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Macquarie Infrastructure Corp (NYSE:MIC)
Q4 2019 Earnings Call
Feb 25, 2020, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, ladies and gentlemen, and welcome to the Macquarie Infrastructure Corporation Fourth Quarter and Full Year 2019 Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference over to your host, Mr. Jay Davis, Managing Director of Investor Relations.

Jay Davis -- Head of Investor Relations

Thank you, and welcome to Macquarie Infrastructure Corporation's earnings conference call, this covering the fourth quarter and full year 2019. Our call today is being webcast and is open to the media. In addition to discussing our financial performance on this call, we have published a press release summarizing the results and filed the financial report on Form 10-K with the Securities and Exchange Commission. These 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. And 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 curve. 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 reference 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. In addition to Christopher Frost, participating in today's call is Macquarie Infrastructure Corporation's Chief Financial Officer, Liam Stewart.

With that, it is my pleasure to introduce MIC'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 you may be aware, we reported MIC's finance operational results for the full year 2019 early this morning, I will begin our call by commenting on some of the highlights from those results and then provide a brief update on our pursuit of strategic alternatives. Liam will then provide additional commentary on our 2019 financial results, and I'll wrap up our prepared remarks by discussing our outlook for 2020 before open the call to your questions.

MIC generated adjusted EBITDA of $640 million and adjusted free cash flow of $410 million in 2019 in line with our guidance. Both figures include the contract termination payment of approximately $39 million received by IMTT in March. In addition to generating expected financial results, we also completed the streamlining of our portfolio with the sale of the remaining businesses of the contracted power segment and further strengthened our balance sheet. We are pleased with these outcomes and the financial position of the company generally, and so now are focused on unlocking additional value for shareholders throughout our pursuit of strategic alternatives.

As we advised the market in October, we are actively pursuing strategic alternatives for MIC, including the sale of the company or sales of one or more of our well-operating businesses. We also said that we reduced the time through to early 2020 to refine our analysis of the value maximizing options available to us. We have done this and with the assistance of our financial advisors are actively moving a sales process forward.

As we also noted in October, until such time as we have an agreement on a sale or sales or have otherwise terminated our assets, we won't be speculating on any particular outcome or make any additional comments other than to say we remain confident in our ability to unlock additional value. While we actively pursue strategic alternatives, we continue to execute initiatives in support of MIC's three strategic priorities. These priorities are; one, investing in infrastructure of our businesses. Two, prudently managing our available capital and resources. And three, strengthening our balance sheet.

The successful execution of initiatives in support of these priorities contributed to the financial results consistent with our guidance. In support of our strategic priority to invest in the infrastructure of our businesses and improve their resiliency, we announced this morning that IMTT has signed a significant new contract with Diamond Green Diesel, Diamond Green Diesel is a joint venture between Valero Energy Corporation and Darling Ingredients. Under this 20-year take-or-pay contract, IMTT will provide storage and handling services to Darling Ingredients for both feedstock and renewable diesel. IMTT will construct two five mile long pipelines connecting the St. Rose terminal to Diamond Green's refinery in Norco.

In addition, IMTT will expand the rail and marine infrastructure at St. Rose terminal to accommodate the movement of feedstock and finished product from the Diamond Green refinery. The contract is expected to begin generating revenue for IMTT in late 2021. As part of this project, IMTT will also repurposed approximately 800,000 barrels of existing storage capacity for heavy and residual oil to renewable diesel and related feedstocks. That would bring the total amount of heavy and residual oil capacity repurposed since early 2018 to 2.3 million barrels and reduced heavy and residual residual capacity on the Lower Mississippi River by approximately 20% consistent with the strategy we set out in early 2018. This is a great example of the great projects that helps reposition IMTT and connect it to the customers involving products for which there is a clear and growing demand.

In addition to the Diamond Green project, IMTT has agreed to undertake the expansion of its facility at Geismar on behalf of an existing customer. IMTT will construct additional chemical storage capacity pursuant to assisting new contracts. Including previously announced repositioning projects, IMTT has committed to projects with a total value of approximately $350 million since 2018, approximately $92 million has been invested to date and a third or $150 million is expected to be invested during 2020.

