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Macquarie Infrastructure Corp (NYSE:MIC)
Q3 2019 Earnings Call
Oct 31, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Macquarie Infrastructure Corporation Third Quarter 2019 Earnings Conference Call. [Operator Instructions]. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Mr. Jay Davis, Managing Director of Investor Relations. Please, go ahead sir.

Jay Davis -- Managing Director of Investor Relations

[Technical Issues] to Macquarie Infrastructure Corporation's earnings conference call, this covering the third quarter of 2019. Our call today is being webcast and is open to the media.

In addition to discussing our quarterly financial performance on this call, we have published a press release summarizing the results and filed the financial report on Form 10-Q with the Securities and Exchange Commission. Materials were released this morning, 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, Christopher Frost, let me remind you that this presentation is proprietary and all rights are reserved. Any recording, rebroadcast or other use of this presentation in whole or in part without the prior written consent of Macquarie Infrastructure Corporation is prohibited.

This presentation is based on information generally available to the public and does not contain any material 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 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.

During today's call, we will, at various times, make reference to the non-GAAP measures, earnings before interest, taxes, depreciation and amortization or EBITDA and free cash flow as defined by us. A reconciliation of these non-GAAP measures to the most comparable GAAP measures can be found in the tables attached to our earnings press release published this morning.

In addition to Christopher Frost, participating in today's call is Macquarie Infrastructure Corporation's Chief Financial Officer, Liam Stewart.

At this time, it is my pleasure to introduce Macquarie Infrastructure Corporation's Chief Executive Officer, Christopher Frost.

Christopher Frost -- Chief Executive Officer

Thank you, Jay, and thanks to those of you joining our call this morning. As many of you'll have seen by now, along with the publication of our earnings press release this morning, we distributed a second release announcing our intention to actively pursue strategic alternatives for MIC. This decision to pursue strategic alternatives reflects confidence in our ability to unlock significant additional value for shareholders by selling MIC or selling each of its businesses or executing on other strategic transactions.

The decision follows a thorough review by our Board at its annual strategic retreat this fall. The review included analysis and support from a range of financial, legal, tax and industry advisors. For the past two years, we have been focused on executing initiatives in support of three strategic priorities. These have been: one, the investment in the infrastructure of our businesses; two, the strengthening of our balance sheet; and three, the prudent management of our available capital and resources. As a result, we have streamlined our portfolio to the successful sale of six smaller and non-core businesses on attractive terms. Use the proceeds from these sales to dramatically strengthen our balance sheet and with that extended the maturity of our remaining debt and deployed or committed to deploy capital into each of our businesses to improve both their competitiveness and their resilience.

You will recall that I've said on many occasions that the successful execution against these strategic priorities would not only improve the performance of MIC but also increase the number and quality of strategic alternatives available to us. Therefore, we believe now is the logical time for us to actively pursue these alternatives. Specifically, we intend to pursue the sale of MIC or the sale of its businesses or other strategic alternatives to realize greater value for shareholders. In addition to sales for cash, strategic alternatives could involve a spin-off of one or more of our businesses, a merger or joint venture, our focus will be on maximizing value for shareholders. We have not and will not set a time limit for these activities, but will advance the effort as quickly and efficiently as possible, just as we have done with the sales of smaller and non-core businesses.

Consistent with that objective, we have appointed financial and other advisors to assist us in any process. Along with this announcement, as noted in our press release this morning, MIC has entered into a disposition agreement with Macquarie Infrastructure Management USA, the external manager of the company. It is public and was filed with the SEC this morning. The agreement sets out the terms under which the arrangement with our manager will be terminated for those businesses, which are sold or otherwise divested as well as the payment to be made to the manager. The payment is consideration in general for the future earnings the manager would have generated under the existing management services agreement. The amount paid to the manager will be based on the equity proceeds realized above a threshold level and after deducting transaction costs, taxes, paying off or reserving for the payment of holding company level debt and the disposition payment. The payment increases along a sliding scale based on increases in the proceeds realized, thereby more closely aligning the interest of the manager with those of our shareholders.

