looking at have too high a level of ancillary revenue for us and not enough of core contracted revenue. And so, we still think there is a price dislocation. As we saw at IMTT this quarter, ancillary revenue is not as good revenue as contracted revenue. We’re happy that at IMTT the ancillary is on the sort of 13% of the mix. But at a lot of the businesses that we’re talking about where there is a lot of pain when we dig beneath the surface, the ancillary looks like it is 40% or 50%. And I think the real interesting thing that will play out this year is when people get their first quarter numbers and second quarter numbers and third quarter numbers. I don’t think people have got anymore provisions to release from their balance sheet. And what I don’t see other businesses doing unlike ours is overspending on maintenance CapEx in this year or pulling costs forward as we did into 2015 into the first, fourth quarter at both IMTT and Atlantic. So, I guess, we still remain interested. We still remain hanging around the hoop. We still have dozens and dozens of meetings with investment bankers and counterparties and potential targets. But we’re going to be - I think the first rule of capital allocation which I outlined in terms of our priorities is, first rule, do no harm and don’t do anything dumb. But I would say the sort of - to the extent that there is a barometer of the mood, I think that resigned acceptance that this is the new commodity price environment has not just infiltrated IMTT’s customers, it seems to have infiltrated some of the people we’re in discussions with, who essentially can see that in their current model with their current capitalization levels they don’t have a sustainable business model. So that’s all I’ll say at this stage.

[Jeremy Tonet:]

Yeah. That makes sense. It is amazing to us how that maintenance CapEx somehow continues to shrink for some of those guys. And maybe just extending that a bit further, at times you’ve talked about the outlook for potentially adding a new vertical, any updated thoughts that you could share with us on that at this point?

[James Hooke:]

Yeah. At this point in time I would sort of say given where we see our share price and our cost of capital. We’re probably more focused on deploying capital into the full verticals that we’re in. We always kick the tires on other spaces. But I would sort of say, at this point in time we’re more interested in deploying our existing capital and our existing free cash flow into growing our businesses; and with the pipeline of opportunities we see, entering into a fifth vertical in any meaningful way would require a sort of capital raise. And at this - I’m not sure that people who are raising capital in this environment have a huge amount of fund. So given that I am a weakling in pain of this, I would - my immediate reaction is to run from that car crash rather than to it.

[Jeremy Tonet:]

That’s great. Not much fun at all. We appreciate your strong balance sheet. That’s it for me. Thank you.

[James Hooke:]

Okay. Thanks, Jeremy.

[Operator:]

Thank you. Our next question comes from the line of TJ Shcultz of RBC capital markets. Your line is now open.

[TJ Shcultz:]

Great. Thanks. Good morning. I guess, just first I wanted to - hey - try to get a little bit more granular on where most of the opportunity sits to invest organically at IMTT over the medium term. You laid out the contribution mix by products, so if we think about that 55% in refined, 23% exposure to chemical, are these are two areas you expect to spend the bulk of the growth capital over the next couple of years? Maybe if you can give a little bit more color on the $80 million you’re going to spend this year or just any view that the contribution mix by product shifts at all over the next few years?

[James Hooke:]

Yeah. It’s a good question. I think the answer is of the $80 million that we have in the pipeline today, it splits between petroleum and chemical. Whilst vegetable and biofuels and animal oils are great, it would be hard to go heavily longer in that space without buying, I guess, specialty terminals in that space. So I can’t see the mix essentially changing from those two. And I think in terms of the growth CapEx, what I think will probably occur is that you’ll see the chemical component increase slightly over time. Having said that, with the $50 million - with the $80 million we’ve got in the pipeline, probably more of that is petroleum related and that’s just because, if you think about where the majority of that comes from at the moment, it’s from our existing customers looking for us to provide new and additional services to them. And we have more additional customers in the petroleum space than we do in the chemical space, because it’s 55 versus 23. So I think you will see them grow in rough proportion to each other, but may be skewed to chemical growing faster. But I don’t think there will be a material mix change other than if we rolled the clock forward five years, I wouldn’t mind it if chemical was at sort of 35%, but getting it from 12% - 23% to 35%, that’s a big lift. Well - sorry, getting it from 23% to 35% the way I want to get it from 23% to 35% is a big lift. We can put one of them in reverse and get them much faster, but I don’t intend to do that, so.