Collectively, these projects are expected to generate incremental stabilized EBITDA of $39 million annually. Of that, $6 million is expected to be completed in 2020, graphing to $90 million in 2021 and the majority of the full $39 million in 2022. The projects at IMTT are being developed at an increasing multiple of approximately 9 times EBITDA. They also increase our visibility into IMTT's cash generating capacity over the long-term as a result of having a weighted average initial contract term of approximately 19 years. I would direct your attention to Slide 8 of the earnings supplement posted on the MIC website this morning for additional information on these projects, including the timing of the expected contributions from the specific projects.

Regarding the results for our operating businesses in 2019, IMTT reported results in line with guidance. Storage utilization was favorable in the fourth quarter at 85.3%. For the full year, utilization averaged 84%, down slightly versus 2018, but in the mid-80s as anticipated. Consistent with our expectations, the amount of storage grew throughout the year with utilization increasing to approximately 86% at year-end, up substantially from the trough at the start of 2019 of approximately 80%.

IMTT benefited from the recovering utilization on the Lower Mississippi River driven by strong demand for heavy and residual oil storage related to refine out 2020. This additional demand increased both utilization and average contract tenure compared with the end of 2018. At Bayonne, demand for heavy and residual storage remained robust. While demand for distillate storage did not improve as much as anticipated, demands of lending the marine fuels was lower than expected as the supply of low-sulfur fuel oil was sufficient to meet unfulfilled needs in Ottawa when the new regulations came to effect on January 1, 2020. That also meant that available distillate inventories were used to make tinging of demand instead, reducing the amount of distillate shipments to market this year versus last.

We expect demand for distillate storage at Bayonne to increase during the second half of the year as markets normalize following the implementation of IMO 2020. Importantly, across IMTT, we believe storage rates stabilized in the fourth quarter of 2019. Although average storage revenue is expected to be lower in 2020 compared with 2019, reflecting the full year impact of contracts renewed at those storage rates in the second half of last year.

Atlantic Aviation reported results in line with guidance against the backdrop of the modest year-over-year increase in general aviation flight activity. Atlantic Aviation was able to attract larger aircraft, which in general conceived more fuel. Atlantic Aviation was also able to increase the number of tenants leasing space in the new hangars that are being constructed over the past few years. In addition to tenants purchasing a large portion of fuel behind base, Atlantic Aviation benefits from the fact that both tenant and transit aircraft generate hangar rental revenue.

The construction of additional hangars is being backed by airport lease extensions that improve our visibility into Atlantic Aviation's cash-generating capacity. Beyond that, the developments further have diversified the earnings of the business with approximately 40% of gross profit coming from hangar rentals and ancillary services during 2019.

MIC Hawaii also reported results in line with guidance, reflecting the stable performance for both the regulated and unregulated portions of Hawaii Gas and the ongoing contribution from renewable power and cogeneration operations. MIC Hawaii remains focused on executing initiatives in support of their clean energy supply plan, in particular delivering clean, cost-effective energy to customers throughout Hawaii.

I'll provide additional commentary on our outlook for 2020 including our guidance in a few moments. However, at this point, I'll ask Liam to provide additional detail on our results for the fourth quarter and full year 2019.

Liam Stewart -- Chief Financial Officer

Thanks, Chris, and good morning. I'll briefly recap our consolidated results and follow that with additional detail on the performance of our individual operating businesses. In addition to generating adjusted EBITDA of $604 million and adjusted free cash $410 million, we reported $211 million of cost capital in 2019. We believe these investments will produce attractive amounts of additional EBITDA and free cash flow in the future.

We maintained the strong financial position and ended the year with a cash balance of slightly over $350 million and leverage of under 4 times net debt to EBITDA. During the year, we repaid or deconsolidated a total of $655 million of debt including $350 million of holding company level convertible senior notes repaid at maturity on July 2019. A portion of the cash balance and the deconsolidation of some $300 million of debt, stems from the successful sales of our contracted power businesses for a net $223 million.

Assuming our current portfolio of businesses, we expect leverage to increase over the course of the year as we deploy a portion of that cash balance into committed growth projects including the Diamond Green Diesel project. The lag between the deployment of the cash into these projects and generation of EBITDA and free cash flow will cause our leverage to increase in the interim. Between our existing cash balance, our projected operating performance in 2020 and our planned growth company deployment, we anticipate ending the year with leverage below 4.5 times.