To be clear, we remain confident in the long-term prospects for each of our businesses. It is worth briefly reminding ourselves of the unique investment merits. With 19 [Phonetic] terminals and over 48 million barrels of bulk liquid storage capacity, IMTT is one of the largest providers of independent liquid storage and handling services in the US. It benefits from premier positions in two of the four major petroleum and chemical storage markets in the US. Given its position in these key markets, IMTT is well placed to capitalize on growing demand for storage and handling of bulk liquid products. This demand includes the storage and handling of petroleum products relates to the implementation of IMO 2020, as well as storage and handling of chemical products related to natural gas development in the US.

We believe storage utilization of IMTT has troughed as evidenced by the consistent increases in utilization over the course of 2019. And IMTT continues to benefit from a strong pipeline of development opportunities both within and outside of expense line.

With 17 [Phonetic] fixed based operations across the US, Atlantic Aviation is the preeminent provider of fuel and ground support services to the general aviation market. The fundamental driver of Atlantic Aviation's performance, the level of general aviation flight activity in the US remains robust. Importantly, Atlantic Aviation also enjoys a significant pipeline of opportunities for the expansion of operations at existing bases and the addition of new bases to its network.

MIC Hawaii comprises a stable regulated gas production and distribution business, a market leading propane distribution business and some of the largest solar power facilities in Hawaii. Together these operations are at the forefront of efforts to develop a cleaner, more sustainable energy complex in Hawaii.

We also remain confident in the cash generating capacity of our businesses as presently configured and in the health of our balance sheet. We firmly believe the steps we have taken over the past two years have made each of our businesses more resilient. As a result, we are reaffirming our dividend guidance for the payment of $1 per share for the fourth quarter of 2019. In addition, based on our view of the performance of our businesses, we intend to pay a dividend of $1 per share per quarter in 2020. As ever, this assumes our businesses and operations are performing at levels that support the dividend and does not assume a sale of any business. In addition, it is subject to general economic conditions and stability in the broader market.

I'll provide additional color on our next steps in a few moments. But I don't want to either look the continued stable performance of our businesses in the third quarter. At this point, I'll ask Liam to share some of the highlights with you.

Liam Stewart -- Chief Financial Officer

Thank you, Chris. I'll be brief. MIC's financial and operational results for the third quarter of 2019 were consistent with our expectations across the board. They reflect continued good performance at Atlantic Aviation driven by effective management of the business and growth in general aviation flight activity year-on-year. And improvement in the contribution from MIC Hawaii reflecting the sale of the mechanical contracting business sold in late 2018, and a continuation of the positive trends at IMTT that were present in the first half of the year.

IMTT's results for the quarter reflect the ongoing increase in utilization, partially offset by lower average storage rights. Utilization averaged 85.2% for the quarter, up from an average of 82.9% in the second quarter and 82.1% in the prior comparable period. We continue to expect utilization to be in the mid to high 80%s range at year-end.

Demand for heavy and residual oil storage on a Lower Mississippi River has driven the improved performance. Heavy products are used as feedstocks in secondary refining processes. As a result, IMTT's heavy and residual oil storage capacity on the Lower Mississippi River is largely full, other than the crude oil tanks related to the refinery that IMTT purchased in July. As such, IMTT has paused broad scale efforts to repurpose storage capacity.

We continue to expect that IMTT will generate EBITDA for the full year of between $287 million and $297 million or between $248 million and $258 million, excluding the refinery termination fee received in the first quarter of this year. IMTT has also benefited from increased throughput revenue and increased ancillary services fees in 2019.

Atlantic Aviation delivered a good result for the third quarter against FAA reported general aviation flight movements industrywide that were up 0.7% overall. Based on the same FAA data, flight activity at the airports on which Atlantic Aviation operates increased by about 1%. As in the second quarter, Atlantic Aviation sold more jet fuel this year than last, and generated more revenue from hangar rentals. An increase in expenses, particularly salaries and benefits reduced the amount of improved gross margin flowing through to EBITDA. Atlantic's EBITDA result also reflects approximately $3 million of negative adjustments primarily related to its maintenance business. Excluding this, the results for the third quarter of this year would be a modest improvement on the third quarter in 2018. The adjustments will also impact Atlantic Aviation's results for the full year, of course. However, we are reaffirming EBITDA guidance for the business in a range of $275 million to $285 million.