[TJ Shcultz:]

Okay. Fair enough. That’s helpful. I think next if you can address a little further on the counterparty discussion that continues to be a big dim for investors, maybe if you can discuss your biggest type of customers at IMTT or what percentage are investment-grade, just any additional color or details here would be helpful I think?

[James Hooke:]

Yes. So let me go through, if you’re sort of talking about in the customer space, of the top - firstly, no one customer is material. The top 20 customers represent about 70% of our business. Of the top 20 customers, 16 are investment-grade and four are not rated. Of the four who aren’t - sorry three are not rated, one is sub-investment-grade but like the upper end of sub-investment-grade to the extent that is a meaningful statement. And the other three who aren’t rated, it’s not like they’re not rated because they wouldn’t be quality counterparties. They’re generally not rated, because they’re private companies of the sort that receive a lot of publicity in the media, without naming names, for their non-energy related activities rather than for their energy related activities. So I would say that they are all robust in terms of - that’s the sort of math as to how it works out. Even while counterparties have changed over time, if I went back and looked at this from the 2007 refinancing of IMTT, you have the same mix of investment-grade and the top 20% representing it. I think the real issue is, we say, Shell is a big customer of ours, and we think Shell is a great counterparty. They’re a good person to do business with. They’re an investment-grade company. When we say, we don’t do business with E&P companies, someone then comes back and says to us, well, what about Shell, they do E&P. For which the answer is, okay, Shell and Exxon do E&P, but we still view them as good counterparties. When I say, we don’t have E&P exposure I mean we don’t have exposure to companies who do nothing but E&P, and are therefore weaker counterparties than that. So that is the sort of to give you answer. We just - because of the - and it’s not through strategy or brilliance or anything, it’s just because of the product mix we’re in we don’t have E&P companies as our counterparties, because we don’t do crude gathering and processing, crude throughput and wellhead sort of related services. I would say also though, and this is a clear thing, we get paid in advance for our contracts, 30 days in advance. We have the product sitting in our tanks, which is we call it as a New Jersey lien, which is if you want to get the product out of our tanks, good luck getting it out without paying us. And thirdly, we have the ability to transfer new customers in. The only example over time we looked out at a customer who went bankrupt historically, it was what - the contract was washed through bankruptcy and we essentially had the same terms renewed. Unlike what I think people worry about in the sort of bankruptcy in the upstream world of an E&P company going bankrupt and the off-take or the basin reserve or capacity payment being rewritten through bankruptcy, because ours is demand-full product in a sort of refined product mix, if someone doesn’t honor the contract with us, whether it’s a chemical customer or a petroleum customer, they can’t run their business because we are at that point of the supply chain. So I would say - and again, I’m not meaning to belittle shareholders’ sensitivity around counterparties. I get why people are focused on this. But of all the things that keep me awake at MIC at night, that IMTT counterparty exposure and the creditworthiness of the counterparty exposure doesn’t make it into my top 10 things of causes of insomnia. It’s something we focus, we track and we work on. But to be honest, I’m more worried about counterparty risk at all of the other businesses than I am at IMTT. And that’s because there is a material counterparty risk at the other businesses, but historically, we just had more bad debt expense of the other businesses than we’ve ever had at IMTT. It’s more of an issue elsewhere within our portfolio, but we never get questions on that. And I understand the nature of the questions. I’m just saying it’s not - it’s not giving us any grief.

[TJ Shcultz:]

Okay, great, very thorough. Just lastly on the tax commentary, I know you’re typically able to push that out as you invest. I think the current date you have out there is late 2019. But just so I understand this does not incorporate the 210 in new backlog or BEC II?

[James Hooke:]

So it does incorporate the 200 in backlog. It doesn’t incorporate the 130 of BEC II, because that’s not in our backlog. If and when that goes into our backlog, we will then provide a revised tax guidance update. And it also and - I also want to clear on this, nor does it incorporate the 500 gigawatt of power elsewhere in Bayonne. And the benefit of BEC II and that potential plant, depending on whether it was built is getting bonus depreciation if we’re entitled to it on those looks of equity is pretty good, if we can do it.