IMTT reported EBITDA of $298 million for the year, up 1% from $296 million in 2018. The small increase year-over-year includes the $39 million termination payment and reflects flat average utilization largely offset by increased costs and the impact of lower average storage rates. Atlantic Aviation reported EBITDA of $276 million for 2019, up 5% from $263 million in 2018. Atlantic Aviation's results reflect continued effective management of the business against the backdrop of modest growth in general aviation flight actively.

MIC Hawaii generated $60 million of EBITDA in 2019, up from $38 million in 2018. Recall however that the 2019 result reflects the lockdown of the sale of the mechanical contracting business at the end of that year. Excluding that transaction, MIC Hawaii's EBITDA increased 9% year-on-year. Hawaii Gas benefited from the full year impact in 2019, as the new utility gas rates that went into effect in July 2019, partially offset by a decrease in gas consumption associated with warmer average temperatures.

Our corporate and other segment recorded negative EBITDA of $25 million for the year, higher than 2018 by $7 million. The year-on-year change reflects the absence of a full year revenue contribution from the renewable power development joint venture that we exited mid-year and increased professional services fees incurred primarily into next-gen without the strategic alternatives.

Regarding MIC's tax position, we fully utilized. Our net operating loss carry forward at the end of 2019, offsetting a portion of the taxes associated with the guide on sales of our contracted power businesses on our operating income. This means that we expect MIC will have a current federal income tax liability in 2020. Based on our projections including for the deployment of growth capital, we anticipate paying approximately $20 million in fed loan income taxes in 2020. We are forecasting having a cash balance at year-end 2020 of approximately $100 million after this payment. Consistent with prior guidance and reflective of the cash generated by our businesses, the MIC board has authorized a payment of the dividend with solid per share in the fourth quarter of 2019. The dividend will be paid on March 11, 2020 to shareholders of record on March 6, 2020.

Before I turn the call over to Chris, I want to touch on the coronavirus outbreak and its implications for MIC in addition to the impact on macro economic activity generally, we're monitoring. One, the stock price of jet fuel, transportation fuel prices have declined since the start of 2022. Two, traffic patterns of Atlantic Aviation. Three, tourism numbers in Hawaii. And four, ship movements and fuel consumption patterns for IMTT. To date, we estimate that the impact of the coronavirus outbreak for MIC has been limited to Atlantic Aviation where the rapid decline in the price of jet fuel in January had an impact of this and $1 million on Atlantic's results. I will note that jet fuel prices appear to have stabilized in February.

With that, I'll hand the call back over to Chris for his thoughts on 2020.

Christopher Frost -- Chief Executive Officer

Thanks, Liam. While we are moving forward with the pursuit of strategic alternatives, we remain focused on operating our businesses as safely and efficiently as possible. We expect to continue to execute on the initiatives in support of our key strategic priorities, initiatives designed to improve the resilience old and our visibility into the long-term cash generating capacity of our businesses. We expect IMTT to generate EBITDA of between $245 million and $255 million through 2020. We are assuming; one, average storage utilization will increase to the high 80% in 2020 and end the year at around 90%. This outcome reflects increased demand for distillate storage in Bayonne and the leasing of the remaining storage capacity associated with the St. Rose refinery. Two, storage rates are stable throughout the year, making the average in 2020 is likely to be consistent with rates achieved in the fourth quarter of 2019. And three, projects placed in service in 2020 contributed approximately $6 million of EBITDA.

We believe we are making reasonable assumptions related to growth in demand for storage in Bayonne and risks associated with the coronavirus. It is expected that in the second half of the year as low-sulfur fuel oil inventories are drawn down, distillate storage and blending will increase in order to meet the demand for IMO 2020 compliant fuels. This should have a positive impact on IMTT's utilization.

Clearly, the full impact of the coronavirus is an unknown at this point. To the extent it results in an extended slowdown in global trade, it could reduce demand for marine fuel storage. In short, we are confident in IMTT's ability to further diversify its product and customer mix by delivering new capacity, connectivity and capability to position the business well over the long-term.

We expect Atlantic Aviation to generate EBITDA of between $290 million and $300 million in 2020. Here we are assuming; one, the growth in the volume of fuel sold is consistent for 2019. Two, dollar-based margins on fuel sales continue to grow at a historically normal rate. And three, increases in hangar occupancy and rental revenue continue. As we mentioned in our press release this morning, Atlantic Aviation has agreed to acquire a small FBO in Bridgeport, Connecticut. The contribution from which is included in that guidance for the year. We will also continue to pursue accretive acquisition and development opportunities to expand the business and the services it provides to the customers consistent with our strategic priorities.