MIC Hawaii generated substantially more EBITDA in the third quarter this year compared with last. You will recall that the 2018 results included the writedown of the mechanical contracting business that was subsequently sold in the fourth quarter of last year. That aside, MIC Hawaii performed in line with expectations. Unseasonably warm weather this year reduced demand for gas modestly and laid the cost increased. We expect MIC Hawaii to deliver a full year results consistent with our prior guidance as well.

The Corporate and Other segment recorded cost of $5 million compared with cost of $6 million a year ago. The results for the third quarter of this year reflects the recategorization of transaction costs associated with the sales of our renewables businesses to discontinued operations. Now that those transactions have closed. Approximately $2 million have been recorded in ongoing operations in the first half of the year. I'm pleased to report the closing of the sale of our remaining operating renewable business as anticipated in September. In total, we generated net proceeds from the sales of our various interest in renewables businesses of approximately $210 million after transaction costs and taxes. Available liquidity principally balances on existing credit facilities was approximately $2 billion at quarter end. We anticipate having a cash balance at year end of approximately $300 million, the majority of which would be available to support our dividends or to fund a portion of our growth projects in 2020.

As foreshadowed during our last conference call, the Lower Mississippi River subsided to levels of permitted work on various growth and maintenance projects in the region to proceed. As a result, our spending on growth projects increased sequentially in the third quarter to approximately $52 million. We now expect to deploy between $200 million and $220 million on growth projects for the year, lower by about $15 [Phonetic] million versus our original expectations.

Our reduced expectations for 2019 represent largely a deferral of projects into 2020. Importantly, the deferral is not expected to have an impact on either our consolidated EBITDA or our tax liability in 2019, given most of the delayed projects was scheduled to be placed in service in 2020 or beyond.

With that, I'll hand the call back over to Chris for a few additional observations.

Christopher Frost -- Chief Executive Officer

Thanks, Liam. Between now and early 2020, with the support of our advisors, we will refine our analysis of various strategic alternatives. As I mentioned a few moments ago, these could include the sale of MIC, sales of one or more of our businesses or any of spin-offs, a merger or joint venture as a means of generating value for shareholders. We will update the market when the Board has approved a specific course of action or has otherwise determined that further disclosure is necessary or appropriate. While we are setting a specific path forward, we will continue to focus on our current priorities, particularly on investing in the infrastructure of our businesses. We remain confident in our ability to further diversify the product and customer mix at IMTT, by delivering new capacity, connectivity and capability that positions the business well over the medium to long term.

At Atlantic Aviation, we will continue to pursue acquisition and development opportunities to expand the already significant footprint of the business and the services it provides to customers. In general, both acquisitions and development projects will also add value in the form of extending the weighted average remaining lease life of Atlantic Aviation's portfolio.

And MIC Hawaii and Hawaii Gas will benefit from ongoing investment in the reliability and sustainability of the energy complex in Hawaii. We are confident that our nearly 4,000 employees across our businesses will continue to focus on what they do well. Namely, managing and operating our businesses safely and efficiently, while providing the high level of service and support that customers have come to expect.

In summary, we intend to pursue strategic alternatives that could include could include the sale of the MIC or of its businesses. We have solid businesses with good prospects. And we are confident in our ability to deliver value in a sales process should that be the most appropriate path forward, just like we have in our sale processes to date. MIC's third quarter results were consistent with our guidance and reflective of the stability inherent in the asset class.

We reaffirm our previously provided guidance with respect to the performance of the businesses over the balance of the year and the distribution of $1 per share as a dividend in the fourth quarter. And finally, we intend to pay a dividend of $1 per share per quarter in 2020. This assumes our businesses and operations are performing at levels that support the dividend does not assume a sale of any business and remain subject to general economic conditions and stability in the broader market.

With that, I thank you again for your participation in our call this morning. At this time, I will ask our operator to open the phone lines for questions.

Questions and Answers:

Operator

(Operator Instructions) And our first question coming from the line of Jeremy Tonet with J.P. Morgan. Your line is open.