[TJ Shcultz:]

Okay. And then just to remind me on BEC II, what’s the timeframe to get that into the backlog or are you in the regulatory process?

[James Hooke:]

So, where we’re at in the regulatory process is essentially we’re waiting on the New York ISO, where there is a connection class as I’ve learnt when dealing with regulators like that the how long is whatever number I pick it will be, two months longer. So I might as well say we’re imminent, in the remaining two months’ time we’ll get it. But I think the guidance we’re comfortable giving is that that capacity will be online late 2017 or early 2018. But that’s the best I got for you at the moment unfortunately.

[TJ Shcultz:]

Okay. Thank you.

[Operator:]

Thank you. Our next question comes from the line of Sameer Rathod of Macquarie. Your line is now open.

[Sameer Rathod:]

Hello, good morning. How are you?

[James Hooke:]

Good, Sameer. How are you?

[Sameer Rathod:]

Good. A couple of, I guess, housekeeping questions, a few years ago MIC stopped disclosing year-on-year storage rates for IMTT. Could you tell us, I guess, anecdotally how the storage rates are compared to historical, like 2015 compared to 2014 or 2012 or whatever benchmark you want to use?

[James Hooke:]

Yes. So I think what we said in the script is essentially that the prices continue to rise. One of the reason, and I want to take you back to the reason we stopped breaking it out, is because within firm commitments, given the way those contracts were being structured, the distinction between volume, price and then additional contracted services became something of a difficult component to unpack. But I think what we said - so we commented on firm commitments. I think what we’ve said to people in this quarter is effectively what we’ve said over the last few, which is utilization which had dipped in 2014, because we had tanks offline for cleaning and inspection. And people sort of were spooked as to really offline for cleaning and inspection, will it ever come back or you’re just saying that because your utilization is down. We’ve noted to people, you can note that utilization is back up, so that’s really proof that it was offline for cleaning and inspection, and we’ve seen prices continue to increase. I think what I would characterize in terms of prices though in terms of - to the extent that unpacking that makes sense is that the go-go days of 2009, 2010 of sort of double-digit price percentage increases, we’re not in that environment anymore. But I think as we said to people in 2009, 2010, by definition that stuff doesn’t continue in perpetuity. So the sort of pricing related increases have sort of tempered back to where you would more expect them to be in proximity to sort of CPI rather than sort of spectacular pricing increases. But I think that’s being something that really has played out over the last two years or so or three years rather than new. But I guess that should give some commentary or I guess that’s the sort of…

[Sameer Rathod:]

Right, right. In terms of the extending of lease durations, are the rates that - if someone signed a longer duration lease are the rates more favorable for them or how much more favorable are the rates? Have you seen any change in - are you adding any more carats [ph] to getting people to sign longer leases by lowering the rates?

[James Hooke:]

Yes. So it’s an interesting question. Historically, I would say, overall the trade was, if you get a - the more term you sign up for, you get it at slightly lower rate, because in return to sacrificing flexibility you end up sacrificing - you end up getting a benefit for that. So I’d say, historically that’s been the case. There have been instances actually where we charged a higher price for a longer period, because of effectively storage within a contango environment and people said, okay, I’ll pay up for that. But I would say, by and large, if you’re getting term you’re generally doing it at a lower amount. I am not sure actually, and this is a sort of view that, again, we have a sort of discussion with ourself over this, that actually customers are as well-served by signing short-term contracts as they are. One of the issues for a customer when they sign a short-term contract is, at the end of the contract period they have to - they’re responsible for paying for the cleaning of the tank. So if you only take a tank for one year, you include a cleaning expense on a one-year contract. If you take a tank for four years, you’re getting cleaning expense and amortize that over the four years. So I think customers going in and out of tanks and giving them back and not giving them back, actually if they look at the full cost, I think a customer is better off by staying in tankage for longer. But I also appreciate with that that I sound like a salesman who’s having a conversation with himself as to why you should buy a 100-year annuity rather than a one-year annuity. But I think customers do better from signing long-term contracts, but…

[Sameer Rathod:]

So, basically, you are not offering any additional incentives to increase the leases in line with what you’ve been doing historically?