MIC Hawaii is expected to generate EBITDA of between $60 million and $65 million in 2020. This forecast includes an expectation of modest growth in the consumption of propane, particularly on the private, commercial and industrial customers. We expect to deploy between $200 million and $225 million of growth capital during the year. This forecast includes the roughly $160 million related to previously approved projects and the 2020 portion of projects announced today. And we will of course continue to invest in the maintenance of our businesses consistent with sustained cash generating capacity. We expect to deploy between $55 million and $65 million in maintenance capex during the year, with the majority being allocated to IMTT as has been the case historically.

Putting that all together, we expect MIC to generate EBITDA of between $575 million and $600 million in 2020. Excluding the impact of the contract termination payment received by IMTT in 2019, that equates to year-on-year growth of 4% at the midpoint of our guidance. We expect flow-through from EBITDA to free cash flow to be between $360 million and $400 million and supportive of our prior guidance for a dividend distribution of $1 per share per quarter in 2020. The level of free cash flow generation reflects an anticipated increase in net interest expense, primarily as a result of reduced earnings on cash balances and the payment of federal income taxes of approximately $20 million mentioned earlier.

For the evanesce of doubt, our guidance regarding consolidated results assumes the continued operation of our existing portfolio of businesses. To the extent we sell one or more of our businesses, these estimates will likely need to be revised. I am pleased with the performance of our businesses in 2019 and confident in our prospects for 2020 including with respect to our pursuit of strategic alternatives.

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 your questions.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Tristan Richardson from SunTrust.

Tristan Richardson -- SunTrust Robinson Humphrey -- Analyst

Hey, good morning, guys.

Christopher Frost -- Chief Executive Officer

Good morning, Tristan

Tristan Richardson -- SunTrust Robinson Humphrey -- Analyst

I appreciate the guidance. You noted that it included the FBO acquisition. Can you talk about growth in 2020 maybe on a same store basis or just sort of some of the underlying assumptions on an organic basis?

Liam Stewart -- Chief Financial Officer

Yeah, Tristan, it's Liam. In terms of the acquisition we announced this morning, it's really from an overall Atlantic perspective immaterial. So it's tens of million dollars in terms of purchase price. And the expected contribution to the 2020 number is roughly $1 million. So effectively the guidance incorporates the same store level of growth. I think if you think about '19 notwithstanding sort of weaker than we've seen historically on FAA flight data and activity increases year-over-year, we saw very good pull-through on the volumetric side and not sort of flow-through, a very good year from a fuel gross profit perspective in line with the overall EBITDA performance at Atlantic, as well as very good performance from a hangar rental perspective as well. And we would anticipate similar thing in terms of performance for 2020 as well. And so the way we think about that guidance is really at the midpoint, it effectively implies a repetition of the year-over-year EBITDA growth that we experienced in '19 against the backdrop of somewhat needed growth in FAA flight activity.

Tristan Richardson -- SunTrust Robinson Humphrey -- Analyst

Helpful. Thanks, Liam. And then just thinking about free cash flow paired against your associated capex for the year, thinking about where do you see long-term leverage or what are your leverage are with long-term average?

Liam Stewart -- Chief Financial Officer

Yeah. I think in terms of comfort level, it's really unchanged from what we've said historically in that 4.25 times to 4.5 times range. So I think as we think about this year, obviously with the -- we start the year with a very significant cash balance. We anticipate that a lot of that will be deployed into projects such as the Diamond Green Diesel project that we announced this morning. We'll end the year with over $100 million of cash and leverage in that 4.25 times to 4.50 times range. In terms of the existing portfolio, I think that's where the comfort level really is. As we've spoken about before, clearly some of these projects takes some time to be developed. And in terms of the IMTT portfolio, we've don't anticipate that they will all reach stabilization until 2022. So you'll see a little bit of elevation in terms of leverage in advance of those projects coming online.

Tristan Richardson -- SunTrust Robinson Humphrey -- Analyst

Helpful. Thank you guys very much.

Christopher Frost -- Chief Executive Officer

Thanks, Tristan.

Operator

[Operator Instructions] Your next question comes from the line of TJ Schultz with RBC Capital Markets.