Christopher Frost -- Chief Executive Officer

Good morning, Jeremy.

Jeremy Tonet -- J.P. Morgan -- Analyst

Hi, good morning. Just wanted to start off with the strategic actions you guys have taken today, and wondering if you could provide a bit more color as far as how active your conversations have been with potential buyers of the businesses? Or any color that you could share as far as appetite out there?

Christopher Frost -- Chief Executive Officer

Yeah, Jeremy, I think you would appreciate that we're not able to comment on that.

Jeremy Tonet -- J.P. Morgan -- Analyst

Got you. Okay. And maybe you could talk a bit about the disposition agreement with the sponsor there? And walk us through the mechanics, how that works a bit?

Christopher Frost -- Chief Executive Officer

Yeah, certainly. I think the important point to note is the disposition agreement sets out the terms upon which the manager will be terminated following either the sale of the company or any of the operating businesses or any other strategic alternatives that we may pursue. As I mentioned in my prepared remarks, the disposition agreement includes a payment to the manager, which seeks to represent the potential earnings the manager may have earned had it continue to operate or manage the business or the company. Importantly, the payment is based on the equity proceeds realized to the company. It is subject to a minimum threshold and we adjust the proceeds for transaction costs estimates of any taxes that will be payable on the disposition and also paying off or reserving for the payment of both corporate level debts. The payment increases along the sliding scale based on increases in the proceeds that are realized.

Jeremy Tonet -- J.P. Morgan -- Analyst

Great. I was just looking to the language a bit here, and there is something about the date of January 2022. Is there anything -- could you explain a bit more about how the timeline works there?

Christopher Frost -- Chief Executive Officer

The disposition agreement has a term of 6 years on it. And the course that you are referring to represents an additional payment to the manager to the extent that we have successfully executed on the strategic priorities -- sorry, alternatives within that time period.

Jeremy Tonet -- J.P. Morgan -- Analyst

Got it. And then maybe just a final one on IMTT here. I'm wondering, the utilization stepped up a bit here. Where do you see that kind of exiting the year versus your prior expectations at this point? And how do you think about the trade-off between increasing utilization and the rates that you guys are looking for, the tenor of the contracts? How that all mixes together?

Liam Stewart -- Chief Financial Officer

Yeah, Jeremy, it's Liam. So clearly, this quarter we've seen a step up in utilization. And then I'd note that it's sort of first step up we've seen year-over-year as well. So we do see signs of utilization continuing to improve. Our guidance i.e., sort of year-end spot utilization is in that sort of mid to high 80s range as well and that's consistent with what we've said previously.

I think as you see in the results for this quarter, notwithstanding the improvement in utilization, the sort of average storage revenues down sort of in the low single-digit percentage -- single-digit percentages year-over-year. So clearly, as we see that improvement in utilization rises, taking some time to recover. And as we've said, we anticipate that the utilization recovery will come first and then the late recovery would follow thereafter. What we continue to see sort of to seek to engage with our customers around meeting their needs in respect to one, sort of utilization as well, but two, also in terms of what we can do to extend tenor.

Jeremy Tonet -- J.P. Morgan -- Analyst

Great. That's all from me. Thanks for taking my question.

Liam Stewart -- Chief Financial Officer

Right.

Operator

And our next question coming from the line of Tristan Richardson from SunTrust. Your line is open.

Tristan Richardson -- SunTrust Robinson Humphrey, Inc. -- Analyst

Hey, good morning, gents. Liam, could you talk a little bit more about the maintenance business in terms of a revision, is that kind of a restatement of past results or is it an asset writedown? Just kind of curious because --

Liam Stewart -- Chief Financial Officer

No. It's not a writedown. It's really just a reversal of some prior period maintenance revenue. And Atlantic does a little bit of maintenance, and its obliged to, on the, some of the lease agreements that has with a few FBOs. So it's really non-core to the overall business. And in the quarter, we had a very good results from a volume perspective. The FAA activity was slightly stronger to Atlantic FBOs, and it was across the industry, and I wouldn't anticipate that we'd see this going forward.