[James Hooke:]

Yes, it’s not like we’ve been throwing money at people to sign up. And, as I said, one of the reason - in my comment - remarks I made previously is where our sales peoples or our commercial folks feel like their pushing against a brick wall, there is no point. And by that, I would say, there are just some organizations at the moment where the edict has come from on high from the CFO we will not sign a contract longer than 12 months, because cash is tight, yadi yada. In those scenarios, like there is no point in us offering even a four year contract at a discount, because we know that the person has - the person we are dealing with has zero flexibility in negotiating that. So in that scenario, you’re sort of - it’s just pointless to discuss a multi-year contract, because the person you are dealing with doesn’t have the authority to do a multi-year contract. In other cases, typically where someone has signed a five-year deal, they got the usual better deal for five year deals than they would have for a one-year deal. But it’s not - there’s no real - no, we haven’t sort of tactically responded one way or the other, if that’s the question.

[Sameer Rathod:]

Yes. That’s the question. I think historically, I’ve asked in the past, but a certain percentage of your capacity at IMTT is held by trading houses or financial institutions. Hypothetically, we’ve seen some people get out of commodity business. Let’s say hypothetically some of these people do go away and they don’t come back in the form of another trading house. Can you revamp that storage capacity quickly or do you think you would have to cut rate materially to move the capacity?

[James Hooke:]

No, like - no, no - this isn’t a hypothetical question. It’s like Morgan Stanley has exited trading, JPMorgan has exited trading. All of that capacity has been rented to either new counterparties or the people they’ve flogged their business to. So this has been unfolding real time. It’s a situation I would say we’ve been dealing with ever since the preliminary announcement in the Volcker rules to some degree. And all of that capacity we’ve moved away. In some situations, the exact same name is on the contract, because the person who was - the human being who was the trader at JPMorgan is now the human being who is the trader at such and such counterparty. And so, your question is a very real and live one, and one we’ve been dealing with the last, I guess, three or four years and we’ve been able to get the capacity away. In each of those scenarios, we always have a decision in front of us, which is when the business is sold, we often have a consent right as to whether we will consent to novating the contract to the new counterparty. And by and large, so long as we think that counterparty is material - or is good, we will do that. If we think that counterparty is dodgy, we won’t do that. But an example I would give you, and this is where there is somewhat false distinction here between counterparties of a fundamental nature as I described in this traders is, JP Morgan used to manage some of the product that came out of the Phillips 66 refinery in New Jersey, as JPMorgan exited the trading business Phillips 66 in-housed that capacity. The product that sits physically in our tanks at Bayonne is still the same providence. It still comes out of that refinery. The counterparty’s name has changed, but again, it was - there are sort of two types of trader, I guess, is what I’m trying to say. There were those traders who are sort of what I would call speculative traders and there are those traders who are taking physical product either from a refinery or to a customer source and providing - being a conduit, either a marketing channel or a source of financing during that trade. And so in that scenario from my worldview absolutely nothing’s changed. Like the product is coming from the same location, it’s fulfilling the exact same role in the supply chain. Technically, the counterparty has changed from being a trader to a refinery. But in reality, in my mind absolutely nothing’s changed.

[Operator:]

Thank you. At this time I’m showing no further questions. I’d like to hand the call back over to management for any closing remarks.

[James Hooke:]

Thank you very much. We will be on the road participating in a number of conferences and road shows over the next couple of months. And I’m sure you will be seeing many of you at these. Jay will also likely be in touch either way, whether you want him to or not, as always to make sure you have your say. Please save any difficult questions for Jay. I would like to finally thank our lenders and our suppliers and our customers for the support they’ve given us over the year. And I would like to thank Gerard Adam and the team at IMTT headquarters in New Orleans for making sure that IMTT kept its SOX clean in 2015. Good compliance is good business. And we appreciate the effort of Gerard and everyone at IMTT for getting the business over the COSO and SOX hurdle for the first time. Thank you and good bye.

[Operator:]

Ladies and gentlemen, thank you for participating in today’s conference. That does conclude today’s program. You may all disconnect. Have a great day everyone.