TJ Schultz -- RBC Capital Markets -- Analyst

Hey, good morning. Can you just differentiate the pricing pressure at IMTT you've seen in 2019 or you saw in 2019 at IMTT St. Rose versus at Bayonne, where are you getting more pricing pressure, what are the some -- what are some of the factors driving in each geography? And is the view that this is stabilized going forward?

Christopher Frost -- Chief Executive Officer

Yeah, TJ, it's Chris. Good morning. Look, as we said in the prepared remarks, rates for 2019 is consistent with our expectations and guidance. And you'll recall that last year we spoke about having some long-term legacy contracts, particularly, New York Harbor that rolled off on to lower market rates. And you saw that in our results for 2019, and you'll also sort of see the full year impact of that in 2020. As we also said in the prepared remarks, we are seeing a good recovery in utilization, particularly around the heavy and residual oil both at Bayonne and also at St. Rose and that is driving us back up to historic levels of utilization and similar rates.

I think the sort of the area of focus for us is with respect to New York Harbor, and particularly as it relates to clean product. And so as I said in my prepared remarks, we think the fourth quarter of 2019 in terms of an average revenue is what we've rolled into in terms of 2020, which is really sort of reflecting a lot of those legacy contracts being renewed, but being renewed at a lower market rates compared to when they were entered into.

TJ Schultz -- RBC Capital Markets -- Analyst

Okay, great. And just to clarify on the Diamond Green Diesel project, does that storage capacity that you are building that is by the expansion of the Diamond Green Diesel facility or is there upside to your capacity additions once that expansion on the facility is completed?

Christopher Frost -- Chief Executive Officer

Yeah. The infrastructure improvements we're making will ensure that St. Rose is the logistics hub for the -- of the expansion of the Diamond Green refinery. I think you raised a good point and that is in terms of the upside that exists. And it's right that the finished product pipeline has additional capacity to handle additional product. And it also has the ability to operate bidirectionally. So both from St. Rose to the refinery and from the refinery to St. Rose. That pipeline also has the ability not only to handle renewable diesel, but can also handle say gasoline distillate, as well as both traditional and renewable naphtha.

And I think you will also appreciate the fact that where that finished product pipeline terminates is less than half a mile away from two world scale refineries, as well as a petrochemical facility. And so we do see potential upside to the Diamond Green economics or to the infrastructure improvements that we're making to the extent that we're able to attract other product on to that pipeline. And so I think that -- and we haven't included that within the numbers. The numbers that we've sort of set out represent the contracted payments. But we do you sort of see upside to the story, particularly around enhancing our connectivity to system players, driving a more stable storage demand environment and obviously increasing the diversity in product mix at St. Rose.

TJ Schultz -- RBC Capital Markets -- Analyst

Okay. Makes sense. Just lastly for me on the strategic alternatives. I think what I've heard today essentially that you've made the decision with your advisors to formally move forward. So with that, is there more formal timeline to complete the process or are there more formal processes under way for now? If there is anything you can add there? Thanks.

Liam Stewart -- Chief Financial Officer

Yeah. Look, what I've sort of said in the prepared remarks was that we use the time since making the announcement to evaluate the value maximizing options available to us, that we're moving forward with a sales process and at this stage we're not willing to sort of speculate as to sales structure and timing as you would appreciate. But we are moving forward with the same focus and commitment as we have done with the sales of some of our larger non-core businesses.

TJ Schultz -- RBC Capital Markets -- Analyst

Okay. Thank you.

Christopher Frost -- Chief Executive Officer

Thanks, TJ.

Operator

At this time there are no further questions. I would now like to turn the conference back to Christopher Frost, Chief Executive Officer.

Christopher Frost -- Chief Executive Officer

Thank you for participating in our conference call today. We remain focused on driving value for our shareholders through both effective management of our businesses and pursuit of strategic alternatives for the company. We look forward to speaking with you on our next quarterly call or prior to that as circumstances warrant. With that, good morning and have a great day.

Operator

[Operator Closing Remarks]

Duration: 34 minutes

Call participants:

Jay Davis -- Head of Investor Relations

Christopher Frost -- Chief Executive Officer

Liam Stewart -- Chief Financial Officer

Tristan Richardson -- SunTrust Robinson Humphrey -- Analyst

TJ Schultz -- RBC Capital Markets -- Analyst

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