Tristan Richardson -- SunTrust Robinson Humphrey, Inc. -- Analyst

Helpful. Thank you. And then just lastly on the disposition agreement. I guess, just -- traditionally we just think of the sponsor is generally aligned in its ownership of MIC shares and would be a beneficiary of any value creation proportionate to its ownership as any other shareholder would, but could you talk just about sort of the Board's decision and/or just what the Board was weighing as it sort of offered this agreement to the sponsor.

Christopher Frost -- Chief Executive Officer

Tristan, I think it's important to note that Macquarie's 15% shareholding is quite separate and distinct from its rights and obligations under the Management Services Agreement. The two should be separated. The disposition agreements that we talked about really deals with how we're treating the manager on termination following the sale of the company or the operating businesses. So I think it is important to sort of see them as quite separate and distinct.

Tristan Richardson -- SunTrust Robinson Humphrey, Inc. -- Analyst

Helpful. Thank you guys very much.

Operator

And our next question coming from the line of TJ Schultz with RBC Capital Markets. Your line is open.

TJ Schultz -- RBC Capital Markets -- Analyst

Hey, good morning. Hi. Would you sell St. Rose and IMTT band separately? Or is IMTT to be sold in its entirety?

Christopher Frost -- Chief Executive Officer

I think, TJ, you would appreciate that we're not going to speculate at this stage on hypotheticals. As I said in my prepared remarks, that we're going to use the balance of this year and the early part of next year to refine our analysis of the different strategic alternatives with the support of our advisors, and we will do that as efficiently and in a timely way possible. And once the Board has made a decision on the preferred course of action, we'll look to update the market then.

TJ Schultz -- RBC Capital Markets -- Analyst

Okay. Is the -- in the disposition agreement, is there an incentive to undertake a whole company transaction? Or is it the same either way if it's a whole company transaction or assets to different buyers?

Christopher Frost -- Chief Executive Officer

There is no differentiation with respect to the strategic alternatives being pursued .

TJ Schultz -- RBC Capital Markets -- Analyst

Okay. And then in that agreement just a lot of moving parts still haven't gotten through the whole thing, but can you clarify the base management fee waivers going forward if a qualifying event occurs or the caps you announced last year recouped? Or are they waived going forward?

Christopher Frost -- Chief Executive Officer

You will see in the agreement, then you'll recall that the manager agreed to waive a portion of the base management fee as part of the disposition agreement. The manager has undertaken not to reverse that waiver during the period of the agreement.

TJ Schultz -- RBC Capital Markets -- Analyst

Okay. And just in the interim here, do you -- how much -- at IMTT, as you operate the business, how much capital do you expect to deploy into IMTT next year for growth projects?

Liam Stewart -- Chief Financial Officer

Yeah. Rob [Phonetic], I'm going to give you the sort of segment-by-segment breakdown TJ. So our guidance we've revised down this year to be sort of $200 million to $220 million, and that largely reflects the sort of projects that IMTT which will fall over into 2020 as well. And then we have today roughly $150 million of gross capital committed across all of the MIC verticals for next year and consistent with historical norm, with a large proportion of that is at IMTT.

TJ Schultz -- RBC Capital Markets -- Analyst

Okay. Thank you.

Liam Stewart -- Chief Financial Officer

Thank you.

Operator

And I'm not showing any further questions at this time. I would like to turn the conference call back over to Mr. Christopher Frost for closing remarks.

Christopher Frost -- Chief Executive Officer

Thank you for participating in our conference call today. We remain focused on continuing to execute on our strategic priorities and will again be on the road meeting with investors and analysts in the weeks ahead. We look forward to speaking with many of you during that time. With that, have a great day.

Operator

[Operator Closing Remarks]

Duration: 23 minutes

Call participants:

Jay Davis -- Managing Director of Investor Relations

Christopher Frost -- Chief Executive Officer

Liam Stewart -- Chief Financial Officer

Jeremy Tonet -- J.P. Morgan -- Analyst

Tristan Richardson -- SunTrust Robinson Humphrey, Inc. -- Analyst

TJ Schultz -- RBC Capital Markets -- Analyst

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